The implosion of SVB Financial Group SIVB-owned Silicon Valley Bank has been blamed on its reckless strategy of investing the deposits mobilized in long-term Treasury bonds. Fed's successive and aggressive rate hikes have pushed up bond yields significantly, causing a drop in the value of the bonds the bank held in its portfolio.
The second-biggest banking collapse has spread panic among banking clients and the markets, as reflected by the sharp decline seen in the shares of financial stocks ever since SVB disclosed its woes. The Fed cops at least a part of the blame, according to some analysts. It is against the backdrop that comments by Wharton Professor of Finance Jeremy Siegel in late September 2022 when the Fed announced a third straight 75-basis-point hike in the fed funds rate makes sense.
Tesla CEO Elon Musk endorsed the professor’s view then.
What Happened: Siegel came down heavily on the Fed for not tightening monetary policy before inflation went out of control. Now, by tightening monetary policy aggressively, the central bank is making another mistake, he said in a CNBC interview.
“The last two years [are] one of the biggest policy mistakes in the 110-year history of the Fed, by staying so easy when everything was booming,” Siegel said.
To make his case, Siegel noted that when commodity prices were spiking, the Fed under Jerome Powell stood pat and now when the very same commodities and asset prices are on the way down, the central bank sees stubborn inflation that requires it to “stay tight all the way through 2023.”
He also sees a recession materializing, with working- and middle-class Americans paying the price.
“I am very upset,” he said, adding, “It’s like a pendulum. They were way too easy through 2020 and 2021.” Now the Fed says, “We’re going to be real tough guys until we crush the economy,” he added.
“I mean, that is just to me absolutely, poor monetary policy would be an understatement.”
Musk Comments: Quote-tweeting the CNBC video, Musk said, “Siegel is obviously correct.”
Incidentally, ahead of the Fed’s September rate hike, the billionaire said there is too much latency in Fed decisions, adding that it is problematic in a “fast-changing world.”
He also previously commented on Ark Invest founder Cathie Wood’s tweet about the Fed relying on lagging indicators and taking cues from the situation that prevailed in the 1970s, when the central bank aggressively raised rates to ward off inflationary pressure that was entrenched for about 15 years.
“Yes, the fundamental error is reasoning by analogy, rather than first principles,” Musk said in reply.
Originally published on Sept. 25, 2022 and updated.
Photo: Courtesy of Tesla Owners Club Belgium on flickr
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