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AFF Sentinel-Vol 20#14-Banks Are Likely Less At Risk Than Some Think

Poor Bank Management and Lacking Oversight Are Not Everywhere

Steve Dittmer | AFF Sentinel

Colorado Springs, CO

Originally sent to subscribers 03/26/23

The question of banking stability has gotten some folks a bit concerned.

It’s true there are some banks that had problems. But as Sen. Bill Hagerty (R-Tn), Senate Banking Committee said, even with those banks, it was a liquidity problem, not a solvency problem. They had the capital. Those banks were hurt by people spooked and making a run on the banks and forcing liquidation of long-term bonds ahead of their time. In fact, one of them was minutes away from arranging money from one division of the government when another division shut them down.

But Hagerty said the San Francisco Fed was not doing their job as a regulator or Silicon Valley Bank’s collapse would never have happened. The Fed should have had those two banks sold by Monday morning, he said. Instead, they created uncertainty. Government bureaucrats were picking winners and losers by guaranteeing all deposits at two banks.

It’s another example of government bureaucrats ineffective with the authority given them.

It’s also true many banks have some problems on their books but time and a new administration that knows how to manage and how to mostly stay out of the economy, will give those banks time to work out of their problems. It’s the flip side of Biden’s plans to tax “unrealized income.” These banks won’t have to deal short-term with book losses unless there is a run on their deposits. Over time, they can deal with their long bond problems in an orderly fashion.

In most cases, a run is not likely. Country banks are run more conservatively, have a higher capital cushion and have a higher percentage of deposits. And most depositors in rural and small town banks are under the $250,000 limit for federal deposit insurance anyway. Credit unions are even less at risk and are covered up to the same limits by a different organization.

The big banks will survive anyway, because their positions and behavior are more well-known and publicized and because they will be saved no matter what. As for international banks, the Swiss government may have moved too swiftly to put Credit Suisse to sleep but that bank has been in trouble for over a decade, everyone knew it but no one there ever figured out how to fix it.

The biggest problem now is uncertainty, and with the stock and bond markets more involved in the financial system that ever before, that makes things more unsettled because the markets hate uncertainty. They may be certainly wrong -- but they feel better when they think they know what’s happening. And the Federal Reserve is not helping. Neither is Treasury Secretary Janet Yellen.

Early in the weekend of the Silicon Valley Bank crisis, Yellen said all depositors would not be made whole, just those up to the standard $250,000 limit. By the end of the weekend, Biden administration officials, the Federal Reserve board and other finance gurus had decided to make all depositors whole, including venture capital clients who had millions of dollars in accounts in one bank.

As to whether they would do that again, Yellen has flipped and flopped both ways several times. Meaning banks, bank stock holders, depositors and bank customers don’t know what might be covered if there is another bank failure.

Which gets banks into moral hazard territory. What stops people when the government will back everything? It’s more of the left’s philosophy that nothing is anyone’s fault. There is no accountability.

All of this is due to the mismanagement of the U.S. economy by the Biden administration and a Democrat Congress, aided by some weak Republicans who are more concerned about their standing with the media, Democrat colleagues and liberal voters who want more money and protection from the government. Pumping trillions of dollars into the economy, forcing the price of oil and gas up that powers the economy by cutting supply and regulating business to death was bound to seriously damage the economy with major inflation.

Especially after leftist governors had put the economies of whole states under anesthetic for two years. The patients survived but were seriously damaged. The Federal Reserve didn’t put a stop to stupid political tricks, and their 1940s Keynesian econometric models continue to fail the country.

Congress may need to step in and clarify some policy regarding bank bailouts so everyone knows the rules and poor bank managers know they will be on the hook for stupid bank tricks. Because leaving these questions up to the Federal Reserve, the Biden Treasury officials and who knows who else is not providing the clarity and confidence this economy needs.

The economic data shows consumers are compensating intelligently by redirecting limited dollars facing inflated costs by spending it on necessities like food, gas, utilities and housing. That’s enough to keep the economy going, though at a reduced pitch and rate of growth. Unlike the federal government, they have to meet the day-to-day bills, not pile it on some never-to-be-dealt-with accounting sheet like the federal government keeps doing. That’s not to say they are not racking up some debt. Consumer debt has been rising. But nearly all consumers are aware of that, know they will have to pay it back and are making efforts to keep that debt from escalating beyond control.

Unlike the federal government.

It does mean it is a good time to be in the business of providing a necessity like food, especially one that can both stretch budgets -- like ground beef, chuck and round cuts -- and satisfy the craving for something special like a steak or prime rib or something in between, like terrific smoked brisket.

The problem is, some citizens in the future will have to deal with the federal government’s debt. Joe Biden won’t. He hasn’t really the foggiest notion of how big a problem it is.

There have been some interesting and educational critiques of the Federal Reserve’s actions in the last several year and we’ll delve into them next.

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