A New Financial CRISIS?! Why A Credit Crunch Could Be Coming!

Slowly at first and then all at once This is how most Financial crises occur And we seem to be in the slow part for Now the recent banking crisis may have Sped things up a bit that's because it's Starting to cause a credit crunch which Has the potential to turn into a credit Crisis the all at once that was behind The 2008 financial meltdown my name is Guy and today I'm going to explain what A credit crunch is how it could evolve Into a credit crisis when this could Start to impact the market and why this Might all be planned you do not want to Miss this Let's start with a simple definition a Credit crunch is when Banks Significantly reduce their lending to Individuals and businesses less lending Means less economic growth because Individuals can't borrow as much to say Buy a new car and businesses can't Borrow as much to say expand their Operations Banks tend to reduce their lending when Central banks raise interest rates this Is because Banks borrow short and lend Long in other words Banks borrow money Based on the short-term interest rate Set by the central bank and they lend Out money based on longer term interest Rates set by the free market now in Theory banks are incentivized to make Loans when long-term interest rates are

High that's because the bigger the Difference between the short-term and Long-term interest rates the more profit A bank makes however this assumes that Short-term interest rates are lower than Long-term interest rates in practice Shorter term interest rates have been Higher than longer term interest rates This is the yield curve inversion you Keep hearing about the reason it signals A recession is basically because it Means that it's not profitable for banks To lend and less lending means the Economy will eventually contract Here's where things get interesting the Yield curve has been inverted since Early last year and yet there's been Almost no economic contraction and no Recession not only that but until Recently Banks continued to lend to Individuals and businesses even though These loans don't make them any money The answer to this mystery is that the Markets are forward-looking put simply Everyone thinks that the Federal Reserve And other central banks will soon start Lowering interest rates in response to a Crisis of some kind lower short-term Interest rates will put all the loans The banks recently made back into profit In theory this is fine because history Suggests that rate Cuts will come Eventually Banks can continue to sit on Unprofitable and underwater loans until

Then In practice however this assumes that People won't suddenly start withdrawing Their deposits from their Banks because Of say perceived solvency problems Newsflash the money that the banks lend To individuals and businesses comes from You their depositors All the money you have in the bank has Been invested or lent out for profit Until the pandemic came along U.S banks Were only required to keep 10 percent of This money on hand Since March 2020 it's been Zero percent and if that wasn't bad Enough many of the assets that Banks Bought have lost their value due to Rising interest rates as a result some Banks technically don't have enough Money on hand to honor withdrawals this Means that if everyone rushes to Withdraw their money at the same time The bank in question will go under If you watched any of our videos about The banks that went under recently You'll know that this was the cause of The banking crisis people started to Notice that these Banks technically Didn't have enough on hand to honor Withdrawals so they panicked and started To withdraw causing these Banks to fail That said it seems that Signature Bank Was shut down by Regulators for being Pro-crypto more about that using the

Link in the description I digress Now three things have happened because Of the banking crisis the first is that People have started moving their money Out of small and medium-sized Banks and Into big Banks this is because the big Banks are too big to fail this means They're guaranteed to be bailed out by The Federal Reserve the second thing That's happened is that people have Started scrutinizing the balance sheets Of their Banks any bank that appears Weak has seen its stock sell off an easy Example here is First Republic which Ended up going under in part because of The panic around its declining stock Price Scary stuff This ties into the third thing that's Happened and that's that people with Lots of money have started moving it Into Investments that earn a higher Interest rate than their savings Accounts This includes various forms of U.S Government debt and money market funds Which invest in U.S government debt on That note the reason why the interest Rates on savings accounts remain so low At most banks is because raising these Interest rates would eat into their Profits If the yield curve is inverted like it Is now some banks could face losses for

Paying their depositors more than the Interest they're earning on loans As such you can think of the low Interest rates on savings accounts as The bank's way of creating an Artificially steep yield curve they're Effectively borrowing money from their Depositors at a very low interest rate And lending it out at a higher rate However this assumes that banks have Lots of deposits as I just mentioned Deposits have been leaving small and Medium-sized banks for big Banks and They've been leaving Banks of all sizes For Investments that earn a higher rate Of interest This has been happening since interest Rates started Rising last March but the Recent banking crisis put this trend Into overdrive to put things into Perspective Banks of all sizes lost Around 400 billion dollars in deposits Shortly after the FED started raising Rates big Banks recently reported losing Another 500 billion dollars in deposits Since the start of 2023. after the first Bank went down back in March small Banks Alone lost 100 billion dollars in a Single week This is consistent with fed data which Suggests that total Bank deposits have Fallen by more than a trillion dollars Since it started raising interest rates Last spring meanwhile the amount of

