Interest rate risk – the FDIC is ringing the alarm bell that many banks are setting themselves up for future failure. The Fed is making short term money available to banks below 1%, but they can’t find any borrowers with decent credit who will borrow and stll make a profit (what’s wrong with that picture)… So the banks are turning right around and buying longer term Treasury Bonds with a higher yield. The problem is that someday the Fed is going to increase the short term rates – then the interest on the long term T-bonds won’t cover the cost of the short term borrowing. At that point, the banks start losing money or theyhave to sell the t-bonds at a large loss.
This is being set up because the Fed and US treasury are making long term assurances about short term rates. It’s setting the stage for Round 2, and the FDIC is on a direct collision course with Tim Geithner. The US Treasury is not a Private Equity Mergers & Acquisitions firm
Yet Bernanke is going to get fast-tracked and greenlighted to another term.
Let’s review:
After years of super-low interest rates under Greenspan and Bernanke, banks move their assets from cash to mortgage assets and housing, which happens to be in a bubble.
All of a sudden, as the bubble begins to burst, banks find they don’t have enough assets. Their housing assets aren’t worth as much as they thought, and now they don’t have enough cash. Naturally, it’d follow that higher interest rates would encourage people to put their cash into banks, or at least be compelled to pay banks a higher rate, making it more worthwhile to lend.
But alas, in Bizarro World, that’s not the case. Government cash (borrowed, of course) is a perfect substitute for consumer cash now. So now we can drop interest rates again. Spend spend spend.
and then complain that people aren’t saving enough, like they do in Japan.