If J.P. Morgan CEO Jamie Dimon is leading talks to create a new rescue plan for First Republic Bank (as the WSJ reports), you can be sure the Fed will play a pivotal role.
The fear is that absent a bank bail out, Banking weakness could have a negative cascading effect on credit markets and ultimately lead to a deep recession or depression. One could easily imagine trillions in nominal value of bonds being downgraded – from Investment Grade to High Yield (fallen angels), from High Yield to Default status as global credit tightens… The credit markets need to purge. Some degree of bloodletting well beyond the current level would be a net positive for the Banking system and the global economy, each of which have become addicted to the Fed’s easy monetary policy of the last 14 years.
- Should we stand by and watch the financial system collapse? No.
- Are we on the brink of a financial system collapse? Only if you believe the financial press and the Fed which is to say that the Banking industry must not be allowed to suffer a hard landing – not after the Fed inflated the Banking bubble with 14 years of QE and easy monetary policy.
- You can be sure that after the Fed writes its next trillion dollar check, we will be told that doing so was the Fed’s only option. It reminds me of former President George W. Bush’s famous line during the financial crisis: “I’ve abandoned free-market principles to save the free-market system”. What a fool. Since 2008, every Fed Chair, Treasury Secretary, sitting Congress and President has done the same.