And so it begins… Financial Crisis of 2023

Banks are failing, financial markets are swooning and the Fed is once again getting ready to step in and turn on the dollar liquidity firehose. Whereas the previous financial crisis of 2007-2008 was caused by credit risk (subprime mortgages bundled into toxic mortgage-backed securities, remember all that?) and risk of market failure, this one is caused by an interest rate crisis: the Fed tried to reign in inflation caused by its previous crisis management by hiking interest rates faster than it had ever done during the previous 45 years or so. This made various low-yield financial instruments held by banks worth a lot less. This is not necessarily a problem (the banks have various mechanisms to fix cash flow problems)… unless there is a bank run, forcing the banks to sell their not very valuable financial instruments for not enough money, resulting in bankruptcy.

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