Money held at money market funds has Gone parabolic 120 billion dollars went In the week after the first bank Collapsed now in theory Less in the way Of Bank deposits means less Bank Lending In practice however it appears that the Opposite is true as macro analyst Jens Norvig pointed out in a recent Blockworks episode borrowing at small And medium-sized Banks appears to have Spiked not contracted because of the Recent banking crisis Jens explained That this is because individuals and Businesses with existing credit lines IE Loan offers from banks are accepting These offers in anticipation that the Banks will tighten their lending the Same phenomenon occurred at the Beginning of the pandemic lending Initially spiked before Contracting This means that it might take a few Months for the actual credit crunch to Occur macro analyst Andreas stano Larsen's research suggests that it could Take up to six months before individuals And businesses have used up their Existing credit lines and start facing Restricted lending from their Banks In a recent episode of the macro trading Floor Andreas explained that the demand For loans matters too not just Supply in The EU loan demand recently fell to Levels not seen since the 2011 financial Crisis this further suggests that a

Credit crunch will occur in the second Half of the year at least in the EU Now there are just two caveats to this Timeline the first is that Banks aren't The only ones doing the lending if you Watched our video about the commercial Real estate market you'll know that Shadow banks are also big lenders This includes hedge funds investment Banks and even insurance companies Jens was asked about Shadow Bank lending In the aforementioned blockworks episode And he admitted that the shadow banking Sector could keep the economy chugging Along However he cautioned that this depends On the conditions of the loans being Given by Shadow Banks which tend to be Much worse moreover most of the Shadow Bank's existing money came from the Investors or clients they don't make new Money out of thin air like regular Banks Do this means that any lending by Shadow Banks won't have the same stimulative Effect on markets particularly risk Assets like cryptocurrency The second caveat to this credit crunch Timeline is that the credit crunch seems To have begun already at least among the Big Banks Fed data suggests that commercial and Industrial loans have been on the Decline since at least December the Apparent uptick in lending noted by yens

Is noticeably absent now this can be Easily explained by the fact that Yen's Analysis pertains specifically to small And medium-sized Banks this is more Significant than you think because small And medium-sized Banks provide most of The lending to small and medium-sized Businesses and these make up almost half Of economic activity By contrast big Banks lend primarily to Big businesses which have no issues Finding funding if they needed the Overall decline in Bank lending could Therefore be due to a decline in demand For loans by big businesses if so then Andreas's demand side projections for The EU could also apply to the US In any case the key takeaway here is That small and medium-sized Banks and Small and medium-sized businesses are The ones that are going to feel the Credit crunch the most this is why some Analysts are arguing that this credit Crunch won't be like 2008 where the big Banks and businesses were affected However this assumes that the credit Crunch won't turn into a credit crisis Whereas a credit crunch is when Banks Restrict lending to individuals and Businesses a credit crisis is when Banks Restrict lending to each other A credit crisis happens when Banks don't Trust the safe collateral they're using For loans back in 2008 the supposedly

Safe collateral that came into question Was mortgage-backed Securities which are Literally collections of mortgages When the housing market collapsed Banks Started questioning the quality of this Collateral and eventually stopped Lending to each other everything crashed As a result this begs the question of How a credit crisis would unfold this Time given that regulations around Collateral have been firmed up since the Last one Well the first possible answer has to do With the Doom Loop that could arise Between small and medium-sized Banks and Small and medium-sized businesses as I Mentioned earlier Banks make their money By lending out or investing customer Deposits Although there have been lots of deposit Outflows from small and medium-sized Banks these seem to have stabilized this Makes sense considering their primary Customers don't get good service at the Big Banks However if small and medium-sized Banks Reduce their lending to small and Medium-sized businesses then they will Have a harder time finding new clients And could lose existing ones this would Lower customer deposits which would Reduce lending even more causing yet More deposit flight and so on To honor these withdrawals small and

Medium-sized Banks would have to sell Their Assets Now this assumes that the FED doesn't expand the bank term funding Program or btfp to include them which is Possible note that the btfp lets Banks Borrow against certain kinds of Collateral at par I.E full value If that doesn't happen though this Mass Selling of assets could trigger a credit Crisis of some kind it's honestly not Clear which kind of collateral would be The cause in this scenario but some have Speculated that the exposure of the Shadow banking sector to commercial real Estate could be the Catalyst now the Second possible way a credit crisis Could unfold is via the debt ceiling Which may or may not be raised by the Time you see this video in short Concerns that the US government will Default on its debt could cause extreme Volatility in the markets for U.S Government debt AKA U.S bonds this is Scarier than you think because U.S bonds Are the highest form of financial Collateral and not just in the US if the Quality of this collateral is called Into question because of the debt Ceiling it could cause 2008 level chaos For financial institutions around the World the markets would in short be a Total mess Now it's important to point out that the Upcoming credit Crunch and potential

