The Fed Should Be Fired as Bank Regulator. Powell’s Discussion of Silicon Valley Bank & Regulatory Failure Shows Why

The Fed is structurally too conflicted to regulate banks. The FDIC is not, but it needs tiger teeth to bite CEOs’ heads off.

By Wolf Richter for WOLF STREET.

The collapse of Silicon Valley Bank laid bare how inept and conflicted the Federal Reserve is as banking regulator, and why it can never be deconflicted the way the Federal Reserve System is structured, and why it will always be inept – willfully inept.

The structural problem with the Fed as top-dog banking supervisor is that the Federal Reserve System consists of the Board of Governors, which is a federal agency that Powell chairs; and 12 regional Federal Reserve Banks (FRBs), such as the San Francisco FRB, whose shareholders are the financial institutions in their districts, such as SVB Financial, whose CEOs sit on the board of directors of the FRBs, such as SVB CEO Greg Becker, and that the bank examiners employed by the FRB of San Francisco were examining Silicon Valley Bank. They were squealing about the risks at SVB for a few years, as we now know, and they escalated, and they tried, but it was all muffled.

The Fed should never be a bank regulator because it cannot be an effective bank regulator because it’s too conflicted: The regional FRBs are governed by the CEOs of the banks in their districts, whose primary objective is their own wealth, not effective regulation that could cut into their own wealth. And this came out big time in the wake of the collapse of Silicon Valley Bank.

Powell alluded to these issues during the post-meeting press conference, when he was being pushed by reporters about Silicon Valley Bank and the Fed’s regulatory failure.

Everyone knew about it, from bank examiners to the public, but the Fed let it go:

“At a basic level, Silicon Valley Bank management failed badly,” Powell said. “They grew the bank very quickly. They exposed the bank to significant liquidity risk and interest rate risk, didn’t hedge that risk,” he said. This bank “was an outlier in terms of its percentage of uninsured deposits and in terms of its holdings of duration risk,” he said.

“We now know that supervisors saw these risks and intervened,” he said. “Supervisors did get in there and were on this issue,” he said. “The supervisory team was apparently very much engaged with the bank, repeatedly and was escalating. Nonetheless, what happened, happened.”

“There have been presentations about interest rate risks. I mean, it’s been in all the newspapers,” he said.

“It’s not a surprise that there are institutions that have had unhedged long positions in long-duration securities that have lost value as longer-term rates have gone up due to our rate increases. So that’s not a surprise,” he said.

When asked if he could confirm whether or not the Fed’s Board of Governors (which Powell chairs) knew about these escalations by the bank supervisors at the FRB of San Francisco, Powell said: “We’ll have to come back to you on that. I don’t know.”

And when he was asked how the Fed would ensure that banks comply with these citations, how the Fed would enforce them, Powell said: “That is a great question.”

Reviews & investigations to find out “what went wrong.”

“We’re doing a review of supervision and regulation,” Powell said. “My only interest is that we identify what went wrong here. How did this happen is the question. What went wrong. Try to find that. We will find that. And then make an assessment of what are the right policies to put in place so it doesn’t happen again. Then implement those policies.”

“We’re undertaking a thorough internal review that will identify where we can strengthen supervision and regulation,” he said.

“It is clear we do need to strengthen supervision and regulation. And I assume that there will be recommendations coming out of the report,” he said.

“It’s 100% certainty that there will be independent investigations, and outside investigations, and all of that. When a bank fails, there are investigations. And, of course, we welcome that.”

“The question we’re all asking ourselves over the first weekend was how did this happen?”

But wait… we know “what went wrong.”

We already know “how this happened,” we know “what went wrong,” we don’t need any more reviews and investigations and reports and recommendations. What went wrong is that an FRB regulates the banks that own it. That’s structural. You cannot fix that with a report. The FRB of San Francisco regulated one of its shareholders, SVB Financial, whose CEO was on the board of directors of the FRB of San Francisco. This is a form of voluntary self-regulation.

The Fed should be fired as banking supervisor and regulator; the FDIC should get that top job along with tiger teeth to bite CEOs’ heads off.

No review and investigation can fix the regulatory setup. The Fed will never be an effective bank regulator and supervisor. It’s structurally too conflicted.

Congress should restructure banking supervision. The Fed should remain lender of last resort for the banks, and focus on monetary policy. But it should be fired as bank supervisor and regulator. It had its chance and blew it. Over and over again.

The full regulatory and supervisory power should be given to the FDIC, which has long been one of the three bank regulators, but junior to the Fed. And it should be given some real teeth.

The FDIC’s priority has been to minimize the losses to the deposit insurance fund. Effective and tough-love supervision that reduces the magnitude of the fallout if a bank fails, and that prevents many bank failures in the first place, is in line with the FDIC’s priority of minimizing the losses to the deposit insurance fund. The FDIC is not structurally conflicted – unlike the Fed.

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  191 comments for “The Fed Should Be Fired as Bank Regulator. Powell’s Discussion of Silicon Valley Bank & Regulatory Failure Shows Why

  1. elbowwilham says:

    An age old problem: Who watches the watchers?

    • sunny129 says:

      elbowwilham

      The Foxes are running the hen houses. No supervision needed right?

    • Eddie says:

      This was the case with the savings and loan scandal of the 90’s, the financial collapse in 2008 and the recent debacle. EVERYONE knew and knows the Fed is conflicted and does nothing. Forget the FDIC getting teeth, the fact of the matter is private banks will NEVER allow real governmental oversight.

      • Steve says:

        then we must protect ourselves from the banks if it’s even possible.

      • Astronomer Soft says:

        FDIC should be the bank regulator. It’s so obvious.

        • NBay says:

          Agree 100%, but that would be “socialism” which is a BIG no-no in this commie and meddling government hating county of “free and rugged (and exceptional) individuals”.

          70-90% or so of them have been VERY cleverly enslaved, but don’t KNOW it, so I suppose it’s a wash…….of sorts.

          BTW, hope you guys dig up some aliens soon, couldn’t be any worse than our own filthy rich and the wannabes….and I have seen a LOT of Sat matinees about them…50’s was peak season for that stuff.

    • Moi says:

      Very much like actuaries who left the public service pensions in 6 trillion debt. They rate what their masters want to hear.

    • Aaron says:

      “But the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others. The provision for defense must in this, as in all other cases, be made commensurate to the danger of attack. Ambition must be made to counteract ambition. The interest of the man must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary.”

      The Federalist No. 51

      The original design of US government never contemplated giving politicians the ability to create unlimited credit in irredeemable paper “money.” Ambition appears to be galloping ahead with no counterbalancing ambition.

    • DR DOOM says:

      In a Contitutional Republic with democratic (mob) representation the electorate is the ultimate watchdog. The electorate is collectively dumber than a rock and to top it off, do not give a shit.

      • Anthony A. says:

        That sums it up nicely!

      • Cas127 says:

        Nihilism about the electorate/325 million non-political class citizens serves the interest of maybe 5-6 million system insiders.

        Why do their work for them by writing off 95 pct of the public as hopelessly stupid/disengaged (who do you think reads/comments on this blog)?

        Maybe the insiders use their MSM to alienate the 95 pct from one another…who could otherwise squash the insiders in a second?

  2. All Good Here Mate says:

    If the powers that are would read your site, we’d all be much better off.

    • Leo says:

      The powers know this well enough to extract big commissions to keep this system based on conflict of interest.

      Great article by Wolf. No other business website covers this visible issue.

  3. dishonest says:

    Jerome is too well connected to Democrats and Republicans to get into any real trouble,

  4. Concerned Citizen says:

    Here is a solution to the problem of bank regulation.

    Place a real-time dashboard with all appropriate metrics a healthy back would track online for all to see. In this dashboard, have highlighted guard bands for required ratios. When these ratios go ‘red’, non-political people and an automated system would notify the authorities who would by law, begin actions to rectify any unbalance within the mandated ratios.

