‘The U.S. banking system is sound and resilient,” Federal Reserve Board Chairman Jerome Powell said on Wednesday in an effort to calm depositors worried about more bank failures. That was the same day the Fed raised interest rates another quarter point to deal with inflation that has been running at four-decade highs for nearly two years.
The two problems, along with so many others that families are confronting right now, have a common cause: President Joe Biden’s disastrous economic policies.
While another banking crisis might have been contained – a reassurance we take with a grain of salt – the Biden crisis will continue to metastasize as long as he and his administration are calling the shots.
Let’s review how we got into this fix.
One of the first things Biden did as president was to sign his “American Rescue Plan” into law – a $1.9 trillion spending splurge that he said was needed to “rescue” the economy. But when Biden signed this monstrosity in March, 2021, the economy was already roaring back, and had regained almost all the ground it had lost during the misbegotten COVID lockdowns. That’s why even some (honest) liberal economists warned that injecting another $2 trillion in borrowed money into a hot economy would spark an inflationary spiral.
Lo and behold, that’s exactly what happened. Prices started climbing the very next month and topped 9% in June 2022. Over the course of the entire 12 months of 2022, the Consumer Price Index spiked 8% – the highest annual increase since 1981.
Once reality set in among Washington’s elite, the Fed had to start jacking up interest rates in hopes of bringing inflation under control. And over the past year, it has raised rates nine times.
That, in turn, contributed to the failure of Silicon Valley Bank, because as interest rates went up the value of Treasury bonds went down. Suddenly, SVB didn’t have enough money to cover its depositors.
As we noted in this space yesterday, “every one of the financial crises of the last 30 years or so (and even further back) was preceded by major interest rate hikes by the Fed.”
So, what did Biden do? He bailed out SVB, and Treasury Secretary Janet Yellen this week promised that the federal government – that is, you and me – will cover all deposits at smaller banks, even though the FDIC insures deposits up to only $250,000. That was supposed to calm the market at a time when nearly 200 other banks are at risk of failure if just half of their depositors decide to withdraw their funds, according to a study published by the National Bureau of Economic Research last week.
But that promise carries enormous risks as well. As everyone should know by now, privatizing profits while socializing risks only encourages greater risk-taking and is a recipe for bigger disasters down the road.
Just as problematic, though, are calls to use the SVB debacle as an excuse to impose still stricter regulations on the banking industry, which will only stifle economic growth further.
If more regulation were the answer, there’d never be a bank failure anywhere, because the mountain of rules and mandates is already miles high. If anything, it’s made the system more vulnerable by fueling massive consolidation. Since 2000, the number of banks in the country has been cut roughly in half even as the size of the economy grew by 52%.
No one can say how these interlinked crises will play out. But what must be emphasized over and over again is that none of this was inevitable.
The simple truth is that we would not be suffering this succession of increasingly worrisome economic turmoil if Biden hadn’t tried to “rescue” us. Remember that today. Remember it tomorrow. Remember that as the contagion he’s unleashed continues to spread.
— Written by the I&I Editorial Board