On Sunday, March 12, the Federal Reserve, the U.S. Treasury, and the Federal Deposit Insurance Corporation (FDIC) announced emergency measures to support U.S. regional banks experiencing bank runs. Were these actions a “bailout” and have they already created unintended consequences? To Joseph Wang, former senior trader at the New York Federal Reserve, the answer to both of these questions is an unambiguous “yes.”

Joseph joins Stephen Miran, co-founder & portfolio manager at Amberwave Partners, alongside Jack Farley for an in-depth conversation on the banking intervention and its effect on moral hazard and monetary plumbing. Filmed on March 13, 2023, at 4pm ET.
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Joseph Wang’s latest piece, “Hidden To Market,”on FedGuy.com:

The joint statement from the Federal Reserve, the U.S. Treasury, and the FDIC:
Federal Reserve’s Bank Term Funding Program (BTFP):
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Timestamps:

00:00 Introduction
00:47 The Bank “Bailout”
09:10 The Shocking Incompetence of Silicon Valley Bank
20:02 Will There Be More Bank Failures?
22:40 Public Ad
23:44 Moral Hazard in U.S. Banking Bailouts
27:55 Why Hasn’t Silicon Valley Bank Been Bought?
31:35 Emergency Relief From Fed, Treasury, and FDIC (Federal Deposit Insurance Corporation)
41:41 Consequences of Fed’s BTFP Program on Big For Duration
52:25 Does Huge Fall In Interest Rates Mean Fed’s Hiking Is Over?
01:01:13 February Inflation Data
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets….(read more)

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The Bank Bailout Will Destroy Markets

Joseph Wang and Stephen Miran have recently argued that the bank bailout will destroy markets.
Their argument centers around the idea that government intervention through bailouts can distort market incentives and lead to a misallocation of resources.

One of the main problems with bailouts is that they create a moral hazard – the expectation that if a bank takes on excessive risk and fails, the government will step in to bail them out. This encourages banks to take on more risk than they would otherwise and can ultimately lead to a larger financial crisis down the line.

Furthermore, bailouts can lead to the misallocation of resources. Instead of allowing the market to correct itself by letting failing banks fail, bailouts keep these inefficient institutions alive, creating a burden on the rest of the economy. The bailout money could have been used to invest in more productive and innovative industries, but instead is used to prop up failing banks.

The authors also argue that bailouts can lead to higher inflation as the government prints money to finance the bailout. This is because when there is an increase in the money supply, the value of money decreases, leading to higher prices for goods and services.

Lastly, bailouts can lead to a loss of confidence in the banking system. If the government is seen as propping up struggling banks, it can erode trust in the stability and integrity of the financial markets. This can make it more difficult for banks to attract deposits, leading to a weaker financial system overall.

Overall, Joseph Wang and Stephen Miran provide a compelling argument for why the bank bailout will ultimately destroy markets. While the intentions behind a bailout may be good, the long-term consequences can be quite negative, including the potential for a larger financial crisis down the line. It is important for policymakers to carefully consider the costs and benefits of bailouts before implementing them in the future.