by Chris Black
The banking industry enjoys unparalleled government subsidies, special privileges, and bailouts, making it exempt from free market principles.
The Federal Reserve’s manipulation of interest rates is just one example of the extensive central control present in the financial sector.
The largest banks are granted explicit protection from the US taxpayer as Systemically Important Banks (SIBs) – entities deemed too significant to fail.
SIBs were invented during the 2008 financial crisis to protect Wall Street institutions from failure due to fraud and mismanagement in real estate lending.
However, recent events indicate that regional banks are also being included in this elite class.
When Silvergate, Silicon Valley, and Signature banks faced collapse, Janet Yellen declared that no bank failure would be tolerated if it posed a risk of contagion.
As a result, the only bankers who face consequences for their decisions are those running the smallest and least significant banks, leaving taxpayers to once again defend the interests of the big banks.
Yellen has assured the general public that banks will bear the cost of programs such as expanded deposit insurance by raising fees, but she seems to underestimate the public’s ability to see through this charade.
Ultimately, everyday citizens will be left holding the bag, literally.
It is crucial to examine what the American people received from the last round of bank bailouts and the continuous subsidies provided to the financial sector since 2008.
As it turns out, they financed the transformation of banks into less valuable entities within the economy that are just as likely to collapse and require future bailouts.
The Federal Reserve reduced interest rates to zero, providing banks with practically free money.
Banks borrowed from the Fed’s discount window or used depositor funds to purchase Treasuries or Mortgage-backed securities with returns, allowing them to profit from the interest rate difference.
This scheme was extremely profitable for banks as long as rates remained at zero.
Regrettably, this policy was entirely counterproductive in terms of stimulating actual economic growth.
The money wasn’t made available to entrepreneurs and consumers who could put it to productive use, but instead, it became a windfall for the financial sector and government budgets, both of which continued to expand relative to the rest of the economy.
With interest rates increasing, the situation has begun to unravel.
Bankers had assumed that rates would remain low indefinitely.
However, as rates began to rise, the banks slid into insolvency as the value of their large bond holdings fell.
The problem is that only those running the smallest and least significant banks face the consequences of their actions, and once again, the government is stepping in to save the day.
With the introduction of expanded deposit guarantees and special lending facilities, there is hope that the current economic downturn can be reversed.
However, if these measures fail, Janet Yellen and the Federal Reserve are prepared to implement even larger and costlier interventions.
The impending recession is expected to be severe, with declining demand for loans and rising defaults adding to the challenges faced by banks already struggling with their balance sheets.
Allowing these financial institutions to fail would be catastrophic for the economy, particularly given the increased size of the stimulus-driven financial sector in recent years.
Unfortunately, the previous bailouts and lack of accountability for irresponsible or criminal behavior may contribute to a significant financial crisis that could ultimately lead to the collapse of the U.S. dollar.