    After 2008 and now today’s situation, no one in their right minds would trust the FED and the ratings agencies to monitor the health of banks.

    Power to the People!

    • jon says:

      I agree Power to the People but people are really powerless. The rich and elite have their Democrats and republicans Stooges working hard for them at the expense of middle class.

    • Augustus Frost says:

      Bank ratings aren’t even published, and you actually expect that?

      Read this carefully. The goal of bank supervision (all three agencies) is to hide the true condition of weak and troubled banks. Anything else with the current financial system structure (fractional reserve banking) creates the potential of yelling “fire” in the proverbial crowded theatre.

      Here is my short version of regulatory reform and yes, I know virtually everyone is against it because it ends the welfare provided at taxpayer expense.

      First, give bank customers the real option of actually depositing their money at banks where it can’t be lent out. There is no actual safety without this feature, except in the sense the FRB engages in massive “printing” if necessary to make everyone whole. Those who deposit the money would have to pay for this service, receiving no interest.

      Second, either get rid of deposit insurance altogether or reduce it to a nominal amount, like $5,000 or $10,000. No one who is making a loan to a bank should be insured. That’s what “depositors” are doing now.
      There are other insured options (like Treasury MMF) for those who have more.

      Third, create a non-voting depositor committee to represent bank customer interests where they can know the true condition of the bank. There would be some details to work out on maintaining confidential information from competitors.

      • El Katz says:

        Which treasury MMF is insured? Please enlighten because the disclaimers on the brokerage sites indicate that they are not…… Most contain the usual boilerplate of “you could lose money”.

        Depositing money in bank where the bank can’t lend it out? You’d have to pay a fee to deposit it there as no one works for free. Without the interest generated by loans, there’s no revenue for the bank. Imagine the screaming from the average schmuck when they get hit with a 2% per month fee for money kept on deposit.

      • Mr. Random says:

        Uhh, doesn’t depositing their money at banks where it can’t be lent out equate to zero growth in your funds? Why is this any better than burying it in the backyard or under the mattress?

        • OutsideTheBox says:

          AF is a renter. He doesn’t have a backyard to bury his money.

        • old school says:

          Nothing wrong with renting in general at today’s home prices and interest rates. Supposedly rent spread to house payment is at record in favor of renting.

        • HowNow says:

          AF usually posts good comments. But this comment isn’t one of them.

      • sufferinsucatash says:

        I saw a news story today about a kid on the run in Montenegro.

        He had forged passports and late last year was worth 40B.

        He was a big wig in the crypto world.

        So paaaleeezzzeee do not ever tell me the banks are bad and crypto is good in the same mouthful.

        That’s just common courtesy at this point in history. Haha

        • Flea says:

          Wow 40 billion can’t keep him out or jail,should have went to Russia .Bribe with a couple billion ,live the rest of your life in LUXURY

        • phillip jeffreys says:

          True!

          But who critically enabled the financialization of assets in the first place?

      • OutsideTheBox says:

        AF

        You win the prize ! ……..For the silliest banking idea EVER !

        • Petunia says:

          I thought the entire rant was straight out crazy.

          Let’s not forget this bank run was caused by one person inciting a group of large depositors to withdraw their money. The problem of collateral mismatch existed in the entire class of banks and was a know problem. So, this would not have happened without a large depositor inciting it.

      • Randy says:

        I dont know how accurate they are but
        Weiss has bank and credit union ratings at its website. They publish them also or at least used to…. I looked at their guide around 2010 (at the library) or so to see how my banks and other local ones were rated. To my surprise most of the banks mostly got bad ratings. Overall ratings of C or below.

        I believe each bank (credit union) is graded on 5 attributes. Two of them are liquidity and profitability. Capitalization (?) might be another. An overall rating is computed based on weighting these 5 ratings.

        Any of you know how well their (Weiss) ratings did during the GFC ? Didn’t Moodys get in big trouble during the HB1 because their ratings were so inaccurate ? Or was it some other rating agency ?

        • Randy says:

          There’s this… published 2010 critical of the major rating agencies. I have not read it.
          It can be downloaded from the internet.

          Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities?
          Claire Hill
          University of Minnesota Law School

      • Joe says:

        Our current monetary system is based on debt money, fractional reserve and usury. What you are getting at is changing what we use for money and how it is used for banking and investing. It will happen bevause the current system is inherently unstable, but there are too many vested interests for it to happen voluntarily.

      • phillip jeffreys says:

        Hmmm. Chicken or egg?

        Bank balance sheet mis-mangement since the late 1980s or major depositor opportunism?

        Decisions. Decisions. Who to impale on the spikes of accountability first?

      • Craig says:

        Would the narrow bank which the fed is refusing to give an account to meet the first requirement?

        • Wolf Richter says:

          Banks are supposed to lend. That’s their purpose. Narrow banks don’t lend. They just use FDIC deposit insurance to get cheap deposits and then invest the cash in securities to make money off the difference. That shouldn’t be a bank, and it shouldn’t carry government insurance. Money market funds can do that just fine, that’s what they’re for. These people trying to create narrow banks just want FDIC insurance in order to attract low-cost funds – another instance of billionaires asking for a government handout. The Fed should never approve them.

    • sufferinsucatash says:

      I read SVB did actually try to figure out wtf they owned in a new system. And they could not get all the info updated into a “Quickenesque” live data set.

      • Petunia says:

        I find that hard to believe.

        The bank has some trader buying and selling for them, and this person certainly knows the value of the positions at all times. Just because the bank doesn’t have to mark to market doesn’t mean it doesn’t know the value of their book. They know.

        • sufferinsucatash says:

          FT:
          “The January 2022 risk control report gave the bank a “gentleman’s C”, finding that SVB lagged behind similar banks on 11 of 11 factors considered and was “substantially below” them on 10 out of 11, the people said. The consultants found that SVB was unable to generate real time or even weekly updates about what was happening to its securities portfolio, the people said. SVB listened to the criticism but rebuffed offers from BlackRock to do follow up work, they added.” – various sites

        • Petunia says:

          suffer,

          Just because they don’t wish to disclose doesn’t mean they don’t know. The lack of transparency is to obscure the recklessness of their positions, the lack of hedges. They have to know the value of the book, the value at risk, just to trade the book. It’s not rocket science for an experienced trader, who can calculate in their head the value to the nearest million, 10 million, etc. I worked for a regional bank in NY with 2 traders and these guys knew. The loan book was a whole other problem.

        • Wolf Richter says:

          Petunia,

          You nailed it. Anyone, including lowlife me, who has ever had a bond portfolio can check every day what the unrealized gains and losses are. It is displayed in one summary figure for all bonds, and you can then check per bond. That’s just a regular brokerage account. It knows your cost, and it knows current market value, and it calculates the differences, which is your unrealized gain or loss.

          This thing that the banks “didn’t know” is just hilarious. They knew to the minute, and their disclosures of unrealized gains and losses are likely accurate as of the last day of the quarter for which they reported and within the accounting rules and regulations they follow. There are no surprises here.

          If they were hiding stuff, that’s a different issue — but I have not seen no allegations that they were trying to hide stuff.

  5. Bubbajohnson says:

    I Feel your pain Wolfman. Rich or poor is all that will be left. Govern ment will continue to gain ground in every way with more control over all our lives.

    • sufferinsucatash says:

      The old Fascist fear fantasy to scare

      One time a guy handed me some literal paper tea party propaganda. I quickly scanned it and said “this is all fake”. He told me to “look it up on some sites I give you”.

      Ummmm

      • Bubbajohnson says:

        You can still vote to stop the Govern ment? Sheep act as though they have blinders on.

        Ah cho

      • HowNow says:

        A right wing friend posted some stuff about social security. Half of it was untrue. He said, “OH, I didn’t know. I was just reposting something I read.” But he never acknowledged this and left his post out there. The problem is that no one wants to change their position, regardless of how ignorant it is.

