It’s in many ways a lamentable reality, but real it is that when investors are panicked they migrate into Treasuries. They do so not because government bonds are safe, but because government because bonds backed by the world’s most productive people are the picture of safe.
So, while describing Treasuries as a flight to safety is shooting fish in a crowded barrel, there’s an outre quality to it at the moment. In his last few columns, the Wall Street Journal’s Joseph Sternberg has made a variation of the same point about “unprecedented low interest rates and quantitative easing” having “distended global finance.” With seemingly all alleged problems in finance, including bank failure, Sternberg has fingered the Fed as the cause. Except that it’s hard to tie the central bank to the present, or past. Silicon Valley Bank (SVB) instructs here.
To see why, consider its holdings when it experienced a run. And consider when those holdings were compiled: amid years of allegedly “zero” rates of interest from the Federal Reserve. Apparently SVB didn’t get the memo judging by assets that were largely of the Treasury variety. Supposedly capital was “costless” when deposits into SVB surged, but the bank surely didn’t lend as though money was “free.”
Some will point to the surge of deposits from startups as evidence of “easy money,” but startup funding is if anything a reminder of just how expensive capital is. It’s all equity capital, and it is precisely because most startups will never generate the income necessary to pay back debts incurred. In other words, capital is so expensive in Silicon Valley that there’s no interest rate at which it’s economic to lend to startups.
It all raises a question about a popular notion bruited by Sternberg (among many, many others): “low interest rates” as the source of “distended global finance.” The question is where these rates revealed themselves, and what the Fed had to do with them. As Sternberg himself acknowledges in the piece quoted from, banks through which the Fed projects its wildly overstated influence shrink by the day as sources of finance. As for venture capitalists, the tough terms that inform their finance are in no way indicative of “easy.”
The Fed-focused including Sternberg might say that the central bank’s retreat from “zero” in March of 2022 resulted in a financial pullback, but as Sternberg’s own Wall Street Journal reported in May of 2022, venture capitalists had begun to put their startups on a diet well before the Fed started hiking. They did so not because of the Fed (in a global economy, any Fed “tightness” is overrun by global sources of credit), but because Valley “unicorns” were no longer unicorns. Put another way, if startup valuations had remained high in 2022, any Fed “tightening” would have been quickly replaced by global and domestic sources of finance. Sternberg seems to get this as evidenced by his acknowledgement of the growing heft of nonbanks, but central bank obsession dies hard.
Since it does, Sternberg and others are reluctant to cease writing about the Fed as the central planner of credit in amount and in cost. The problem with such a view is that even the banks never went “easy” while the Fed was at zero. See SVB again.
More broadly, Sternberg would be wise to reacquaint himself with a market phenomenon exponentially more powerful than the Fed: it’s called compound interest. The latter should reminds us that those with capital have no choice but to be prudent, simply because it’s so incredibly expensive for those with actual skin in the game to be “easy” and offer up credit in “costless” fashion as the pundit class imagines they do.