You’re probably hearing a lot about U.S. banks in trouble and failing. That after three of the four biggest bank failures in U.S. history. This past week it was First Republic in San Francisco. And all of this with America’s bank regulators working nonstop behind the scenes to avert financial crisis. It leaves us asking how this could happen after so much money and effort spent over the last 100 years to avoid calamity. Today’s cover story is Fear, Itself.
The first ingredient in the current recipe for banking disaster is America’s record-shattering surge in inflation. Food prices up more than 11% in a year. Key items like eggs up 40%. Energy prices inflating a remarkable 41% last summer. Add to the mix the actions that America’s money regulator — the Federal Reserve — took to counter the inflation, raising interest rates over 1,700% in a year. It’s a toxic combination for many banks because of their investment choices.
For views on exactly what’s happening, we hear from two members of Congress on the House Financial Services Committee.
Democrat Jim Himes:
Rep. Jim Himes: The really important headline is that the banking system is safe.
And Republican Warren Davidson:
Rep. Warren Davidson: You’re seeing the consequences of bad policy decisions.
We start with the March failure of California-based Silicon Valley Bank. Here’s one of its seminars held online last fall.
Silicon Valley Bank video: At the most basic level, Silicon Valley Bank, we bank tech companies, but we also love to do so much more than that.
Because of Silicon Valley Bank’s investment choices, rising inflation and interest rates created billions of dollars in paper losses. On March 9, anxious customers withdrew $42 billion. $100 billion more was scheduled to go out the next day, until regulators closed the door.
Himes: Silicon Valley Bank had some very unique features. It was largely venture capital money, it was a very kind of incestuous group of people that got talking together on the message boards and all decided to withdraw their money at once. That's called a classic bank run.
Warren Davidson: Anybody that watches the Christmas movie "It's A Wonderful Life" knows that, you know, the whole fundamental of the banking system is a lot of that money gets lent out. So if everybody comes and wants their money back all at once, it creates almost an impossible situation. Things stay stable as long as no one panics. But once everyone runs for the doors and says, "I have to have my cash now," it really can be destabilizing to the banking system that we have.
Documentary: And the crash of 1929 turned into the Great Depression.
More than 9,000 banks failed from 1930 to 1933. Americans rushed to withdraw their money, but about one-fifth of customer cash was lost forever.
Documentary: Savers all panicked and rushed to get their savings out, often in vain.
The dynamic inspired one of the most famous lines in American history, spoke by President Franklin Delano Roosevelt at his 1933 inauguration.
President Roosevelt (March 4, 1933): The only thing we have to fear is fear itself.
That same year, Congress created The Federal Deposit Insurance Corporation. The FDIC insures up to $250,000 per depositor in member banks to lessen the odds of customer panic.
But most of Silicon Valley Bank’s deposits were way more than $250,000 and unprotected.
Himes: Silicon Valley Bank had folks that had deposited many, many millions of dollars, in some cases billions of dollars.
Same with New York-based Signature Bank, which was shut down two days later. And the newest closure, San Francisco’s First Republic.
And the promise of protection for deposits up to $250,000 was also unable to avert the savings-and-loan crisis from 1980-95, born of skyrocketing inflation and, again, the banks’ investment choices. More than 2,900 banks failed, with assets of more than $2.2 trillion.
Rep. Leon Panetta (Congressional Hearing, January 26, 1989): This crisis is a major economic and budgetary threat. It threatens the future of the housing finance system. And above all, above all, it causes people to doubt the safety of financial institution deposits.
Next, from 2007 to 2014, a mortgage and financial crisis took out more than 500 banks, with assets nearing a trillion dollars. That included the largest bank failure in history: Washington Mutual. And Congress passed a $700 billion plan to bail out big banks at taxpayer expense.
Documentary: Bear Stearns was forced to take an emergency loan funded by all of us.
Documentary: President Bush tried to make light of a grim situation. "Seems like I showed up in an interesting moment."
If public confidence is key to avoiding panic and financial chaos, it doesn’t help that today’s regulators have proven shockingly wrong, says Davidson, the Republican. He and many others warned three years ago that mass government spending was causing a critical inflation problem.
Davidson: Some people in the administration, some people in the Federal Reserve, some people in the Treasury said it wasn't. Well, they know that it was, and it did. And then they said, "Well, it won't hit consumers." Then it did hit consumers. And then they said, "Well, it's going to be transitory." And it clearly isn't transitory. So, then, when the Fed finally acknowledges it's not transitory, they start raising rates very rapidly.
The Fed, or Federal Reserve, is supposed to help avert fiscal crisis by managing interest rates, inflation, the money supply, and supervising banks. But the head of the Fed, Jerome Powell, and Treasury Secretary Janet Yellen wrongly insisted the inflation spike that started in 2021 was just temporary. A year later, Yellen admitted she was wrong.
Janet Yellen / Secretary of the Treasury (CNN, March 31, 2022): Well, look, I think I was wrong then about the path that inflation would take.
Sharyl: It's hard to have confidence in the same people who have been very wrong about important things in the past.
Warren Davidson: Yeah, not just Secretary Yellen, but Chairman Powell and most of the Federal Reserve Board of Governors.
Both of our experts agree that record government spending is a driver of the troubling inflation. But they disagree on blame.
Himes: I would say, yes, coming out in order to make sure that people didn't starve to death, that businesses didn't go under, the federal government spent an enormous amount of money — $6 trillion — over the course of the last four years. When the Republicans say that's a Democratic problem, baloney! Two-thirds of that was spent under President Trump. If they try to make Democrats out to be the big spenders, the deficit under Donald Trump was absolutely record-high deficits.
Today, experts warn that many U.S. banks have problematic investments similar to Silicon Valley Bank and won’t be able to disentangle themselves overnight. Leaving us with one sentiment from the bank runs of the 1930s: the biggest thing to fear might be fear itself.
Himes: So long as you don't have more than $250,000 on deposit in a bank, up to $250,000, your deposit is guaranteed. So if you're worried about your bank, you don't need to go withdraw those deposits.
Davidson: The good news is, for the vast majority of Americans, their deposits are safe. They have a $250,000 Federal Deposit Insurance Corporation coverage for, you know, almost everyone in the country if they have less than $250,000 in their account or in any one account. Right? And so, when you have deposits at banks, that insurance is the government saying, "Look, even if something bad happens, and the bank fails, we will give you your money.”
Sharyl (on-camera): To put a lid on panic that could have spread to the whole country, the federal government stepped in and insured deposits above $250,000 at the failed banks. Critics argue that bailed out rich businesses, and encourages risky behavior by other banks.