Is the Global Financial System on the Brink of a Crisis?
The global financial system is once again facing a potential crisis, warns macroeconomic expert George Gammon. In a recent update to his YouTube subscribers, Gammon points to alarming indicators that signify the impending wave of bank failures. Let’s delve into the details and understand the significance of these developments.
Indicator #1: Bank Borrowing from Federal Home Loan Bank (FHLB) and Bank Term Funding Program (BTFP)
A key indicator highlighted by Gammon is the significant increase in bank borrowing from the FHLB system and the newly formed BTFP. Troubled banks typically resort to borrowing from the marketplace or the repo market when they need liquidity. However, if these channels fail, they turn to the FHLB, albeit reluctantly due to its costly terms. In dire circumstances, when even the FHLB refuses to do business with them, banks seek help from the Federal Reserve through facilities like the BTFP.
Data from the Federal Reserve Economic Data (FRED) system shows a skyrocketing trend in borrowing from both FHLB and BTFP, indicating that the banking crisis is far from over. This increase suggests that more banks are likely to fail, potentially pushing the global financial system into a crisis even more severe than the 2008 global financial meltdown.
Indicator #2: Monitoring the Discount Window of the Federal Reserve
Gammon advises monitoring the discount window of the Federal Reserve to predict the timing of the next wave of the crisis. This emergency lending program provides short-term loans to banks. A spike in activity at the discount window would signal that banks are on the verge of collapse.
Implications of a Second Wave of Bank Failures
The consequences of a second wave of bank failures could be catastrophic. The collapse of major banks in the 2008 crisis had a profound impact on the global economy, leading to widespread job losses, foreclosures, and a stock market crash. If the upcoming crisis is worse than 2008, the effects could be even more severe.
Moreover, when banks fail, lending contracts, causing a credit crunch and hindering economic activity. This decline in consumer spending, investment, and business expansion can trigger a downward spiral that exacerbates the crisis.
Additionally, bank failures can erode confidence in the financial system, prompting investors to withdraw from the market and causing stock market declines. The interconnectedness of the global banking system means that a crisis in one country can quickly spread to others, potentially triggering a domino effect of bank failures worldwide.
Government and Central Bank Interventions
In response to the looming crisis, governments and central banks may need to intervene with massive bailouts and stimulus measures once again. While these measures can temporarily stabilize the financial system, they come with significant costs such as increased government debt, inflationary pressures, and the risk of moral hazard.
The Need for Regulatory Measures and Reforms
The potential impact of a second wave of bank failures underscores the importance of robust regulatory measures and reforms within the banking sector. Implementing measures such as strengthening capital requirements, improving risk management practices, and ensuring adequate oversight can help mitigate the risk of another devastating financial crisis.
In Conclusion
The signs are pointing to a second wave of bank failures that could rival or surpass the 2008 global financial fallout. The parabolic increase in bank borrowing, particularly from the FHLB and BTFP, suggests that the banking crisis is far from over. Monitoring activity at the discount window of the Federal Reserve can provide insights into the timing of the next wave. The consequences of such a crisis would be severe, impacting the global economy, financial markets, and individuals and businesses alike. To prevent future crises, regulatory measures and reforms must be implemented within the banking sector.
