The turmoil caused by the U.S. banking crisis has subsided, but the debate continues in the public opinion about whether the U.S. government's involvement is appropriate.
On May 16, the former bosses of the bankrupt Silicon Valley Bank and the Signature Bank made their first appearance after the crisis, facing questions at a congressional hearing. Greg Becker, former president of Silicon Valley Bank, criticized that Silicon Valley Bank was crushed by rumors on social media, and the impact on the bank by the government takeover was devastating; Scott Shay, the former chairman of the board of Signature Bank, also expressed displeasure with the regulatory takeover, saying the move was incredible and unprecedented.
How do American financiers evaluate the banking crisis in the United States and the government's bailout? Fed continues to raise interest rates slightly after the crisis, proving that US banks have landed safely after the crisis?
American journalist Ben Norton recently interviewed American economist Michael Hudson on the above issues. Michael is a former Wall Street financial analyst, a fellow at the Levy Institute, and a special research professor in the Department of Economics at the University of Missouri (Kansas). The Observer Network translated and compiled this interview to help understand the logic behind this banking crisis.
Michael Hudson
Ben Norton: Hello everyone, I'm Ben Norton, a reporter for the Geopolitical and Economic Report. Today I have the privilege of having the authored American economist Michael Hudson discuss the banking crisis in the United States again.
In March, I invited Michael to discuss the collapse of three U.S. banks in just one week. At that time, Silicon Valley Bank, Signature Bank, and Silvergate Bank collapsed. However, the crisis continued, and a fourth bank failed. So it's necessary to get Michael back to talk about the latest developments.
In just two months, four banks in the United States failed. The latest example is First Republic Bank, which was recently taken over by JPMorgan Chase and was the largest bank failure since the collapse of Mutual Bank in Washington in 2008. We should say that this is the second largest U.S. bank to fail since 2008, and as Michael often says, many banks have actually gone bankrupt but not "allowed" to fail.
Now, First Republic Bank has $207 billion in assets. There are many similarities between this collapse and previous bank failures.
One of the similarities is that most of their deposits are uninsured. About 68 percent of deposits in First Republic banks are above the federally insured limit of $250,000, and $120 billion worth of deposits are uninsured.
Interestingly, compared to other banks, the depositors of the First Republic Bank were very wealthy, and many of them received long-term low-interest mortgages from the bank. For example, Zuckerberg, Facebook's CEO, has a $6 million mortgage at First Republic Bank with only 1% interest, which is very low.
Last time Michael explained that one of the reasons for the collapse of Silicon Valley Bank was that Silicon Valley Bank invested a lot of long-term bonds. The value of these long-term bonds has dropped significantly due to the Fed's violent rate hikes. So when there was a run on the banks, the banks had to sell the bonds that had depreciated in an attempt to pay depositors. But in the end, Silicon Valley simply didn't have enough money, so it went out of business.
First Republic doesn't have as much exposure to bonds as Silicon Valley Bank, but it does have long-term mortgages worth about $100 billion.
Now that JPMorgan is taking over First Republic Bank, JPMorgan has been given a private deal from which it is expected to earn $2.6 billion, according to JPMorgan reports. As part of the deal, JPMorgan Chase was not required to pay First Republican Bank's corporate debt, and the U.S. government-backed Federal Deposit Insurance Corporation (FDIC) agreed to a loss-sharing agreement.
Since the value of some long-term mortgages has already been lost, the FDIC agreed to cover 80% of the credit losses if JPMorgan Chase ended up losing money on mortgages and commercial loans. At the same time, it is estimated that the FDIC's deposit insurance fund will spend $13 billion on this.
In just two months since early March, the FDIC's deposit insurance fund has disbursed about $35 billion to bail out Silicon Valley Bank, Signature Bank, and now First Republic Bank.
These are some basic facts. This doesn't explain what's happening in the macroeconomy, but it does show an example of the U.S. government's bailout of private banks. While big banks like JPMorgan Chase are made billions in private deals, the Federal Deposit Insurance Corporation is bearing the cost.
Still, as Pam Martens and Russ Martens pointed out on Wall Street on Parade, JPMorgan Chase has actually been ranked by regulators as the riskiest bank in the U.S. as well. Therefore, allowing JPMorgan to take over the bank, which already has financial problems, would make the US financial system riskier.
