On March 20, I had the pleasure of talking to Kai Ryssdal about the Federal Reserve, financial regulation, and all the banking craziness happening this month (March 2023); you can find the interview here. It’s a short piece, so I wanted to put down in slightly more detail some other reflections I have, and what I’m looking for in forthcoming monetary and fiscal responses to *everything*.
For a brief recap, SVB was a regional bank in California that did a lot of business with startups (especially tech startups), wine producers, and other businesses in that part of the country. It was also heavily involved in climate finance and even had an arm working to fund construction of affordable housing. Its primary function — a big one! — was serving startups, which are generally uncertain ventures; holding venture capital funded deposits; and providing banking services (loans and so on) to venture capital firms, private equity groups, and high net worth individuals. SVB collapsed in part due to its business model: it received a large volume of deposits from area startups, but, due to relatively small demand for credit from its lending arm, held a large share of longer-term assets like US government bonds. US Treasuries are typically considered to be relatively safe assets, but SVB had the bad luck of holding Treasuries in the midst of the Fed’s 2022-2023 policy of consistently increasing interest rates, which has contributed in part to rising rates on US Treasuries (and, by extension, falling bond prices).
Without going into too much detail, SVB’s asset values, when marked to market, would have sold for less than their ‘book value’, or the value these assets were listed at on SVB’s balance sheet, to which we might expect prices to return if SVB could hold them to term. A group of SVB’s depositors publicized their worries about their ability to redeem their deposits in full, began a run on the bank, SVB attempted to honor those obligations by selling off assets, generating worse asset:liability ratios, the Fed declined to allow SVB to borrow against its (again, pretty high quality) collateral to quickly access cash, which all exacerbated worries of SVB’s default and the ensuing run. By Friday, March 10, the FDIC took over SVB, and by Sunday, March 12, the FDIC promised to move all deposits with SVB into a bridge bank, so that depositors would have full access. The Biden Administration made a big deal about how this was not a bail-out, because SVB was not being rescued, but rather its depositors. Shortly after, a similar scenario played out for Signature Bank, based in NY, which did a lot of business with cryptocurrency, in which depositors were rescued, but the bank was not.
These events unleashed a big wave of uncertainty (I by chance used the word ‘wobbles’ which made it into the tagline for that interview) — shareholders sold off financial stocks, which took a downturn, credit rating agencies decreased a number of major banks’ ratings, and a few other major banks were discovered to be at risk of failure, including First Republic Bank (rescued by a bunch of larger private banks but still in trouble) and Credit Suisse (purchased by UBS, and generating different sorts of financial turbulence). The Fed created a new lending facility for banks in distress, has lent $160 billion USD at the discount window to American banks, and is reopening dollar swap lines with foreign central banks; the Swiss National Bank has offered major liquidity support to UBS for its purchase of Credit Suisse; and bank stocks continue to fall in price. NB: these events are not directly related! But they seem to reveal underlying unease with financial institutions, and also that shareholders are trigger-ready to sell. We’re waiting to see whether this induces the Fed’s Open Market Committee to slow (or pause) its rate hikes on Wednesday, March 22. It’s a wild time!
It’s also a frustrating time! CEOs of SVB and Signature Bank lobbied for deregulation that ultimately (in 2018) exempted banks with $50 billion to $250 billion in assets from stress tests that much larger banks were subject to; the failure of these banks has revealed the major consequences of such theoretically ‘medium’ banks to their respective regions. There is also some irony in the tech industry, which has been linked with the rise of the gig economy and its many ills, complaining loudly about the negative employment consequences of not bailing out their premier banking institution. And where were the outraged VCs when congress let the Child Tax Credit, and every other socio-economic success of 2020 and 2021 expire? Worse still is the revelation that Powell declined to read one sentence in his speech about SVB’s regulatory failures prior to the run, and the fact that the bank had been under scrutiny for some time. While Powell’s desire not to fuel broader unease with the financial system was understandable, it was yet another bad mark for an institution staffed largely by former finance employees.
The Fed’s rate hikes since March 2022 have had devastating effects for developing economies thanks to interest rate spillovers and the appreciation of the USD. They’ve also induced major central banks elsewhere to follow suit, chilling real estate development when there is an obvious housing shortage, and making it harder for first time home-buyers to purchase. Contractionary monetary policy is designed to slow inflation in the bluntest of ways: make it more expensive to borrow, discourage lending, and (hopefully) decrease spending to the degree necessary to bring down prices overall. Despite the Fed’s aims, households that keep spending and firms that have continued to hire seem to be fueling what some cheeky commentators call the ‘honey badger economy’, which keeps growing regardless. But now that these rate hikes are finally chilling activity in part of the economy that has fueled growth for most of the 2010s onward, the Fed is pouring in money to rescue banks and their depositors. What gives?
It’s important to emphasize that allowing banks to fail has bad economic consequences. My objections to Uber and other particularly egregious cases of tech startups’ contributions to the flourishing of the gig economy notwithstanding, tech companies employ workers, banks serve communities, and allowing them to fail spreads the costs far and wide to vulnerable households and firms that had little to nothing to do with those dynamics. The Federal Reserve’s use of the discount window to ensure that banks have enough cash on hand to withstand uncertainty is another important resource that we want banks to avail themselves of, to forgo crippling financial panics that induce self-defeating runs on banks. Dollar swap lines are important resources to insulating global banking systems from international contagion; some firms that are unfriendly may benefit, but many more that are just fine will be saved from needless financial uncertainty in the process. My only complaint would be that there should be wider provision of these liquidity services to smaller economies that are generally more vulnerable to international financial fluctuations than more robust ones tend to be.
Jay Powell and other top brass at the Fed are on the record that their primary responsibility is to control inflation and minimize unemployment rather than to use monetary policy to advance other social and economic goals. I think it’s important for progressives to accept him at his word, and stop looking to the Fed to provide more support for households, the poorer end of the US’s income distribution, other economies, debt relief, carbon transition, and so on. Instead, progressive ought to shift their perspective to other branches of the US government. To this end, moves by the Biden administration to work around these challenges — like creating new relief measures for student loan debt as the Supreme Court appears likely to overrule the administration’s attempt to cancel student debt in August 2022, and the Inflation Reduction Act as (biodegradeable) rocket fuel for carbon transition, and more — maintain my optimism that all is not lost. And if all else fails, a progressive consumption tax that bites is always there for anyone that wants to try it.
Nina Quinn Eichacker 