I see a lot of stories in the news about banks incurring losses because the Fed has been raising interest rates over the past year or so.
If the reason for raising interest rates is, as they've said, to curb inflation, i cannot tell that inflation is under control where I live.
If banks are losing money because of higher interest rates, who is making profits because of it? Anybody?
When interest rates rise, bond prices fall and vice versa. We've just come out of a long period of low interest rates and many banks bought oodles of bonds, which are now rapidly declining in value. Sadly, in too many cases, that more than outweighs the banks making money hand over fist from retail customers by not raising interest rates as fast as the Fed rates.
AJ
Nobody is making profits because of it. The problem is bond values. When interest rates go up, the value of existing bonds goes down. Silicon Valley Bank had a bond heavy portfolio.
The interest rate increases have destroyed an estimated $600 Billion in bond values. That's wealth destroyed, not transferred to someone else.
I read an article a few days ago claiming that "The Fed" had warned SVB multiple times over 2022 and 2023 that their investment structure was risky. They had a "risk assessment officer" (or similar title) at one time but this person first took on other duties and then left the bank altogether, the post was left vacant.
Someone must have noticed something, at least one of the people running the bank sold their shares a few days before the fit hit the shan. That sounds to me like insider trading, although I seem to remember the Enron and Lehmann Bros equivalents pretty much got away with this kind of behaviour a few years back.
To your original question, we had negative interest rates for several years where I live and the banks were suffering. Their shares rose quickly once the interest rates started drifting upwards.
If banks are losing money because of higher interest rates, who is making profits because of it? Anybody?
Sure. People who buy CDs and other interest bearing investments. Even those with savings and checking accounts that pay interest.
Credit card companies make more money when interest rates go up. They charge more. Same with banks making loans and mortgages. Even people buying bonds now because the new bonds have higher coupons and old bonds are selling at a discount.
I guess even inflation helps credit card companies because they charge a fee to the merchant that is a percentage of the sales price. If the price is higher (due to inflation) they get more.
One of the problems with the banks in trouble isn't that they won't make more money on new loans and mortgages. It's their investments. Their bond portfolio is worth much less. But even that wouldn't have been a problem if they weren't forced to see those assets because of the run on their bank (people withdrawing their money which required the bank to sell those bonds at a loss).
What was the name of that smaller bank which had to be rescued by four larger ones? They were doing ok until their - rich - customers started panicking and withdrawing their deposits. This was part of the knock-on effect from SVB.
What was the name of that smaller bank which had to be rescued by four larger ones?
You mean First Republic?
The problem the Fed made was they didn't start raising interest rates soon enough and then, when they did, they had to be overly aggressive. The current administration wanted a strong economy going into the mid-term elections. That added to the inflation.
Inflation was caused by supply chain issues. Less supply with high demand = higher prices. Basic capitalism economics.
But the government flooding the economy with money added to the mess. During the lock-downs and layoffs during Covid, the stimulus was necessarily for people and small businesses to survive. But the government kept pumping money into the economy when it was no longer necessary. That's what really drove up inflation. And the government is still doing it with things like wanting to pay off student loans and giving child tax credits. That's more money in the hands of spenders which equals more buying which equals higher inflation. Also, the government's decisions on fossil fuels have jacked up the price of oil in the U.S. Not that long ago, we were self-sufficient and actually selling oil.
The other problem is the consumers. People keep spending money. I don't mean on milk and eggs and rent. I mean on electronics and travel, etc. As long as the demand is there, prices will rise. Again, capitalism. Dwindling savings and increased debt are going to be a major problem for people in the future.
Inflation was caused by supply chain issues. Less supply with high demand = higher prices.
It's there also in housing. Average price per square foot in February of 2010 was $77 in the OKC MLS area. It was $145 in February of this year. And it didn't break $100 until February of 2019 - so a $23 increase in 9 years, versus a $45 increase in the last 4 years. In February of 2010, we had 5 months supply of houses available. February of 2023, we have 2 months - which is up a LOT from the 0.8 months (aka 3 weeks) supply we had February of last year.
