Banking on Panic

The Pitch: Economic Update for March 16, 2023

Friends,

Last weekend, the entire American economy seemed at risk by a new bank collapse. Was the run on Silicon Valley Bank a reboot of the 2008 financial crisis, or was it something else entirely? Because the story broke on a Thursday and the collapse expanded over the course of Friday, social media had a full weekend to spin itself into a lather. The fact that the two biggest cryptocurrency banks in the nation — Signature and Silvergate — were also undergoing high-profile collapses of their own was enough to send most of the free marketeers on Twitter into a tailspin.

Most of this week’s newsletter is devoted to last weekend’s banking crisis — its causes, its effects, and what we can do to avoid more collapses in the future — but before we get into the details, it’s important to do a little autopsy of last weekend’s panic. We have seen time and time again that panic can absolutely devastate the global economy, and so it’s important to explore how that panic spreads — and how people use panic as a tool to expand their power and influence.

So the free marketeers drummed up panic and caused a bank run on Silicon Valley Bank, which inspired even more panic. But as soon as it became apparent that SVB was collapsing, those same free marketeers, who rail against government at every opportunity, pivoted to demanding a full bailout. Or as John Thornhill so aptly put it in the Financial Times, “Just like many of the banking titans after the global financial crisis of 2008, tech tycoons appear to favor the privatization of profits and the socialization of losses. There are few libertarians in a financial foxhole.”

Venture capitalist David Sacks spent all weekend demanding government intervention on behalf of his wealthy friends:

And then Sacks tried to make it sound like he wasn’t asking for government to save wealthy tech investors while also escalating the situation to a threat against people “below” him in the economy and expanding both the culpability and the consequences of the crisis by saying, emphasis mine, “We have a very big problem on our hands.”

Sacks has been furiously backpedaling through all the usual rhetorical loop-de-loops in the days since his super-emotional weekend — he’s been trying to tightly define “bailout” and restating his claims that he’s not technically a libertarian but instead a “populist” who prefers small government — but the fact is that he was calling for government to take extreme measures to ensure that depositors in Silicon Valley Bank are made whole, and that wealthy corporations didn’t have to face the consequences of their own stupidity.

But in terms of the true villains of last week’s panic, Sacks doesn’t hold a candle to the high priest of the cult of neoliberalism, former Treasury Secretary Larry Summers. Summers has spent much of his time since President Biden’s election in 2020 arguing against the “risks” of the pandemic relief programs. He’s falsely argued that student loan forgiveness would increase inflation and that students don’t deserve relief, and he’s claimed that in order to bring inflationary prices down, ten million Americans must lose their jobs.

Summers, too, supported the repeal of bank regulation during the Clinton administration, and he argued in 2016 that there was too much banking regulation. “Some parts of regulatory efforts have operated to remove many sources of income for banks, and that has had the perverse effect of when you have reduced future income, your safety declines,” Summers told CNBC — a classic groundless trickle-down threat that regulation kills business.

So now that we’ve seen how deregulation has played out for Silicon Valley Bank, what does Summers think about all this?

That’s certainly a choice. Summers never met an investment in working Americans that he didn’t want to kill. He consistently claims that spending money on the middle class would hurt the economy for everyone. But when it comes to spending billions to preserve the savings accounts of some of the wealthiest companies in the world, Summers doesn’t blink. We must spend that money, he argues, for the good of everyone.

Summers is making his biases known, here: He argues that the wealthy few at the top of the economy are the only ones who create economic prosperity, and so the government must do whatever it can to ensure that those wealthy few are protected. He also argues that any programs which invest in 90% of Americans are at best a waste of money and at worst actively harmful to the economy.

This isn’t just bad economic thinking; it’s exactly the opposite of how the economy really works. Prosperity comes from the bottom up and the middle out. We’ve seen this again and again in the real world, most recently in how those pandemic relief funds — the program that Summers argued so vociferously against — inspired America’s astounding economic rebound from pandemic lockdowns, which outpaced virtually every other nation on earth.

For trickle-downers, panic is a vital tool. If neoliberals like Summers can successfully convince you that taxing wealthy people and regulating business is somehow bad economic news for you and your neighbors, that’s really good news for the rich. And if they can take advantage of a crisis to loudly claim that wealthy people suffering the consequences of their greed will destroy the whole economy for everyone, that works out really well for the wealthy and powerful. It’s how income inequality skyrocketed after the Great Recession.

Trickle-downers never let a good crisis go to waste. People don’t tend to think clearly during panics — they let fear take the drivers’ seat. And in moments when we’re fearful, we fight to preserve what we have. Wealthy trickle-downers like Sacks are excellent at drumming up panic on social media, paving the way for neoliberals like Summers to maximize moments of economic panic by flooding the zone with media appearances and explaining in calm, intelligent tones, why the only reasonable way to save everyone is to preserve and fortify the wealth of the super-rich. People who have just caught wind of the panic via a news alert tune into TV news to find out if they should be concerned, if their finances are secure. And then Summers, who is credentialed by the news shows as an expert, assures viewers that the status quo must be preserved so that life can continue.

