I think the banks are risky. We bought bonds with the money we received from deposits, but if we sell them because the bond prices have dropped a lot, we will lose money. SVB has a loss potential greater than its capital. This is all because the Fed raised interest rates too quickly."
"Is that so? But why would there be losses in bonds? Aren't they bought at a cheaper price than the money received at maturity?"
Well, the interest rates were very low when the bank bought those bonds. They were practically zero interest rates.
"Why were the interest rates so low?"
The central banks lowered the base rate to negative levels where necessary to raise the inflation rate to 2%, and they even bought long-term bonds directly to lower interest rates.
"What is the inflation rate now?"
There is some variation, but advanced countries have an inflation rate ranging from 4% to 10%.
"That's much higher than 2%."
Yes.
"If the problem is the rise in interest rates, can't the interest rates be lowered again? But the banks say that the bond interest rates they hold are too low. If the interest rates are lowered again, the banks will have to buy low-interest bonds again, right?"
Yes. But for now, we have to survive.
"The bank went bankrupt, and the stock market has dropped, but it doesn't seem to have crashed. Moreover, the market interest rates were already lower than the base rate, as if there had already been an interest rate cut. There may be a reason for the Fed to intervene if the stock prices plummet, the dollar surges, and bond sales occur. But aren't we already in a position where the market has already relaxed?"
That could be. But if we don't do anything, something will break.
"The purpose of the interest rate hike and QT was to break the overheated economy, excessive leverage, and the rising whirlpool of prices. Now that the effects have been seen, are they turning back?"
The prices are going down, even if it's because of the base effect. Besides, it's a lagging indicator.
"If they stop tightening, the decline will slow down. In the case of Nasdaq, it may even draw a parallel line. The central bank justified zero interest rates by looking at this lagging indicator."
The Fed's real intention is the rise in stock prices.
"No, the real intention is that we hope the world will continue forever. For that, various pension systems must be maintained, and the appropriate interest rate level and a steep curve are essential, as we saw in this case. Japan chose to return to low-interest rates in a similar situation before. As a result, the entire Bank of Japan became a giant SVB for the sake of conscientiously holding government bonds."
Still, the market may be right.
"Right. The market has known about it for a long time. Which bank is in trouble and that the central bank cannot afford to not provide free money. And inevitably, the central bank will have to print more money again."
"Then next week's plan is clear."
That's right.
Source: Alex