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Mazzei Minute: 03/17/23

Things are starting to break. That’s what happens when the government and the Federal Reserve throw $10 trillion of easy money at an economy that has obvious supply and workforce constraints after a global pandemic.

What follows is troublesome inflation, rising interest rates and the inevitable sound of cracks in the banking sector. The fall of Silicon Valley Bank, the 16th largest bank in the country, reveals the harm the D.C. establishment has caused.

Jerome Powell, the Chairman of the Federal Reserve, faltered when the financial system needed strong leadership to prevent inflation. Now, he threatens the country with recession and job losses by raising interest rates too fast and too high.

The owners of Silicon Valley Bank certainly mishandled the finances of the bank by putting far too much money in long-term U.S. bonds, which have performed very poorly as interest rates have rocketed higher. But the conditions of so much easy money in the hands of the bank’s venture capital clients were made possible by the lack of restraint on the part of the Powell Fed.

Now the FDIC and U.S. Treasury must come to the rescue to protect insured and even uninsured deposits to calm the frayed nerves of the banking system and markets. I give them credit for responding quickly. Nobody wants a run on the banks. The result, however, is that venture capitalists and start-up tech companies, which benefited from all the easy money, are now being bailed out with more cash from the Fed.

So far, if things stay contained, and we certainly hope they do, the taxpayers aren’t in a strict sense “bailing out” wealthy depositors. Let’s hope Powell’s mistakes don’t come to that.


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