Our leaders have a choice: They can either allow the Sacks and Summerses of the world to bully and terrify them into maintaining the status quo that inspired the collapse in the first place, or they can ensure that new regulations are put in place, and that bad actors suffer the consequences of their actions.

The Latest Economic News and Updates

Silicon Valley Bank and the Case for Bank Regulations

The Biden Administration handled the SVB crisis quickly and with confidence. Arguments will play out for years about whether it was smart to make all of SVB’s depositors whole — even the giant corporations who kept an incredibly unwise amount of money lying around in SVB accounts. In doing so, the administration was seeking to quell the panic that had spread over the weekend and stop more bank runs before they began.

It’s impossible to know what the perfect response would have been, but the argument that spending a few billion in FDIC funds to protect deposits at SVB now is cheaper than losing hundreds of billions of dollars at multiple mid-sized banks later is a compelling one. And Wall Street seemed to have recovered at least some of its confidence in medium-sized banking institutions by Tuesday:

Quelling panic was an important first step, but ensuring accountability is even more important. The administration now needs to punish those accountable and rewrite laws to ensure that this kind of problem never happens again. And they also need to ensure that government isn’t expected to make wealthy people and corporations whole after every bank failure in the future.

After the 2008 financial crisis, our lawmakers passed the Dodd-Frank Act to ensure that American banks would be able to survive stresses and fulfill the promises they made to their customers. As Elizabeth Warren so aptly described in her must-read New York Times editorial on Monday, though, “Greg Becker, the chief executive of Silicon Valley Bank, was one of the ‌many high-powered executives who lobbied Congress to weaken the law. In 2018, the big banks won,” Warren writes.

Senator Warren continues, “With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank. Regulators, including the Federal Reserve chair Jerome Powell, then made a bad situation worse, ‌‌letting financial institutions load up on risk.”

She’s right to point fingers at Trump. When he signed the bill into law, the then-president called Dodd-Frank a “disaster,” much like other “job-killing regulations.” But Trump wasn’t the only trickle-downer who partially rolled back Dodd-Frank: 17 Democratic senators voted to allow medium-sized banks like SVB to take on greater assets under fewer regulations, creating the conditions that allowed last week’s collapse to happen.

All of Senator Warren’s recommendations are appropriate: The 2018 loosening of Dodd-Frank must be repealed, executives of SVB and the other two failed banks should be forced to return the multi-million dollar bonuses that they gave themselves over the past year (including hours before the government took over the bank), and deposit insurance must be reformed to ensure businesses “that are trying to make payroll and otherwise conduct ordinary financial transactions are fully covered” while companies like Roku that had nearly half-a-billion dollars just sitting fallow in an account at SVB don’t get a handout from the government in return for handling their money in a stupid and wasteful manner.

Ryan Cooper at The American Prospect makes an intriguing policy proposal to create a public banking system: He calls for every American to get a Federal Reserve account. This would offer many of the solutions that any of the many postal banking proposals have offered in the past — everyone would be able to create an account, even people with little money or poor credit, for instance. But also, Cooper notes, having a Fed account “would also make it vastly easier for the government to make payments to citizens.” (Cooper’s suggestion dovetails nicely with author Christopher Leonard’s idea that the Fed should give money to ordinary Americans in moments when quantitative easing is necessary, rather than just dumping huge sums into a few large financial institutions.)

It does seem as though leaders were startled by the sudden crisis into reconsidering regulations. Andrew Ackerman at the Wall Street Journal reports that The Federal Reserve is now considering a wide range of “tougher capital and liquidity requirements” for medium-sized banks and “steps to beef up annual ‘stress tests’ that assess banks’ ability to weather a hypothetical recession.”

But others are pointing fingers directly at the Fed, claiming that their recent volley of high interest rate hikes contributed to the collapse of three banks this month. And now that high interest rates are putting stress on banks and other big financial institutions, the financial media has suddenly decided that the Fed’s campaign to raise interest-rates is a bad thing. (Yes, this is the same financial media that stayed silent or openly cheered on the Fed’s raising of rates when the only potential victims were working people and ordinary Americans seeking mortgages.)

While I’m no fan of the Fed’s misguided attempt to fight price increases by raising interest rates, I don’t necessarily believe that those rate hikes are to blame for the bank collapses. A bank should always be able to perform its essential duties during periods of high interest — that’s literally the minimum requirement of what a bank should be able to do. The Fed’s not the villain here; SVB’s inability to manage risk — indeed, the bank didn’t even employ someone to oversee its risk management — is the problem.

But the global banking community is now going through a crisis of its own, as Credit Suisse is undergoing a liquidity crisis and the Swiss central bank is stepping in to backstop the troubled large financial institution. As I write this on Wednesday night, Credit Suisse’s stock indicates that the market has little confidence in the institution’s future.

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And as I write this, the government is currently trying to resolve a crisis at First Republic Bank. The odds are very good that we’ll have much more banking news to discuss by the time next week’s newsletter arrives in your inboxes.

