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Jerome Powell's Bernanke moment?
Former Fed chair Ben Bernanke once (incorrectly) dismissed concerns about banks during the subprime mortgage meltdown. Is Jerome Powell making a similar mistake?
Federal Reserve chair Jerome Powell is trying to reassure Wall Street that the stunning collapses of Silicon Valley Bank, Signature Bank and First Republic are not going to be problems for the rest of the banking sector and broader economy.
“Let me comment briefly on recent developments in the banking sector. Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient,” Powell said in his opening remarks to reporters Wednesday following the Fed’s decision to raise interest rates again.
To quote the famous Hanna-Barbera cartoon canines Astro and Scooby-Doo: “Ruh-roh!”
Powell’s remarks sound eerily similar to what one of his predecessors, Ben Bernanke, said in testimony to Congress back in March 2007 just as fears were growing about problems with financial firms that had a lot of exposure to subprime housing loans, mortgages to people with poor credit histories.
“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Bernanke said.
Just as it turned out that Bernanke was wrong to not be more concerned about the 2007-2008 mortgage meltdown, there is the risk that Powell is being to dismissive of the problems with regional banks.
Sure, larger financial firms are in much better shape now than in 2008 thanks to new federal rules and regulations requiring them to take fewer risks and have more capital. But Jamie Dimon and JPMorgan Chase can’t bail out every big failed bank. (First Republic = WaMu and Bear Stearns 2.0?)
Powell admittedly has a delicate tightrope to walk. He can’t show the market that he’s terrified about what’s going on with regional banks. But he can’t glibly shrug off worries either.
Just look at what else is happening in the banking world today. Shares of Memphis-based First Horizon are in free fall (out into nothing?) after it had to call off plans to merge with Canada’s TD Bank. And shares of LA’s PacWest Bancorp are down more than 40% after saying that it was trying to find a buyer.
Regional bank stocks have been crushed due to growing fears that more of them may be in trouble. Investors are hoping the Fed will do something to stop the bleeding. To that end, most market watchers think the Fed will not raise rates in June. But is a pause enough?
Don’t be surprised if calls for a rate cut sooner rather than later start to grow louder. It doesn’t look like the banking sector’s woes are over just yet…no matter what Powell says.
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