MARCH 28: Another update, this time from The Lever, showing that as early as 2018, SBV was on the regulatory radar as a potential risk whose failure could well endanger the system as well as banks its size. This document, as explained by David Sirota & Julia Rock, demonstrates that regulation is not sufficient to the task of “reform,” that is, the kind that will allow for management of inevitable crisis rather than prevention of occasional panic: https://www.levernews.com/document-shows-regulators-knew-of-svb-risk-five-years-ago/
MARCH 25: Here’s a brief update on the financial crisis that is still unfolding. The new current in discussion by informed observers is a practical orientation: what is to be done? Peter Coy’s column of 3/22 in NYT is a good example, as is the op-ed of the following day 3/23 in same by Saule Omarova of Cornell Law School, a former nominee (by Joe Biden) to be Comptroller of the Currency.
Coy’s headline is “Seven Ideas to Prevent the Next Bank Crisis,” as if the avoidance rather than the management of inevitable crisis—a normal moment in any money economy—is the point of banking regulation, which of course is overseen by the central bank itself. Of the seven he mentions, three ideas are interesting enough to warrant an intellectual personification. (1) “Insure all deposits” is the battle cry of Robert Hockett at Cornell (see below, @ MARCH 13), now taken up by Janet Yellen, with her signature stutters and missteps. It’s a solution that either magnifies moral hazard or makes the case for public control of all banks. (2) “Make banks narrow” is the brainchild of Amit Seru at Stanford Business School (a place rightly famous for its emphasis on business ethics). By this he means something like what Mervyn King proposed in The End of Alchemy (2015), citing William Leggett, the 19th-century money crank (also William Jennings Bryan, the Populist/Democratic presidential candidate of 1896 famous for his “Cross of Gold” speech in convention): require banks to hold immediately liquid assets against all deposits in a 1:1 ratio. This of course adjourns “fractional reserve” banking, which is to say the very premise of banks as such; that’s what King means by “the end of alchemy.” (3) “End leverage,” an idea peddled by Laurence Kotlikoff, an economist at BU, which also translates as an end to banking as we know it, for it again requires capital requirements equivalent to liabilities in the form of deposits.
Omarova’s op-ed, “Banks Can’t Be Trusted: A ‘Golden Share’ Might Help,” is the Cliff/Spark Notes version of her “Bank Governance and Systemic Stability: The ‘Golden Share’ Approach,” Alabama Law Review 64:4 (2017): 30-70, which proposes to put government appointees (holders of a non-voting “golden share”) on the boards of banks to monitor practices on a day-to-day, or at least quarterly basis. This close-up “partnership” between the private and public sectors is, in effect, a way of moving banks toward a public utility model, whereby “externalities” such as the environmental impact of loans and consequent investments can be assessed, and risk can be realistically redefined, accordingly, to include items other than potential losses to shareholders and depositors. It’s a timid step, but in the right direction.
More to come, because this event ain’t over yet.
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Herewith a day-by-day sample and summary of the salient opinion regarding the new banking crisis started by the collapse of Silicon Valley Bank in early March. I’ve been doing this at Facebook, but it’s time to transfer my assets to the Substack repository.
By way of introduction, the through line here is the absurdity of private control of bank assets—my argument, which is borrowed from mainstream figures like Mervyn King and Willem Buiter, both alumni of the Bank of England, and Martin Wolf, the Financial Times columnist, is simply that the rational grounds for such control disappears once taxpayers stand as guarantors of bank deposits through the FDIC, to begin with, and then via TARP and related programs during the extraordinary financial crises of 2008-2011 and 2020. This seems to me the self-evident yet unknown conclusion to be drawn from the myriad data at our disposal: it’s that old elephant in the room.
The so-called financialization of the economy that characterizes the late neoliberal phase of capitalist development—by which the financial sector becomes the cutting edge of growth because the industrial sector must park its surplus capital with the banks if it is to realize any respectable return on its increasing profits—is a long-term effect of the detonating event in the rise of corporate capitalism, ca. 1890-1920, that is, the separation of ownership and control of the private property that constitutes the tangible assets of the corporation.
Karl Marx saw in this separation both the necessary condition of socialism and the probable cause of stock-jobbing, speculation, in short gambling with “other people’s money.” I have elsewhere extrapolated from his observations in Volume 3 of Capital (see chapters 23, 27-32) to compare this epochal transformation of the 20th century to the key moment in the transition from feudalism to capitalism, which begins in the 16th century when nobles with exclusive customary rights to land ownership turn their property over to rent-paying commoners—and with it day-to-day decisions about the allocation of resources. The social death of the landed aristocracy follows, as does the social death of capitalists when they turn control of their property over to salaried managers with no legal title to or claim on the assets of the corporations they direct.
