The precious metals website Schiffgold recently wrote that the wave of bank failures may unfold again, but the Federal Reserve will find itself in a dilemma. The following is the full text.

In 2009, 140 banks went bankrupt. According to a recent report by financial consulting firm Klaros Group, hundreds of banks are at risk of going out of business this year. This is mainly portrayed as a threat to individuals and communities rather than to the economy as a whole. However, for banks under heavy pressure across the US, a series of small bank failures could soon spread to a more serious “carnage” — particularly in economies with high inflation and extreme reliance on ultra-low interest rates.

Most of the companies at risk are small banks with assets of less than $10 billion, and a few are larger regional banks. Some banks may be able to avoid going out of business by halting expansion plans or reducing services. Other banks may bail themselves out by merging with larger banks. However, due to the high rate of inflation, the Federal Reserve is currently unable to cut interest rates, and “maintaining high interest rates for a long time” seems increasingly likely, and banks with large exposure to struggling commercial real estate are particularly likely to trigger a domino effect. That is, the collapse of small banks will lead to a larger scale bankruptcy, which will eventually evolve into a real estate crisis.

The Klaros report looked at troubled community banks, which are being “held hostage” by higher interest rate policies, and are bearing huge losses on struggling commercial real estate loans, uninsured deposits, and other loans and bonds. As Federal Reserve Chairman Powell acknowledged, not all of the Federal Reserve's “hostages” (banks) can survive. Don't worry, though — as he said during a recent Senate Banking, Housing, and Urban Affairs Committee hearing on monetary policy, the failure of a few banks won't turn into a vicious cycle of unchecked control:

“Banks are going to go out of business... I think it's manageable, that's the word I use.”

In other words, banks will go out of business, but not enough to trigger a large-scale banking crisis or destroy the wider commercial real estate industry. Powell said that the Federal Reserve is “cooperating” with small banks that are in trouble and provide loans for vacant office buildings and retail buildings, but whether what he says is credible is up to the audience. He said:

“Many big cities and small cities have vacant buildings... the tens of thousands of people working in these buildings are also under pressure... We're just trying to plan ahead.”

Deciphering the Federal Reserve's pun has always been a delicate task. After all, even if he actually thought that a bank failure in 2024-2025 would be enough to trigger a domino effect, he wouldn't say that; otherwise, it would cause market panic, and it may soon become a self-fulfilling prophecy.

Powell promised that in any case, if the Fed's intervention in the economy causes a banking crisis, the Federal Reserve will use taxpayers' money to protect large banks that are considered “systemically important.” First Republic Bank (First Republic Bank), the first bank to go out of business in 2024, did not fall into the category of “too big to fail”; it was annexed by the larger Fulton Financial Company (Fulton Financial). Nearly 50% of the loans in the First Republic are invested in commercial real estate.

But the reality is not that simple; the Federal Reserve's arrogance has left it in a dilemma between preventing a banking crisis and preventing inflation from getting further out of control. It requires higher interest rates to lower inflation, but key sectors of the economy that are heavily dependent on loans cannot survive in an environment of high interest rates.

In a free market, interest rates should actually be much higher — banks that are “too big to fail” will no longer exist. The part of the economy that cannot afford higher interest rates will be removed from the system.

Without the ruthless yet self-regulating mechanism of the free market (that is, no matter the size, the losers are out), the Fed's magic would put the US in a seemingly endless cycle. If you compare this cycle to a spring, then the spring will no doubt become tighter and tighter, because the Federal Reserve continues to delay the problem to prevent the financial system and the dollar from completely collapsing.