Banking on the Federal Reserve

David Thornton

David Thornton is a freelance writer and professional pilot who has also lived in Georgia, Florida, Kentucky, South Carolina, Tennessee, and Texas. He is a graduate of the University of Georgia and Emmanuel College. He is Christian conservative/libertarian who was fortunate enough to have seen Ronald Reagan in person during his formative years. A former contributor to The Resurgent, David now writes for the Racket News with fellow Resurgent alum, Steve Berman, and his personal blog, CaptainKudzu. He currently lives with his wife and daughter near Columbus, Georgia. His son is serving in the US Air Force. You can find him on Twitter @CaptainKudzu and Facebook.

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13 Responses

  1. Philip H says:

    As the Fed continues to raise rates to combat inflation, there is now a new concern about weakening banks. Further interest rate hikes could imperil the hoped-for “soft landing” for the economy, but failing to continue to raise rates could let inflation continue unchecked. Neither option is a good one, and the Fed is going to have to attempt to thread the needle.

    This again, points up why the Fed’s rate hikes are a poor, poor response system to large scale economic changes. Increased demand from “full employment” isn’t something we really should blunt.Report

    • North in reply to Philip H says:

      Rate hikes are the only option on offer. Raising taxes and cutting spending on a Federal lever is something politicians don’t like to do and something that takes ages to pull off. So rate hikes it is.Report

      • Philip H in reply to North says:

        The only reason rate hikes are on the table is because we have an economic policy that favors corporations over labor. A continued strong labor market and its concomitant demand is seen as a BAD thing. Especially coming out of pandemic, where corporations are still trying to claw back profits the “lost.”

        There’s no reason for it.Report

        • North in reply to Philip H says:

          Err inflation exists and has to be addressed even though neither you nor I like it. If you’re on the “it’s just corporate greed” tinfoil train I don’t think I can help ya there.Report

          • Philip H in reply to North says:

            The policies being used to address inflation aren’t working. The labor market is not yet slowing – and demand is strong. Profits are up nearly every sector.Report

            • North in reply to Philip H says:

              They’ve slowed inflation and likely will slow it more since rate hikes take a while to kick in. What’d probably be ideal would be if Biden and the GOP cut a deal for some modest broad based tax increases and modest spending cuts- especially if they married that with some serious permitting reform but that’d require both an entirely different GOP than currently exists and also a lot of political courage from the Dems.Report

          • Slade the Leveller in reply to North says:

            Now would be an excellent time to re-read William Greider’s Secrets of the Temple.Report

            • North in reply to Slade the Leveller says:

              “I’ve been writing for some months, the system is not just broken and not just injured; it is collapsed. And as long as the government continues to play putting Humpty Dumpty back together again, I think it will fail. That’s not an ideological statement. It’s just—I think it’s the reality.”
              William Greider January 29, 2009Report

    • Dark Matter in reply to Philip H says:

      Full employment wasn’t the problem. Covid locked down demand, we reduced supply, then after the lockdowns ended demand increased instantly and supply did not.

      Further a lot of people found different jobs during the lockdown, so those industries cranking back up is a problem.

      Related to that we had that massive traffic jam at the ports for many months.Report

  2. CJColucci says:

    Bank failures are rare.

    Er — no. There have been 562 between 2001-2023, so far.

    https://www.fdic.gov/bank/historical/bank/Report

  3. Jaybird says:

    Our own Doc Saunders tells his SVB story:

    Report

  4. DavidTC says:

    The bank’s deposits leaned heavily toward large accounts that exceeded the FDIC limit for deposit insurance.

    And what this story constantly misses is ‘why’.

    See, there actually is a good reason for why this happened. And it’s not convenience…there actually is a pretty easy way to get around this, called sweep accounts, where money is held in multiple banks and moves transparently between them.

    Why didn’t the companies do that? Because SVB offered these corporations incentives for leaving all their money with them. Incentives like lower-interest loans, better pay structures, all sorts of things. These CEOs had immediate access to get loans and stuff at all hours, APIs to do things that would have required business hours and a bank manager at other banks, etc.

    In other words: Companies who did put all their money in that bank took a _deliberate risk_, in exchange for benefits.

    You know when we aren’t supposed to be willing to make someone whole at someone else’s expense? (Which the Fed is, indeed, going to do, raising fees for everyone that will passed on to customers?) When…they take a deliberate avoidable risk to make money. Like here.

    But I kind of exaggerate there. See, that was the official reason they kept all their money in one bank, but there are two other fun facts: SVB is really, really good at making connections and glad-handing tech-bros and going to school with them, and etc, etc.

    I.e., some of it was just the general graft and corruption that literally defines the executive class in this country. Aka, doing favors for their friends. Woopsie-doodle, that favor of keeping allt heir money in one back just cost the company hundreds of million of dollar, oopsie! Better go get a job as CEO at a _different_ company!

    And the last unmentioned thing: You actually can just _buy insurance_ that would cover bank failures over $250,000. You can just buy it. They could have made these dumb choices, but just bought insurance to cover their risk. They did not do this, because they…are irresponsible idiots who don’t like money going to anyone but them.

    But sure, let’s make them whole, by levying fees on everyone, and not even vaguely discuss how a bunch of ‘the smartest guys in the room’, the supposed genius techbros and finance millionaires, did what appears to be a completely idiotic decision to keep all their money in one bank. (And then…literally start a run on the bank, yes, they are the ones who caused it.)Report