Accept that comparison or not, here is how Marx himself thought through the implications of corporate capitalism:
“Formation of stock companies. By means of these: . . . [Capital] is here directly endowed with the form of social capital . . . as distinguished from private capital, and its enterprises assume the the form of social enterprises as distinguished from individual enterprises. It is the abolition of capital as private property within the boundaries of capitalist production itself. . . . This [the “transformation of the actually functioning capitalist into a mere manager”] is the abolition of the capitalist mode of production within capitalist production itself, a self-destructive contradiction, which represents on its face a mere transition to new form of production. It manifests its contradictory nature by its effects. It establishes a monopoly in certain spheres and thereby challenges the interference of the state. It reproduces a new aristocracy of finance, a new sort of parasites in the shape of promoters, speculators, and merely nominal directors; a whole system of swindling and cheating by means of corporation juggling, stock jobbing, and stock speculation. It is private production without the control of private property.” [Capital, Kerr ed., 3: 516, 519]
With these observations in mind, and with those of non-Marxists like King, Buiter, and Wolf at hand, you can easily follow my diary of the unfolding crisis, which is a kind of index to the inevitable conclusion: whether we like or or not, we have long since socialized bank assets, so it’s time we treated social, democratic control of them as a practical question, not a utopian dream. It’s socialism or barbarism, for real.
The Fed’s modest rate hike (25bp) of yesterday, March 22, is a signal to Wall Street that it is more concerned with the still-tight labor market and how that might translate as wage-push inflation than with the fragility of the financial system and how that might cause a larger crisis of confidence in banking as such. With a different mandate and a different orientation to the purpose of economic growth—after all, even Alan Greenspan understands that markets are means to social ends, not ends in themselves—the Fed could be sending a signal to Main Street that it is more concerned with the value of our pensions than with the solvency of Silicon Valley start-ups.
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MARCH 13: There are no rational grounds for private control of bank assets if taxpayers are the guarantors of bank deposits. This is the argument of Martin Wolf, Mervyn King, Willem Buiter, the last two alumni of The Bank of England, all three esteemed authorities on global finance; none are avowed socialists.
It is borne out by the failure of SVB and the rescue of its depositors by the Fed, the Treasury, and the FDIC. The practical solution to the scandal of this idiocy is to turn the banks—all of them—into public utilities. The evidence seems to be leading everyone but the bone-heads like Peter Thiel to that conclusion, as witness Peter Coy's column today at NYT, which ends as follows:
"If market discipline works in theory but not in practice, one alternative is to bow to reality and explicitly insure all bank deposits. It would certainly lessen the number of panics such as the one that killed Silicon Valley Bank and Signature Bank, without giving banks carte blanche to behave irresponsibly. One person who favors that solution is Robert Hockett, a professor at Cornell Law School, who has written two pieces about the idea for Forbes recently. The F.D.I.C. premiums are higher for riskier banks, which makes sense. Given that the F.D.I.C. already takes risk into account, Hockett told me, the $250,000 limit is 'vestigial, like the human tailbone.'
"Insuring all bank deposits would make banks look more like public utilities, [Karen] Petrou [managing partner at Federal Financial Analytics] told me. She said she’d prefer relying more on market discipline, as originally intended. But that ship may already have sailed."
FOOTNOTES:
**Another interesting aspect of the situation: those deposits from start-ups were idle cash because they were flush with venture capital. In other words: the deposits were money parked at SVB, which wasn't using it to invest in anything innovative, technologically or otherwise, no, it was money parked, in turn, in boring old bonds, so that—aack!—government could do the investing in innovation (as per CHIPs). https://www.nytimes.com/.../silicon-valley-bank-lehman...
**The Economist weighs in, suggesting that no limits on deposit insurance will encourage recklessness--aka moral hazard--but that re-regulation along the lines of Dodd-Frank will suffice. Bullshit. This con game is over. https://www.economist.com/.../what-really-went-wrong-at...
