Silicon Valley Bank, a California-based lender that specialized in financing tech startups, recently collapsed after experiencing major losses related to bad loans. While investigations into the cause of the bank’s failure are ongoing, some experts argue that it was due, at least in part, to a failure of regulation and supervision. The Dodd-Frank Act, passed in 2010, had increased the regulation of banks, particularly those deemed “systemically important,” which included Silicon Valley Bank. However, in 2018, Congress passed a law that rolled back some of these regulations for smaller and mid-tier banks. Critics argue that these deregulations contributed to Silicon Valley Bank’s collapse. While some Democrats have defended the 2018 law, others, including Sen. Elizabeth Warren and Sen. Bernie Sanders, have said the law’s softening of regulations contributed to the bank’s demise. President Joe Biden has vowed to strengthen banking rules to prevent similar failures in the future. The Justice Department, Securities and Exchange Commission, and Federal Reserve Board are all investigating the bank’s collapse.
The fed somewhat caused this crisis by being late to raise rates and then raising them at a historic rate over such a short period of time. Many believe that Silicon Valley Bank is the sounding the alarm bell that a recession is inevitable.
What is a recession?
A recession is a significant and widespread decline in economic activity over a sustained period of time. It is characterized by a reduction in the production of goods and services, a decrease in employment, and a decline in consumer and business spending.
Recessions are typically measured by a decrease in a country’s gross domestic product (GDP), which is the total value of goods and services produced within a country’s borders. A recession is generally defined as two consecutive quarters of negative GDP growth.
Recessions are often caused by a variety of factors, including a decrease in consumer confidence, a decline in business investment, a decrease in international trade, and financial crises.
During a recession, individuals and businesses may experience financial hardship, including job losses, reduced income, and decreased profits. The government may respond to a recession by implementing monetary and fiscal policies, such as lowering interest rates or increasing government spending, in an attempt to stimulate economic growth.
Recessions can have a significant impact on society, as they can lead to increased poverty, inequality, and social unrest. Therefore, understanding and mitigating the effects of recessions is an important goal for policymakers and economists alike.
What’s the best way the Fed can assist during a recession?
One of the primary tools of the Fed is to adjust interest rates. During a recession, the Fed can lower interest rates to encourage borrowing and spending, which can stimulate economic growth.
What’s the best way to invest when interest rates are getting cut? Buy ETFs that hold long term bonds?
When interest rates are cut, the prices of existing bonds typically rise. This is because the interest rate on existing bonds becomes more attractive relative to new bonds issued with lower interest rates. As a result, investors are willing to pay more for existing bonds with higher interest rates.
Here are a few bond ETFs that may perform well when interest rates are cut:
iShares 20+ Year Treasury Bond ETF (TLT): This ETF holds U.S. Treasury bonds with maturities of 20 years or more and can benefit from lower interest rates.
Vanguard Long-Term Bond ETF (BLV): This ETF holds investment-grade U.S. bonds with maturities of 10 years or more and can benefit from lower interest rates.
iShares 10-20 Year Treasury Bond ETF (TLH): This ETF holds U.S. Treasury bonds with maturities of 10 to 20 years and can also benefit from lower interest rates.
iShares Core U.S. Aggregate Bond ETF (AGG): This ETF holds a broad range of investment-grade U.S. bonds with maturities of less than 30 years and can benefit from lower interest rates.