    • josap says:

      No one here is rich enough not to end up poor in your scenario.

      • Bubbajohnson says:

        Stay out of debt, live within yours means. Took my lifetime but in the end. I feel rich and life is good.

  6. gametv says:

    There is another conflict of interest that needs to be resolved. The central bank is simply a group of bankers protecting their own interests with monetary policy. Why is that not going to end up in corruption?

    Will the Federal Reserve ever engage in monetary policy decisions that hurt the interests of the rich bankers that sit on their boards? No.

    Congress needs to pass legislation to audit the Fed, which would be an independent study of the effectiveness of the Fed in managing monetary policy and how it has impacted the country. They should also be forced to provide full disclosure on all purchases or sales of assets in realtime, any changes whatsoever to the balance sheet.

    • RH says:

      Welcome to rebel alliance, game tv and Wolf! However,gametv, auditing the “Fed” bank cartel will accomplish nothing by itself.

      It was already sued to compel it to disclose its secret bailouts year ago. I remember how angry people were when the trillions in secret bank loans that their “Fed” made them were finally disclosed (over $16 trillion to bankers and cronies per Forbes and $7.7 trillion just to banks per The Week, apparently.) To avoid impending punishment, the bankers just used the appointment of someone who looks like Santa’s elf grandma, so no one would want to attack her politically.

      Only forcing the “Fed” into a carefully overseen, truly Federal government agency (carefully overseen so the banks terms could not offer $200,000 per speech to its leader after he or she did their bidding) might prevent the banksters from continuing to run it for their benefit, not Americans’ benefit.

      • RH says:

        B a n k s t e r s, not banks terms, auto spell checker!

      • Wolf Richter says:

        The $16 trillion added together were a whole bunch of short-term loans that got rolled over month after month, and each was added. The peak amount outstanding was much much smaller.

        It was like I give $1,000 for one month, and after one month, I get my $1,000 back, but you’re still out of money, so I give you a new loan of $1,000, and after a month you pay me back, and we do this for 12 months, and then someone comes along and adds them all up and says I lent you $12,000, when in fact I only lent you $1,000 for a year.

    • Mojer says:

      Good question gametv, because the Central Bank must be controlled by private banks, as already stated by many on the comments, and how to give control of the chicken coop to the fox.

      A question that is now urgently needed to be resolved before all the chickens (us) are all eaten for free.

    • Steve says:

      there is a reason why we have the words “wealth transfer”.

  7. Rosebud says:

    Wolf, are you trying to confuse us by mentioning a Top Dog bank?

    did you ever read the Zuckerberg bio?

    “… speaking at Y Combinator’s Startup School course at Stanford University, Zuckerberg made a controversial assertion that “young people are just smarter” and that other entrepreneurs should bias towards hiring young people. ”

    y’see what really went down, was an old guy did “it”. Silicon V Bank got caught like deer staring at the headlights, several years, just staring….but there is still much asset to go around, and its being taken up as we speak. See my comment at previous thread.

    • phleep says:

      Oh, a young person like Sam Bankman-Fried? No, it is much more a structural thing, a conflicts thing, than just “young, old.” Bankman-Fried sat at the juncture of various conflicts (actually, engineered them) and, like a certain percentage of anyone in such a seat, made a hash of it. Same goes, I believe, for relying on any other misplaced category like gender, etc. (See Theranos.)

      • Rosebud says:

        SBF was offended when I mentioned being thrown under the Bus one day back last December. It had its moment like Zelensky a year ago, saying as much. Crisis Actors of the Asset.

        In the meantime, are you less bothered today by tracking ads today? do the algorithms play good music in the Neptune Bar, Santa Crux?

    • JGP says:

      I just read yesterday that IQ’s have been going down in recent years in both Europe and North America. Why this is happening is not clear, but lately Zuckerberg looks like a example of it.

      • Daedalus says:

        Don’t worry. If the scores get too low for the ‘right people’, they’ll simply ‘recenter’ the test (write easier, less complex questions).

        • 91B20 1stCav (AUS) says:

          …so what is the Eloi threshold?…

          may we all find a better day.

  8. VT says:

    Small typo: It had its change and blew it. I think you meant had its chance.

  9. breamrod says:

    knew a woman who was a fed bank regulator awhile back. She told me that if she told one of her banks that they had too much exposure in say commercial real estate the bank ceo would call up the head of the Atlanta fed and complain that she was interfering in their ability to make money. She was then told to back off. I wonder if the FDIC would be compromised in some way.

    • phleep says:

      Conflicts and undue influence are always a thing to be structured and managed.

    • Bubbajohnson says:

      Your post reminds me of a very old joke.
      I’m from the govern ment and am here to help.

      • Daedalus says:

        If the banks don’t want government interference, then when they crash they should burn. And, when the people who lost their money come after them with pitchforks, the bankers should fight them by themselves, without ‘government’ cops, or the military, or the legal system.

    • Glen says:

      Yes. Bill Black stated that they were told that the bank regulators were to consider the bank CEOs as their customers, not somebody they were to regulate. That’s when he quit.

    • sufferinsucatash says:

      A woman was fed a bank regulator?! Whaaaat?! ;)

  10. gametv says:

    We need a whole new set of rules to stop the finance industry.

    1. Establish a reasonable cap on credit card interest rates. allowing credit cards to charge 20ish% interest rate on balances should be criminal.

    2. Prohibit large scale ownership of residential real estate or massively tax it. The government has for a long time tried to promote home ownership by the people who live in a home. Let’s prevent greedy people like the Blackrock group from bidding up prices on homes.

    3. End new mortgages by Freddie and Fannie. Stop allowing mortgage bankers from selling mortgages they dont end up owning. This is a root cause of the housing bubble and puts the taxpayer on the line in case of a meltdown in real estate prices. The mortgage industry only has incentives to sell more mortgages. Allow the private market to set rates and to bear risk if they finance homes that are in bubble territory.

    …add your own….

    • Augustus Frost says:

      No one is entitled to have a credit card at all. Utterly ridiculous.

      As for your third one, I have a better solution. Get rid of government guaranteed mortgages altogether.

      • Halibut says:

        Bingo. And bingo.

        #2 is goofy too. Gametv, go buy all the real estate you want if it’s so lucrative. Beat em at their own game. Go for it.

      • toby says:

        Thats the point, if someone can’t get a credit (card)under 15%max, they shouldn’t get a credit at all. Those rates are killing people.
        I’d like to see some statstics regarding rates above 20% and homocide, substance abuse, domestic violence, suizide… .

        If you get squeezed like that, sooner or later anyone cracks.

    • Gattopardo says:

      Gametv…
      “Let’s prevent greedy people like the Blackrock group from bidding up prices on homes”….

      For the THOUSANDTH time on this board, it is not BlackRock who does that. You may be thinking of BlackSTONE.

  11. Alec says:

    FedGPT coming soon

  12. Depth Charge says:

    William K. Black: “The best way to rob a bank is to own it.”

    SVB was just another “friends of Mozillo” situation, where the bank was taking care of wealthy insiders with cheap loans and all sorts of fraudulent financial activities in exchange for what amounts to criminal immunity.

    There is no rule of law anymore for the rich. They plunder, they collapse the economy, then they plunder some more. And then we get these annoying soundbites from gas bags like Jerome Powell about how “blah, blah, blah, blah, blah…..”

    END THE FED.

    • sunny129 says:

      Depth charge

      We need a GREAT RESET to get rid of ALL incompetency, corruption, nepotism, fraudulent Bankers, regulators and their sycophants in the Congress.

      I won’t hold my breath.

      • Greg Hamilton says:

        Sunny129,

        A Great Reset is coming alright, just not the one you’re looking for.

      • Flea says:

        Sunny You like eating worms,dandelion salad or any garbage you can find . Be careful what you ask for you might get it

        • Depth Charge says:

          Ahh, yes, the old saw about we better always bailout the wealthy because otherwise we’ll all be roaming the streets looking for bugs to eat. Some of us don’t buy your bullsh!t.

