The rise in US interest rates should be the last in the current cycle.
As eager as Federal Reserve Chairman Jay Powell is to make amends for past mistakes, by being tough on inflation, he is fueling a conflagration in banking and commercial real estate, contributing to the debt ceiling imposed by Congress.
If anyone thinks the rescue of First Republic this week is the end of the current problems in the US banking system, think again.
The fragile share prices of regional banks such as PacWest Bancorp and Western Alliance Bancorp are no coincidence.
It is a recognition that deposit outflows, misjudgments about interest rates and some unreliable credit standards are taking their toll.
Balancing act: By being tough on inflation, Federal Reserve Chairman Jay Powell (pictured) is fueling a conflagration in banking and commercial real estate
It is bizarre, given the additional risks that any rate hike poses to the banking system, that the Fed continues to raise borrowing costs.
So far, Joe Biden’s White House has been careful to avoid Donald Trump’s mistake of trying to dictate to an independent central bank.
But senior White House economist Heather Boushey acknowledges that rate hikes are having a “negative effect on the banking sector.” If an entire layer of US banks were hampered by outflows, it could bring the US economy to a shocking halt.
What I find extraordinary is how little has been learned from the past. When Northern Rock collapsed in 2007, then Bank of England Governor Mervyn King was hesitant to act as a lender of last resort for fear of moral hazard.
He then supported the bailout of The Rock and the recapitalization of most of the banking system.
However, there was an admission that rescuing the hopeless, foolish and unscrupulous is a game for mugs.
This is little recognized by the US authorities. Stung by the fallout from the 2008 Lehman Brothers bankruptcy, US Treasury Secretary Janet Yellen, regulators at the Fed and the Federal Deposit Insurance Corporation have acted like deer caught in the headlights.
Raising the $250,000 (£200,000) deposit guarantee cap and applying it to business deposits is an invitation to reckless borrowing. The rule after 2008 was that no bank could be ‘too big to fail’.
The new standard is that medium-sized banks are also not allowed to go bankrupt. One understands why authorities try to keep the system together.
Uninsured deposits in US banks have tripled between 2009 and 2022 to $7.7 trillion (£6.1 trillion).
Social media and online banking have made the building more vulnerable to speculative attacks. British and continental banks have tried to reduce the heavy capital and liquidity requirements that have hurt competitiveness.
Especially in the eurozone, it is not yet clear whether banks are completely safe. Still, they may be better prepared than their American counterparts to weather the storm.
Excite
Britain should be the home of sports and supercars with its innovative technology developed at the Formula 1 racing center around Silverstone.
Despite James Bond’s marketing pizzazz and the inspiration of executive chairman Lawrence Stroll, Aston Martin struggles in the sports car stakes.
The latest figures from the British carmaker offer little encouragement.
There is strong demand for its SUV DBX and the average retail price has been increased to £180,000.
Working in a space dominated by Porsche and Ferrari, at a time when the industry is moving towards advanced hybrid and electric models, is expensive.
Aston’s pre-tax losses fell to £74.2m in the first quarter, but capital spending on a new sports model and electric cars drove up negative cash flows to £118m.
Porsche, on the other hand, appears unaffected by the global pressure, with a first-quarter profit of £1.6bn. China accounted for a quarter of the 80,767 vehicles sold.
Luxury cars seem accustomed to the second Cold War.
Hot air
It’s hard to hide the glee at seeing veteran business disruptor Carl Icahn targeted by Hindenburg Research.
The short-seller claims that publicly traded Icahn Enterprises has private assets on its books at inflated values.
It alleges that Icahn is using money from new investors to pay outrageous dividends to longer-standing investors. Sounds familiar.
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