Aside from the Whole Banking Crisis Thing, Economic Signals Are Very Strong

In what would likely have been the top story of most other weeks, inflation fell for the eighth straight month in February. This is definitely a positive pattern:

Of course, prices are still way too high for Americans shopping at grocery stores, looking to purchase a car, or renting or buying a home. But it’s indisputable that the numbers are going in the right direction. And signs are good that prices will continue to drop — the Wall Street Journal reports that U.S. producer prices showed “significant moderation” last month, meaning that it continues to cost less to manufacture and ship the goods that we all buy. The supply chain is healing. Last Friday delivered a very strong jobs report, too, with more than 300,000 jobs added to the economy.

But because the economics world is topsy-turvy right now, experts are, ridiculously, claiming that a strong American labor market is bad news for the economy. The Fed, you see, seems to still be clinging to the falsehood that prices rose last year because wages are rising and people are working, so they’ve been raising interest rates in order to make money more expensive and cool down the labor market. (Readers of The Pitch know that prices were actually higher because of global lockdowns during the pandemic — shutting the economy off and turning it back on again is no simple task — and corporations used those supply chain price hikes as an excuse to raise their own prices and profits in a flagrant act of greedflation.)

Will the Federal Reserve take note that prices are consistently declining and pause their relentless program of interest hikes? Will they interpret the banking crisis as a sign that they should cool their interest rate hikes for a while? Or will the strong jobs report encourage the Fed to continue raising rates? Experts are all over the map with their predictions now that the global banking situation is so volatile. We’ll find out next week when the Fed meets to decide their course of action.

Interesting, too, that Larry Summers and others are quick to claim the loss of millions of jobs would be great for the economy because it might cause the Fed to lower rates, but no neoliberal economists are arguing that the banking crisis is good news for the economy because it might cause the Fed to lower rates. It’s easy for the financial press to spin millions of Americans losing their livelihoods into good economic news, but a few bank stocks losing value for the wealthiest Americans is a bridge too far. You really learn where people’s priorities are in a crisis.

But Consumer Debt Is on the Rise

One of the major reasons we need to get high prices under control is the fact that credit-card debt is on the rise. Too many Americans have been forced to charge everyday expenses because wages haven’t risen as high as prices, and the store of extra money that many households accrued during the pandemic is long gone. And credit card interest rates have risen with the Fed’s rate hikes, so people are both relying on credit cards more than ever to pay higher prices AND they’re paying more for the “privilege” of using their cards.

Gabriel T. Rubin and Gwynn Guilford write at the Wall Street Journal that “Borrowers in their 20s and 30s reached 90-day or more delinquency on credit-card debt and auto loans at a higher rate in the fourth quarter of 2022 than before the pandemic.”

Those same young consumers are likely to face the resumption of student loan payments this fall if the Supreme Court rejects the Biden Administration’s student loan debt forgiveness program, as expected. “A Government Accountability Office report last year estimated that about half of borrowers would be at risk of delinquency and default when the payment suspension ends,” Rubin and Guilford note.

Lowering prices should help with some of that pressure — especially if wages continue to grow. But if the Fed were to finally succeed in its stated goal of cooling down the labor market and employment numbers were to dip sometime in the next few months, we could see a significant consumer credit crunch this fall.

Some crises, like last weekend’s SVB debacle, pop up unexpectedly. But our leaders don’t have to be taken by surprise by this impending credit delinquency problem. They can take action now by pushing prices down, raising wages, and forgiving debts to ensure that a generation of young Americans aren’t pushed out of the economy with ruined credit ratings and a mountain of debt. With prices coming down and the job market still running hot, we can build a policy solution to help these young people pay down their inflation-era debt without ruining their lives for a decade. But the time to build that policy solution is now — not when we wake up to headlines warning that the system is in crisis, as we all experienced over the past weekend.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• In this week’s episode of Pitchfork Economics, economist Richard McGahey discusses his new book, Unequal Cities, which explores how state and local governments are stifling the economic power of America’s cities through decades of policy choices.

Closing Thoughts

It’s been a particularly exhausting week, so I wanted to end with a brief piece of very good news: Democratic leaders in the state of Michigan successfully repeated the state’s so-called “right-to-work” laws, which were designed to weaken union power by allowing employees to opt out of paying dues. This is, to the best of my knowledge, the first time that a state has fully repealed one of the modern anti-union laws that started spreading in the first decade of this century.

It’s also a symbolically important victory, because the modern labor union was born in Michigan when auto workers stood up to demand their share of the auto industry’s then-record profits. It would be fitting, then, if Michigan marked the high-water mark and retreat of the anti-worker movement.

Harold Meyerson at the American Prospect puts this victory in context, identifying that there’s a long way to go to restore union power, and that such a goal would “require a strengthening of labor law to again give workers an unencumbered right to join unions, which business and Republican-dominated courts and administrations have stripped away over the past 60 years.”

Still, a win is a win. And it’s important to celebrate your victories when they’re earned. It’s heartening to see Michigan Democrats move so quickly to improve outcomes for workers on the heels of their convincing midterm election victories. And it’s very hard to argue with immediate positive economic results for the vast majority of constituents. Hopefully, these same leaders are already planning their next slate of big wins for Michigan workers and families.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach