Episode 221: “Are We Really Surprised We’re Having Another Banking Crisis?” with Alex Pollock and Steve Dewey
[iframe style=”border:none” src=”//html5-player.libsyn.com/embed/episode/id/26438022/height/100/width//thumbnail/no/render-playlist/no/theme/custom/tdest_id/2148569/custom-color/87A93A” height=”100″ width=”100%” scrolling=”no” allowfullscreen webkitallowfullscreen mozallowfullscreen oallowfullscreen msallowfullscreen]
It looks like the bill is finally coming due after decades of reckless monetary policy and out of control federal spending. After 40 years of relatively stable prices, we now have raging inflation. Interest rates have risen dramatically. Mortgage rates have more than doubled. And commercial banks are now sitting on more than $600 billion of unrealized bond losses.
Of course, and as expected, with the Silicon Valley Bank bailout, the Regulators have pulled out their default playbook declaring yet another institution systematically risky, taking another step toward the federalization of our banking system.
But there’s also something new to worry about: regulatory mission drift. The Fed’s historical mandates are to 1) promote price stability and 2) full employment and a safe and sound banking system. But instead, the Fed – and the Treasury – have changed their priorities to promote the progressive policies of climate change and equity.
Joining me to talk all this through are Alex Pollock and Steve Dewey. Both are grizzled veterans of the banking and regulatory world, which, as Alex points out, has been hit by a major crisis every decade since the 1970s. Together we have many decades of experience in financial markets. Alex and I have been conversing with each other, and interrupting each other, for almost fifty years.
Alex is a Senior Fellow at the Mises Institute and was Principal Deputy Director of the Office of Financial Research of the U.S. Treasury Department in 2019 and through 2021. He was also my second boss in the commercial banking world almost 45 years ago and was on my board at Allied Capital Corporation as we worked through the 2008 crisis and its aftermath.
Steve Dewey worked for several years in Asia during the Asian financial crisis and for the FDIC during and after the 2008 financial crisis where he was involved in the resolution of failed banks.
According to Alex, “We are still living in the aftermath of the long manipulation of interest rates and financial markets by the Federal Reserve and the club of central banks worldwide: the vast expansion of money and suppression of interest rates to an abnormally low level. Now we’re seeing the results.”
Meantime, rather than being the above-the-fray dispassionate wise actor, the Federal Reserve has become part of the problem: Just in the last six months, the Fed itself lost $44 billion which exceeds its capital of $42 billion. A big portion of its $8.7 trillion in assets are highly vulnerable to rising interest rates. Ironically, the Fed’s interest rate risk is similar to SVB’s.
So, what’s going to happen next?
The Fed and the Treasury seem likely to take more control in the name of risk management. The banking system holds $17 trillion of deposits and Treasury Secretary Janet Yellen recently declared that these would be de facto insured by the Treasury, the Fed and the FDIC.
But consider this: the FDIC’s deposit insurance fund is $128 billion, which is – putting it mildly – a little short of $17 trillion. Also, if the Fed continues losing money on its mortgage-backed securities, it will be losing over $100 billion a year.
Republican Senator Everett Dirksen, the Minority leader during the 1960s Kennedy-Johnson years, once said “a billion here, a billion there, and pretty soon we’re talking real money.” Now we’re talking trillions. Has the banking system become to big to save?
Will the “solution” be a nationalized bank and a digital currency to prevent a collapse of the system? Or something else? How do the woke climate and equity agendas figure into this?
There’s a lot to speculate about here. Join in our conversation for our take on the crisis.
As always, we try to make complicated things easier to understand and nothing right now seems more complicated than our money.