Trump Wants To Abolish The FDIC And Weaken Bank Regulations

Economist Paul Krugman explains why Trump's desire to abolish the FDIC and deregulate banks is a very bad idea:

The incoming Trump administration reportedly wants to abolish the FDIC and weaken bank regulation in general. And that could eventually lead to very bad things. . . .

We know that Donald Trump has a thing about the 1890s, when men were men, tariffs were high, businesses were free to pollute the air and water, and nobody knew what went on in meatpacking plants. But you can bet your Bitcoin that he’s never heard of the Panic of 1893, a huge wave of contagious bank runs that was catastrophic for industrial production and employment.

Economists actually understand bank runs pretty well. 

Normally the illiquidity of most bank assets isn’t a problem, because on any given day only some of a bank’s customers want cash, while others are making deposits, so it’s OK to hold limited amounts of ready cash.

But if for whatever reason depositors fear that a bank may be about to fail, they will rush to pull out their money — and their fears can turn into a self-fulfilling prophecy, because a bank trying to raise money in a hurry can go bankrupt even if it would have been solvent if it had had time to sell at a more deliberate pace. And since the collapse of one bank can cause fears about other banks, bank runs can be contagious.

Deposit insurance made old-fashioned bank runs a thing of the past. But from the beginning it was obvious that protection for depositors had to come with strings. Otherwise banks could play heads I win, tails taxpayers lose: attract funds by offering attractive interest rates, then invest in potentially high-yielding ventures that could also easily go bad. Depositors wouldn’t worry, because they were protected; bank owners would get rich if they were lucky, just walk away if they weren’t.

So deposit insurance had to be accompanied by things like capital requirements that forced bank owners to put their own money at risk and restrictions on the kinds of investments they were allowed to make.

Concerns that unregulated banks would gamble with depositors’ funds weren’t purely hypothetical. The interaction between deposit insurance and deregulation of savings banks in the 1980s turned a modest-sized problem into a huge mess that eventually cost taxpayers around $130 billion — adjusting for inflation and economic growth since then, that’s the equivalent of around $650 billion today.

Now the incoming Trump administration seems eager to deregulate the financial industry. We’re hearing about the possibility of abolishing the FDIC. Deposit insurance would supposedly remain, although it would be absorbed into the Treasury Department. But the FDIC has a lot of institutional experience in bank regulation, which would presumably be lost. And this comes amid a general push to loosen financial regulation, indeed regulation of all types.

I have no idea how far this stuff will go, although Wall Street types are clearly eager to start taking dangerous risks again.

But it does seem like a reasonable guess that panics, along with pollution and polio, are well-positioned to make a comeback.

Most Americans Still Trust Their Bank

The charts above are from a Morning Consult Poll -- done between March 13th and 15th of a nationwide sample of 2,005 adults, with a 2 point margin of error. 

GOP Is Saying Banks Are Failing Because Of "Wokeism"

The Silicon Valley Bank failed because Republicans deregulated banking - allowing bankers to do stupid and dangerous things with the money they were entrusted. But Republicans don't want to admit they were wrong, so they are ridiculously blaming the bank failure of the bank being "woke". Here's how James Downie describes this new Republican nonsense at MSNBC.com:

In the latest edition of The Wall Street Journal’s “Inside View,” columnist Andy Kessler ponders last week’s collapse of Silicon Valley Bank, the second-largest bank collapse in U.S. history. The autopsy might seem straightforward: The bank was unusually vulnerable to interest rate hikes because most of its holdings were in long-term debt and because its customer base was disproportionately startups and other industries that needed more cash as interest rates rose.

But Kessler suggests another possible cause. "In its proxy statement," he writes, "SVB notes that besides 91% of their board being independent and 45% women, they also have '1 Black,' '1 LGBTQ+' and '2 Veterans.' I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands."

Now, there’s nothing “woke” about woefully inadequate risk management. White men have excelled at that for millennia. But, regardless, as MSNBC host Stephanie Ruhle put it, “This has absolutely NOTHING to do with a bank being ‘woke.’” 

Missing the point in times of crisis is nothing new for the Journal’s opinion pages. This is the same publication whose editorial board, after the terrorist attacks of Sept. 11, 2001, suggested President George W. Bush should use the tragedy to pass “pro-growth tax cuts.” But in this case, Kessler, far from having the “Inside View,” is merely repeating Republican talking points. 

