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digital daily: Macro Monday - A No-Bailout Bailout

The banking system is posing a greater risk to crypto assets than crypto assets to the banking system. That was unthinkable even a few days ago. After all, the surge in policy rates had been remarkably orderly in traditional markets and brutally efficient in deleveraging crypto markets. But beneath the surface, liquidity issues are building – basic ones, nothing like 2008. Banks can’t afford to raise deposit rates as the yield on their longer-term assets is too low. Making matters worse, even “riskless” securities held by banks are down substantially in value. A massive wedge has emerged between what banks are willing to pay for short-term financing and what can be earned in the open market. Average US deposit rates are running around 40 basis points with money market funds yielding more than 4%. Naturally, there is a gravitational pull away from deposits. It escalated quickly – as financial crises do – to a liquidity squeeze for the weakest links. As funds left the banking system, assets were sold, losses were crystallized, and depositors were spooked in a few smaller banks. This threatens a broader bank run. The speed of escalation was matched by the Sunday “solution” – emergency clauses and a new Fed program. The Bank Term Funding Program was created to ensure that all depositors are whole, something insurance schematics can’t scale to achieve. Think of it as a one-year discount window with better terms. But it shines a spotlight on policy tension. Policy can’t win the fight against inflation without breaking a few things. We were reminded that financial instability is the greatest fear of policy. The good news – your money is safe. The bad news – it’ll be worth less. Inflation assets are the big winner here.