The financial sector saw new players, some of which lacked a diverse bond portfolio. These new players were hit hard when bond values dropped. When the government runs a deficit, it sells bonds to maintain a positive balance. Banks benefited from this arrangement, earning income from the bonds. However, as interest rates increased, the value of old bonds dropped. Most banks sold their bonds to non-bank financial institutions, minimizing their losses. However, SBB, a conservative bank reliant on deposits, suffered and was one of the first to go under.
We last had a financial crisis in 2008 (ignoring the pandemic years), and if we’re not in another crisis now, we’re well on the way to it, with mortgages rising, taxes increasing and the price of everything continuing to rise. Your spending power is being hit in three directions. But, isn’t that what central banks want? So we spend less and inflation comes down, theoretically. Yet the banks, who might not be to blame this time, are now feeling the hurt. In fact, they stand to gain from rising interest rates because they can raise their borrowing costs. This week Phil asks Steve, will the banks always win, come what may?
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