Credit crisis could be avoided if the FED starts lowering interest rates debt Default notwithstanding however if we Take fed chairman Jerome Powell at his Word the FED won't be cutting until Inflation comes back down to two percent In fact the FED seems to be a fan of the Banking crisis that's because it's Finally resulted in the tightening of Credit conditions that the central bank Has been wanting to see since it first Started raising rates recall that credit Conditions were loose until recently due To expectations of an imminent rate cut If you need additional evidence fed Expert and Wall Street Journal Correspondent Nick timuraus mentioned in A recent blockworks episode that the FED Wants the banking crisis it just doesn't Want it in the news He essentially said that the FED is Walking a fine line between credit Crunch and credit crisis This means that's a sort of race between Inflation and credit conditions if Inflation comes down fast then the FED Will lower interest rates and there will Be no credit crunch or credit crisis if Inflation stays High however then we Will see a credit crunch in the second Half of the year in the U.S and Elsewhere if you need additional Evidence of that timeline look no Further than the recent survey of Bank

Lending conducted by the FED it found That most banks are planning on Significantly restricting lending in the Coming months due to all the conditions Just discussed it also confirms a drop In demand for loans speaking of which in A recent episode of the macro trading Floor Andreas explained that the Resolution of the debt ceiling will Further drain liquidity from the markets This is because the treasury Department Needs to refill its bank account at the Fed this will suck over 500 billion Dollars out of the markets at the same Time the FED will continue to reduce the Size of its balance sheet further Draining liquidity and as a cherry on Top apparently the FDIC also needs to Drain some liquidity from the markets Because of all the banks it's bailed out Andreas estimates that U.S dollar Liquidity will bottom early next year This is around the time that the FED Would likely pivot in response to a Recession and it suggests that the Markets could see a slow grind down Between now and then as an added bonus The issuance of debt by the treasury to Fill up its bank account could cause Short-term interest rates to spike this Would likely cause more deposit flight From Banks of all sizes into U.S bonds And money market funds and potentially Cause more Banks to go under as well

Andreas believes that the treasury will Be careful with its Bond issuance as a Result but I reckon that's giving Janet Yellen a little too much credit But back to andreas's claim that the Treasury doesn't want to exacerbate the Banking crisis by issuing debt in a way That causes interest rates to spike this Is probably true but it appears that the Same can't be said for the Fed Take a second to consider that the FED Is technically owned by the mega Banks If you watched our video about First Republic you'll know that it was Acquired by JP Morgan on very good terms You'll also know that I think JP Morgan And the other Mega Banks would love to Acquire the thousands of small and Medium-sized Banks scattered across the United States also on very good terms This means letting troubled Banks go Under and get seized by the FDIC when The FDIC puts the seized Bank up for Sale megabanks can pick and choose which Assets they want and which liabilities They'll leave with the FDIC whatever the FDIC can't sell goes to Blackrock which Is peculiar to say the least And it's not just the mega Banks who Want this either small and medium-sized Banks tightening their credit conditions And going under means that small and Medium-sized businesses shrink and go Bankrupt now this conveniently allows

Big businesses to swoop in and acquire Their competitors at a massive discount As for the FED itself meanwhile Consolidation in the banking sector is Likely required for the successful Rollout of a central bank digital Currency or cbdc come to think of it the FED probably needs consolidation in the Business sector too it probably doesn't Want any economic activity happening Outside its cbdc system say it's almost As if the rich and Powerful individuals And institutions want this to happen and It just so happens that this trend of Banking and business consolidation is Taking place on a global scale this Might have something to do with the fact That almost every central bank is in the Process of rolling out a cbdc of its own But don't worry I'm sure this is all Just one big coincidence And that's all for today's video If you Learned something new let me know by Smashing that like button if you want to Make sure you keep learning subscribe to The channel and ping that notification Bell and if you want to help your Friends and family get with the program Take a second to share this video with Them If you're wondering how you can escape This messed up Financial system well the Answer is crypto all you need is an Exchange where you can buy sell and

Trade and a hardware wallet to keep your Crypto safe we happen to have the best Deals on both and you can find them on The coin Bureau deals page that will be Down in the description As always thank you so much for watching And I'll see you next time my name is Guy and you have been watching the coin Bureau [Music]