The US banking system is currently facing a twin set of problems. Both could spell doom for the US economy broadly, but so far have benefited the wealthy and powerful.
The first problem is a continued potential run on bank deposits, which became a well-known issue after the collapse of Silicon Valley Bank (SVB) in March. SVB, along with many other regional banks, took advantage of low interest rates to expand their balance sheet with high-value clients, which they then reinvested in typically safe US government bonds.
The problem occurred when the Federal Reserve raised interest rates unexpectedly high to curb runaway inflation after President Joe Biden took office. Those bonds were worth less than they were when SVB purchased them, but the bank still had to sell them at a loss to cover withdrawals. When word got out that SVB was potentially insolvent, it sparked a bank run. The same phenomenon more recently resulted in the failure of First Republic Bank. (RELATED: Goldman Sachs Under Investigation After Advising Silicon Valley Bank Before Collapse)
#ICYMI: We posted the Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank: (1/2) https://t.co/FuQqS72nAc pic.twitter.com/k8XhHVTDGE
— Federal Reserve (@federalreserve) May 4, 2023
However, at this point the threat of bank runs is largely old news. The more salient risk of volatility comes from bank speculation, or short selling, that resulted from the instability over the past two months. Short sellers borrow shares of stock they expect to fall and repay them for less later. Many major regional banks suffered wild swings as speculators bet against their collapse but then sharply reversed course. Speculators have profited immensely from pressure that regional bank stock prices have come under recently, making $1.2 billion last week.
This has led for calls for regulation to halt short selling all together, although currently the Securities and Exchange Commission has no plans to do so, according to Reuters. It is likely that small investors will lose out from volatile swings in stock prices more than the professional investors.
Both issues complement each other and can easily spell doom for the US economy. For, example one study from March found that 186 banks were at risk of failure if depositors quickly withdrew their funds. In this scenario, the average American middle class family is likely to bear the brunt of the pain while the wealthy make out relatively unscathed. (RELATED: ‘We Don’t Need 23,000 Employees’: Vivek Ramaswamy Calls For Federal Reserve Reform After Rate Hike)
In the case of SVB, the government stepped in to insure deposits over the $250,000 limit covered by the Federal Deposit Insurance Corporation (FDIC). This is quite possibly due to the fact that SVB was full of primarily Democratic donors, and catered largely to the tech industry that Democrats rely on to censor speech online.
Newsweek dutifully points out that the $20 billion worth of FDIC funds used to keep SVB afloat did not cost the taxpayers, but this is not entirely true. Director of the American Institute for Economic Research’s Sound Money Project William Luther explained to the New York Post that, the FDIC is “not really an insurance fund,” but a “rainy-day fund, which gets drawn down following a bank failure.” Although the banks have to cover it up front, “they pass along some of the cost to their customers in the form of higher fees and lower-quality services.” However, the fund is finite; if the crisis continues, it could ultimately have to be backed up by the American taxpayer.
The alternative is the more recent case of First Republic, which also caters to affluent clients such as real estate developers and wealthy home buyers. However, the government has yet to insure the bank’s deposits over the mandated $250,000. This is likely because J.P. Morgan stepped in to absorb the bank before it hit a crisis point.
However, this is far from a win for the American public. The FDIC is still on the line for a loss sharing agreement with the bank for many personal and commercial loans. Furthermore, the acquisition is a major win for both mega-banks and the federal bureaucracy.
J.P. Morgan’s Jamie Dimond gets to present himself as a “patriot and a savior” in a media-abetted public relations campaign for the bank. Furthermore, as more regional banks get absorbed by larger multinational banks, the American financial system comes under the control of fewer hands. This could potentially lead to more “debanking” that suppresses speech or activities that the government disapproves of. (RELATED: ‘That’s Chilling To Me’: Dem Senator Asked Officials About Censorship Tools To Prevent Bank Runs, GOP Rep Says)
As the economic forecast remains pessimistic, a banking crisis has the potential to become a self-fulfilling prophecy. If speculators believe the economic situation will get worse, they will likely bet against it which could lead precisely to the downturn they feared.
While the economy could be on the brink of collapse, the banks get bigger, the rich remain whole, and the American taxpayer picks up the bill.