Mark Moss explains how the Federal Reserve's rapid rate hikes in 2022 created a duration mismatch at banks, causing Silicon Valley Bank and two others to collapse. Banks were forced to tap a $60 billion government liquidity facility, draining it completely. Scott Bessent now wants the cap raised to prepare for future crises.
In 2020, they set it up and we've seen like a little blip right here. It was used a little bit in 2020. Where we really saw this big blip was right here. Now, it's important to note that there's a $60 billion— let me write that here— $60 billion cap on this fund. In 2023, we saw it actually go all the way up and touch the cap. What happened in 2023? If you can remember back, the Federal Reserve, Jerome Powell, In 2022, started raising rates, one of the fastest rate hiking cycles in history, and it caused 3 banks to collapse in 2023. It was the big Silicon Valley Bank was the big one that went under, and a lot of banks were in trouble. Why? Well, because they had a mismatch on duration. They took in customer deposits. Customer deposits are due on demand, so anytime you should be able to go get the money out of the bank. But then they take that money and they put it into long-term treasuries, so they may lock it up for 5, 10, 20, 30 years at a time, and And the problem is because they raised rates so fast, the value of those bonds had collapsed. And so when depositors asked for their money, the banks were forced to sell the treasuries at a loss. They went bankrupt, went out of business, 3 banks, and other banks were hurt and they had to draw on that facility. We can see that. And now here we are right here, and it's effectively at zero, effectively at zero. So it's there, it's ready to go, but it's at zero. Now, Bessent is urging to upsize this. This is what everyone's kind of getting all caught up in. Everyone's predicting in the world. Like, oh my God, Scott Bassin said that we need to upsize it. Yeah, he wants to be ready because what happens if we need more than that? We want to be ready again, like giving my kids the credit card in advance.