“We see now coming out they were one of the most woke banks,” said Rep. James Comer, R-Ky. Referring to diversity, equity and inclusion policies, Florida Gov. Ron DeSantis told Fox News: “I mean, this bank, they’re so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission.”

“SVB is what happens when you push a leftist/woke ideology and have that take precedent over common sense business practices,” tweeted Donald Trump Jr. (The executive vice president of the Trump Organization did not elaborate nor say whether “common sense business practices” include those that led to his employer’s being convicted of tax fraud.)

This tactic long predates SVB's collapse: “Say ‘woke’ in case of emergency” has become a favorite Republican strategy. At first, denunciations of “wokeism” were mostly used in attempts to oppose gay rights and scrub school curricula of mentions of Black history. But more recently, Republicans have expanded their use of the term. After the train derailment in East Palestine, Ohio, Rep. Mike Collins, R-Ga., wondered whether “Norfolk Southern’s DEI policies [were] directing resources away from the important things like greasing wheel bearings.” As Republicans scramble for politically palatable budget cuts, lawmakers such as House GOP Conference Chair Elise Stefanik of New York have tried to target the Defense Department’s “woke agenda.” When a former student shot up a Texas elementary school, Sen. Ron Johnson of Wisconsin blamed “wokeness.” And when Memphis, Tennessee, police fatally beat Tyre Nichols, Trump Jr. was one of the conservatives who blamed Memphis police for hiring “woke DEI candidates” as officers. 

Why are conservatives using one word to explain everything from a train derailment to a bank failure to the police wrongly beating a motorist? Because it lets them duck the consequences of their ideas.

They could acknowledge that SVB might still be around today but for deregulation signed by former President Donald Trump that was supported almost unanimously by Republicans (and even some Democrats). But it’s easier to blame the “woke agenda.” They could admit that school shootings are more common because of lax gun laws. But it’s easier to blame the “woke agenda.” They could accept that American policing may be in desperate need of reform. But it’s easier to blame the “woke agenda.”

While debate continues over whether SVB has received (or should have received) a bailout, it’s useful to think of the word “woke” as its own bailout — for conservatives. Whether it’s explaining away an inconvenient news development or creating a stopgap reason to oppose a Democrat, criticizing what it calls wokeness is the one-size-fits-all solution for today’s right. An intellectually healthy party would engage with the news, react to the developments, reconsider its priorities when necessary and strengthen its policies as a result.

But it’s easier to rail against an imaginary “woke agenda.”

SV Bank: It's What Happens When Regulations Are Removed

 Why did Silicon Valley Bank fail? Robert Reich explains it in this excellent article:

On Friday, bank regulators closed Silicon Valley Bank, based in Santa Clara, California. Its failure was the second largest in U.S. history and the largest since the financial crisis of 2008.

 

On Sunday, regulators closed New York-based Signature Bank.

As they rushed to contain fallout, officials at the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation announced in a joint statement on Sunday that depositors in Silicon Valley Bank would have access to all of their money starting Monday. They’d enact a similar program for Signature Bank. 

They stressed that the bank losses would not be borne by taxpayers, but who will bear them? What the hell happened? And what lessons should be learned?

The surface story of the Silicon Valley Bank debacle is straightforward. During the pandemic, startups and technology companies enjoyed heady profits, some of which they deposited in the Silicon Valley Bank. Flush with their cash, the bank did what banks do: It kept a fraction on hand and invested the rest — putting a large share into long-dated Treasury bonds that promised good returns when interest rates were low.

But then, starting a little more than a year ago, the Fed raised interest rates from near zero to over 4.5 percent. As a result, two things happened. The value of the Silicon Valley Bank’s holdings of Treasury bonds plummeted because newer bonds paid more interest. And, as interest rates rose, the gusher of venture capital funding to startup and tech companies slowed, because venture funds had to pay more to borrow money. As a result, these startup and tech companies had to withdraw more of their money from the bank to meet their payrolls and other expenses. 

But the bank didn’t have enough money on hand. 

 

There’s a deeper story here. Remember the scene in It’s a Wonderful Life where the Jimmy Stewart character tries to quell a run on his bank by explaining to depositors that their money went to loans to others in the same community, and if they’d just be patient, they’d get their deposits back? 

In the early 1930s, such bank runs were common. But the Roosevelt administration enacted laws and regulations requiring banks to have more money on hand, barring them from investing their depositors’ money for profit (in the Glass-Steagall Act), insuring deposits, and tightly overseeing the banks. Banking became more secure, and boring.

