A few days ago, JP Morgan, the largest megabank in America, announced its significant profits amidst the ongoing banking crisis, similar to its success during the previous one. The bank also issued a warning, anticipating more bank crashes in the future, hoping to capitalize on them just as they have done so far. JP Morgan is now projected to generate $84 billion in net interest income, a notable increase of approximately $10 billion since April. This surge is primarily attributed to the failure of regional banks, prompting depositors to flock by the millions to “too big to fail” banks like JP Morgan, which benefit from an implicit taxpayer bailout.
Of course, this projected $84 billion is in addition to the fire sale orchestrated by JP Morgan’s acquisition of First Republic, which was priced at a bargain due to a $63 billion taxpayer donation. Undoubtedly, this crisis has been immensely profitable for JP Morgan, evident by CEOs gleefully discussing the potential for further gains. According to them, we have only witnessed the first act of the Federal Reserve’s plans, with the rate hikes of the second act yet to begin, including the implementation of quantitative tightening.
Quantitative tightening refers to the process in which a central bank sells assets instead of buying them. Ordinarily, if a central bank wishes to artificially stimulate the economy for political reasons (which is often the case), it does so by injecting money into the economy through printing money. This practice involves creating new funds, typically used to purchase government bonds or mortgages, thereby increasing the money supply and making loans more accessible, even for less viable businesses. However, this approach also leads to inflation. To counterbalance this, central bankers resort to quantitative tightening by selling the assets they had acquired. For instance, if they sell a government bond for $1,000,000, they effectively eliminate that million by deleting the zeros. It’s akin to reversing the money printing process.
Unfortunately, the success of quantitative tightening remains largely theoretical. The two previous attempts in 2013 and 2019 ended in spectacular failures, resulting in unprecedented spikes in interbank loans and treasury markets. Consequently, both attempts were swiftly abandoned. In other words, based on actual experience, printing money is comparable to adding salt to a meal—it’s easy to add, but incredibly challenging to remove.
However, this time around, the central banks cannot simply abandon their efforts as they are running out of options. The Federal Reserve recognizes that the economy is shifting, understanding that they cannot raise interest rates amidst a potential crash. Yet, inflation remains persistent, necessitating a tightening of monetary policy while praying that it does not cause excessive damage. Given Morgan’s enthusiasm and the Federal Reserve’s track record, it is highly likely that we will witness more bank failures and possibly other disturbances on Wall Street’s horizon, each with the expectation of a generous bailout funded by taxpayers. Rest assured, we will be vigilant observers of these developments.
