The current lull in the banking crisis would be a great time for US policy makers to reflect on how they handled the handful of banks that have bitten the dust.
Unfortunately, we can’t expect that kind of honest introspection from Sleepy Joe Biden or his doddering treasury secretary, Janet Yellen. Ditto for the Fed chairman, Jerome Powell, whose easy-money interest-rate policy is at the heart of our banking woes.
So where do we go for advice? Sorry to you banker haters out there, most of the potential lessons and future remedies will be coming from Wall Street.
Yes, these guys are often self- interested, greedy bastards, which is why they’re perpetually the target of populist scorn both left and right. They get pilloried when stuff goes wrong (see the nasty congressional hearings after the 2008 banking collapse), which makes them hesitant to share their knowledge when the public needs it most.
But they’re also smart and experienced on financial crises. That’s why I’ve been dialing up some of these people — all of whom would speak only on background for the reasons listed above — about how policy makers can avoid more bank failures in the coming months.
Their answer: You can’t. Inflation may be abating. And who knows, the Fed might stand pat and pause its rate hikes, moving up its target inflation rate to 3% or 4% from the long-standing 2% objective. It won’t matter, the balance-sheet risks just don’t go away that fast: Too many risky loans, too many sweetheart mortgage deals, and too many assets trading at a loss plague many midsize banks following years of easy money from the Fed and the US government.
Avoiding the next crisis
Fixing these issues will take years, not months. So best not to reflect on how to avert this crisis, but the next one.
First, they say, policymakers shouldn’t mess with deposit insurance limits. Let depositors who didn’t understand there was a limit know there is one, and it’s $250,000.
Plus if you want to protect yourself, there’s an easy solution: Spread any additional money above $250K into accounts at different banks. You’re covered. Presto.
In the case of Silicon Valley, Signature and the latest near-collapse, First Republic, none of the genius VC and well-off depositors gave a second thought to a possible failure. Their accounts had millions of dollars, well over the FDIC’s limits.
That’s not supposed to be the government’s or the taxpayers’ problem. It becomes a problem only when you do what the Bidenistas did — bail out depositors by guaranteeing all their millions and throwing those well-known FDIC limits out the window.
A real teachable moment would have been forcing all those VC dudes with big bucks at Silicon Valley Bank to take a modest haircut, which would have been the result after the bank was unwound, bankers on the ground tell me. Ditto for Signature and First Republic, if it implodes.
But Biden and Yellen panicked, believing that by throwing money at the problem, they might stave off the next bank run.
What policymakers failed to understand, and keep failing to learn, is something known as “moral hazard” — you keep taking excessive risks because there are no consequences. In free markets, losses associated with excessive risk-taking are a necessary evil. But the feds through various bailouts covered them up for years, then in 2008 they were faced with the largest risk-taking disaster in modern history.
Repeating the past?
And it’s destined to happen again after the latest bailout fiasco. If you can ignore the $250,000 insurance, what’s stopping a VC company from plowing millions of dollars of deposits into a bank indulging in excessive risk-taking in exchange for favorable terms on loans, etc.?
Nothing, which is why Silicon Valley Bank collapsed, and others will follow.
Next, my Wall Street sources say, stop using the Fed’s interest-rate policy to backstop losses in the financial system. It’s creating more moral hazard and a continuation of the wild speculation that got us into this mess. There is a lot of talk Powell will take a breather during the next Fed meeting in May. He may not raise interest rates despite inflation that remains well above the target rate — a nasty tax on the average Joe and Jane out there who can’t afford food or gas.
The dirty wager is that another rate hike (above 5%) would lead to more bank failures. But if Powell blinks, he would be rewarding bank managers and encouraging them to keep gambling. For all the Fed chairman’s faults, when he began raising rates, he didn’t sugarcoat his objectives. Banks continued to roll the dice despite the smoldering risks of their balance sheets.
Let the banks pay the price — so Joe Six Pack doesn’t have to.