    • Gloria says:

      The system is entirely corrupted, rigged, and captured to the core. There’s no coming back from that, no reform that can fix it. It must all go, otherwise the monster will grow new heads if one is chopped off.

    • Flea says:

      Banks are like Fort Knox,no money in banks,no gold in Fort Knox .

  13. Bubbajohnson says:

    Know the mark of the Beast. Govern ment and Banksters
    Don ‘t feed the Beast.
    Stay out of debt and pay as little in taxes as legally possible.

    • sufferinsucatash says:

      you lost me with everything but “pay as little taxes as possible”.

      I liked that part!

  14. TR says:

    “People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.”
    John Kenneth Galbraith

    I wonder how long the poor will tolerate the privileged. Seems they have not been bothered by fictional reserve lending, fiat currency, bailouts, tax breaks for a select few. A question that no one seems to have an answer to. What is a fair/equal tax system? Small Mom & Pop main street businesses should get exactly the same tax deductions/breaks/benefits as the largest corporations.
    That should start a fight. ;-)

    It gets sadder everyday.

    • Augustus Frost says:

      You’re assuming they could do something about it, if they actually knew and understood, which they mostly don’t since the public is mostly clueless and economically illiterate. The public is also easy to bribe with “bread and circus.”

    • Greg Hamilton says:

      TR,
      I think the original quote is, “It is better to reign in Hell than serve in Heaven” from Paradise Lost. Galbraith just modernized it a bit. For people in power it rings as true today as much as it did in Milton’s time. And as long as there are people it will always ring true.

    • Halibut says:

      Alben Barkley, vice president to Harry Truman, said “I would rather be a servant in the House of the Lord than to sit in the seats of the mighty”.

      Politicians like that are hard to find these days.

      FWIW… my cat is named Alben W Barkley.

    • Prairie Rider says:

      ‘Paradise In Distress.’ Golden Earring, 1999.
      Biting dystopian lyrics and a catchy guitar hook.

  15. John says:

    End The FED

  16. Flashman says:

    Can someone remind me why the United States needs a Federal Reserve?

    • andy says:

      I think it is to prevent the boom and bust cycles (like housing or stock bubbles). And to have price stability.

  17. Gary Fredrickson says:

    The idea that the Federal Reserve corporation is unaware of the banking system is flawed. At Powell’s March 22, 2023 FOMC news conference, Powell said that the effects of his Quantitative Easing (QE) were well known and understood. The purpose of the QE comment was to dispell concern that the bank loan program, showing up on the balance sheet, was more QE in a different form. He basically admitted that he knew his QE would cause inflation, the Federal Reserve through all their counterparties know the banks are holding large amount of negligible interest long term treasuries, there was discussion of allowing banks to count those very same Treasuries to meet their Reserve requirements. Therefore, the Federal Reserve knew very well what could happen with a little application of “present value” mathematics.
    The issue of the motivation of the Federal Reserve deserves investigation; perhaps create inflation to lower the value of the national debt, provide inflation as a regressive tax for budget deficits, and almost certainly some huge wealth transfer to the oligarchs (families) through Wall Street. Just one problem to this tried and true technique since at or before Jesus ran into the money changers at the Temple Mount; today’s geopolitics oppose a world reserve currency subject to such machinations.

  18. Ted Byrley says:

    This really stupid. You are not going to like what I am saying. The problem here is that the movement of funds from one financial institution to another is now too efficient. It is too easy to chase higher interest rates outside the regular banking system or disintermediation, unlike in the early 1980s. I would not be surprised if the Fed’s Reverse Repo facility is actually causing this mess indirectly. Why wouldn’t you want to somehow have a deposit at the Fed with SOFR and US Treasuries as Collateral vs. uninsured demand deposits at some bank? This could mean that we are dealing with control freaks with no clue what money is. There I said it. Also, bring back Libor for the information it gave the system. I could talk about the BIS and their stupidity. But, of course, I am just a small-time economist who knows nothing.

  19. jeff says:

    Dang it, the conspiracy theorists win yet again. That makes 18,607 wild conspiracies in the past decade that were actually right on.

  20. nick says:

    Why the 10 year and 2 year yields are falling? We still have lots of inflation.

    • Longstreet says:

      Because a few gunslinging bankers who made big chunks of money took chances and now they are SAVED and those who are dealing with inflation now must deal with it more and longer because the Fed must now SERVE THE BANKERS and not fight inflation

    • andy says:

      There is not enough room in the dollar for everyone to shelter in.

  21. Longstreet says:

    “.willfully inept”
    Pocket that phrase…..is that the motto of the US govt?

    “we must see what happened and never let this happen again,”
    Stop this BS. We heard this in 2008 and here we are.
    People need to LOSE MONEY …. uninsured deposits are a form or market discipline. People who breached their fiduciary responsibilities must be punished.
    All deposits should not have been insured. Big depositors should pay more for insurance. Amounts over 250K should have been covered on a sliding scale, if at all.

    • andy says:

      “Amounts over 250K should have been covered on a sliding scale, if at all.’

      So what you’re saying: Yellen should come out and say – you know what, after some reflection, we will ensure all deposits above 250K. 50 cents on a dollar.

      Did I get that right?

    • Randy says:

      I thought I read something like 40% of depositors have over 250k in their bank accounts.
      Wouldn’t that include a lot of middle class
      people ? I’m not saying middle class people should be immune to punishment but am suggesting there are many depositors who aren’t especially rich that would lose a lot.
      Someone here suggested depositors pay a fee, the more you have deposited, the more the fee.
      Maybe. But I’m okay with complete coverage as some are suggesting. Unless someone can spell out specifically what is so bad about that.
      Whats wrong with: punish the bank executives (if appropriate) not the depositors. Why is this too simple minded ?

      • Prairie Rider says:

        Randy,

        Take, for example, ROKU. This corporation had $1.9 billion in cash which they were “sitting on.” $486 million of this, or 26% was on deposit, uninsured, at Silicon Valley Bank.

        Now, perhaps ROKU wanted the cash to be at the ready and to have it essentially in a checking account with a bank. And that’s what they did. But the rules are that this amount, which is over the $250,000 FDIC coverage limit, is not protected in the event that the bank is poorly managed and becomes insolvent — precisely the case for SVB.

        The CFO for ROKU could’ve, and should’ve put the cash in very short term Treasuries. This would have protected ROKU.

        What the President, the Fed, the Secretary of Treasury and the FDIC have done is change the rules to protect entities that they want to protect. Government chooses the winners and losers; while changing the rules to do so as they so desire.

        No! The same rules for all competitors must be maintained and adhered to. Otherwise, the “fix” is in. As is demonstrated once again, in the USA, the “game” is rigged.

        “The Virgin Mary loses faith
        And starts a chain-reaction
        The Lord just stands there weepin’
        Bitter tears in the rain
        Ain’t that a shame…
        (Shake you sinner)

        Devil just bought a brand new
        Penthouse in heaven
        There goes the old neighborhood
        There goes the good old neighborhood
        Movin’ on down to hell

        There’s no one here to kiss or bless
        This damp and dark unholy mess
        You could say: Paradise in distress!
        (Shake you sinner)”

        • kam says:

          “Government chooses the winners and losers” which makes Government (you) the loser.

        • Dantes says:

          The Roku VCs demand that they keep cash in deposits so the bank can speculate with it – either lend or buy risky assets. The VC are also shareholders of SVB, and benefit from the kickbacks. They don’t care about the rules, and now Yellen comes out asays they are only going to cover their friends, the SIBs , smaller banks be damned. More political kickbacks.

      • Eric says:

        Keep in mind the $250k limit is per depositor. The idea that a significant fraction of individuals may have in excess of $250k sitting in a given bank is insane. About 1/3 of the population doesn’t own real estate, or more accurately have a mortgage on real estate, so in the grand scheme of things they have paychecks not assets.