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MARCH 15: "Expensively credentialed, negligibly educated Stanford brats threw a tantrum". That's the headline on George F. WIll's column today in the Washington Post. I thought he was referring to the morons in Peter Thiel's Silicon Valley posse (Elon, Bret, et al.), those intrepid entrepreneurs who take risks with other people's money because they know that the government they vilify will save their asses when the crisis comes. But no, cranky old George was ranting about some DEI disaster at Stanford involving a Federalist Society invite to Stuart Kyle Duncan from the chapter at the law school. Will professes to hate what Trump stands for. But he peddles the same crap day after day, as if he is heir apparent to the mantle of William F. Buckley, Jr., another charlatan who posed as a Brahmin intellectual and who was, right under that thin layer of a faux British accent, an unprincipled thug willing to tear up the shallow roots of American identity in the Declaration--in those mere words, "all men are created equal."
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MARCH 17: Matt Stoller weighs in at his Substack, BIG, on the SBV debacle with a detailed analysis that, in a Brendeisian mood, defines its cause as the de-regulatory, pro-consolidation culture of the Fed since the advent of the neoliberal regime in the 1980s. But he, too, ends up suggesting that "Too Big To Fail" is now the law for all banks except the small community kind: they are effectively "government banks," so they should be directed by elected bodies and their agencies. Here are the key grafs:
"Now, I don’t want to get too deep into the SVB fiasco, there are a lot of explainers elsewhere. . . . I will just note that the FDIC was not panicking, and if it had been able to go through with its original plan, uninsured depositors would have gotten back 50% of their cash almost immediately, and the rest back shortly thereafter, with only a slight possibility of a haircut. If the Fed had opened up its discount window or a facility to discount good collateral, there might have been runs on mid-size banks, but those would have been contained. And if the Fed had actually broken up the Too Big to Fail banks - JP Morgan, Citigroup, Bank of America, Wells Fargo, and Morgan Stanley - there wouldn’t have been a run at all. The only reason people withdrew uninsured deposits is because they had de facto government banks.
"But instead, Powell and Yellen, who run Biden’s financial policy, forced a bailout of all uninsured depositors, billionaires like Conway, and firms like Roku, which had $500 million sitting in a bank account. That’s utterly absurd. As one European bank regulator said in horror, 'At the end of the day, this is a bailout paid for by the ordinary people and it’s a bailout of the rich venture capitalists which is really wrong.' And what it means is that a new class of banks, with $100 billion of assets, are now de facto government banks. The 5000 small community banks aren’t, so they will eventually get wiped out (as they are starting to notice. Little is as annoying as the solidarity that community bankers feel towards the Wall Street bankers trying to kill them.) More fundamentally, it shows that Dodd-Frank, with its homework for regulators, its stress tests, its living wills, its goal of ‘ending Too Big to Fail,’ is a conclusive failure."
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MARCH 19: Ezra Klein's reply [NYT 3/18], as it were, to Matt Stoller, which suggests that the de-regulation of mid-sized banks ($250 billion) wasn't such a crazy idea because, as the CEO himself said, SVB wasn't dealing in complex derivatives as per the bundled mortgage tranches of the 2007-08 financial crisis. Fighting the last war and all that. But the conclusion is the same: private control of bank assets is absurd if there are no more truly private banks because the public--us taxpayers and our government--are their guarantors:
"But this gets to a broader point: Banking is a critical form of public infrastructure that we pretend is a private act of risk management. The concept of systemic risk was meant to cordon off the quasi-public banks — the ones we would save — from the truly private banks that can be mostly left alone to manage their liabilities. But the lesson of the past 15 years is that there are no truly private banks, or at least we do not know, in advance, which those are."
FOOTNOTE:
**Sebastian Mallaby at WaPo [3/18] reaches the same conclusion against his own better judgement, and, I will add, his own evidence: "At the height of the 2008 crisis, policymakers fixed the problem of capital-short banks by forcing them to accept capital injections from the government. But this semi-nationalization was hated by bank shareholders, whose ownership was diluted; and today’s market conditions are not (yet) extreme enough to warrant such radical action. The upshot is that the economy might be hobbled by zombie lenders for the next year or more. Such is the price of an inflationary bubble that the Fed was too slow to pop."
Too slow to pop? The Fed was supposed to anticipate the complete breakdown and reconstruction of supply chains, 2020-22, or the incredible greed of rental property owners, who jacked prices by 80% over the same period? Oh please. This is uncle Milty Friedman's verdict on the Great Depression in reverse. [In A Monetary History of the US (1962), Friedman argued, wrongly I prove in Against Thrift (2011), that the Fed turned the financial collapse of 1929 into an unnecessary economic catastrophe because it didn’t understand that deflation raised real interest rates, so that by standing pat it made borrowing more expensive and money harder to come by when “ready lending” was essential to smoothing a normal business cycle.] Horseshit either way unless we grant the Fed a God-like omniscience.
