Banking is in a league of its own when it comes to government subsidies, special privileges, and bailouts.
There isn’t a vestige of the free market left when it comes to the country’s financial sector. Central control goes way beyond the fact that the Federal Reserve has been fixing the price of money (interest rates) for the past few decades.
The largest banks enjoy the explicit guarantee of the U.S. taxpayer. They are designated Systemically Important Banks (SIBs) – deemed officially too big to fail.
Bureaucrats invented the SIB designation during the 2008 financial crisis when fraud and mismanagement in real estate lending threatened to destroy many of the institutions lining Wall Street.
Now it appears regional bankers have joined this protected class. When the Silvergate, Silicon Valley, and Signature banks blew up, Janet Yellen stepped into the breach and declared no more! Officials will not allow any bank to fail if its collapse represents a risk of contagion.
The only bankers left to worry about consequences for the decisions they make are running the smallest and least significant banks.
American taxpayers have once again been pressed into service defending the way of life of those at the big banks.
Yellen has offered her assurance that banks, not citizens, will pay for programs like expanded deposit insurance through increased fees. She just assumes people are too dumb to figure out at the end of the day, average citizens are always on the hook.
It is worth reviewing what Americans got after the last round of bank bailouts and the regime of persistent subsidies to the financial sector since 2008.
It turns out they paid to transition banks into something a lot less useful in the economy, but they’re somehow just as likely to collapse and need another bailout.
The Federal Reserve took interest rates to zero and kept them there, giving banks access to essentially free money. Banks borrowed from the Fed’s discount window or took depositor funds and used this free money to buy Treasuries or Mortgage-backed securities with yields. Then they pocketed the interest rate spread.
The scheme was wonderful while it lasted – for the banks. There was no way to lose as long as rates stayed at zero.
It was, unfortunately, entirely counterproductive in terms of growing the real economy.
This money wasn’t lent to entrepreneurs and consumers who might do something useful with it.
It was simply a windfall for the financial sector and government budgets – both of which kept growing relative to the rest of the economy.
Today interest rates are on the rise, and the wheels are coming off. Bankers made the assumption that rates would remain low indefinitely. When that turned out to be wrong, the banks began sliding into insolvency as value of their vast holdings of bonds fell.
This problem is compounded by deposit flight at small and regional banks.