        For those with a mortgage, the primary contributor to net worth is tied to the value of their primary residence, and I suspect retirement accounts would come in second, not liquid assets.

        The Fed publishes surveys every 3 years on these things. Although dated, for 2019 they estimated median family net worth to be $121.7k.

        For families who owned a home the median net housing value (value of home minus home-secured debt) was about $120k, i.e. no real liquid assets outside of the value of the primary residence.

        For most of America, having that much cash floating around would be a dream come true.

        For those interested, the last Fed report is:

        Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances

        To Wolf’s point, the conflict of interest between the Fed and the banks they are supposed to regulate is beyond absurd.

  22. Ted Byrley says:

    Okay, I think I got it. Janet Yellen is the supreme leader of the United States, and her oversight committee is the Politburo Bureau, with the ability to issue as much debt and print money as they want to. Congress then does not matter at all, and the Budget Negotiations are all show. We will just print new currency reserves at will and use this to back up trillions of uninsured demand deposits. Her committee is meeting right now as we speak. Simple.

    • El Katz says:

      “Politiburo Bureau”: Brought to you by the Department of Redundancy Department.

  23. sufferinsucatash says:

    I dunno, I feel that is too harsh. Powell is answering questions. There will be investigations. You’re kinda sounding like Warren now ;). Lol

    People love self driving cars until they crash and they die. People don’t like self driving banks?

    • Rigel says:

      Powell sounded evasive and like he knew more than he was telling in the way he answered questions by saying things like “We don’t know what went wrong” “I’ll have to get back to you on that” “that’s a great question” “we’re undertaking a thorough review “. It looks to me like he’s got something to hide.

    • Wolf Richter says:

      I think you missed it all. So I’ll repeat it here, paragraph #2:

      “The structural problem with the Fed as top-dog banking supervisor is that the Federal Reserve System consists of the Board of Governors, which is a federal agency that Powell chairs; and 12 regional Federal Reserve Banks (FRBs), such as the San Francisco FRB, whose shareholders are the financial institutions in their districts, such as SVB Financial, whose CEOs sit on the board of directors of the FRBs, such as SVB CEO Greg Becker, and that the bank examiners employed by the FRB of San Francisco were examining Silicon Valley Bank. They were squealing about the risks at SVB for a few years, as we now know, and they escalated, and they tried, but it was all muffled.”

      • sufferinsucatash says:

        And in your scenario when was the right time to close down SVB? At the heights of the real estate bubble and tech madness?

        Tell the glutton to stop eating before they die? Little good that does.

        Intervene and staple their stomach, add 5 years to their life. They will scream they have no free will!

        Bad actors will always be that until they are a lesson in history. A footnote in what not to do. Credit Suisse was taken off life support as well. The baddest actor.

        I still think the fed and administration’s actions were prudent.

        With respect

        • Zest says:

          I imagine the answer is that good regulators would’ve stepped in a year or two ago (or three or five), and told SVB that they couldn’t concentrate their risk unhedged. That they need diversification in their overall business model. That too much of their deposit volume was uninsured.

          And until they fix those things, they are ineligible to give bonuses, give executive stock awards, or do stock buybacks, etc.

          The point of regulation isn’t to go out and kill any bank that can’t pass a stress test. It’s to force them to fix the things that are causing the failure before S hits the fan.

        • Mark says:

          Your missing the point. Regulators would have forced the bank many moons ago to lower duration risk, reduce balance sheet growth etc.

        • Wolf Richter says:

          sufferinsucatash,

          Mark nailed it: You completely missed the point.

          The primary job of bank regulators is NOT to shut down banks that misbehave, but to force them to correct their behavior (in this case “concentration risk” and “duration risk”) YEARS before the bank gets into serious trouble so that the bank doesn’t need to be shut down.

        • sufferinsucatash says:

          In reply that I missed the point.

          I did mention “stapling their stomach”

          Which is what the regulation suggestions amount to. SVB was a tech VC bank, they took risks. That is what tech people wanted, prob why they banked there. Elon musk bought Twitter on what amounts to a dare! Cmon, their bank had to be crazy too.

          Hindsight is 20/20, I don’t think the fed even knew what they were going to do about inflation, let alone tell a bank what to do about it. Biden even had some stress tests done back when Liz truss screwed up. He asked “do we have any weakness?” “Look for the weakness”. They looked and came back with “Nada”.

          I just think this stuff was in everyone’s blind spot. Theres always a blind spot. Prob stage 2 cancer that needed some radiation before spreading.

          Yes of course if they would MRI the system, maybe we would detect more cancer in it. But you also might slow things down so much it is just as detrimental.

          anyway, I’ll agree to disagree. On to the next article! May all our money always be safe! :)

      • Swamp Creature says:

        Here’s a list of the banks I’ve dealt with for my primary checking and savings accounts over the years

        Franklyn National Bank – LI NY – gone, bankrupt

        National Bank of Washington, DC – gone, bankrupt

        Perpetual Savings & Loan, DC – gone, bankrupt

        Wychovia Bank – gone, bankrupt, taken over by Wells Fargo

        They all had the best and the brightest experts running their operations.

        • Wolf Richter says:

          I’ve got a couple under my belt too. And I bought my condo in Tulsa (late 1980s) from a bank that had foreclosed on it, and a few month later the bank collapsed, and the FDIC took over. My neighbor bought his condo (across the hall) from the FDIC for 20% less than what I’d paid, LOL.

        • sufferinsucatash says:

          I had a business loan meeting at a wachovia/Wells Fargo in the upper management and mannnn were those people completely bat $h*t crazy in how they ran those banks. I mean whoa!

          Dunno about best and brightest. More like habitual gamblers.

  24. grimp says:

    We need nameless unheralded forensic accountants from both the public and private sector auditing these fools. Constantly.

  25. Ed H says:

    The Fed was created by and for bankers. Why is anyone surprised by their lax oversight of banks?

    • Rubicon says:

      That’s a good point, ED H.
      Meanwhile, Wolf’s narrative here is perfectly stated. As there are huge ramifications for this part of Capitalism, and we sense the whole system is beyond any redemption, and beyond the ability to make a clean sweep of Fed System.

  26. Island Teal says:

    SVB was started by cowboys and run like the Wild West from the very start.
    Having worked around and in close proximity to said cowboys you got to see a lot of the action way too close sometimes. The Valley was like that 30-40 years ago.

    • Sufferinsucatash says:

      Back to my theory of “Never trust a bald guy, unless you want a fun time” lol

  27. George says:

    As usual, Wolf your report is very good. I would go one step further and get rid of the FED completely. The FED is what got us in this mess in the first place, with ridiculously low interest rates for years, and money printing. That encouraged reckless spending by government as well as the private sector. Normalized interest rates should be 2-3 percent above inflation, and if target inflation is 2%, the normalized FED rate should be between 4 and 5 percent. Interest rates are currently about where they should be under “normal” conditions, not zero or near zero. Along with low interest rates, QE encouraged risky investments and bubbles in investment markets, including housing. It also allowed the government to pursue reckless fiscal policy with basically free money. It does not require an economic or financial degree to understand, and yet the FED went down the path of putting us in a banking and financial crisis anyway, and it is not the first time they have done so. Many have seen this coming for a long time. I believe there is an unspoken agenda, and it isn’t for the good of the people. On a larger scale look at what is happening throughout America. It isn’t for the good of the people. Nearly 80 percent of the population believe the next generation will not enjoy the same quality of life that the current generation has enjoyed. We do have a systemic problem too be certain, but it is not racism: it is widespread corruption, lawlessness, and blindness to the truth.

  28. Bs ini says:

    Wolf was printing about the businesses behind the SVB in eary 2022 when the cash burn and ipo market dried up . Then the rise in rates and money leaving the bank . All reported by Wolf. No acceptable accountability by the Fed nor will they say what needs to happen pass the process to FDIC . Forget Congress they are more hens on the house !

