The Banking Crisis Is Over Thanks To Regulators

It might feel like dodging bullets but the banking crisis of the last days is actually great news for investors.

While I sympathise with those who have lost money in these collapses, the bigger issues are what are key to most of us.

We should accept financial crises are unavoidable. There will be many new ones in the future and there is certainly a huge canon of them from the past. Crisis and disaster is just a function of life and it’s not their existence that is core but the reaction to them.

We have been through the Covid crisis and as a result there is a large financial price to pay. A lot of wealth has been lost through disruption. That wealth is gone. It has been papered over by giant financial interventions that have bridged the chasm in an attempt to avoid acute economic death spirals, instead swapping them for chronic grinding financial stress. The rebalancing device is inflation, because that is the time-tested process to rebalance economies after horrific disasters like war, because inflation is solely in the power of governments and they can make sure it is unescapable while remaining compulsory for everyone in the system.

Inflation will grind on until the economies we care about are back to 2%-3% growth and 2%-3% budget deficit and GDP/debt is in the (new norm) low 90% range. Until then the real target will be an inflation of around 5% until the poison has done the job and inflation can be brought down to the magic 3%. This is how financial stability will be maintained.

This reality is where we will be for at least a couple of years, and tightening is all about reeling in the excess money pumped in during Covid, while avoiding a monetary runaway situation.

The road ahead cannot be smooth, there are too many variables.

However, there is one call to make: Will governments keep the financial and economic landscape “together” or will the whole system meltdown?

To me this is a silly question asked by old quivering misers and answered with a roaring NO by their doom-gurus.

It can get bad but the extreme pictures that are pressed on us about the economic future are just horror movies for the financially gothic.

What is feared are reruns of classic financial panics 2007-2008, 1929, etc.

Are we going back to these situations? My answer is no and the reason is simple.

The old crash panics were caused by situations where the participants and regulators (often practically non-existent) had no clue what was going on and how to fix it.

When the locomotive of a market came off the rails all they could do was clean up the carnage and the terrible rolling consequences.

Right now regulators are absolutely “on it.”

A miss by an inch is as good as a mile.

Back in the autumn my U.K. portfolio was malfunctioning. This told me something wicked was coming so I bailed. Literally two hours later the regulator popped up and saved the whole U.K. financial services industry with a $100 billion bailout. Today few remember and no one cares. In the past the regulator and government would have dithered, down would have gone the U.K. pension industry, crash would have gone the stock market, boom up would have shot interest rates, bang down would the pound have collapsed.

Instead crickets.

However nasty the SVBVB
, Signature, Silvergate chaos, it’s over. Credit Suisse—it’s over. The regulators are sorting these situation in hours not weeks, months and years and doing so with “whatever it takes’” actions. Moral hazard, gone into the trash where it belongs. Magic money being used properly to bail us all out when something inevitable happens like a bank run.

I’m no regulator hugger, but they are doing a great job right now and if they keep on the pace as they have since Covid, then you can BTFD rather than run for the hills.

There are tough times ahead, with strong inflation, disruption and rebalancing sure to happen, but the system is proactively working to maintain stability rather than in the drowsy, dozy state of the past.

So for me that is the upshot of this crisis. The market’s future is going to be spicy but it is still a game fit to play for anyone with trust in the regulators to pull rescue from the jaws of disaster.

I know it’s contrarian, but as Mr. Buffett says, there are times to be greedy when others are fearful.