Negative interest rates and quantitative easing have wrecked the economic system. Negative interest rates destroy the profitable portion of a bank’s asset base, and no amount of cost-cutting or efficiency initiatives can compensate for this loss. Furthermore, persistent quantitative easing has transformed the investment side of the balance sheet into a ticking bomb.

Deutsche Bank is the latest headline after Credit Suisse. Nonetheless, everyone was aware that Credit Suisse faced enormous obstacles and a lack of profitability. On the other hand, Deutsche Bank was recovering from years of losses. Since 2019, Deutsche Bank has launched a solid rebalancing plan, with a goal of increasing return on tangible assets to 8%, a massive cost-cutting initiative, and a shift from investment banking to its core lending activities. After years of losses, the core capital ratio grew and profits began to emerge, indicating the apparent success of the plan.

Every time there is a banking crisis some scratch their heads and wonder; how could this happen? Surely it must be greed, bad risk management or lack of regulation. More intervention should solve it. However, all those excuses miss the most critical point: The U.S. banking system was destroyed by design, and the big banks played along with it.

The fractional reserve system has always been a problem. Very few people understand how quickly the capital of a bank can dissolve. The entire balance sheet of a bank is a deck of cards and the smallest decline in the profitable asset base -loans- or the volatile liabilities -deposits- would make the entire building collapse because the problem has always been to take additional long-term risk using short-term liquid liabilities -deposits-.

The mismatch between assets and liabilities makes the entire balance sheet collapse and there is never enough capital and reserves to cover the losses. However, decades of prudent banking and increasingly sophisticated risk management tools helped reduce the risk of a bank failure. It was never going to be perfect, but it worked for the most part.

The Silicon Valley Bank Collapse Is a Direct Consequence of Loose Monetary Policy.

The second largest collapse of a bank in recent history after Lehman Brothers could have been prevented. Now, the impact is too large, and the contagion risk is difficult to measure.

The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealized losses and financial hole in the bank’s accounts would have not existed if it were not for ultra-loose monetary policy. Let us explain why.

The U.S. Supreme Court has heard different arguments from supporters and opponents of President Joe Biden’s student debt forgiveness program. It is probable that the justices will rule before June. However, it is important to remember a few challenges.

Student loans are an essential tool to help maximize the number of citizens that have access to the best and most exclusive tuition. American universities are among the top in the world and high-quality tuition comes with an elevated cost. To help the disadvantaged access top universities it is important to have a thriving and affordable loan system, a solid grant program and an open market that supports the majority, including those who are not in university yet.

We must aim to make the current system better, not maintain it disguising the problem with a deficit-financed subsidy.