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The Bank Crisis: The best mousetrap is no mousetrap, and 4 other observations
Because of contagion, every bank is now too big to fail.
This week the Federal Reserve raised interest rates by another quarter point as expected, despite recent bank failures that undermined public faith in the financial system. The Fed, which failed to properly supervise these banks, will now make things harder on working people. Why? To address inflation which has been caused by the war in Ukraine, supply-chain disruptions, excesses in profit-taking, and the slight additional effect of government efforts to minimize public suffering during a pandemic.
The government stopped aid to working people, which was only a minor factor in any case, but has done nothing about the other inflationary forces. That tells us something about its priorities.
Here are five observations about these events for your consideration:
1. Every bank is now too big to fail.
We know that ex-politico Barney Frank, among others, promoted raising the size at which certain bank regulations take effect. Signature Bank, where Frank is on the board, and Silicon Valley Bank then slipped under the radar. That’s important (not least because it erodes the credibility of people like Barney Frank).
But we now seem to live in a world where no bank is small enough to fail. The key word is contagion – or, if you prefer, panic. SVB was an outlier in its combination of poor investments and (supposedly) uninsured deposits. But our world is more interconnected than ever. That means panic can spread more quickly than ever. One email seems to have set off a run on SVB, and the combined failure of SVB and Signature – another small-ish bank – was apparently enough to imperil the entire financial system.
That tells us that bank runs can be triggered much more easily now. It also tells us that multiple failures among smaller banks could have the same overall effect as the failure of one large bank – perhaps not as we currently understand “systemic risk,” but as the flashpoint that could trigger a panic. That panic, in turn, can threaten the whole system.
That could happen more easily than some might think. A recent paper on bank fragility concluded that “the U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value.” This is because “marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%.” They add that 10 percent of banks had larger unrecognized losses than SVB’s and 10 percent of banks had lower capitalization.
And, while SVB had an unusually large percentage of uninsured deposits, they found that nearly 190 banks are at risk of being unable to cover insured deposits if – as the result of panic or something else – a mere half of uninsured deposits are withdrawn. Even a small wave of “fire sale” withdrawals could endanger substantially more than 190 banks.
They conclude that “recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.”
Banking has become something like public health. A single bank can become a vector. If the infection spreads, the entire population is endangered. That means the health of each individual must be carefully monitored for the safety of all.
2. The Federal Reserve cannot be trusted.
The Fed defended its supervision of these failed banks again this week and insisted that it had things under control. “The banking system is sound, it’s resilient,” said Fed chair Jerome Powell, adding that current “weaknesses” do not pervade the entire “banking system.”
In response, banking stocks plunged. That’s because investors don’t trust the Federal Reserve. You shouldn’t, either. It serves the interests of the financial class and the wealthy, using the ideologically blinkered “science” of orthodox economics to underpin its decisions.
As evidence of this, it should be noted that the CEO of Silicon Valley Bank was on the board of the San Francisco Fed until shortly before his bank collapsed. That’s not unusual. In 2012 we reported that Jamie Dimon, CEO of JPMorgan Chase, sat on the Fed’s Management and Budget Committee. I stand by my assessment that Chase is worse than Enron. Dimon’s committee supervised the pay of senior Fed executives and approved the self-evaluation of senior Fed executives. That, in practice, meant giving senior leadership its performance reviews.
That committee also reviews and approves the Fed's overall budget, including the budget for auditing bankers like ... Jamie Dimon. Its other main responsibility was to "review and endorse the Bank's strategic plan" –a plan that’s worked out well for bankers but not so well for the rest of us.
While Dimon has thankfully departed, the five-person committee currently includes two bank CEOs, a real estate executive, and a health insurance CEO.
3. We need a “People’s Fed.”
That must change. I proposed something called a “People’s Fed” in 2014, which would include representation from all regions, economic sectors, and demographics. But my thinking didn’t go nearly far enough. Bankers need to be excluded from any but advisory roles, with guardrails constructed to prevent revolving door behavior.
