Europeans should know better
After everything that’s happened over the last decade, it’s hard to believe that Europeans would trust any commitments made by US policymakers. And yet according to the Financial Times:
Europe’s financial regulators are furious at the handling of the Silicon Valley Bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they had helped to write.
While the disapproval has yet to be conveyed in a formal setting, some of the region’s top policymakers are seething over the decision to cover all depositors at SVB, fearing it will undermine a globally agreed regime.
One senior eurozone official described their shock at the “total and utter incompetence” of US authorities, particularly after a decade and a half of “long and boring meetings” with Americans advocating an end to bailouts.
Why would anyone trust America? We also wrote the rule book on international trade (Washington Consensus), and then started violating trade law in every way possible (under both Trump and Biden.)
Our policy is completely, 100% unprincipled. We state broad principles, and then in the moment we do whatever is politically expedient.
There’s a term for this sort of country:
PS. Yes, our banks (and regulators) were blindsided by rising interest rates that devastated the value of their long-term bonds. But surely no one could ever have imagined the possibility that 10-year Treasury bond yields would skyrocket up to . . . checks notes . . . 3.5%!!
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17. March 2023 at 15:49
The bananafication of America continues?
The Swiss National Bank just extended a $54 Billion lifeline to Credit Suisse. The Swiss too!?
Yes, we have no bananas.
There are ratings, Moody’s,and S&P and so on for bonds. But in 2008 the ratings fell apart…
Even sophisticated, uninsured high net worth depositors were evidently clueless to the inner workings of SVB.
Let us assume, for sake of argument, that depositors are incapable of bringing about a rock-solid banking system. But we need a banking system. Then what?
In the meantime, play those Bananarama records….
17. March 2023 at 16:06
On an intellectual level I think I agree with Scott Sumner, although I have pretty much given up having opinions on anything anymore.
But if federal deposit insurance covered up to $50 million instead of just $250k,then there would be no bank runs at SVB.
In a less than perfect world, should federal deposit insurance be unlimited?
17. March 2023 at 17:39
it’s hard to believe that Europeans would trust any commitments made by US policymakers.
This is a Putin talking point.
No, really!
https://www.rt.com/russia/568924-medvedev-rift-western-nations/
“The behavior of Washington and others this year “is the last warning to all nations: there can be no business with the Anglo-Saxon world [because] it is a thief, a swindler, a card-sharp that could do anything.”“
17. March 2023 at 19:13
Solon, I’d set the limit at $10,000.
Steve, Even a broken clock is right twice a day.
18. March 2023 at 07:01
Banana republic’s also arrest the political opposition on trumped up charges. There is always a double legal standard in such countries.
And your leftwing radicals, and your mesolithic myrmidon globalists, are marching towards Mar-a-lago.
The communist thugs, in the form of postmodernists, have arrived to crush any and all opposition.
Sumner is leading them; he’s the tip of the sphere; the gangster of all gangsters.
18. March 2023 at 07:14
Scott:
Europeans have never “got” Americans. They’re locked in hierarchical view of society where everything is top down, so it’s not surprising that they think the regulators should just call the shots. In this case, I agree they’re right, but like you said a broken clock is right twice a day.
OTOH, the incompetence of everyone on the American side during the current banking situation (and I must say in many other situations) must be appalling to the Europeans. If there is one thing Europeans are usually damned sure to do, its to follow the basic rules and, unlike even well educated Americans, Europeans usually actually know the rules.
So it goes back to that old thing: when to follow the rules and when to think outside the box?
18. March 2023 at 07:40
That’s right, Sara.
Clintons and Bidens can rake in millions from pay to play, but a billionaire who spends hundreds of thousands of dollars a day, will now be indicted because of a measly 300,000 (or so they say) gift which they claim he failed to report.
Only an imbecile would believe a billionaire would accepted 300,000 with the intent to hide it. It’s a joke. It’s a sick, twisted, woke plot to keep him from being elected again. It’s the same ruse they pulled on Roger Stone and others.
