While worries of a banking crisis rocked the stock market, there was much debate on Wall Street and in Washington about the actions taken by the Federal Reserve and the Treasury Department since the collapse of Silicon Valley Bank and Signature Bank. Two phrases are being thrown around on CNBC and elsewhere: “moral hazard” and “hawkish pause.” Here’s what they mean and how these four words shape this evolving situation. We hope club members can use what they learn here to improve their understanding of the issues dominating the market and how they affect their portfolios. moral hazard (noun) – lack of reason to try to avoid a risk when protected from its consequences, e.g. B. through insurance. the premiums paid by the banks for this insurance are based on this amount and we cannot simply increase the payout now that the risks have increased. If you underinsure your home, you won’t be able to claim a higher payout after the house burns, you sort of get what you paid for. On the other hand, there is a view that depositors should not pay the price for mismanagement. If we didn’t guarantee all deposits, it would trigger an even greater run on banks as depositors either try to spread deposits over the $250,000 limit across multiple banks, or simply choose to withdraw everything and go to one institution deposit implicitly backed by government to too big to fail status. That’s the debate. So far, in the current banking sector turmoil, the Treasury Department and the Fed have tried to reassure depositors while making it clear that they are not bailouting banks’ shareholders. Treasury Secretary Janet Yellen told lawmakers Thursday, “Our banking system remains sound and Americans can rest assured that their deposits will be there when they need them.” We’re not trying to determine what’s right in this situation — we’re looking Check out how the current way of covering deposits could create “moral hazard,” allowing businesses and consumers to take risks they might not otherwise have knowing the government will be there to do catch them when they fall. If they take the increased risk and it pays off, it will eventually mean a payday for them and the shareholders; and if they take it and lose it, don’t worry, the government will pay the depositors back anyway. This is not to say that there is no middle ground, a scenario where deposits are 100% guaranteed nationwide and regulations are put in place to protect against any resulting moral hazard. In particular, as we were writing this, we learned that several banks, including Club holdings Wells Fargo (WFC) and Morgan Stanley (MS), will collectively deposit $30 billion with troubled First Republic Bank (FRC). The depot, run by the best banks in the world and run by management teams that understand the baking business better than anyone, will be uninsured. It’s an interesting solution that addresses moral hazard concerns — at least at First Republic Bank — while providing the liquidity it needs. FCR management will think twice before taking an unwarranted risk while being closely watched by the world’s best bankers, all of whom now have a very serious interest in First Republic’s solvency. I don’t know what the Feds are going to do next week, but I just want to be the first to say hawk break. CNBC’s Steve Liesman tweet Concerns about the banking system and signs of slightly cooler inflation data give the Fed some cover to moderate further rate hikes. According to the CME FedWatch tool, the market is betting a more than 80% chance of a second straight meeting of rising rates by a quarter point. On the one hand, there is a view that continued Fed hikes created the conditions that led to the two bank failures, just days apart, that happened to be the second and third largest in US history. Typically, an estimated 12 to 18 months elapse between a monetary policy action and its impact on the economy. However, it was accelerated after the fall of SVB and Signature. While the odds of not missing a rate hike are slim, there’s an argument for what CNBC’s Steve Liesman called a “hawkish pause,” which refers to pausing rate hikes but makes it clear that the tightening cycle isn’t over is. Feed into that mindset: Bank failures are deflationary, and they do some of the work for the Fed. This is because they have a chilling effect on borrowing needs. If money is harder to borrow, less of it will flow into and circulate through the economy, and that will help bring prices down. No need to rush with another hike hold proponent would say. On the other hand, the recent cooler inflation data is still well above the Fed’s target of 2%. The consumer price index for February rose 6% annually while unemployment remains near record lows. Given the Fed’s dual mandate of maintaining price stability and maximizing unemployment, the case for a rate hike is relatively simple – keep going until inflation reaches more sustainable levels. The bullish market reaction after the European Central Bank (EBC) raised interest rates by half a point on Thursday could prompt the Fed to hike rates at next week’s monetary policy meeting. The other concern raised by advocates of a rate hike is that not doing so would signal nervousness on the part of the Fed – the thought is that if they don’t hike now, it’s not because they see something we don’t see. Fed Chair Jerome Powell’s post-meeting comment is likely to be as important as the rate decision. Two possible scenarios: a rate hike with more dovish comments or the hawkish pause. (See a full list of Jim Cramer’s Charitable Trust stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim spoke about a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS GOVERNED BY OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION SHALL BE OR CREATED BY YOUR RECEIVING OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC RESULT OR PROFIT IS GUARANTEED.
Signature bank logo is seen in this photo illustration taken in Warsaw, Poland on March 13, 2023.
Jaap Arriens | Nurphoto | Getty Images
While worries of a banking crisis rocked the stock market, there was much debate on Wall Street and in Washington about the actions taken by the Federal Reserve and the Treasury Department since the collapse of Silicon Valley Bank and Signature Bank. Two phrases are being thrown around on CNBC and elsewhere: “moral hazard” and “hawkish pause.” Here’s what they mean and how these four words shape this evolving situation. We hope club members can use what they learn here to improve their understanding of the issues dominating the market and how they affect their portfolios.
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2023-03-17 11:34:03
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