My broker is also a builder. He won't touch a custom contract for less than cost plus, and he figures $190 per square foot as a minimum right now. That's up $70 in the last four years, too.
Also, the government's decisions on fossil fuels have jacked up the price of oil in the U.S.
Yeah, no. there is no basis for that conclusion.
Also, the government's decisions on fossil fuels have jacked up the price of oil in the U.S.
Yeah, no. there is no basis for that conclusion.
Of course there is. Before, we were exporting. Now we're importing a lot.
First thing Biden did was stop the Keystone Pipeline. Then he cancelled drilling leases. Then he went to war with the oil companies and is surprised that they aren't bending over backward to help him.
Oil is a global market. Oil prices are based on oil futures. It is not based on supply and demand locally. It is based upon perceived future supply and demand globally. Also, I do not believe pipeline being constructed would even be operating at this point even if Biden had not stopped it.
[He] went to war with the oil companies
Care to elaborate? What does going to war with the oil companies mean to you?
Care to elaborate?
It's true that oil prices are based on a global market, but only to an extent. Explain why the price of gasoline in Phoenix is much more than in Houston. Why isn't it the same everywhere if it's based on one factor?
The U.S. had an excess of oil not that many years ago (I'm refraining from mentioning administrations because I don't want yet another political thread). That drove the price of oil in the U.S. down, just like the Ukraine war drove the price up more in Europe than in the U.S. because they are more dependent on Russian oil than the U.S. There are many other circumstances than the global market that determine price.
Yes, the Keystone pipeline wasn't going to be completed for a couple of years, but everything the oil industry does is geared to the future. Do you think they can find oil and start pumping it overnight? Do you think they can build a refinery in a week? Their business decisions and investments are driven by the future. If they are told their investment won't pay off in the future, they won't do the investment.
Which leads to Biden going to war with the oil companies. I thought that was obvious. He's telling them they are the cause of climate change. That he will replace them with other forms of energy. That they are overcharging to reap enormous profits. That the high price is their fault (greed). That they are the devil. He's canceling leases. He's threatening tax changes that would negatively affect them. He publicly calls them out. He blames them instead of himself. Typical politics.
He's telling them they are the cause of climate change.
So are your gas stoves, your refrigerators, your washing machine, and now apparently your air conditioner, since all of those home appliances are now facing new regulations that really don't make economic sense, but "save energy".
He's telling them they are the cause of climate change. That he will replace them with other forms of energy. That they are overcharging to reap enormous profits. That the high price is their fault (greed).
So he's guilty of telling the truth? Who do you think invests heavily in green energy? Biden said we will move to more environmentally sound forms of energy. If they insist on suckling at the fossil fuel teat, they will be left behind. They are smart enough not to do that.
So he's guilty of telling the truth?
Nope. Because we're supposed to be a capitalistic society. You know, the one where the next best thing to come along isn't just that, it's also both technologically sound and market price competitive.
Under current technologies, wind turbines are NOT technologically sound. Why not? Um - all those pesky damned blades aren't recyclable - which means they're simply being buried in landfills when older turbines wear out. (That's REALLY environmentally sound, right?) And since we don't have Ice-X in this universe, they freeze up in the winter, so they have to be de-iced ... by helicopters.
Oh, and you've also showed you're either a gadfly OR simply being argumentative for the sake of being argumentative by your wording here.
fossil fuel teat
Guess what? There is no such thing as a fossil fuel. Never has been. The use of that term was discredited in the energy sector a LONG time ago. And, just like in the infomercials, but WAIT! There's MORE! Oil and petroleum products aren't just used to power engines.
They're used to make the grease for the bearing those wind turbines require! You know - all the lubricants! Or would you rather go back to killing whales to extract oil from them?
