Could Your Bank Be Next?

BTFP is the new TARP and no one told you

The banking system is broken, not just because of bad policy or economic forces, but because the people in charge are either dangerously incompetent or protected from consequences. What we’re seeing now isn't just a repeat of 2008, it's a continuation of the same playbook, where reckless behavior is rewarded, accountability is avoided, and taxpayer-backed programs keep failing institutions alive.

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At the heart of the problem is fractional reserve banking. Banks are allowed to lend out the majority of the money deposited with them, keeping only a small fraction in reserve. This works under the assumption that not everyone will ask for their money back at once. But when confidence breaks and withdrawals surge, the system becomes dangerously fragile. If the reserves are tied up in assets that can't be sold quickly without losses, the bank becomes a ticking time bomb.

During the years of near-zero interest rates, many banks loaded up on long-term Treasury bonds and mortgage-backed securities. These were considered “safe” assets, but only if interest rates stayed low. When the Fed finally raised rates to fight inflation, the market value of those long-duration bonds collapsed. Suddenly, banks were sitting on massive unrealized losses, and if they had to sell those bonds to cover withdrawals, those losses would become real very quickly.

That’s exactly what started happening in 2023. Silicon Valley Bank was the first major example. It bought tens of billions in long-term bonds, then watched them lose value as rates climbed. When depositors started pulling out funds, the bank didn’t have enough liquid assets to cover it, and had to sell those bonds at a loss. The result? A classic bank run and a rapid collapse.

Rather than let these mismanaged banks face the consequences, the Federal Reserve stepped in with the Bank Term Funding Program (BTFP). This program allowed banks to borrow money from the Fed using those underwater bonds as collateral, not at their current, lower market value, but at full face value. This was basically a way to pretend the losses didn’t exist. It wasn’t a direct cash bailout, but it was still a rescue package that protected bad decision makers from the fallout of their own mistakes.

This is what economists call moral hazard, and it's not just some academic term. It means that risk-takers are shielded from the consequences of failure. When that happens, they take even bigger risks next time. The people who ran these banks made simple, stupid decisions. They bet everything on interest rates staying low forever. They didn’t hedge. They didn’t diversify. They ignored the possibility of rate hikes, a fundamental risk that anyone in finance should know better than to dismiss. And when it all went wrong, they got help, not punishment.

What makes this even more ridiculous is that everyone could see it coming. Inflation had been rising. The Fed was backed into a corner. Yet these so-called experts, people with prestigious titles and millions in compensation, failed to prepare for one of the most basic interest rate cycles in history.

And let’s not forget how this all started. During Trump’s presidency, he repeatedly pressured Fed Chair Jerome Powell to keep rates low, even when economic conditions didn’t justify it. Trump even floated the idea of firing or demoting Powell when he raised rates modestly. The Fed, likely influenced by political pressure, paused or slowed rate hikes. That delay encouraged banks to lock in low-rate, long-term bonds, under the false belief that the low-rate environment would last forever. Powell gave in then, and when he eventually had to raise rates to tame inflation, the time bomb those banks built finally exploded.

But here's the part that makes it all meaningless, the so-called “correction” never actually happened. The Fed might have raised rates publicly, but behind the scenes, it was bailing out the very institutions that were supposed to be punished by those higher rates. With programs like BTFP and other liquidity lifelines, banks were insulated from the consequences. They didn’t have to sell bonds at a loss. They didn’t have to write down their balance sheets. They just borrowed freshly printed Fed money using inflated collateral values, and moved on.

This is why the correction is fake. We pretend to have market discipline, but in reality, we have a rigged system that steps in to protect the worst actors every time. The interest rate hikes were supposed to cool the economy and flush bad bets from the system. Instead, we created a two-tiered game: one for the elites who get rescued, and one for everyone else who gets crushed by inflation, higher mortgage payments, and job uncertainty.

The end result is a financial system that cannot be trusted. One where failure is protected, responsibility is avoided, and incompetence is rewarded. And while they might say these measures are temporary or “necessary to avoid contagion,” what they’re really doing is preserving a system that is fundamentally broken.

This isn’t capitalism. This isn’t discipline. This is theater. And everyone watching knows it.