The Swiss National Bank came through as expected with a lifeline to support Credit Suisse Group AG (CS) late yesterday in the form of a 50 billion Swiss franc (US $54 billion) lending facility. If I were them, I would now fire management and the board and find some competent people to run the place. I know the last bunch was already fired but this new bunch isn’t any better.

Back here in the States, regional bank shares remain under pressure with First Republic Bank (FRC) tumbling almost 30% in early trading back down to ~$22 as its downgrade to junk status renders it incapable of operating profitably and a likely sales candidate at a very low price (its market cap is down to ~$4 billion from over $30 billion before the storm hit). Overall, stocks are weak and bonds are bid for as investors try to sort out the implications of the week’s events.

Interestingly enough for all of those calling for the demise of crypto, Bitcoin’s price has held up well throughout the collapse of FTX and all that followed including crypto bank and crypto exchange failures and a heavy regulatory crackdown. Bitcoin is currently trading at just under $25,000 and is one of the best performing assets of the year.

In order to judge where markets may be heading in both the short and long term, it is important to understand that we are experiencing the culmination of 50 years of activist financial policymaking that created today’s overleveraged and fragile global financial system. Not all of the policies introduced over this period were ill-advised but many of them were. I will discuss this at greater length in the April issue of The Credit Strategist where paid subscribers can get the whole story. But a brief synopsis here may help readers think through what may happen as we move forward.

Today’s world began with America’s exit from the gold standard in 1971 and the post-1971 liberalization of exchange rates and deregulation of savings, extended to the growth of shadow banking, derivatives and foreign exchange trading, and then resulted in the explosion of unsustainable levels of public and private debt throughout the world.  Advanced economies shifted their focus from productive to speculative investments and from domestic manufacturing to cheaper offshore production while the explosion of leveraged credit allowed consumers to spend beyond their sluggish wage growth.  Debt levels grew far beyond the productive capability of the global economy to sustain them, forcing the government to intervene to support the system every time the system cracked and experienced a debt crisis (this is what is happening again now).

When debt levels became unsustainable in 2008, governments intervened to support the system.  But that support came in the form of more and cheaper debt over the next 15 years that only worsened the problem. Further, that support was not accompanied with reforms to encourage productive investment or discourage speculation. Instead, governments adopted pro-debt policies such as ZIRP and QE that rendered debt even more attractive and resulted in an explosion of global leverage that can never possibly be repaid other than through default, inflation or currency debauchment.

Today, the global economy lacks the productive capacity to generate sufficient income to service or repay its current debt burdens (which are growing much faster than that productive capacity). (As an aside, our most highly valued companies focus on fundamentally unproductive activities that do not deepen capital formation which is a reflection of the fact that investors value the wrong things in a self-reinforcing cycle of destruction.) All public and private sector economic actors can do is engage in an endless Ponzi exercise (in the sense that Hyman Minsky used the term) of endlessly refinancing this debt until markets finally break. Governments are faced with sustaining an unsustainable system that promises more inflation, more wealth inequality, and more political division.

You rarely read this version of economic history in the pages of The Wall Street Journal or other establishment publications because very few people are willing to face the reality of our situation. Certainly none of our political leaders will tell us the truth; they couldn’t get elected if they did because voters don’t want to hear it. But if we had better leaders, they could convince people to listen. Unfortunately, our system makes it virtually impossible for those types of leaders to emerge because the media destroys their reputations by demonizing success and caricaturing and trivializing personal issues. We won’t solve our economic problems until we solve our deeper governance problems.

In the meantime, governments and regulators will continue playing “whack-a-mole” with problems in the banking system, don’t be fooled into thinking we are out of the woods.