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MARCH 22: Willem Buiter is the leading authority on central banking in the world right now; he's pitching a 25bp rate hike to the Fed, whose decision is public at 2:00 EDT. It's an over-cautious argument, I think, because it's determined by his fear that "moral hazard" has been amplified and enforced by the Fed's new role as lender of first rather than last resort. He's right to harbor this fear, of course, and he knows there's no going back--so why not contain the threat by making the banks public utilities de jure, since they're already that de facto? He's on record elsewhere in suggesting that this is inevitable. Why not just go ahead now, at least with the logic on the table, where it can be debated? Here are the key grafs from his Project Syndicate piece dated 3/21:
"What will the Federal Reserve do at its upcoming meeting? I believe that the financial stability concerns following the demise of SVB and Signature Bank were addressed effectively by ensuring that all deposits in these two badly managed institutions would be made whole. De facto, this means that all deposits in US banks are henceforth insured. This no doubt contributes to moral hazard, because incompetent or reckless bank management will not be punished through a loss of informed depositors. But it is the unavoidable price of ruling out the systemic threat posed by bank runs. Moral hazard was contained by letting the banks go bust and exposing the shareholders and unsecured creditors (and presumably even secured creditors if the losses are large enough) to whatever the banks’ mismanagement cost.
"But this prudential response was not optimal, because the new Bank Term Funding Program created by the Fed, which offers one-year loans to banks with the collateral valued at par, should have been made available only on penalty terms. With market value well below par for many eligible debt instruments, the lender of last resort has become the lender of first resort – offering materially subsidized loans. The same anomaly (valuing collateral at par) now applies to loans at the discount window."
FOOTNOTE:
**Notice that Buiter says the BTFP will value the banks’ collateral at par, not its market price: no losses for anybody. He concludes with what seems a throwaway line, suggesting the abandonment of “fractional reserve banking.” But this amounts to saying what Mervyn King, Martin Wolf, and Lev Menand either state forthrightly or strongly imply in their recent works on banking, that central banks now function as de facto headquarters of indicative economic planning. Here’s how Buiter puts it: “Financial stability in the US is best served in the short run by the Fed standing ready to intervene as lender and market maker of last resort. In the medium and long run, the original Dodd-Frank regulations, repealed for small and medium-sized banks in 2018, should be reimposed, and perhaps limits on banks’ proprietary investment activities should be restored – or maybe fractional reserve banking should be abandoned altogether.”
On King, see my review of The End of Alchemy (2015) at Public Books: https://www.publicbooks.org/atlas-mugged/
On Menand, see my review of The Fed Unbound (2022) at Project Syndicate: https://www.project-syndicate.org/onpoint/review-of-menand-bernanke-chancellor-on-crisis-and-federal-reserve-by-james-livingston-2022-12
On Wolf, see my review of The Crisis of Democratic Capitalism (2023) at Project Syndicate: https://www.project-syndicate.org/onpoint/reviving-democracy-after-end-of-capitalism-by-james-livingston-2203-03?utm_source=Project+Syndicate+Newsletter&utm_campaign=af2a91d9ed-sunday_newsletter_03_12_2023&utm_medium=email&utm_term=0_73bad5b7d8-af2a91d9ed-107115341&mc_cid=af2a91d9ed&mc_eid=5c47be853f
Jim,
Can't iargue with your point that it's time to seriously consider making the banks public utilities. Practically speaking, I think there is just too much regulatory capture by the finance sector to make it a reality.
That the banks weren't penalized for their incompetence is, as Buiter notes, a serious moral hazard problem. The temporary backstop created by the Fed is only a short term solution to the current instability of the financial sector. Borrowing at par value only increases the amount of unrealized losses by the banking industry. At the end of 2022 banks were sitting on 1.7 Trillion in unrealized losses. How much more will be added now that banks can borrow at par value? And what happens at the end of the one year borrowing by the banks? Add in the ticking time bomb of Congress having to raise the debt ceiling by this June, and it should be apparent that a group of reactionary, know nothing members of Congress just might push the system off the cliff. Here's hoping I'm dead wrong.
That throwaway line "or maybe fractional reserve banking should be abandoned altogether" is quite a doozy in the absence of any follow-up. Admittedly, I have not read much about banking for many years, but what is the option to fractional reserve banking since the entire current system is based on that? Anybody making any real proposals here?