And oil also is used to make both fertilizer (good luck feeding the world without that) and plastic - as in, EVERYTHING that's plastic is made with oil. How long is the list of products that are or have plastic in them? (Like your computer, your keyboard, and your mouse?)
Of course, it's useful to for all those electric cars to have tires, right? Oh, that's right - you need oil for those. Along with the wiring harnesses and batteries that go in those current waste of OTHER resources. (That's a totally different discussion, but needless to say - so I'm going to say it anyway - if you don't have oil, you don't have your 'modern' electric car - or damned near ANYTHING that has moving parts. We don't have the magnetic bearing technology available yet, either.)
Is my rebuttal giving you a headache? Aspirin doesn't come from willow tree bark - it's made from oil. Maybe you want to deal with the pressure and chew some gum to relieve your stress now? Oh, wait - that's made from oil. It's enough to make you tear your shirt off - which, unless it's made from 100% cotton or wool, is made with polyester. Oh, yeah - more oil.
Note that I'm all for alternative products to what we have now. IF they're developed by private industry WITHOUT government bias. That's not happening now - and oh, yeah, one other MINOR detail. As per World Meter (darn it, I do note my sources for backing up my assertions) the population of Europe is 749,871,155 today. The US population is 331,449,281. So, that's 1,081,320,436 people. Let's say every single one of those people reduce their energy usage by 10%. Now ... what about the 1,454,401,693 people that live in China and the 1,417,804,969 that live in India? You know, the people that are NOT following the conservation of energy and other assorted ecological bullshit because they don't have to? I certainly recall someone running for the Oval Office saying he wanted to bankrupt the coal industry in the United States - while China approved and started building two coal power plants every WEEK just last year.
while China approved and started building two coal power plants every WEEK just last year.
Better to burn the coal in power plants than let coal-seam fires burn those coal deposits. ;)
Actually in China burn hundreds of coal-seam fires.
It has been estimated that some 10–200 million tons of coal uselessly burn annually
(quoted from Wikipedia)
HM.
EVERYTHING that's plastic is made with oil.
Not quite. There are bioplastics, but they make up a small percentage (~2%) of all plastics and currently have limited commercial application due to cost and performance characteristics.
Food containers are one application of which I'm aware, though I'm sure there are others.
limited commercial application due to cost and performance characteristics
Like solar and wind power generation? LOL!
Note I'm not AGAINST those technologies - when they're cost effective and can do the job to actually replace other technologies. At this time, they are neither. (And bioplastics aren't much better, ecologically, than regular plastics, based upon the research I just looked at - again, at least at this point.)
I don't disagree with you (and did agree with most of your long post). Being pedantic, I did feel I needed to point out that there are plastics (albeit scarce) made without petroleum ingredients.
Some plant products eg cellulose, are nature's equivalent of plastics. And hoomans are now utilising cellulose products as plastics.
AJ
I don't disagree with you (and did agree with most of your long post).
That's all good, and learning new things is always good. I almost posted a link to a video clip from 'Kentucky Fried Movie' about Zinc Oxide and You in my comment above, but didn't, so it's now here in my reply.
Oh, and one more thing - did you notice how he suddenly shut up, and not just in this thread?
you're either a gadfly OR simply being argumentative for the sake of being argumentative
though I'm sure there are others.
Nylon 11 aka Rilsan has better performance for some applications than alternative materials like Nylon 6.
In the sixties and seventies production and use of Rilsan was fiscally and administratively supported by the French government to help French farmers of castor beans.
Then there is/was Galalith (Erinoid in the UK) made from casein. (still produced in small quantities mainly for buttons)
HM.
So he's guilty of telling the truth?
Okay, now you're turning it political so this is where I drop off. You asked me how Biden declared war on the oil companies. I answered that. And by your response I guess you agree that he did.
Do yourself a favor. Stop watching CNN and MSNBC. I say the same thing about Fox News. You'll never get the true story from any of them.
