We will tolerate moral hazard, bailouts, lax supervision, and zombie firms to not address the bubble in financial assets. We don't want to pay the price for financial policy sins and allow for an economic morality play. To lay blame requires self-analysis and requires admitting to mistakes.
The more recent problem started with the mistake of economic shutdowns from COVID that were relieved through excessive monetary policy. Of course, we are not focusing on the large problems arising from excessive policy post the GFC. The public would not tolerate shutdown if they were not paid to accept these policy choices. The true problem arose when an immediate solution became a normal policy action which led to monetary excess. Now the Fed is trying to reverse the excesses. The Fed put that worked in a low inflation environment has now become a Fed focused on a market structure that does not allow failure.
The Fed valued labor over inflation to the point that it now needs to raise rates and reverse the excess. The result is no Fed put for financial markets, but a selective support of institutions based on politics and sentiment. In the case of SVB, the bailout was not for any banking institution but for the politically powerful venture industry. The Fed and government are using selective support to stop the natural result from the reversal of the monetary and fiscal policy bubble.
The current policies create a large transfer from bond holders to creditors through a combination of stronger growth, higher inflation, and the repricing of bond risk. US marketable debt to GDP has fallen from highs. We are living through a new period of financial repression where inflation exceeds the interest rates and wealth is taken from savers and lenders and given to spenders and borrowers. Because the Fed is slow to respond to their bubble there is a large wealth transfer that will disrupt current market institutions.
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