The globalists are desperate. They are lashing out.
18. March 2023 at 08:12
“Banks can now bring this impaired collateral to the Fed and get cash to meet deposit outflows, but the Fed charges the short-term market rate, which is closer to 4% or 5%.”
BAGEHOT’S DICTUM: the central banks should lend early and ‘without limits’ to solvent firms at a ‘higher interest rate’ with ‘good collateral’.
But Volcker did the opposite. “In 2002, the Federal Reserve began to set the discount rate above the federal funds rate, reversing its previous practice of keeping the discount rate below the funds rate.”
18. March 2023 at 08:18
“I’m glad to see, upon reading on, that Prof. Summers explains himself in the comments. Still, I was taken aback upon first seeing this tweet by him attributing SVB’s troubles to its having done what all banks always do!” George Selgin
Never are the commercial banks intermediaries in the savings-investment process. From the standpoint of the commercial banking system (the payment’s system), every time a CB makes a loan to, or buys securities from, the non-bank public, it creates new money – demand deposits, somewhere in the banking system. I.e., deposits are the result of lending – not the other way around.
All bank-held savings are lost to both consumption and investment – i.e., until their owners, e.g., invest them directly or indirectly via non-bank conduits.
18. March 2023 at 19:23
Yes, the US was also unreliable after signing the nuclear deal with Iran, in failing to defend the red line against chemical weapon use in Syria, in principles and logic concerning its publicly stated desire to have Ukraine and Georgia join NATO in 2008,in the logic and legal rationales for invading Iraq,…
There are so many examples that support the notion that the US is not only an unreliable partner in treaties, and increasingly morally, strategically, and tactically unprincipled, but also politically unstable. The latter is part, but only part of the reason why NATO members shouldn’t trust the US too much. The mere fact that Trump was elected President is enough to greatly undermine confidence in the US.
19. March 2023 at 06:26
Yes, but the rise to 3.5% was lightning fast! Like 12 months? How can we expect a large bank to be able to adjust to a change that averaged almost 20bps per month! Lol.
19. March 2023 at 08:03
Michael, Good point.
Bill, Yes, some people didn’t live through the early 1980s. 🙂
19. March 2023 at 11:54
The difference between principles and opinions is that you hold to principles when it’s against your interest.
19. March 2023 at 13:57
Scott, if the FDIC limit were credibly set to $10,000 we’d quickly end up with half a dozen banks in the US. Depositors, bond holders and equity holders would flee everyone not Chase, BoA, Citi and a few others. The macro effects would not be pretty.
20. March 2023 at 01:28
According to Richard A. Werner:
“Ultimately the central planners maximise their power by introducing CBDCs. . . .
It is concerning that for the past decade or so central banks have steadily been working towards the introduction of CBDCs, while at the same time adopting policies that have killed thousands of small banks.
Once CBDCs are introduced, it just takes a bit of bank run, such as in the case of Silicon Valley Bank, and all deposits will be shifted to the central bank, driving banks out of business. Then we will have arrived at the most centralised form of banking: A Soviet-style economy with only one bank.”?
https://professorwerner.org/should-banks-be-allowed-to-fail/
20. March 2023 at 06:47
re: “if the FDIC limit were credibly set to $10,000”
You do that in increments and in conjunction with gradually driving the banks out of the savings business (which doesn’t reduce the commercial banking system’s size).
Savers never transfer their savings outside the payment’s system, unless they hoard currency or convert to other National currencies, e.g., FDI. The NBFIs, e.g., MMMFs, are the DFI’s customers.
20. March 2023 at 07:15
Atlanta gDp now’s latest estimate: 3.2 percent — March 16, 2023
N-gDp is still too high. And Dr. Philip George’s corrected money supply confirms this (“The Riddle of Money Finally Solved” – the ratio of M1 to the sum of 12 months precautionary savings )
20. March 2023 at 07:17
@postkey
Then Bitcoin would be the preferred currency.
