Global Courant 2023-05-05 14:00:16
President Biden has now presided over three of the four largest bank failures in US history, and experts warn that the Federal Reserve’s interest rate regime could lead to additional problems across the industry.
Since March, three major banks — First Republic Bank, Silicon Valley Bank and Signature Bank with assets worth $212 billion, $209 billion and $110 billion, respectively, according to Federal Reserve data — have imploded in the wake of high interest rates and bad management decisions. The Federal Deposit Insurance Corporation (FDIC) has estimated that its actions to fix the failures will cost taxpayers about $36 billion.
“The Federal Reserve, the Treasury, this whole administration, quite frankly, has been very inconsistent with their operations in the financial markets,” EJ Antoni, an economist and research fellow at The Heritage Foundation, told Fox News Digital in an interview. “So they’ll do one thing in one case and then do something completely different in the next.”
“But if this latest episode is any indication, as the federal government becomes increasingly desperate in this banking crisis, as the crisis continues to escalate, we are seeing an increasing willingness to use taxpayers’ money to bail out these institutions,” Antoni added.
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President Biden will speak about the banking system on March 13. He noted that “Americans can rest assured that our banking system is safe.” (Anna Moneymaker/Getty Images)
On Monday, the FDIC announced that JPMorgan Chase would pay the agency $10.6 billion to take control of most First Republic assets, but that the move would cost the FDIC Deposit Insurance Fund about $13 billion. That federally managed fund was created in the 1930s to provide a backstop in the event of major bank failures.
Silicon Valley Bank’s bankruptcy in March cost the Deposit Insurance Fund $20 billion, and Signature Bank’s collapse shortly after cost the fund about $3 billion.
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“Normally, bigger banks would take on these regional banks because they’re a good deal right now,” Thomas Hogan, a senior research faculty at the American Institute for Economic Research and former chief economist on the Senate Banking Committee, said in an interview.
“Now that they’ve seen that the government is willing to provide assistance, they’re going to wait until the banks are actually bankrupt and then the government is willing to provide a bailout package to enable that takeover,” Hogan said. “That’s definitely what happened with First Republic and JPMorgan Chase.”
“It’s a bad incentive. The precedent they’ve set will make private banks less willing to take over or bail out these failing institutions.”
At least four regional banks are also facing significant market pressure, according to Hogan. First Horizon BankPacWest Bancorp and Western Alliance all saw their share price plummet during Thursday trading.
Hogan, Antoni and Stephen Moore, a senior economist at FreedomWorks, blamed the bank failures largely on rate hikes the Federal Reserve has made over the past year.
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“A lot of these banks have government bonds that are worth right now — they’re down about 30% in value because of the huge interest rate hike over the past year. So their balance sheets now look terrible because of some of the Fed’s actions,” he said. Moore to Fox News Digital.
“The reason the Fed had to take these measures was because we had this extraordinary spending spree,” he added. “You had a completely indefensible spending spree after COVID passed. Then prices went up. Inflation went to 9%. And then you had to force the Fed to respond to that through these almost unprecedented rate hikes.”
On March 11, 2021, Biden signed the American Rescue Plan, his signature $1.9 trillion COVID-19 stimulus package that was criticized at the time as unnecessary given the progress of the pandemic.
Since then, year-on-year inflation has deteriorated from 2.6% to a more than four-decade high of 9.1% in June 2022, but fell to 5% from March. The slowdown in inflation was accompanied by rapid rate hikes from the Federal Reserve, from near-zero 0.25% in March 2022 to 5.25% this month.
Fed Chairman Jerome Powell testifies at a congressional hearing on June 22, 2022. (Win McNamee/Getty Images)
The Federal Reserve was widely criticized for extreme enforcement low interest rates from the pandemic era way too long.
“If you force financial institutions to chase returns – which is exactly what they did by setting interest rates at zero and holding them for so long – you are also forcing banks to take increasingly leveraged positions,” he said. Anthony.
“In other words, instead of just keeping a relatively large percentage of deposits on hand because they can easily make money from relatively safe investments, they now have to take virtually all of the deposits and place virtually all of them in high-risk positions,” continued he. . “So, again, it’s an increase in leverage that shouldn’t have happened. And now all of this is coming home to sleep.”
Meanwhile, the Federal Reserve and the White House have declared the banking system safe in an effort to allay fears.
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“I’m going to ask Congress and banking regulators to tighten the rules on banks to make it less likely that bank failures like this will happen again and to protect American jobs and small businesses. Look, the bottom line: Americans can make sure our banking system is safe,” Biden noted in March.
“Your deposits are safe. Let me also assure you: we will not dwell on this. We will do whatever it takes on top of all this,” he said.
And Federal Reserve Chairman Jerome Powell said Wednesday that the banking system remains resilient despite recent “tensions,” Reuters reported.
Thomas Catenacci is a political writer for Fox News Digital.