  29. JamesO says:

    since the beginning of this century, we’ve had our government equally controlled by both Republicans and Democrats. on their collective watches we’ve had 2 massive housing bubbles. neither bubble has helped the average american family. each has made things worse. both parties have been totally subservient to Wall St and the interests of the billionaires. they both have done nothing to address the unbelievable concentration of wealth in the hands of so few. and these are the same billionaires who demonstrated during the early days of covid that they all have their global hideaways and don’t give a flying f$&k about our country nor the people who live here. they love it that the Republicans and Democrats continue to play this highly manufactured red v blue thing keeping everyone focused on anything but the real problem … the real war that’s going on is the super rich billionaire pukes v everyone else. and we are getting our butts kicked. come on … let’s take back our country.

    • Randy says:

      Agree wealth concentration is bad.

      I dont agree its the 1% vs. the rest of us.
      Not even close. Warren and Sanders played that far too much. And I have socialist leanings !
      There are all kinds of issues the middle class disagrees on; where they stand on them isn’t a function of 1% membership or not typically.
      The middle class doesn’t agree on abortion, gun control, climate change on and on…

      I’m with you on Democrats vs. Republicans.
      More Americans need to be Independents.
      Not just in name.

  30. In says:

    All those who opposed the establishment of the Fed died when the Titanic sank before 1913.

    • 91B20 1stCav (AUS) says:

      In – you’ve got a pretty good premise for a historical potboiler novel there…

      may we all find a better day

  31. RAB says:

    What is the FED’s ESG and DEI ratings?

  32. drifterprof says:

    Thanks to Wolf for again identifying fundamental system dysfunctions which are in plain sight, but often left unspoken.

    The regulatory problem reminds me of what John Kenneth Galbraith wrote in his book “The Great Crash 1929″:

    “Moreover, regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age—after a matter of ten or fifteen years—they become, with some exceptions, either an arm of the industry they are regulating or senile. The [newly established] SEC was especially aggressive. To any young regulatory body, after all, Wall Street was certain to seem a challenging antagonist. Wall Street was always disposed to fight back. It insisted on the right of a financial community in general, and of a securities market in particular, to conduct its affairs in its own way, by its own lights and to govern itself.”

    Recent financial crises are in some ways similar to what Galbraith describes led up to the 1929 crash. Big finance, which back then was composed more of individual players rather that corporate institutions, created shiny new investment entities which lured irresponsible big institutions as well as masses starry-eyed of retail investors. Those new entities were crude Ponzi schemes compared to modern times, but basically served the same function as the much more opaque and complicated derivatives did in 2008.

    Knowing all this does not help alleviate my somewhat pessimistic view of human institutions, and some basic ape-like characteristics of the poorly socialized individual human.

    • Antonym says:

      Amen. Finally the FED has made moves that even Wolf can’t defend anymore.
      There is not only a political Washington swamp but also a huge financial one in New York, the home town of various maffias.

      • longstreet says:

        Wolf a Fed defender?
        Explaining isnt defending

        • Wolf Richter says:

          This “Wolf is a Fed defender” stuff is just hilarious.

          These people need to understand something:

          I railed against the Fed during QE and ZIRP for years. That’s how this site’s predecessor site (Testosterone Pit) started out, and it continued with Wolf Street.

          When the Fed’s QT took off in 2018, I supported it because it was undoing the damage of QE.

          When the Fed bailed out the repo market in 2019, I railed against the Fed.

          When the Fed went hog wild in 2020, I shredded the Fed.

          When the Fed ignored the surge in inflation in early 2021, still doing QT and ZIRP, I called it “the most reckless Fed ever.” Google the phrase, LOL. And I did for months until the Fed got serious about tightening.

          When the Fed started hiking rates and then started QT, I supported it.

          Get the drift?

          Money printing and interest rate repression should be a crime. I people want a propaganda hype-and-hoopla rag for money printing and interest rate repression, this is not the place. If people want mindless Fed-hater stuff no matter what the Fed does (hate when it did QE, hate when it does QT) or Fed-pivot-mongering stuff, or Fed-is-trapped stuff, people need to go find their happiness somewhere else.

          I understand that there are bloggers out there that railed against QE. And when the Fed switched to QT, they first denied it, and then railed against the Fed for doing QT, and they railed against the Fed no matter what the Fed does. To me, that’s just clickbait idiocy.

    • longstreet says:

      drifter
      indeed. like ‘29
      but the difference is the solution has already been applied….for 14 years
      massive liquidity and fake low rates
      both of which likely triggered this current situation

      What now?

  33. GotCollateral says:

    History of banking is fraught with stuff like this…

    Idk ppl would expect humans to adhere to any set of particular values if those values are only enforceable by other humans…

  34. Rosebud says:

    Wolf, remember Prudential Bear forum?

    One day 2007, i get up and ask everybody how old they are..

    my heads spinning fast, comet McNaught just buzzed the planet, and my posts are twerking like Miley.

    There was over 50 people who coughed up, and i was surprised to see i was much younger than the 51 midpoint. That was a fantastic survey. A few months later Prubear was gone.

  35. Brendan says:

    “We’re looking up our own a$$es with our microscopes to see what we did wrong.”

  36. Nunya says:

    Common sense is not so common. Very obvious conflict of interest, which means it’s done deliberately as if they were mocking the public. It’s a black and white conflict of interest, not even a gray area.

    The question is, who will ultimately be held accountable when the dust settles, and the assets are sold, and we count the pennies left over. Will the taxpayers be on the hook for these shannanigans? Will the CEOs be held liable for their decisions? Will the boards be held liable for their lack of oversight and turning a blind eye?

  37. Brant Lee says:

    Meanwhile, the banks and corporations keep consolidating into too big-to-fail monsters. Which means more power over the government and government bailouts and/or support for the important ones.

    What is the term for a modern feudal system? If you still have some valuables, bury them deep.

  38. Rosebud says:

    i have a quiz for everyone. No Fed people, you are not to answer this!

    What is the Fedbank jurisdiction with oldest demographic? Which is the youngest?

    If you know the answer, provide further details: What commodity or manufacture are these two areas known for.

    • Rosebud says:

      No give? my take:

      ‘The Reserve Banks are decentralized by design and are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. This structure ensures that the reserves and decisions of the Fed are distributed across the country and that the conditions of communities from every part of the nation are considered when the Fed sets monetary policy.’

      The three regional banks are represented in the topic thread, San Francisco, and in the riddle, Boston -oldest demographic, and Kansas City – youngest demographic.

      San Francisco; Silicon Valley, Social Capital, gold standard artwork.
      Boston; Defense, Weapons, guns
      Kansas City; Agriculture, grub

      Summary
      The solutution to the riddle or the banking crisis, the FRB’s version of gold, guns and grub.

  39. Percy41 says:

    The CRO position within banks also needs to be rethought and reconfigured: they need more clout with the CEO and the Board than they have now.

  40. curiouscat says:

    Next week, I intend to send Wolf’s recommendations (sans comments) to each of the member of my Congressional delegation. I would urge all other faithful Wolfstreet readers to do likewise. Nothing may change as a result of complaining but assuredly nothing WILL change if we all keep quiet.

    On another topic, this posting is so good it’s worth another donation. I hope others will follow that example as well.

  41. bki says:

    A thing of beauty in a nutshell:

    The Fed is fired from banking oversight (per Wolf).
    The ‘conflicteds’ are removed (per Wolf).
    The FDIC keeps kickin’ ass at mess cleanups. (I think everyone agrees they are simply mahvelous at this work.)

    The FDIC would take on new bank oversight duties,
    presumably with a firewall between them and the cleanup branch.

    What remains is 100% federal. None of this quasi-governmental stuff any more.

    And there you have it!
    *** The US Department of the Treasury ***
    Sweet!