20. March 2023 at 07:26
SVB and Signature failed not because of a loss in value of the bonds they held, but for their own unique reasons: SVB failed because several leading lights in Silicon Valley implored their venture capital friends and the tech companies they fund to take the money and run, and Signature failed because it was a crypto focused bank. Both banks had solid customer bases, but rumors spread rapidly and broadly on social media triggered bank runs. I’d be less worried about the value of bonds than I would about how social media can amplify rumors and trigger a run on banks that have solid customers bases.
20. March 2023 at 07:52
It’s counterintuitive. You raise deposit insurance for the smaller banks and lower deposit insurance for the larger banks.
20. March 2023 at 08:13
Monetary Tightening and U.S. Bank Fragility in 2023:
Mark-to-Market Losses and Uninsured Depositor Runs?1
March 13, 2023
Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676
20. March 2023 at 08:15
Rayward, I’d put it this way. The losses on the asset side were a necessary but not sufficient condition.
In any case, there’s no point in handwringing over specific mistakes. We built the system to produce these results, and it will continue producing these results until we fix it. (And no, Dodd-Frank didn’t fix the problem.)
20. March 2023 at 11:25
Jon Stewart. This has GOT to be the worst attempt to dunk on Larry Summers I’ve ever seen!
https://www.youtube.com/watch?v=tU3rGFyN5uQ
https://www.youtube.com/watch?v=SHUUTpxmzxA
20. March 2023 at 18:51
It’s not as if we lack examples of European banks failing spectacularly, and issues dealing with mostly-fraudulent dealing of those banks with investors. The Spanish banks told grandmas that their AV1 stock was really a bond, and wiped them out. Either way, Banks are important enough that the regulations will always change when something big enough happens. We’ll see how many pensioners’ investments get wiped out by the CS failure.
With SBV and its ilk, or real risk is bank-like entities that are holding on to people’s money, but are not regulated like banks. Rippling holds on to your payroll money for a window of time. Their treasury is bad, and a bank or two they use blows up. Rippling becomes insolvent, they lack sufficient insurance, and it’s companies 2 levels removed that lose their payroll money, and wonder if they can take it, or they have to close.
You can draw the same picture on a variety of marketplaces: Stripe does payments, and in the wrong day, might have, say, 8 billion in their treasury that doesn’t belong to them: All liabilities. But they aren’t a bank: the money is ultimately in commercial banks. Keeping 8 billion properly managed and insured seems hard, and the regulation for companies like that is nowhere near that of a bank. So if their treasury management fails, and a bank under them fails, people might get very upset.
Ditto for, say, Amazon, Etsy or anyone like that. They might seem like retailers, but today they are marketplaces, holding on to a lot of short term cash deposits, siting on banks, which rely on regular private banks. Hit those companies, and it’s really hard to for a government to not break rules to make the companies whole, which makes depositors whole.
Limiting FDIC insurance is a perfectly sensible idea, but then those kinds of companies better be able to bank at the Fed. Otherwise we’ll see everyone banking in the top 5 banks, knowing that if those banks fail, rescues are unavoidable.
20. March 2023 at 21:09
I never understand the “But how can we expect a business to…” arguments like bill’s. The return from the business is predicated on the owners assuming risk. Is it every country where business owners feel like they deserve return without risk, or just America?
21. March 2023 at 05:10
A headline to warm the cockles of Scott Sumner’s heart:
BANKS
‘A financial banana republic’: UBS-Credit Suisse deal puts Switzerland’s reputation on the line
CNN
—30—
Come Mr Banana-Man come tally my bananas
Day is breaking and I want to go home
Yes, we have no bananas.
Bananarama tunes?
Tomorrow’s Headline: Chiquita Buys Controlling Stake in Swiss National Bank
21. March 2023 at 06:21
“After everything that’s happened over the last decade, it’s hard to believe that Europeans would trust any commitments made by US policymakers. And yet…”
Ukraine.