That lasted until the 1980s, when Wall Street financiers, seeing the potential for big money, pushed to dismantle these laws and regulations — culminating in 1999, when Bill Clinton and Congress repealed what remained of Glass-Steagall.

Then, of course, came the 2008 financial crisis, the worst collapse since 1929. It was the direct result of financial deregulation. Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, called it “a once-in-a-century credit tsunami,” but pressed by critics, Greenspan acknowledged that the crisis had forced him to rethink his free market ideology. “I have found a flaw,” he told a congressional committee. “I made a mistake … I was shocked.”

Shocked? Really?

Once banking was deregulated, such a crash was inevitable. In the 1950s and ’60s, when banking was boring, the financial sector accounted for just 10 to 15 percent of U.S. corporate profits. But deregulation made finance exciting and exceedingly profitable. By the mid-1980s, the financial sector claimed 30 percent of corporate profits, and by 2001 — by which time Wall Street had become a gigantic betting parlor in which the house took a big share of the bets — it claimed a whopping 40 percent. That was more than four times the profits made in all U.S. manufacturing.

When the bubble burst in 2008, the Bush administration moved to protect investment banks. Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, and Timothy Geithner, president of the New York Fed, arranged a rescue of the investment firm Bear Stearns but allowed Lehman Brothers to go under. The stock market crashed. AIG, an insurance giant that had underwritten hundreds of billions’ worth of credit on the Street, faced collapse. So did Citigroup (to which Robert Rubin, Clinton’s former Treasury secretary, had moved after he successfully pushed for the Glass-Steagall repeal), which had bet heavily on risky mortgage-related assets.

 

Paulson asked Congress for $700 billion to bail out the financial industry. He and Fed Chair Ben Bernanke insisted that a taxpayer bailout of Wall Street was the only way to avoid another Great Depression. 

Obama endorsed the Wall Street bailout and appointed a team of Clinton-era economic advisors (led by Geithner, who became Obama’s Treasury secretary, and Lawrence Summers, who became director of the National Economic Council). These were the same people who, working under Rubin in the 1990s, had prepared the way for the financial crisis by deregulating Wall Street. Geithner, as chair of the New York Fed, had been responsible for overseeing Wall Street in the years leading up to the crisis.

In the end, the Obama administration rescued Wall Street, but at enormous cost to taxpayers and the economy. Estimates of the true cost of the bailout vary from half a trillion dollars to several trillion. The Federal Reserve also provided huge subsidies to the big banks in the form of virtually free loans. But homeowners, whose homes were suddenly worth less than the mortgages they owed on them, were left hanging in the wind. Many lost their homes.

Obama thereby shifted the costs of the bankers’ speculative binge onto ordinary Americans, deepening mistrust of a political system increasingly seen as rigged in favor of the rich and powerful.

A package of regulations put in place after the financial crisis (called Dodd-Frank) was not nearly as strict as the banking laws and regulations of the 1930s. It required that the banks submit to stress tests by the Fed and hold a certain minimum amount of cash on their balance sheets to protect against shocks, but it didn’t prohibit banks from gambling with their investors’ money. Why not? Because Wall Street lobbyists, backed with generous campaign donations from the Street, wouldn’t have it. 

Which brings us to Friday’s failure of the Silicon Valley Bank. You didn’t have to be a rocket scientist to know that when the Fed raised interest rates as much and as fast as it did, the financial cushions behind some banks that had invested in Treasury bonds would shrink. Why didn’t regulators move in?

Because even the thin protections of Dodd-Frank were rolled back by Donald Trump, who in 2018 signed a bill that reduced scrutiny over many regional banks and removed the requirement that banks with assets under $250 billion submit to stress testing and reduced the amount of cash they had to keep on their balance sheets to protect against shock. This freed smaller banks — such as Silicon Valley Bank (and Signature Bank) — to invest more of their deposits and make more money for their shareholders (and their CEOs, whose pay is linked to profits).

Not surprisingly, Silicon Valley Bank’s own chief executive, Greg Becker, had been a strong supporter of Trump’s rollback. Becker had served on the San Francisco Fed’s board of directors. 

Oh, and Becker sold $3.6 million of Silicon Valley Bank stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. There’s nothing illegal about corporate trading plans like the one Becker used, and the timing could merely have been coincidental. But it smells awful.

Will the failure of Silicon Valley Bank be as contagious as the failures of 2008, leading to other bank failures as depositors grow nervous about their safety? It’s impossible to know. The speed with which regulators moved over the weekend suggests they’re concerned. The Wall Street crisis of 2008 began with one or two bank failures, as did the financial crisis of 1929.