In the voice of Lance Corporal Hudson (Bill Paxton), United States Colonial Marines 🇺🇸
"Maybe You Haven't Been Keeping Up With Current Events! We Are In Some Deep Shia, Here!"
Prices of Petroleum products has Increased Significantly since the beginning of the Biden administration, because of Policies enacted in the first hours of his term in office!
there is no basis for that conclusion.
Other than, oh, I don't know ... REALITY!
That's a pretty good basis. As SB said, we were a nation that produced enough oil we were EXPORTING it - selling it to other nations - AND we had a full Strategic Defense Reserve, that had been filled with $25 bbl oil.
Now, we're IMPORTING oil because our domestic production has been slashed due to governmental interference. It's funny how the only leases they make available - and then claim no one is bidding on - are on land that doesn't have oil, instead of how they previously operated. That's sort of like saying we'll let you have all the water you can find on the surface - of the Mojave Desert - instead of letting you get water out of the Great Lakes.
Oh, and after selling our Strategic Defense Reserve of oil to certain unnamed countries *cough - CHINA - *cough* when it was full - since it a RESERVE to help with high prices HERE - now it's being refilled. With $90 bbl oil. Yeah, that makes GREAT economic sense.
Government policy has had almost nothing to do with domestic production. Oil companies are choosing not to as it is more profitable for them. Don't believe the hype.
Regardless, since we allow private companies to control our natural resources (which should have been nationalized from the start), we the people would be seeing no benefit from this anyway. Oil is a global market.
Government policy has had almost nothing to do with domestic production.
If you really believe this, you are living in cloud cuckoo land.
HM.
Again, show your math. Just because you believe it to be true, doesn't make it so.
And let me clarify slightly. Domestic policy can affect the price significantly, if extreme enough, nothing has been done in recent times that would have such effect.
One action (there are many) by Biden - the blanket denial of the small refinery exemptions (as provided for in statute) by the Biden administration has led to the closing of a number of refineries and an increase in cost of fuel.
Central banks rise interest rates as reaction to inflation exactly in an attempt to take money out of circulation. Destruction of wealth is intentional in this.
In very broad theoretical terms inflation is a result of there being more money in circulation than there are the total value of goods and services available that could be bought. High demand and limited supply drives prices up.
There was prolonged period when interest rates were very low, that is, borrowing money was very cheap, because everyone wanted to stimulate growth that was barely there. But it sort of worked, for seemingly much longer than it should have. Thus, there already perhaps was way too much money available even before the pandemic that simultaneously injected even more money trough targeted stimulus and seriously cut supply, because of the disruptions on productive side.
High inflation means you want to exchange your money -- cash -- to something else as fast as possible. The higher the inflation the higher the pressure to spend. This is also why small inflation is considered a healthy thing, and deflation feared: if money increased value over time, nobody would spend over absolute necessity and the consumer market dependent on people constantly spending many times more than they need (or even should) would grind to a (relative) standstill.
In plain theory, if interest rates are less than inflation, it's profitable to borrow to spend. If that goes out of hand it creates hyperinflation feedback loop, since the total value of actual stuff to buy is limited, while amount of borrowed money is infinite.
In practice, you have to price in your risk, so even interest rates less than inflation should make you keep the money, accepting it loses value over time as you keep it.
However, if that unknown balance point is overshoot, the too high interest rates would straggle production instead, reducing the supply.
It's actually much more complicated of course. But while there are more money in circulation than the total value of stuff for sale, (almost) everyone loses one way or another.
Who profits when The Federal Reserve raises interest rates?
The Federal Reserve Bank profits.
People tend to forget that it is a private bank which loans that money to the US government.
People tend to forget that it is a private bank
Sort of. It's more autonomous than private. Unlike corporations, it doesn't keep or reinvest profits. Its profits go to the U.S. Treasury.
