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Comment by _heimdall | Hacker News Reader

I'm not sure I would call it orderly so far.

SVB failed so quickly the Fed couldn't go through their usual process. The Fed had to throw out the rules and effectively stare that FDIC limits don't matter and all deposits are fully insured.

They were then so concerned about First Republic failing quickly after SVB that they in all likelyhood helped orchestrate a $30B deposit by major banks to help provide liquidity. That move is extremely odd and really looks a lot like market manipulation and collusion. They also must have known that was a short term measure to delay the failure until they could let the smoke clear and find a buyer, banks would have provided First Republic loans or invested in the bank if they had any faith in it's long term viability, depositing cash is just a show of force.

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More explicitly, the Fed is so committed to destroying wage growth that it will happily blow up banks and throw all of its ostensible rules out the window.

Inflation is a serious problem. It is not just wage growth. Most Americans are seeing declining real wages because of the high rates of inflation

That's by design. When the economy is improving people are getting better off. Once it gets ahead of itself and inflation rises the only way it can slow back down is for people to feel more pain.

Much of inflation is being driven by corporate concentration and failed tax policy:

https://scholarworks.umass.edu/econ_workingpaper/343/

While much of wage growth is being driven by a plague-induced labor shortage and in response to the above. Cranking the interest rate dial to 11 solves very little besides impoverishing workers to preserve the dysfunctional status quo for the wealthy and business owners. This is quite obvious in how they’re handling all these bank failures.

The idea that raising interest rates actually causes inflation is called neo-Fisherism; it's currently being practiced in Türkiye[0] where it isn't working.

[0] formerly known as Turkey

Raising interests rates doesn’t cause inflation, but it also doesn’t fix it when inflation is the result of corporate concentration and cartel like behavior around pricing.

Personally I think we should've used the low interest rate period to actually build some inflation-fighting housing and transit; instead we've just sort of noticed it's a problem now that it's too late.

100% agree. Sadly we were told the federal and state governments "couldn't afford to" borrow lots of money at near-0% to build such things. "The Debt" was just too big of a concern. eyeroll

Sure, inflation is a problem. But there are different causes for inflation, and different remedies based on those.

If inflation is caused by rapid wage growth, then pushing to cool that growth can help. If, on the other hand, inflation is caused by widespread corporate greed increasing prices to juice profits, trying to cool wage growth won't touch it, and will instead make the situation worse.

Why did companies suddenly become greedy in 2021 when they weren't greedy from 1980 through 2020? Why are they less greedy again in 2023?

They didn’t become greedy, an exogenous shock (COVID) caused real price spikes, which then subsided. Companies then decided the price spikes were a new floor, which they could get away with because of corporate concentration, resulting from lack of regulatory oversight and a congress that is asleep at the wheel/paid off by said corporations.

Inflation can never be caused by wages, since wages are the last thing to increase in price, after everything else has increased. Wage-driven inflation is a propaganda myth.

Fun fact - inflation was historically a measure primarily focused on increaseds in the money supply. The definition of inflation as an increase in prices is a modern take, starting in the 80s and 90s. [1]

Price changes are a potential side effect of inflation, but prices can be impacted by plenty of other factors including changes in supply and demand. Price changes alone are a pretty meaningless measure without context. Factor in how easily the inflation measures are manipulated and the numbers aren't even reliable measures.

[1] https://www.clevelandfed.org/publications/economic-commentar...

Using the prime rate to control this specific type of inflation (mainly by corporations using "supply chain issues" to raise prices usuriously) is like using an AA gun on a mosquito swarm (mostly ineffective but causing massive collateral damage).

What other options do they have besides the AA gun though?

The FED has few other tools but the USG is more than the FED. Look up Nixon's price freeze. Legislative or executive branches could enact windfall profits acts. The list is quite long in fact, but requires either a working congress or sympathetic & unrepentant executive.

That is, unless, of course, the mosquito swarm is a useful excuse to actually do the collateral damage you want.

Congress won't legislate so this is what we're left with.

What rules did the FDIC throw out?

typically the FDIC only insures the first $250,000 deposited in an account, but in the case of SVB they said they would cover all deposits

Partly true. The FDIC guarantees account holders to $250k, but they are also responsible for unwinding the failed bank and returning that money to account holders. Because SVBs problems were primarily liquidity-induced, the FDIC was certain they could make account holders whole from the funds available after unwinding.

