Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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March 26, 2023

The Discount Window to the Overton Window

The Pathway to the Nationalisation of Credit

Screenshot 2023-03-26 151217

Gold is money. Everything else is creditJP Morgan in testimony to Congress, 1912.

Designed to Fail

The world is awakening to the harsh realities that lurk below the surface of money and credit. Lynn Alden said, “banks are highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them.” We like the “free” utility of payment services safe in the knowledge that the government protects us from banking’s gambling addiction. However, this construct protects us from the reality that the banks’ gambling habit is not a bug but a design feature. As Martin Wolf wrote in the FT, banks are designed to fail, and they do. Indeed they have been failing regularly since the Florentine era.

Fed Checking Account

Because of banking’s instability, modern money and credit have become closely intertwined with the state. Saule Omarova, a Cornell law professor specialising in banking regulation, well understands this point. She wrote a paper in 2021 called The People’s Ledgercalling for the digitisation of money and for the Fed to offer retail banking services. However, before dismissing this proposal as theoretical musings of academia, it is notable that in September 2021, President Biden nominated Ms Omarova to serve as the Comptroller of the Currency with a ringing endorsement from Elizabeth Warren. The Senator said she would be a “fearless champion for consumers” if appointed.

Banking Lobby

In December 2021, Saule Omarova withdrew her candidacy. Her appointment met resistance from both sides of the House. Unsurprisingly the US regional banking lobby mobilised against her appointment. The Wall Street Journal Editorial Board said the US doesn’t need a bank regulator who wants to end banking as we know it or who wants to create a central bank digital currency. One Senator said at her hearing, “I am unsure whether to call you professor or comrade”. No doubt referring to the fact that Ms Omarova was born in Soviet Russia, and her dissertation completed at Moscow State University in 1989 was entitled Karl Marx’s Economic Analysis and the Theory of Revolution.

De Facto Insurance

Over recent days various politicians have declared their banks safe. Janet Yellen has danced in circles around the issue of Federal deposit insurance. While the FDIC only guarantees the first $250,000 of bank deposits, actions over SVB paint a different story. With confidence in the 4000 regional banks now on a knife edge, Bloomberg reported that “Treasury Department staff are reviewing whether federal regulators have enough emergency authority to temporarily insure deposits greater than the current $250,000 cap on most accounts without formal consent from a deeply divided Congress, according to people with knowledge of the talks.” If you throw a safety blanket over all deposits, you might as well take the deposits directly.

Have a Safe Word

As concern for bank assets moves from the value of Treasury Bonds (at least they have a price) to the value of commercial real estate loans (anyone’s guess), the Fed has flung open its discount window under the guise of the Bank Term Funding Program, a backstop for the regional banks to borrow against their “high-quality assets” at par value. The BTFP is a temporary measure similar to the Bank of England’s support for cash-strapped pension funds last year. In both cases, Central Banks have provided respite out of fear of permanent damage to the institutions they previously force-fed with “risk-free” government debt. It would appear that the regional banks are availing themselves of this safety valve for their distressed balance sheets.

Inside Out

Today’s banking instability stems from monetary instability. After 40 years of downward-only interest rates with a blow-off explosion in money supply during lockdown, our ability to value assets has been vaporised by the largest-ever 12-month rate of change in interest rates. Extreme financial tightening and rampant inflation have undermined confidence in all assets and their relative values. SVB failed because it was overwhelmed with deposits which it invested in the safest available asset. Treasury bonds are the bedrock of “inside money” and form the base layer upon which riskier assets are valued. In the last few days, three of the world’s most respected central banks have raised interest rates further in their fight against inflation and to protect the value of their currencies. Over the same period, the world’s bond investors have registered the fastest-ever one-week yield contraction registering the view the Central Banks don’t have the stomach or the political will for the fight. Facing these radically opposing viewpoints, the price of “outside money” (gold) has soared.

People's Federal Reserve

US regional banks exist in a highly protected world, and most would not survive the impact of a digital bank run, as witnessed by SVB. Most lack the technology to react quickly enough. The politicians and government agents that have declared banks and banking systems safe all inhabit the world of “inside money.” While they have been stress-testing banks according to models built on previously held assumptions, the world has moved on. As technology-enabled fintech companies eat the regulated banks’ lunch, one function at a time, the Overton Window opens to the idea of safe, risk-free banking. This future is the ultimate in fiscal dominance, where politics rations credit to the worthy and banks are franchised payment operatives for deposits securely tucked away at the Federal Reserve. We may yet see Ms Omarova chairing the People’s Federal Reserve.




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