This week, Americans for Limited Government published a provocative and insightful piece about the banking system asking, “Has the United States banking system become too big to save?”
In the past three years, to finance massive federal spending, the Treasury has issued almost $8 trillion new treasury bonds with almost $4 trillion bought by US banks during the tail-end of the Fed’s era of zero interest rates.
US Treasury Bonds? Sounds like a safe investment for a bank, but here’s the problem. After 40 years of relatively stable prices, we now have raging inflation caused by reckless Federal spending. To try to fight this price inflation the Federal Reserve is raising interest rates which reduces the value of the commercial banks treasury bond investments. (We explain why this happens in this episode.)
The result: banks are now sitting on more than $600 billion of unrealized bond losses. Silicon Valley (SVB), Signature, and First Republic banks look to be canaries in the coal mine, potentially the first of many regional bank balance sheets to blow up.
The root cause for this – and the Fed is almost entirely responsible – is the 14 years of free money policies and asset price inflation driven by the Fed. Since 2008, banks have been borrowing from depositors at near 0% interest. With “free money”, bankers forgot how to be bankers matching assets and liabilities, interest rate risk and duration.
As they have during the banking crises of the past quarter century, the regulators have pulled out their default playbook: making more institutions “systemically risky,” foisting the tab on taxpayers and giving regulators more control.
But there’s also something new: the troubling problem of regulatory mission drift. The Fed’s historical mandates are to promote price stability and full employment and a safe and sound banking system. Instead, the Fed (and the Treasury) have changed their priorities to promote the progressive priorities of climate change and equity. Case in point: SVB received its first “outstanding” rating from examiners for fulfilling the SF Fed’s social and climate agenda. These didn’t cause SVB to fail, but it sure looks like examiners became more permissive of – or overlooked entirely – its balance-sheet risks.
The scenario playing out here is potentially accelerating toward something much worse:
What better way to push us towards a correct climate change and equity agenda than a wholly government-operated banking system where everyone’s bank is effectively the Federal Reserve. In this system, our money will become a so-called “central bank digital currency” giving the federal government power over most of our personal financial matters.
Far-fetched? I don’t think so. Read about the “Overton Window.”
Joining me to talk through how we got here and where this may be going is Rick Manning, president of Americans for Limited Government, and its Vice President, Robert Romano.
Rick describes the banks recent “doomed-to-fail strategy, owning and trading government debt, dependent on falling interest rates to create a guaranteed profit.” When those trends reverse, crashes ensue and bailouts occur.
These bailouts, from the Savings-and-Loan Associations of the 1980s to Silicon Valley Bank’s today, have helped drive financial centralization as big banks get saved and little ones go under. After 2008, the Dodd-Frank Act made takeovers easier, setting up an arbitrary mechanism based on whether a bank is deemed to be a “systemic risk.”
Rick explains how this can be politicized:
“They determined that Silicon Valley Bank had “systemic risk” because politically connected people were investing in woke capitalism and the green agenda. But if you’re invested in drilling, you’re not going to get bailed out.”
Says Robert: “it’s a lethal threat to the private sector if Treasury and the Federal Reserve can just label a bank ‘systemically risky’ and take it over.”
Rick and I served on President Trump’s transition team, and we know that sound ideas can get lost in the politics. Still, change has to start somewhere. What about solutions?
We have many but there’s so much in this episode, it almost resists description. Listen in for yourself. I worry that we’re seeing the weaponization of our money. We lay these issues out and you decide. This week, Americans for Limited Government published a provocative and insightful piece about the banking system asking, “Has the United States banking system become too big to save?”
