The Real Culprit Behind the Banking Crisis

Episode #302 | March 20, 2023

Episode #302 | March 20, 2023

The Real Culprit Behind the Banking Crisis

In This Episode

This week, a Stansberry Investor Hour listener-favorite returns to the show... Kevin Duffy, editor of the Coffee Can Portfolio newsletter and hedge-fund manager, is back. And on his mind is the spectacular, near-overnight collapse of banks. But the foundation of this month's banking fiasco was laid years ago.

He explains how it all started... how Silicon Valley banks had risky loan books balanced with less-risky U.S. Treasurys... how banks' assets tripled during the two years of pandemic-driven government stimulus... and how the bond bubble burst and set off a chain reaction. "The problem showed up in the middle of 2022, but we're just now getting around to recognizing it," he says.

Kevin also shares that the root of the problem comes from the U.S.'s fractional-reserve banking system and reliance on the Federal Reserve and leverage. A simple way to understand the problems with today's banks is to list the characteristics of an ideal hedge fund. When that list is inverted, it describes a modern-day fractional-reserve bank. And as for the central bank, Kevin says it's more of a hindrance than a help...

These people [the Fed] are fighting the last war. They are basically designing a system that's going to prevent the previous bubble. But what they're not doing is essentially laying the groundwork for the next bubble and they're not anticipating that [...]

What's frustrating about this is that the solution to all this is very simple.

He argues that Americans would benefit most from a free-market system – one without the Fed. "Of course, you would take away all the problems supporting the system with central banking," Kevin says, "which is the inflation... the devaluation of our currency... the constant boom-and-bust cycles." He puts it simply:

The government, they're not just the lender of last resort. They're really the borrower of last resort [... ]

Part of what got us into this mess is the myth that the government can't default, the government is low risk or zero risk. The irony of this is that the longer we go on, the endgame of this is that the government is going to default.