21. March 2023 at 09:01
Travis, Yes, Stewart’s arguments are pretty weak. Check out NGDP growth.
Bob, You said:
“Otherwise we’ll see everyone banking in the top 5 banks,”
That’s my dream, but it will never happen.
21. March 2023 at 12:52
“Our policy is completely, 100% unprincipled. We state broad principles, and then in the moment we do whatever is politically expedient.”
Yes, but this isn’t new to the US. I don’t see it as a sign of the US becoming more like a Banana republic. We may very well be on our way to becoming one, but the hypocrisy of US policy is not evidence of it – US policy has been filled with hypocrisy for decades.
Politicians talk up the dangers of moral hazard from bailouts, yet the Obama/Bush administrations bailed out the financial and automotive industry in 2009 and now the Biden administration bailed out commercial depositors in 2023.
Our politicians lecture other countries about the benefits of free trade, yet Bush II, with broad support, slapped tariffs on steel from Europe and China. Reagan demanded export quotas on Japan.
When it no longer suited us, we abandoned Bretton Woods and went to a floating exchange rate system.
We proposed that other nations should join the League of Nations, but didn’t join ourselves.
We want war criminals prosecuted at the Hague, but make special exemptions for our military/politicians.
Invading other countries that haven’t attacked you is wrong unless we do it, which he have been doing at least since the Mexican-American War.
The list goes on. I’m not trying to argue Chomsky-style that the US is uniquely evil. It is not. All countries behave this way more or less if they have the power to. All I’m pointing out is that I don’t think that US hypocrisy in its policies is a good measure of whether we are becoming a banana republic.
(A bit of an aside, but as much as I despise Trump, in some ways, he is one of the most honest politicians we have ever had. Yes, he habitually lies about all sorts of things, but as a candidate, he was quite honest about what his thoughts were regarding free trade, immigration, NATO, etc.)
21. March 2023 at 17:44
Everyone at the top 5 banks could easily mean more political power and regulatory capture for those banks. What countervailing good would there be?
21. March 2023 at 18:28
BTW, David Henderson posts that inflation is already licked (almost).
He is not always wrong…
https://www.econlib.org/is-inflation-high-not-according-to-the-producer-price-index/
Worth pondering.
Sometimes I think 50% of America’s problems can be traced back to property zoning….and the rest to self-indulgent punks in the rival political party.
Would be nice if “libertarians” spent more time advocating the total abolition of property zoning…although it is a lost cause.
There are no libertarians when neighborhood property zoning is under review….
21. March 2023 at 21:58
MSS1914, Good comments, except about Trump. He was not honest as a candidate. He lied about his views on all sorts of things. For instance, he promised to pay off the national debt.
Foosion, The Canadian system relies on a few large diversified banks. It works 10 times better than our system.
Solon, You said:
“There are no libertarians when neighborhood property zoning is under review….”
Sad to see people keep repeating these false claims. Find a new ax to grind.
21. March 2023 at 23:41
“There are no libertarians when neighborhood property zoning is under review….”
You found one? Where?
I rephrase: “It is very rare to find a libertarian present when neighborhood property zoning is under review.”
Switzerland’s new national arbor symbol is….the banana tree.
22. March 2023 at 06:20
Scott,
My Trump comment wasn’t well put. Whereas many of our recent presidents proclaimed noble ideas but took very different, hypocritical actions, Trump’s boorish nationalism was on display from the beginning.
I know people that actually believed Bush when he claimed to be trying to bring peace and democracy to the middle east and I know others that genuinely believed Obama when he said he would bring about meaningful change in US foreign policy. All of them became disenchanted eventually. I don’t know anyone who thought Trump would be any different than the person he was on the campaign trail. He never pretended to be anything other than a nationalist who would pursue nationalist policies. In that sense, he presented himself more “honestly” than other Presidents have.
22. March 2023 at 09:45
Scott, at one point in this thread you say you think the FDIC insurance limit should be very low, like $10k. Elsewhere, in response to someone asking if that just means everyone banks at the top 5 banks, you say that you would welcome that situation.
