Some people are quick to say this is not 2008. For once they are right!
In 2008 we had a bank crisis because of over-speculation on risky assets. We fixed the speculation with speculation on safe assets.
We unleashed fiscal spending and trapped most of it in the banks through QE. By 2009 the banks were back in the black by speculating on Treasuries by buying them and reselling them to the Fed and inflating their asset values by forcing rates down. They did this as deposits grew slowly and reduced lending.
In 2020 they went back to the same playbook with a vengeance speculating and accumulating Treasuries and doing QE. But this time the fiscal spending was not trapped in the banking sector. It was injected directly through helicopter money as stimulus, unemployment checks, PPP, and bailouts to all companies and industries and found its way into the stock market. This time deposits and lending ballooned.
Then inflation raised its ugly head and the Fed had to raise rates. All those long-dated Treasuries are now in the red while deposits and all debt types ballooned.
The banks did what they were supposed to do while still doing all the wrong things. They are essentially trapped. They can’t get out of those Treasuries unless the Fed goes to 0 but the Fed can’t go to 0 unless inflation goes down to 2%. They need QE but QE would just create ever larger Treasury holdings already in the red and let their current holdings break even. It doesn’t solve anything. Marginal rate cuts would solve nothing and large cuts would solve little.
We have a situation different from 2008 but in some ways much worse than 2008. The banks are trapped. Maybe it is time to let non-performing debt get erased the old fashion way by letting it be written off. It will be costly but what’s the alternative? Doubling down?