Peter Schiff: The Fed Has Screwed Up Everything That Is a Function of Interest Rates

The failure of First Republic Bank reveals that the banking system isn’t nearly as sound as Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell would have us believe. But as Peter explained in a recent podcast, it’s not just the banking system that’s messed up. The Fed has screwed up everything that is a function of interest rates by keeping rates at zero for so long.

First Republic was the third major bank failure this year and the biggest bank to collapse since the 2008 financial crisis. It was the second-largest bank by assets to fail in US history. Peter said the whole banking system is a house of cards that is now collapsing one card at a time.

We’re still in the early days of the 2023 financial crisis.”

Of course, the mainstream media remains reluctant to call it a financial crisis. But if not, what is it?

Banks keep failing. Aren’t banks financial institutions? But no, they don’t want to do it because they don’t want to evoke the memory of 2008. They don’t want anyone to think that what we’re experiencing is another 2008. Now, in a way they’re right, because it’s not another 2008. It’s going to be way worse than 2008. But it is a financial crisis.”

And Peter said it’s not just banks.

The Fed screwed up everything that is a function of interest rates. Anything that is rate-sensitive is all screwed up because rates were so low for so long.”

This includes the auto market and the housing market.

Fed monetary policy also facilitated massive government budget deficits.

How are we able to sustain a $31.7 trillion national debt? It’s because interest rates were so low. If the Federal Reserve had not kept interest rates at zero for so long, had interest rates reflected the appropriate price of money that a free market would set, there is no way the government could have gotten away with this. Government could not be this big. Government could not have spent all this money because it couldn’t have afforded to pay the interest on the debt.”

Now that the Fed has let rates go up, everything that was built on a foundation of zero percent crashes – including the government.

The government is going to come crashing down if the Fed holds the line on fighting inflation. … We can’t have these deficits and normal interest rates to fight inflation. So, the government is going to be forced to downsize dramatically, make big cuts in government spending, if the Fed is going to continue to fight inflation and keep rates up, which I don’t think it’s going to do.”

Peter said he thinks the Fed is going to reverse course to keep banks from failing, stop the auto industry from imploding, save the housing market, and prop up the government.

And then there is corporate America, which has also levered up thanks to easy money.

What’s going to happen over the next year or two as all this cheap money that they borrowed to buy back their overpriced stock comes due? What about all of the junk bonds that are out there?”

We’re already starting to see bankruptcies. Bed Bath and Beyond recently filed Chapter 11. In fact, there have been 70 major bankruptcies already in 2023. It’s the third-worst start to a year ever. That compares with 71 bankruptcies in the early part of 2020 when governments shut down the economy for COVID. The only other year that was worse was 2009, in the depths of the Great Recession.

In this podcast, Peter also talks about the first quarter GDP data, noting that economic growth is slowing down even as inflation is picking up speed.