Now that the government bailed out depositors at SIRV and newly failed SBNY, we may have entered a new regime in which all bank deposits are insured without limit. The government won’t come right out and say that but for all practical purposes that is what happened with these two banks and the government has set such a precedent. The next test may well be FRC whose stock is down 70% in the pre-market; CNBC’s David Faber just reported the government wants to see FRC sold. Significantly, no institution stepped up to buy SIRV over the weekend and the odds of a buyer emerging quickly for any bank after the unhappy experience of buyers of troubled institutions after the 2008 financial crisis renders that possibility a long-shot (unless the government promises not to sue them for the sins of an acquired bank).

The government reached the best possible solution for the current banking crisis. Taxpayers - at least not directly - will not be bailing out these banks. Instead, a special fund paid for by other banks will pay the freight. Of course, banks will likely pass through the costs to their customers but that is preferable to another taxpayer bailout. The stockholders, bondholders and management of these institutions are not being bailed out as in previous debacles which is appropriate. Hopefully we won’t see the same executives recirculate to cause future damage as occurred here with former Lehman and Deutsche Bank executives manning important risk management and related posts at SIRV. The art of failing upward is one of the most depressing characteristics of the financial industry and we need to hold people accountable for their serial incompetence.

This crisis may trigger the next leg down in the bear market because it should highlight to even the most thick-headed among us the lagged effects of monetary policy. It will be even harder to argue that the system can simply shrug off higher interest rates without structural damage. The only thing that can save bulls now is a reversal of Fed interest rate hikes which are highly unlikely unless we see a broader banking collapse. The Fed may pause interest hikes but that is a far cry from reversing them, leaving rates at their current higher levels to work their mischief throughout the system. Inflation is still high though banking problems are deflationary. But the Fed’s errors of first maintaining zero rates for far too long and then waiting too long to lower them are causing problems we are just starting to see crop up around the system. Leaving rates where they are isn’t going to change that and lowering rates will leave the inflation fight unfinished.

I repeat again my view that the S&P 500 shouldn’t be trading anywhere near 4000 in the current environment. And that the January rally was another attempt by the bear to suck investors back into the market so it could slaughter them all over again. My S&P 500 target remains the low 3000s based on $200 earnings and a 15-16x multiple and that does not take into account the structural damage just suffered by the banking system. Bank stocks are leading the market down and tech stocks look newly vulnerable on rates and venture capital funding problems. The damage to the banking industry is not merely structural; it is psychological as people will (at least for a while in a world with short memories) worry about the safety of banks.

We need to learn that low interest rates are like many things in life - we are told by the so-called “consensus” that they are good for us, but they are really very bad for us. They breed complacency, laziness and stupidity. And they create fragile and highly leveraged financial structures that come apart very easily. Those structures are still in place and are going to keep coming apart until the system fully adjusts. The Fed shouldn’t save everyone and couldn’t save everyone even if it wanted to. It tried to do that over the last 15 years and created the unsustainable overleveraged financial system we have today. They just inched up moral hazard another notch by insuring all bank deposits without limit. These are the wages of monetary sin and they have to be paid sooner or later. This is later.