  

Four lessons from this debacle: 

1. The Fed should hold off raising interest rates again until it has done a thorough appraisal of the consequences for smaller banks. 

   
   

2. When the Fed rapidly raises interest rates, it must better monitor banks that have invested heavily in Treasury bonds.

   
   

3. The Trump regulatory rollbacks of financial regulations are dangerous. Small banks can get into huge trouble, setting off potential contagion to other banks. The Dodd-Frank rules must be fully reinstated. 

   
   

4. More broadly, not even Dodd-Frank is adequate. To make banking boring again, instead of one of the most profitable parts of the economy, Glass-Steagall must be reenacted, separating commercial from investment banking. There’s no good reason banks should be investing their depositors’ money for profit.

Wall Street Opposes Socialism (Unless It's For Them)

 

The giant financial institutions don't like the idea of government helping ordinary citizens. They call that socialism. But they love for the government to bail them out of trouble and provide loopholes and other financial advantages. In other words. They believe socialism should be reserved for Wall Street!

Here's part of what Robert Reich says about this ridiculous view:

The stock market is gyrating wildly in light of Putin’s aggression in Ukraine, but Wall Street traders are doing just fine. Bad news is good news for traders who make money off volatility.

After all, in the year of Delta and Omicron, climate chaos, Trump Republican attacks on democracy, bitter divisiveness, a calamitous exit from Afghanistan, and accelerating inflation, the Street’s biggest banks have reaped record profits. Bonuses are through the front Porsche. Hundreds of traders have racked up seven and eight-figure bonanzas. Morgan Stanley paid out $35 million to its CEO, James Gorman. Goldman Sachs, $35 million to David Solomon. Bank of America, $32 million to Brian Moynihan. Citigroup, $22.5 million to Jane Fraser. And, not the least, JPMorgan, which paid out $34.5 million to Jamie Dimon — plus a retention bonus of $50 million.

Dimon has become a spokesman for the Street and one of the most influential CEOs on Capitol Hill. His public statements are a barometer for what America’s financial oligarchs are thinking.

They are not fretting about what the Fed’s incipient fight against inflation is likely to do to jobs and wages. They’re not worried about the shrinkage of America’s middle class or the precariousness of the working class and poor. They are unsettled by what they consider creeping socialism. In an annual letter to JPMorgan shareholders, Dimon warned that socialism would be a “disaster for our country” because it produces “stagnation, corruption and often worse.”

It should be remembered that Dimon was at the helm in 2008 when JPMorgan received a $25 billion socialist-like bailout after it and other Wall Street banks almost tanked because of their reckless loans. Instead of letting the market punish the banks (which is what capitalism is supposed to do), the Obama administration bailed them out and eventually levied paltry fines which the banks treated as the cost of doing business. According to the Justice Department, JPMorgan acknowledged it had regularly and knowingly sold mortgages that should have never been sold. (Presumably this is where the “stagnation, corruption and often worse” come in.)

Millions of Americans lost their homes, savings, and jobs in the financial crisis. But neither Dimon nor any other top Wall Street executive was held accountable. If this isn’t socialism for rich bankers, what is it?

America’s five largest banks, including Dimon’s JPMorgan, now control almost half of all deposits, up from 12 percent in the early 1990s. Because of their size, these banks are now considered “too big to fail.” This translates into a hidden subsidy of some $83 billion a year — the total estimated discount that creditors and depositors give banks whose solvency is effectively guaranteed by the government. More socialism for rich bankers.

Dimon was instrumental in getting the big Trump tax cuts through Congress. They have saved JPMorgan and the other big banks over $50 billion so far.

But Dimon and JPMorgan are doing their bit to make sure average Americans experience the full consequences of harsh capitalism. Although federal regulators waived overdraft fees for big banks when the economy took a dive in 2020, Dimon and JPMorgan refused to waive overdraft fees for borrowers struggling to make ends meet amid pandemic lockdowns. Dimon and JPMorgan reaped $1.46 billion in overdraft fees — the most of any big bank. . . .

Dimon isn’t really concerned about widening inequality. He’s not really concerned about socialism, either. Nor about any of the other crises hitting America, which expose Americans to more economic uncertainty and insecurity than the citizens of any other advanced economy. His real worry is that one day America might end the type of socialism he and other denizens of Wall Street depend on – bailouts, regulatory loopholes, subsidies, and tax breaks.