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New Banking Crisis Looms As Fears Of A 'Lehman Moment' Rise

By Stefan GleasonCommoditiesOct 14, 2022 03:48PM ET
www.investing.com/analysis/new-banking-crisis-looms-as-fears-of-a-lehman-moment-rise-200631105
New Banking Crisis Looms As Fears Of A 'Lehman Moment' Rise
By Stefan Gleason   |  Oct 14, 2022 03:48PM ET
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As new inflation data pushed the Fed toward continuing with rate hikes, precious metals markets are struggling to make headway.

On Thursday, the government released Consumer Price Index data for September. The so-called core CPI, which excludes food and energy, increased by 6.6% from a year ago. That’s the highest core inflation reading since 1982.

Although prices at the pump have eased since summer, other inflation components continue to rise. Housing, food, and medical care are the biggest contributors to rising consumer prices.

For the time being, though, gold and silver markets are showing a stronger correlation to the Federal Reserve's expectations for further interest rate hikes. Metals markets may not be able to get any sustained traction on the upside until investors are convinced that Jerome Powell and the company are ready to pivot away from tightening.

In other news, former Fed chairman Ben Bernanke was awarded the Nobel Prize in Economics. Yes, you heard that right. The same man who earned the nickname “Helicopter Ben” for his policies of dropping bailout cash into the financial system is now officially crowned an economic genius by the Norway-based globalist organization.

He might have deserved that distinction if he had solved the root problem of unsustainable excesses that periodically build up in financial markets. Instead, his Quantitative Easing programs rewarded those very excesses and encouraged more to build.

Ben Bernanke reinforced financial markets’ expectations of a “Fed put” – that the central bank would step in to rescue Wall Street and the too-big-to-fail banks whenever they run into serious trouble.

Bernanke’s main contribution to central banking philosophy centers on his belief that the Fed didn’t stop and intervene enough or aggressively during the Great Depression. He maintains that investment banks should have been bailed out after the stock market crashed to avert a severe economic downturn.

But inflationary policies fostered by the Fed during the Roaring 20s helped fuel the financial system's excesses that made it vulnerable in the first place.

Neither Bernanke nor the current Fed chairman seems able or willing to grasp the concept that Fed-fueled booms lead to dangerous excesses in the financial system. And the promise of Fed bailouts when the booms go bust creates a moral hazard that incentivizes reckless risk-taking.

Another banking crisis may be in the making now. Financial strains expose major banks as under-capitalized and ill-prepared to weather high inflation, rising interest rates, and a weakening economy.

Many analysts fear bank runs are coming. They are already hitting developing countries. In Europe, meanwhile, banking behemoths Credit Suisse (NYSE:CS) and Deutsche Bank (ETR:DBKGn) are showing signs of distress. Credit Suisse faces an $8 billion capital shortfall.

Credit default swaps – those derivative instruments made infamous during the Great Financial Crisis of 2008 – are again flashing warning signs of rising default risk.

Some analysts foresee another “Lehman moment” – a sudden, looming failure of a systemically important financial institution. JPMorgan (NYSE:JPM) CEO Jamie Dimon warned recently that the U.S economy is headed for a painful recession.

Some sound money advocates predict that the next financial crisis will bring bank bail-ins – whereby banks claim depositors' assets to prevent cascading failures.

Given the growing risks to the financial system, asset protection strategies are a must. Owning physical precious metals outside the banking system is essential to safeguarding one’s wealth.

Accounts held at banks and other financial institutions are vulnerable to the risks those institutions assume.

And should the banking system reach a crisis point, the Federal Reserve will likely make a massive pivot back toward monetary loosening. That puts holders of U.S. dollars in all forms at risk of eroding their purchasing power at an even more rapid pace than has been reflected so far in 2022.

While the U.S. dollar has benefited temporarily from a flight to quality amid selloffs in stocks and other risk assets, it is a fundamentally unsound currency guaranteed to depreciate steadily over time.

When a true flight to quality occurs, investors will realize that the soundest form of money isn’t issued by the Federal Reserve or any central bank, for that matter. The soundest form of money is precious metals.

Central bankers like Ben Bernanke and Jerome Powell deny that gold still functions as money. They believe money and the interest rates attached should be managed by central planners who are supposedly wise enough to know what the proper inflation rate is and when to raise interest rates, when to lower them, which institutions to bail out, which to let fail, and so on.

But nobody, ultimately, is wiser than the free market itself. And absent the imposition of fiat currency by central banks, the market has always chosen gold as the soundest form of money.


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New Banking Crisis Looms As Fears Of A 'Lehman Moment' Rise
 

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New Banking Crisis Looms As Fears Of A 'Lehman Moment' Rise

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