I think there are a couple of problems with your position. First, while there is sort of this libertarian ideal of banks’ risk aversion being enforced by consumers/businesses avoiding risky banks and the risky banks then going out of business, it seems a little crazy to think that individual consumers and businesses are capable of doing this or that this is a good use of our time. What is ACTUALLY the mechanism that keeps deposits safe in a low/no-insurance regime, because I don’t think that “you will take the time to assess banking risks and avoid risky banks” is a reasonable answer. (Point taken that most people are smart enough to recognize some of the cryptobanks as too risky, but this is because most people recognize them as not being banks, so let’s set aside this edge case.)
My other question is what happens when one of those top 5 banks turns out to fail? Consumers and businesses, by this point, will surely just assume that the surviving banks are okay, and they also don’t have very many choices, so the usual mechanism of how to ensure deposit safety is not there anymore.
22. March 2023 at 11:23
Powell says banks are going to get more supervision and regulation and essentially admits they messed up in SVB.
He also notes that banks will be tightening credit, which would have the effects of a rate hike. FOMC: “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.”
22. March 2023 at 12:28
I know you don’t like fdic – but the depositors at SVB had the highest level of uninsured deposits at any institution which kind of discounts the moral hazard argument doesn’t it? The implicit guarantee above the fdic insured amount is suspect since I don’t they would have had a bank run if they thought it was implicitly guaranteed.
22. March 2023 at 15:52
Solon, “You found one? Where?”
I looked in the mirror.
They’re everywhere. Libertarian bloggers, think tanks, etc. Wake up.
Derek, I have a recent post on deposit insurance over at Econlog. Maybe I’ll do another.
Sam, FDIC is not the only problem. A lack of diversification is an even bigger problem.
BTW, How much loss did the SVB depositors incur? What does that tell you?
22. March 2023 at 16:42
“Europeans should know better”
If you are an American, I can partly understand the critical distance to your own country. In this way, an intelligent character demonstrates his independence, his ability to think and his ability to criticize.
Then again, I think: Shouldn’t it be phrased the other way around? How often has America really betrayed Europe? And how often has Europe betrayed America?
My subjective, German-European view is currently:
1) Europe has betrayed America much more often than the other way around.
2) America remains an exceptional, probably unique democratic project.
3) America has been consistently democratic since 1776 or 1789. Which European country can claim that? So again, who betrayed whom here and how often?
4) America is a unique empire that has never existed in this form before. The empires before were based on colonialism, imperialism, conquest, annihilation. Just think of the Roman Empire or the British Empire. America is the first anti-colonialist, imperialist project that simultaneously controls such an empire.
5) America often acts against its short-term, cynical interests. Instead, it is often about democratic values and human rights. Often without clear advantage to the U.S. and with massive American losses. This is also quite unique. Without America, we would all not exist in this democratic form.
6) So despite all the criticism: try to remain more objective. The American story of the “Shining City on the Hill” is very much intact and quite unique in human history.
23. March 2023 at 10:35
Thanks, I had not seen that econlog post. That said, I find you much more persuasive on monetary policy and NGDP targeting than on these banking issues. For example, I’m not very convinced that the metaphors on university/car quality translate as smoothly to banking as you would like; I think your position is more like saying that drivers will obviously just choose not to cross the river on faulty bridges and that they can evaluate bridge safety even though they are not engineers. Like a bank failure, a bridge failure is an extraordinarily costly event if you are on the bridge, and nothing really matters to you except this not happening. But car quality is much more of a gradient in how it matters, and we have many more data points on how car quality matters since banks don’t fail very often.
24. March 2023 at 10:42
derek, One thing that bothers me about this debate is that people treat a scenario with a lack of deposit insurance as an unknown. And yet the world has lots of experience, some quite recent, with banking systems without deposit insurance. We know how the public responds.
I am not imagining what would happen, I’m describing what happens.