(Mises)—The wordsmiths at the Federal Reserve wisely omitted the line about a “sound and resilient” banking system in its statement on January 31. That same day shares of New York Community Bank plunged when the bank announced a loss of thirty-six cents per share when analysts expected earnings of twenty-seven cents a share for the fourth quarter.
Internal or external auditors occasionally comb through individual loans in a bank’s portfolio and make judgments as to whether those loans are worth what the bank says they are worth due to lower appraised values and other issues either particular to an individual property or the market as a whole. Bankers then, begrudgingly, set aside earnings for potential loan losses.
In the case of the real estate loans at New York Community Bank, loan examiners must have told senior management to increase the bank’s loan loss provision by 790 percent to $552 million. This balance sheet expense drove the fourth-quarter loss and caused the bank to cut its dividend.
“The bank reported a near $2 billion increase in criticized multifamily loans—debt with a probability of default,” wrote Suzannah Cavanagh for the Real Deal. “Of its $37 billion multifamily loan book, which comprises 44 percent of its total portfolio, 8 percent was marked criticized in the quarter.” The bank also reported a $42 million net charge-off—debt unlikely to be paid back—for an office loan on which the borrower stopped paying interest.
The bank’s chief financial officer John Pinto pooh-poohed the loan carnage, saying, “We had higher levels of substandard [loans] throughout the Financial Crisis, throughout the pandemic. The rise in substandard loans does not lead directly to specific losses.”
Hope Springs Eternal
Like the 2008 financial crisis, what happens in the US isn’t staying in the US. Tokyo-based Aozora Bank said losses in its US office’s loan portfolio will likely lead to a net loss for the year ending in March, the Wall Street Journal reports. Also, the private Swiss bank Julius Baer took a roughly $700 million provision on loans made to Austrian property landlord Signa Group. The bank said shutting down the unit was what made the loans, and the chief executive has resigned.
Jay Powell made no mention of the New York Community Bank’s news in his prepared remarks, and reporters didn’t ask him about the bank’s troubles during the Q and A. There were no questions concerning the Bank Term Funding Program that will be sunsetted March 11 despite having risen to record highs. According to the Wall Street Journal’s Andrew Ackerman, the popularity of the program was not because of new stresses on banks. But reportedly, “some banks had recently figured out a way to game the program by pocketing the difference between what they pay to borrow the funds and what they can earn from parking the funds at the central bank as overnight deposits.” On January 31, banks had borrowed more than $165 billion from the facility.
It’s doubtful there are no new stresses on banks. New York Community Bank is not an anomaly.
To that point, real estate investor Barry Sternlicht told a conference crowd…
We have a problem in real estate. In every sector of real estate, not just office, because of the 500 basis point increase in rates that was vertical. The office market has an existential crisis right now . . . it’s a $3 trillion dollar asset class that’s probably worth $1.8 trillion [now]. There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.
Sternlicht mentioned a project in New York that was purchased for $200 million that he thought was now worth just $30 million, encumbered by a $100 million loan.
Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties, told Bloomberg, “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.”
Bordwin went on to say, “Banks—community banks, regional banks—have been really slow to mark things to market because they didn’t have to, they were holding them to maturity. They are playing games with what is the real value of these assets” (emphasis added).
“The percentage of loans that banks have so far been reported as delinquent are a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025,” David Aviram, principal at Maverick Real Estate Partners told Bloomberg. “Banks remain exposed to these significant risks, and the potential decline in interest rates in the next year won’t solve bank problems.”
The plan for the Bank Term Funding Program was hatched in haste over a weekend in March of last year in the wake of the Silicon Valley Bank and Signature Bank failures (Signature’s assets were purchased by New York Community Bank). To hide their embarrassment over banks using the facility for risk-free interest rate arbitrage, they say they are shutting the program down because there is no stress in the banking system.
There is stress aplenty in the banking world. As Murray Rothbard wrote in The Mystery of Banking, “Fractional reserve bank credit expansion is always shaky, for the more extensive its inflationary creation of new money, the more likely it will be to suffer contraction and subsequent deflation.”
While bankers and regulators have their heads in the sand, the contraction has already begun.
About the Author
Douglas French is President Emeritus of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe. His website is DouglasInVegas.com.
Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.
