The Fed Is Running Two Policies at Once
Commentary
Last week was a grim reminder that the economic chaos of the lockdown period is far from over. Markets discovered that several major banks, which hardly anyone truly suspected were in trouble, faced closure and quick rescue for fear of contagion. The trouble was the same in each case: too many assets held in fixed-rate debt instruments in a period of rising rates.
The seemingly impregnable Credit Suisse is the latest casualty, saved only by a buyout from UBS, while the share price of First Republic continued to plunge despite the helping hand it received from the U.S. government and other banks. The culprit is the same in each case: too many cash drawdowns from its customer base even as its asset portfolio faced major market reassessment….