2024 Financial Markets

What will happen with interest rates, and are we looking at financial insolvency/crisis again?

It is an election year, so it is hard to say, but The Institutional Risk Analyst is a publication that is followed by many who truly understand how the Housing Finance System functions…and doesn’t function.

From what I have been hearing, many banks are in trouble, including the big banks and we could lose 2,000 banks next year. Problems exist in commercial/office lending and construction lending (projects that penciled with takeout financing of a few years ago, do not pencil today).

A knowledgeable friend and colleague told me that on purely GAAP basis, most all banks are insolvent. As long as consumers and businesses believe they can get all their deposits back from FDIC when they want, things are ok. However, if regulators and auditors make banks justify that assets aren’t impaired, we’re in trouble.

This is a good article in The Institutional Risk Analyst:

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…the Federal Reserve Board wiped out the capital of the central bank during COVID and continued to spend money that was never authorized by Congress. When our friends at CNBC once questioned why we thought the Fed’s actions were illegal, this was the point. But naturally, nobody in the world of global equities or media wants to talk about the fact that the Federal Reserve System and most US banks are now profoundly insolvent and will remain so for years to come.”

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And this…

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Our big worry is that short-term interest rates may fall in 2024, but long-term interest rates will rise due to the Treasury’s vast deficits and mounting interest expense. We estimate that the Treasury would need to pay 5.5-6% to sell new long bonds today. Because the Fed’s balance sheet is already polluted with low-coupon Treasury and mortgage debt, the central bank has little remaining flexibility to respond to a large bank failure or other contingency.

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https://www.theinstitutionalriskanalyst.com/post/the-moral-hazard-of-jerome-powell

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