The Fed’s actions, combined with those taken by Congressional Republicans and collaborating Democrats, hit vulnerable Americans especially hard. Regulations were eased under Trump so that affected banks could stop including race and gender in the data they provide to regulators. That made it harder to identify discrimination in lending, for both racial minorities and women. This, despite a century of race-based discrimination in banking; and despite an Urban Institute study which found that single women in the United States had been systematically charged more for mortgages than single men, even though they were better about paying them.
(As I reported then, “three of the senators who backed this bill received $10,754,752 from ‘Women's Issues’ groups like Emily's List, which Open Secrets describes as ‘promot(ing) the social and economic rights of women.’”)
The Fed’s defenders – the few that remain – love to tout its supposed independence. But independence from whom? Not from bankers or other financial interests, certainly. It is a public institution, created by an act of Congress. But the people who are supposedly represented by that Congress don’t seem to have much of a voice there. That must change.
4. Biden had to rescue SVB, but that should piss you off. So should these politicians.
Like most other observers I’ve read, I don’t think Biden had a choice: he had to rescue SVB’s depositors, including the uber-rich ones. The actions of past years made this collapse, or something like it, inevitable. It's the hand the White House, and we, were dealt. It was dealt by Republicans – and by too many Democrats – when they watered down the already lukewarm reforms in Dodd-Frank.
Politicians should be named and shamed for their votes in (among other bills) the weakening of bank oversight that led to SVB’s failure. I named many of the bought-off Dems in 2018 when I wrote "The $24 Million Reasons These Dems Backed America's Worst Banks," including Michael Bennet, Tim Kaine, and then-reigning bank-money champion Mark Warner. (I haven’t checked those stats lately.)
Don’t believe money talks? Read a 2020 working paper from Thomas Ferguson et al. at the Institute for New Economic Thinking (INET). The authors write, “For every $100,000 that Democratic representatives received from finance, the odds they would break with their party’s majority support for the Dodd-Frank legislation increased by 13.9 percent.”
They add, “Democratic representatives who voted in favor of finance often received $200,000–$300,000 from that sector, which raised the odds of switching by 25–40 percent.”
That’s an incredible return on investment for the banking industry. It’s bad enough when democracy goes on sale, but somehow it hurts even more when it’s sold so cheaply.
A nonpartisan council set up to prevent future financial crises wrote back then that "if the Dodd-Frank reforms were to be recalibrated, minimum capital requirements should be higher, not lower." They did the opposite. Now, after weakening the rules for bankers, they’re strengthening protections for them. As Ferguson and INET head Rob Johnson recently wrote, “authorities are reinstating the financial equivalent of Medicare for All (for financiers only).”
(That’s probably unfair to Medicare for All, which addresses genuine human needs, but it makes the point. A better term might be “government-run greed insurance.”)
5. The best mousetrap is no mousetrap at all.
If you’re putting out mousetraps, mice have gotten into the house. You’ll play a losing game until you find their point of entry. The only permanent way to stop mice from robbing your pantry is not to have mice at all.
Our system for regulating banks relies on the economy’s “mice.” We defer many of our regulatory functions to the Federal Reserve and then give bankers undue power over it. We rely on bankers to self-report certain behaviors. Politicians ask bankers for campaign contributions while they’re in office and want cushy board memberships when they leave. The economists who justify bankers’ actions look to them for well-paying gigs – or, perhaps, for professional recognition.
I’m not saying this mouse-centric “regulatory system” does nothing for the public. They’ll close the pantry door from time to time. But they won’t lock it – and they certainly won’t give you the key. Why would they? They’re mice, and mice gotta mouse. Besides, not just any old food satisfies a luxury-class rodent.
That’s why the best mousetrap is no mousetrap. That means it’s in a house without mice. It’s time to mouseproof the economy.
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