  42. Matthew F Scott says:

    Charles R. Morris in 2008 “How could leverage get so high? In the class of instruments we’ve been talking about, there are relatively few ‘names,’ or underlying companies, that are deeply traded, several hundred at most. And a relatively small number of institutions, basically the global banks, investment banks, and credit hedge funds, do most of the trading. In effect, they’ve built a huge Yertle the Turtle-like unstable tower of debt by selling it back and forth among themselves, booking profits all along the way. That is the definition of a Ponzi game. So long as a free-money regime forestalled defaults, the tower might wobble, but stayed erect. But small disturbances in any part of the structure can bring the whole tower down, and the seismic rumblings already in evidence portend disturbances that are very large.”
    —The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (2008)

  43. otishertz says:

    Hilarious

    “The Fed should never be a bank regulator because it cannot be an effective bank regulator because it’s too conflicted”

    You nor anyone else has a choice about these controllers and they laugh at you.

    • longstreet says:

      conflicted…..?
      That IS THE Game!!

      next thing we will discover are Congressmen taking money from Chinese

  44. RickV says:

    When I was in banking from the 80s to the early 2000s we were audited by the Office of the Controller of the Currency (OCC). Per Wikipedia, the OCC is “an independent bureau within the United States Treasury (not the Fed) … that supervises all national banks and thrift institutions”. I haven’t seen anything about the OCC and SVB, and don’t understand why the Fed seemed to take over supervision of SVB. It would be nice to know what’s going on.

    • Austrian School says:

      The Office of the Comptroller of the Currency (OCC) exclusively regulates national banks.
      Silicone Valley Bank (SVB) was a California state charted bank. All state banks can elect to be regulated nationally by either the FDIC or the Federal Reserve System. Additionally, state chartered banks supposedly have their state banking departments as their primary regulator and either the FDIC or the Federal Reserve as their secondary regulator. In actuality, the state banking departments (even though they are the primary bank regulator), subordinate their primary regulator status to the FDIC or the Federal Reserve.

      Bank holding companies are exclusively regulated by the Federal Reserve. Credit Unions are regulated by the National Credit Union Administration.

      • RickV says:

        Thanks. That clears it up, and is important to know. Interesting Wikipedia was wrong (“[OCC] that supervises all national banks and thrift institutions”).

        • Austrian School says:

          My mistake! you are correct that additionally the OCC regulates federal savings associations and us branches of foreign banks.

  45. Matthew F Scott says:

    This was written after the 2008 crisis but hold true today – Myths of Financial Regulation

    Liberal economist John Kenneth Galbraith, in his classic history of the stock market crash of 1929, bemoaned what he saw as Wall Street’s irrational refusal to rein in speculative financial booms before they went bust, going so far as to declare: “Here, at least equally with communism, lies the threat to capitalism” (The Great Crash, 1929 [1997]). Galbraith’s history shows that government regulators in the lead-up to the crash did not even try to dampen the speculative frenzy. As long as the bubble continued, it was fabulously profitable for the capitalists. And besides, who would want to take the blame for touching off a collapse?

    Under the impact of the Great Depression, Congress passed a precursor of the “Volcker rule,” the 1933 Glass-Steagall Act, which prohibited commercial banks from trading in stocks and bonds. An enduring myth is that Glass-Steagall provided a backstop against financial crises and that its 1999 repeal under the Clinton administration is to blame for the current recession. Glass-Steagall’s formal prohibition on securities dealings did not prevent banks from starting in the mid 1980s to “securitize” their loans (pooling them and issuing securities based on the pool). This was a way for the banks to get the loans off their balance sheets and thus circumvent capital reserve requirements, freeing them to make new loans. Alan Greenspan, who as Fed chairman from 1987 to 2006 was Washington’s regulator-in-chief, hailed such “innovation” for supposedly reducing financial instability by spreading risk among many investors.

    In the years preceding the current crisis, debt-securitization markets were the source of 60 percent of all credit in the U.S. After investors lost huge sums on pools of subprime mortgages, entire swaths of the so-called “shadow banking system” collapsed. Now the Fed is virtually the only buyer of mortgage-backed securities—the sector of the securitization market that in the U.S. dwarfs all others—with holdings totaling over $1.1 trillion.

    Liberal economist Paul Krugman has been a persistent champion of extending federal supervision to the “shadow banking system”—hedge funds, private equity funds and the like. Yet in the lead-up to the current crisis, federal regulators were complicit in using this very system to conceal bankers’ speculative risk-taking. As Lehman Brothers hurtled toward collapse in September 2008, regulators from both the Federal Reserve Bank of New York and the Securities and Exchange Commission turned a blind eye as executives window-dressed their accounts to hide their dangerously high level of debt. The New York Fed under Timothy Geithner, now Obama’s Treasury secretary, further helped Lehman artificially bolster its balance sheet by temporarily holding billions of dollars in “toxic” assets.

    Krugman’s answer to such behavior was that Congress needed to enact “rules that would force action even by regulators who don’t especially want to do their jobs” (New York Times, 5 April). The liberal Krugman sees the government as an impartial arbiter, ultimately serving the common good (with the possible exception of some recalcitrant regulators, who need to be read the riot act). In contrast, Marxists understand that the capitalist government serves as the executive committee of the bourgeoisie as a whole, defending its class rule by employing the armed might of the state—police, army, courts and prisons—against the workers and the oppressed.

    A key element in ensuring the stability of the capitalist order is the belief by the working class that the system’s most clearly destructive features such as mass unemployment can be eliminated through reforms. In the absence of a mass reformist workers party in this country, the Democratic Party is offered as the vehicle through which the capitalist state can be pressured to serve the interests of the working class and oppressed.

    This false consciousness is promoted not only by the pro-capitalist labor bureaucracy but also by the reformist left. Virtually every liberal and reformist organization openly or tacitly supported Obama’s election as a harbinger of “change.” Now, after the bailout of the banks and auto companies, the escalation of the murderous occupation of Afghanistan, the stepping up of repression as part of the “war on terror,” Instead of using economic policies to counteract the worst mass unemployment since the 1930s, Obama rushed to aid the banks.”

    Nothing other was to be expected from Obama and his claque of Wall Street advisers and operatives.

  46. William Leake says:

    It’s the old revolving door. I saw it at the university. The professors who got the most and biggest grants were the ones who sat on the grant-funding committees. Sure, they had a rule that you could not vote on a grant from anyone from your university, but wink wink nudge nudge, we all could see what was happening. Nobody was going to blow a whistle, because they all wanted grants too. At least in the banking industry, the failure of a compromised bank with a revolving door of regulators and bank management clearly reveals the corruption.

  47. SOL says:

    Who’d have thought that an economy based off debt and greed run by the greediest could be so complicated?

    Just keep borrowing and everything will be fine.

    • old school says:

      I think a truth is in an expansion phase there are generally no losses on asset values so nobody has any reason to be digging too deep. Once the asset values collapse a bit then people have losses to get upset about and the lawyers get started and politicians need faces to blame the disaster on.

      Powell might be the fall guy this time. He kept serving alcohol when people were already drunk.

  48. I believe the vice chair, Brainerd, was in charge of regulating the banks. She recently moved to the position of presidents economic advisors. Not sure who the current vice chair is presently. SVB got in trouble holding long duration treasuries, while the Fed drove the yield curve to historic inversion levels. How do you plan for that? And presumably a lot of other banks are in the same position, perhaps with fewer uninsured depositors, and not beholding to hyperbolic venture capitalists who can move millions on their smartphone, and will. This was a huge social failurel, responsibility on the people who brought this bank down. And finally if there is a regulatory issue, how about allowing counterfeit (crypto) currency to circulate in the banking system. Whose fault is that?

    • longstreet says:

      They are getting hurt in long maturities with the 10yr at a measely 3.5%
      Imagine if rates were real and the curve positive

    • old school says:

      I think that is the root of the problem. Fed dumped 8 trillion in free money into the system for too long and then raised rates on it too fast. Two wrongs don’t make a right.

