On June 14, 2022, Peter Schiff appeared on Ingraham Angle, and he said, “Thanks to the Federal Reserve, everybody has so much debt that we can’t afford to pay an interest rate high enough to fight inflation. But it is going to be high enough to cause a massive recession and another financial crisis that’s worse than the one we had in 2008.”
On March 13, 2023, Peter was on Ingraham Angle again, this time to talk about the beginning of that financial crisis.
In the wake of the failure of Silicon Valley Bank and Signature Bank, the Federal Reserve and the US government came to the rescue, quicking putting together a bailout that includes a promise to protect all of the banks’ depositors, along with a Fed program that will offer loans of up to one year in length to banks pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. Banks will be able to borrow against their assets “at par” (face value).
Ingraham started the interview by referencing Citadel founder Ken Griffin who said the rescue package shows American capitalism is breaking down before our eyes.
Peter responded that American capitalism broke down a long time ago and the latest bailout effort is just another nail in that coffin.
The reason we are now having another financial crisis – and it would already be a lot worse if we hadn’t made the mistake of backstopping all these insolvent banks – but the reason they got insolvent was because of the government. The Federal Reserve kept interest rates at zero for 12 years. There was quantitative easing. And during that time, banks, and pretty much everybody else, loaded up on low-yielding debt. But in order to keep interest rates that low, the Federal Reserve had to create massive inflation. They called it quantitative easing, and the adverse consequences really started to show up last year when we had these big elevated increases in the CPI.”
With price inflation becoming such a burden on Americans, the Fed was forced to raise interest rates to fight inflation. That pricked the bubble it had inflated.
Now, all of these institutions are insolvent at higher interest rates. We have a bigger debt crisis now than the one we had in 2008, which was also caused by the artificially low interest rates that followed the bursting of the NASDAQ bubble when the Fed kept interest rates at 1%. That inflated the housing bubble. But this time, zero percent inflated a much bigger bubble, which is why we are now having a much bigger financial crisis.”
Peter emphasized that none of this would have happened if we had stayed with a free market.
The free market would have purged the economy from all these excesses a long time ago, and instead of having a bubble, we would have had a genuine recovery with real prosperity instead of the phony prosperity that we’ve enjoyed. And now the chickens have come home to roost.”
Economist and former Treasury secretary Larry Summers said the problems with Silicon Valley Bank didn’t have much to do with interest rates. He said it was “a failure of risk management.”
So, what was it? Interest rates? Or poor risk management?
Peter said it was both.
But the low interest rates are what led to all the excessive risk-taking. And so did the moral hazard of the 2008-2009 bailouts. Wall Street learned the lesson that you can gamble and if you win you keep the profits. If you lose, the government bails you out. So, that was part of the reason for the risk-taking.”
Peter also pointed out that banking regulations encouraged financial institutions to load up on Treasuries and mortgage-backed securities because of the favorable way they’re treated for accounting purposes.
They don’t have to take any haircuts. They don’t have to mark them the market. And so, it’s government policy that caused all this. But none of it would have happened had we not had the zero percent interest rates or the quantitative easing.”
And Peter emphasized that unfortunately, inflation is about to go through the roof.
When President Biden said nobody is going to have to pay for these bailouts, he’s wrong. We’re all going to pay through inflation. Because the Federal Reserve is financing it by printing money. And so the price of everything is going to go up. In fact, bank deposits are more at risk now than ever before because inflation is going to destroy the value of everybody’s savings.”