The FDIC didn't have time to go through the books thoroughly enough to be 100% sure all deposits would be covered by liquidating the bank's assets.

All accounts are whole on Monday as usual, the Fed simply backed everything and decided it was safer to figure it out later given concerns over contagion.

It's my understanding it's a little more complicated than that and still went through the FDIC.

Apparently the FDIC funds are not entirely liquid either so the fed extended them a short-term loan to provide the liquidity. At the end of the day the shortfall on the sale got covered by the FDIC funds and the loan from the FED came through on the basis of the FDICs fund and the fact that they then owned all of SVBs assets(they were named the receiver).

The FDIC managed the entire thing, backed all the maneuvers with their 128bn fund, is independent and reports to the POTUS, and is entirely funded by deposit insurance fees on the financial industry. The FED had its own opinions on the whole situation I'm sure, and provided a short-term liquidity loan to the FDIC, but it's a bit misleading IMHO they way their involvement is discussed.

That makes a lot of sense, thanks! I had been wondering where the FDIC got the money to cover since the fund was already berks it's minimum required balance and didn't have the liquidity.

I hadn't seen any reports confirming a Fed loan but that seems like about the only way it could have worked.

Yeah, just like a bank won't leave 128bn sitting around doing nothing the FDIC also prob at least puts in to bonds and etc(I don't know the breakdown).

I wasn't aware of any of this until a few weeks ago had to research. As a disclaimer and promotion of independent research haha.

> The FDIC managed the entire thing, backed all the maneuvers with their 128bn fund, is independent and reports to the POTUS, and is entirely funded by deposit insurance fees on the financial industry. The FED had its own opinions on the whole situation I’m sure, and provided a short-term liquidity loan to the FDIC, but it’s a bit misleading IMHO they way their involvement is discussed.

So you are saying that the decision to invoke the systemic risk exception and cover all depositor funds despite the least cost rule was an independent decision of the FDIC and not, as the law requires, a decision made by the Secretary of the Treasury, in consultation with the President, backed by supermajorities of both the Fed board and the FDIC board?

Strange that that’s not what the joint Treasury/FDIC/Fed press release said.

They may have believed that, but that’s not the basis for invoking the systemic risk exception which allowed covering of uninsured deposits.

Yes I'm aware of the insurance guarantee but I'm not aware that the FDIC has some self-imposed rule preventing them from doing more. Honestly that would be a really bizarre self-imposed limitation to have given their mission statement, and given they could just "throw it out" as they see fit.

> Yes I’m aware of the insurance guarantee but I’m not aware that the FDIC has some self-imposed rule preventing them from doing more.

The “least-cost rule” is not a self-imposed FDIC rule, its a rule Congress imposed in 1991 after bank failures in the 1980s were felt to have been managed to expensively when the FDIC used funds to allow banks to stay open or otherwise protected uninsured depositors and creditors.

> and given they could just “throw it out” as they see fit.

They can’t. There is an exception available to the least cost rule, but that exception – the systemic risk exception – cannot be invoked by the FDIC, it can be invoked only by the Secretary of the Treasury, in consultation with the President, and with the support of 2/3 of the FDIC Board of Directors and 2/3 of the Federal Reserve Board.

Will investigate but I'm still hearing no rules were thrown out.

The $250k depositor insurance cap was suspended in favor of all depositors getting bailed out.

They've always said they do their best to recover all depositor funds. It's just not 100% guaranteed by the insurance fund, but that's no reason to wipe out everyone above that.

The loss of confidence (and people losing their jobs) would make that much worse for the economy than finding some more money somewhere else; because banks work on confidence, telling people you have their money stops them from withdrawing it, which means you don't need to actually give them it.

This time they did in fact say all accounts would be made whole. My employer was banking at SVB, the Monday after the collapse we could login to our account and access all the funds as though nothing happened.

I do get why they did it, I was simply pointing out that they changed the rules in the middle of the game.

The FDIC had a rule that they were only allowed to guarantee 250k? As in, they were not allowed to guarantee more if they could or deemed it prudent? They had this rule and they threw it out? Do you have a citation or source for this?

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