This was the most aggressive hike in rates since World War II, or to put it another way, in the history of the modern economic order.įederal Funds Target Range, per the Federal Reserve If you recall the ancient history of *checks notes* the past 15 months, we went from a regime where prevailing interest rates were just above zero to almost 5%. This lever can be applied across the entire consumer basket in parallel. That is, explicitly, an intervention to push down the price of eggs (and other things), via a lever which happens to be much more amenable to direct action than other available levers for controlling egg prices. The United States (through the Federal Reserve) made a considered decision to manage inflation by hiking interest rates. The price of eggs, and other important parts of the consumer basket, is a major contributing reason why we are here. The world sits atop four elephants who stand astride the risk-free rate, and then it is interest rates all the way down. The price of grain embeds an interest rate derivative. The price of eggs embeds an interest rate derivative, among many other things, like how it reflects the cost of grain. All prices embed an interest rate derivative. This is very not obvious to many people in tech, including financially sophisticated people!īut equity is not the only thing that embeds an interest rate derivative. For example, in January 2020, I pointed out that obviously engineering compensation includes an interest rate derivative, because it includes equity. This is both almost a law of nature and also perpetually underestimated in how much it affects the world outside of asset prices. It is not a secret: when interest rates rise, all asset prices must fall. The thing killing banks is a very simple idea with profound consequences. People have a great desire for there to be a narrative here for a bank failure to require stupidity or malfeasance or ideally stupid malfeasance. Importantly, these do not say “seeds of destruction: definitely don’t plant these!” on the package. The seeds of their destruction are sown and watered for years, and then they are reaped quickly. Why are banks failing?Īs we previously covered in a discussion about deposit insurance, now unfortunately topical, banks do not fail in a day. My views are entirely my own, and my analysis is only informed by publicly available data. Short disclaimer: I worked at Stripe (which is not a bank, but works with many banks) for six years prior to leaving full-time employment recently. I’d like to explain how we got here, how the relevant institutions are generally expected to work, what seems to be different this time, and what smart people who are not normally professionally engaged in this might find relevant to know about the infrastructure that we all depend on. “Crisis” is a bit of a strong word, even when invoked as a potential outcome, and I try to be fairly sober-minded. Hopefully this essay helps contextualize what is reported. Please check the WSJ or Financial Times for updates on the fluid bits. This situation is evolving very rapidly and this essay will not.
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