Sunday, March 12, 2023

The Godot recession and collapsing banks.

First, I have a correction. Last week, I snarked about tech firms lowering their hiring requirements at the same time that thousands of their workers are being laid off. An alert reader told me there really is a shortage of applicants for tech jobs, and the layoffs aren't affecting the unemployment rate because those tech workers who get laid off are landing new jobs very fast. I'm happy to clarify that.

But that brings me to another question about employment -- and about the economy in general. 

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Back when I was a teenager, I read an article in our hometown newspaper that trumpeted the fact that the unemployment rate had fallen to 4%. Good news, the experts quoted in the article said gleefully. We're at full employment!

Fast-forward to last week, when there was weeping and wailing and gnashing of teeth over the February 2023 unemployment rate of ... wait for it ... 3.6%. Why? Because it was up by only a smidge from January's historically low unemployment rate of 3.4%. 

Now I'm no economist; my credentials consist of a 101-level class in macroeconomics in college and several decades of watching bona fide economists argue with one another. But it sure seems to me that an unemployment rate of 3.6% ought to be cause for celebration. Why are these people wringing their hands?

It has to do with the specter of recession. Ever since the world shut down for the pandemic three years ago, the folks in charge of financial stuff have been warning dolefully that we're due for a doozy of a recession. Just wait, they keep saying -- in one more quarter, or maybe two, the economy is going to go to hell. The stock market will tank, there will be massive layoffs, and it's just going to be miserable.

But here we are. It's been three years since the pause, and everything's going along tickety-boo. The Wall Street Journal this week quoted the chief economist at Credit Suisse, Ray Farris, as saying, "It's the 'Godot' recession." You know, the one that never comes. (I hope you can read the article at the link; WSJ is paywalled, and their monthly subscription rate is clearly geared toward titans of industry.)

The article goes on to attempt to explain why the recession hasn't shown up yet. Between the stimulus payments and other measures the federal government implemented during the pause (including, I'd suggest, the hold on student loan payments), we've had a soft landing. Yes, inflation is high, but it's been coming down for several months; a lot of the increase was due to supply-chain issues that have mostly eased. Consumer spending is still going strong, and unemployment, as I've said, is super low.

The Federal Reserve has been trying to put the brakes on the economy -- to keep us from tipping over into a recession -- by raising interest rates at a fast clip. But hiking interest rates is a blunt tool, and this weird economic situation we're in may need a finer instrument now.

A big sign that the Fed's favored tool may have maxed out its usefulness came on Friday, when banking regulators seized Silicon Valley Bank and shut it down. The bank catered to tech startups. It was adequately capitalized -- that is, it had plenty of money on hand -- as recently as December. But the Fed's interest rate hikes caused the bank's long-term investments -- Treasury bonds -- to lose value. Once word got out that the bank was selling T-bonds to raise capital, a whole bunch of account holders rushed to pull their money out, which of course made the bank's liquidity problems worse. So the government stepped in around noon Friday and took it over. (Reportedly, SVB employees received their annual bonuses just before the kaboom.)

This is the biggest bank failure since Washington Mutual went belly-up in 2008 and kicked off the Great Recession. But government officials have been quick to reassure everyone this weekend that we're not going to have a repeat of that financial fiasco: SVB didn't have its fingers in nearly as many business sectors as WaMu did; it's really more of a regional player; and so on.

But as I was beginning to write this post, word came of another bank collapse. Today, banking regulators shut down Signature Bank, a commercial bank with headquarters in New York and a broader base of business, including commercial real estate, than SVB's. A quarter of Signature Bank's assets were in crypto last fall, but the bank announced plans a few months ago to sell off a chunk of that.

The government has promised account holders that they'll be able to get at their money in both banks tomorrow.

It's hard to predict what all this will mean for the future of the economy (although economists no doubt will try!), but it will be interesting to see how the Fed's board of governors reacts to this news. Playing with interest rates is really the only tool it has for influencing the economy. The board meets again on March 22nd, and there are indications -- okay, there's speculation -- that the members may vote to slow down their interest rate hikes. I guess we'll see what happens.


These moments of economic blogginess have been brought to you, as a public service, by Lynne Cantwell. Stay safe!


Yvonne Hertzberger said...

Interesting look at U.S. banks for me. I don't pretend to understand it all but in Canada all major banks are guaranteed by the government so that a collapse cannot happen in the way it does in the U.S. That said, there is no guarantee that this prevents a recession. IMHO we are already there. It's semantics and smoke screens.

Lynne Cantwell said...

Here in the US, deposits in federally-chartered banks are insured up to $250,000. So as long as you keep the balance in your accounts under that level, you get your money back if the bank goes under.

In this case, though, a number of depositors had way more than $250,000 in deposits at SVB -- but the government has agreed to make good on the full amount, anyway. Which begs the question of what these supposedly savvy business owners were thinking...

Emotional reactions have a bigger effect on the economy than people think. If enough people believe the economy's going to hell, they'll stop buying stuff and save their money, and the economy will go to hell. Fun, right?