The Silver Lining of Bank Troubles

financial planning for attorneys financial planning for entrepreneurs financial planning for retirement financial planning for young professionals Mar 29, 2023
Revenge Spending

No More Revenge Spending

There’s a new term out there – revenge spending.  When people were hunkered down during COVID, they couldn’t go out to spend.  When things opened up, people took their revenge on the lockdowns and spent like never before.  And the government has joined the party.  As Ronald Reagan famously quipped, saying that Congress spends like drunken sailors is to do a disservice to drunken sailors. 

And we now have inflation.  It comes about by increased demand – too many dollars chasing too few goods. 

In early 2022 the Fed realized its mistake of providing easy credit for way too long as inflation soared.  They pivoted hard by raising interest rates at an unprecedently rapid pace.  In 2023 the Fed remains committed to stamping out inflation, but it is also significantly slowing the pace of its increases. Much of last year we saw successive 0.75 pt rate hikes. At the Fed’s most recent meeting, they raised rates 0.25 pts. At this point, market prognosticators are 50/50 on the Fed raising by another 0.25 pts, or pausing altogether, at their next meeting. The expectation is we’re getting closer to a terminal Fed Funds rate.

In the 1970s we took too long to raise interest rates when combatting inflation, which forced previous Fed Chair Paul Volcker to raise rates up to 20%! That’s a far cry from today, where we currently hover near 5%. The current Fed is not looking to repeat the tough medicine approach of Volcker, and it is not expected to. In fact, the Fed is expected to begin cutting rates at some point in 2024, or as early as the end of 2023.


We’ve had a wave of a few bank collapses in the past few weeks, which were quickly backstopped by the US government. This was nothing like the corporate bailouts we saw under the TARP program during the Great Financial Crisis. For example, the biggest difference in the Silicon Valley Bank (SVB) collapse from the 2008 bailouts was this --  in the 2008 bailouts, both the bank depositors and the corporate bank owners were propped up. When SVB collapsed recently, the bank’s depositors were made 100% whole, but the corporate owners and stock holders were wiped out.

In 2008, we had the $700 Billion TARP bailout program (Troubled Asset Relief Program). Among other initiatives at the time, the US government purchased stock in 8 major, distressed banks at a deep discount (Bank of America/Merrill Lynch, AIG, Wells Fargo, etc.). This purchase provided massive liquidity to banks on the brink of collapse. Source: The Balance. These banks eventually re-purchased stock in their own companies after a few years at a higher price, netting the US government a sizeable “profit”. In other words, the infamous bailout program of the Great Financial Crisis turned out to be a money-maker for our government to the tune of billions. The US government bought low and sold high.

But our government is not in the business of buying and selling stocks, nor should it be. In the case of SVB, the US government through the FDIC set a precedent in backing 100% of deposits at SVB (rather than only the $250,000 max per person/per registration covered under FDIC). Going forward, expect Congress to pass bi-partisan legislation requiring banks to pay higher premiums in order to maintain higher FDIC coverage. This, combined with increased scrutiny over how bankers are permitted to invest customer deposits for profit, is going to drive profitability lower at major financial institutions. You’ll be glad to know that even before the collapse of SVB, our client accounts have very little exposure to the financial sector – we foresaw something like this coming, and steered clear.   

The opportunity, then, is that now that interest rates seem to be finally stabilizing we can get on with the business of investing in markets with the opportunity for return based on earnings expectations (without being overshadowed as much by interest rate hikes)!

Silver Lining of Bank Troubles

When the US government acted swiftly to backstop deposits at SVB, they clearly demonstrated that maintaining confidence in our US financial system was a non-negotiable. One could argue that now banks will have a license to be reckless with customer deposits, since they’re likely to be rescued by the government if they make poor business and investment choices (as SVB did).  But that’s not how the world works. There will be bi-partisan support for more comprehensive banking regulation. People simply want their deposits to be safe. Congress wants that too, so you better believe that bank execs will be in Congress’ crosshairs.

Banks will have higher liquidity requirements, which also means these same banks will tighten lending standards. In other words, fewer loans approved, less taking risks on that small business that needs capital, which means even less liquidity flowing into the US financial system. Banks will hoard cash. How is this a good thing? Well, the Fed has been aggressively pursuing a monetary tightening policy by raising interest rates. Raising rates has the effect of discouraging people and businesses from borrowing too much. When less borrowing occurs, there is less cash flowing in the economy. Less cash flowing in the economy is what the Fed wants so it can stave off inflation.  If, all of a sudden, the banks start restricting their lending practices for a while – which I expect they are already doing in order to preserve their own balance sheets – they will effectually be carrying out their own version of monetary tightening.  Between the Fed and all the banks starving the real economy of liquidity, I expect the Fed will cut rates sooner than many think. Rate cuts must happen. In anticipation of rate cuts, look for the market to soar on the news. You can’t time these things – you simply need to ride the wave and stay invested for upside potential.

Corporate Real Estate

Lest we get the party started too early, the next shoe to drop is commercial real estate. 2008 was in large part a residential real estate bust. 2023 and 2024 we’re going to hear a lot more about the commercial real estate bust. Are you surprised? Nearly half the country is working from home. Do you think companies looking to shore up their finances are going to hold onto office leases they don’t use? Borrowing is expensive. It probably doesn’t make sense to refinance the lease on your old loan. It’s a gloomy outlook for commercial real estate. The US government is likely to step in – even if that means lowering interest rates earlier than they had initially planned.

The good news here is that all this is sort of ex-Miami.  Earlier in the year Goldman Sachs did a real estate study and predicted a rise of 5% in the Miami market!  It seems there is an inexorable supply of people leaving high tax states to come to Florida, with the financial industry focusing on Miami. 

Every year we go through some existential crisis in markets. When you don’t flinch, or better yet you buy into a falling market, you come out ahead if you know your history. In closing, here is a chart to remind you of market history.  Time in the market is better than timing the market. Let history guide you in making investing decisions – stay the course (assuming you are invested with us) and call us if you have questions!

Two takeaways from the below chart of the S&P 500:

  1. Since 1926, the broader stock market has an average annual return of 10.27% (Note this doesn’t include the last few years, which combined would make this % average even higher.)
  2. You rarely actually make 10 +/-% in a given year. Your return is often higher, with a minority of years in large declines.

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