      I think that is why yield curve looks like it does. Market is betting you can’t go that fast without blowing up something big.

  49. Glen says:

    Hey, SCOTUS has ruled that money is free speech, so all those Congresscritters and Senilators are just legally accepting millions in free speech from the rich.

    And it works very well. Those rich VC billionaires were able to get their billions in funds covered after a weekend of calling their employees in DC.

    The system works! I unfortunately, don’t have the funds to by the government.

  50. longstreet says:

    With every crisis the Fed acrues more power
    We are headed towards a nationalized banking system and digital currency

    • Anne says:

      Nationalization of banking, education, Healthcare, and insurance is in reality almost complete, through regulation and Federal backstop. It’s preferable to make it official to stop socializing the losses aka bailouts & privatizing the gains, and to bring all the dirty laundry into the light.

  51. Michael Engel says:

    1) Bernanke zeroed in on zero rates from Tokyo to US. Druggie snorkeled underwater.
    2) Yelen and JP tried to raise rates, but the ECB was high on drugs.
    3) In the last 3Y two exogenous events caused inflation to rise and destabilized the global status quo. The Fed response was fast. The Fed sucked $2T liquidity and raised rates to 5%.
    4) Last June Fedrate was 1.68% while inflation reached 9.1%, on the cusp of 10%. The Fed feared high inflation, feared of being behind the curve.
    5) US gov debt cont to rise to $31.5T, in stepping stones, shortening it’s thrust. Those who financed it suffered unrealized losses and got negative dividends. The Fed real job is to deflate US gov debt at the expense of investors and the BANKS ==>
    $32T x1Y x (-) 0.0333 = $1T/Y. The banks were put on yellow alarm.
    6) Few trading rooms zeroed in on SVB bank, SF sleaze bang, for fun. They herd together, imitated each other and in the middle of one night took it down in Mach 7 speed, before red alarm could sound and the Fed ability to response to that digital attack and intercept it .SVB bank flipped from #1 to zero in nano seconds.
    7) The media, which didn’t lose a dime, is raging, spreading panic for rating.

  52. bruce says:

    Can anyone explain what should have been changed? Re: uninsured deposits (over $250k) how do you suggest they offset that? How can you hedge against rising interest rates besides buying shorter term debt (but would that have paid anything?)

    • The Real Tony says:

      Raising insurance to a million at least would be a step in the right direction.

    • Bobber says:

      Read more, understand how things work, and do your own thinking. Otherwise you are tumbleweed blowing in the wind.

    • Glen says:

      This is a very common problem and perfectly legal methods and programs to handle it have existed forever. Most people just never have this delightful problem to worry about (way too much money):

      It’s just extremely embarrassing to the tech VC billionaires to look like a bunch of fools, or the SVB bank to look like idiots, but they are. I’ll cut some slack to the VC guys; they concentrate on new tech, but they should also have a whole group of people working for them that manage this stuff 24/7.

  53. Rico says:

    It’s corruption.
    Why are we constantly bailing out these thieves and idiots.

    If it is so bad that the government has to step in with the people’s money, people should go to jail.

    • Concerned Citizen says:

      America is a Banana Republic.

      We bailout the well connected like Fannie and Fredie, GM, Chrysler, and so on, the list is very long. It should not surprise us the Woke Silicon Valley Customers of SVB were also bailed out.

      We provide subsides to companies who adopt Woke policies; companies in the Semiconductor industry who are flush with cash are getting big bucks if they meet the “Diversity, Equity, and Inclusion” goals of Marxist government officials. Look at the tech specs in the law, there are few real requirements about fabricating chips in the US.

      I could go on by when the Federal Government is handing out trillions like candy and the Fed is simultaneously raising rates and doing QT you know you live in a Banana Republic.

      • Rico says:

        It’s ridiculous to blame one party, but you’re right about the Banana republic.

        “ A banana republic is a country with an economy of state capitalism, whereby the country is operated as a private commercial enterprise for the exclusive profit of the ruling class. Such exploitation is enabled by collusion between the state and favored…..”

        • Concerned Citizen says:

          This is the Marxist version of a Banana Republic, Marxists is the party I refer to:

          WASHINGTON, Feb 28 (Reuters) – The Biden administration on Tuesday said it will require companies winning funds from its $52-billion U.S. semiconductor manufacturing and research program to share excess profits and explain how they plan to provide affordable childcare.

        • Wolf Richter says:

          You just want to give companies $52 billion in taxpayer money and not asked for anything in return? Just hand it to them and say, here you go, it’s all yours, you’re $52 billion richer now, have fun?

          Well, that too happened in the past.

          Corporate welfare is terrible; but corporate welfare without conditions is terrible-squared.

      • Expat says:

        What is so “woke” about SVB?

  54. polistra says:

    The FDIC was modeled on the Oklahoma bank insurance system, which was part of the state’s original laws at statehood. In 1914 the Federal Reserve was starting to consider a similar federal system, and wrote an informative little report on the existing state systems. Those laws were clear: the deposit insurer was in charge of keeping the banks honest. The insurer has an unconflicted motive, since it loses money when the banks fail.

    https://books.google.com/books?id=ODtQdwL1sCMC

  55. Bubbajohnson says:

    Have no fear folks. Govern ment will raise the debt ceiling just in time. Plenty of $$ for all. This is just the beginning of the end for US. Takes time.

  56. Adam Smith says:

    Wolf, it seems perfectly reasonable to designate the FDIC as a “banking supervisor and regulator…with tiger teeth”. I hope it happens.

    That said, what about starting out by simply disallowing the CEOs (or other executives and similarly conflicted financial stakeholders) of “overseen” banks from sitting on FRB boards? This strikes me as particularly low-hanging fruit, and far likely to be implemented, in the short term, than a wholesale handoff of a critical regulatory function from the Fed to the FDIC (which I assume would require congress to divert its attention from cat litter, drag queens and the laptops of crack addicts long enough to agree – hah! – on such a change).

    • Wolf Richter says:

      Whether CEOs sit on the boards of the FRBs or someone they vote to represent them doesn’t change the fact that these banks are shareholders of the FRBs, and as shareholders they get to nominated and vote for the members of the board. That’s just basic corporate law, and the FRBS are corporations.

  57. BuySome says:

    Welcome to our daily showing of Zentropa,
    Nearly as bizarre as was Europa Europa,
    If the show does not please just give us a holler,
    The next one we’ll feature is How Green Was My Dollar!
    (Popcorn available all hours at the concession counter.)

  58. Expat says:

    It’s a valid debate but it misses the essential question: why is the system the way it is in the first place? Simple. The rich and powerful make the rules. The bankers and the politicians they bought determine how the industry is regulated (same for all industries) until something goes wrong and rules and oversight are changed.

    This happens in other businesses, except that defective cars and toxic waste kill people in a messy, media-friendly fashion. This leads to permanent changes. Banks don’t cripple children or asphyxiate an entire town; banking problems are also too complicated for most people to understand. So a band-aid is slapped on the problem. That band-aid is peeled off shortly after and the banks continue business as usual.

    Occupy Wall Street is perhaps the only real anti-banking protest in recent history and look where they ended up. Wall Street, the media, politicians and police painted them as America-hating anarchists, anti-Christs, and communists.

    You want to solve SVB, Credit Suisse, Goldman, and Citi? Stop voting for the same corrupt politicians. Stop sending Republicans or Democrats to Washington or the state capital. Stop blaming the other side of the aisle when it’s both sides’ fault. Blame yourself for being just as greedy and short-sighted as the Fed and the banks you are criticizing.

  59. Ted Byrley says:

    This whole thing would have happened anyway but to a lesser degree. Rising short-term rates always cause disintermediation. We are just now going to start seeing the effects on Savings and Loans. Credit conditions will tighten, and the recession will begin. Welcome to 1937. Unfortunately, we are not as sophisticated as we believe we are. We are just a bunch of monkeys dancing around to the organ grinder.

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