I would like to ask Michael, how do you analyze this banking crisis, specifically the acquisition of JPMorgan Chase, its private dealings, the FDIC bailout, and the increasing concentration of big banks?
Michael Hudson: The entire U.S. banking system (the Fed report shows more than 700 banks, editor's note), like the banks you just mentioned, face solvency risk.
Surprisingly, all of this is dismissed as an unpredictable crisis. As Queen Elizabeth said when the financial crisis erupted in 2008, did no one detect problems in advance?
For the past 15 years, since I wrote Killing the Host, I've been writing articles and books about it that explain how this crisis happened.
The bankruptcy now goes back to Oba President Ma's plan and his Treasury Secretary Tim Geithner. Geithner appointed current Fed Chairman Jerome Powell.
When Oba's President Ma decided to bail out the banks after the 2008 financial crisis, instead of writing down bank loans to reasonable levels and saving ordinary households, victims of junk mortgages, he decided to join his predecessor, Bill Clinton, former Treasury Secretary Robert Rubin, to save Citibank and other big banks.
These big banks are still the most problematic banks, except that they have government guarantees, as Obama gave them at the time, and no matter how much they lose, they don't end up losing. No matter how much the bank's net worth loses, it is the economy, not the bank, that suffers.
In 2008 and 2009, when the Fed decided to help insolvent banks recover their net worth through quantitative easing, all of these problems were hidden.
The Fed created a $9 trillion balance sheet to support banks, allowing them to access loans at nearly zero interest rates (0.1 percent), and banks lent this growing liquidity to private Wall Street capital firms, which in turn bought up insolvent public companies and took them private. These insolvent companies borrowed money from banks to pay special dividends to their acquirers, leaving the company a shell for bankruptcy, like Bed Bath & Beyond (a major chain of old U.S. household goods stores that filed for bankruptcy protection on April 23).
As long as interest rates are almost zero and banks have virtually free credit, there will be a debt-fueled stock market boom, the largest bond market boom in history, and a housing boom. We've been talking about all these things for years.
So what happened next, under Mr. Powell's Fed? I call him Mr. Powell, a lawyer, who is not an economist, who is a lawyer who serves his clients, JPMorgan Chase Bank, Citibank and other big banks.
Since the outbreak of the epidemic, the US economy has experienced severe inflation and wages have risen, so they have to keep wages down to maintain stock profits to push the stock market up. So the Fed decided and announced that it would start raising interest rates from 0 to 4%.
Since March 2022, the Fed has raised interest rates 10 times in a row, raising them by 500 basis points.
When the Fed decided to make this public announcement, I discussed it with many investors. Everyone says the Fed is raising interest rates, which means that if we hold long-term government bonds, prices will fall. Everyone I know turns long-term bonds into short-term government bonds because they don't want to take on the cost of raising interest rates.
A mortgage that has been held for 30 years is like a bond held for 30 years, facing losses from rising interest rates. After the Fed raised interest rates, suddenly interest rates rose, but interest rates on long-term mortgages or bonds held by investors plummeted by 30% or even 40%.
If you are a bank and you have depositors, meaning that the bank's assets have decreased by 40% at the market price, what would you do if your deposits did not decrease? Almost all banks in the country have gone into negative equity because all banks offer long-term loans.
After the collapse of Silicon Valley Bank, Yves Smith said on "Naked Capitalism" that Silicon Valley Bank had just made hopeless mistakes in portfolio management. Imagine what would happen if Silicon Valley Bank, or any bank in the United States, converted its long-term holdings into short-term Treasuries, as I did with the investors I know.
They collectively dump 30-year mortgages or other long-term mortgages, which in itself collapses the price of 30-year mortgages.
Imagine if all the banks decided to dump their holdings of long-term Treasuries? The same would lead to massive bank losses and soaring interest rates on Treasuries, which they can do because U.S. finance and credit are privatized.
The crisis we are experiencing today is not the kind of crisis that China is experiencing. China's money, credit, and banking are all public utilities; In the United States, all this was privatized. Part of that is constrained by the balance sheet: What do you do if interest rates rise and the value of your assets falls, and your liabilities, the money you owe to savers, continue to remain high?
Some would say, why don't Silicon Valley banks and other banks simply come up with options to hedge?
In other words, if you predict a $100,000 mortgage that could fall to $60,000 in two years, you find a guarantor, and when the Fed raises interest rates to 4 percent, you can still go to the counterparty and say, I want you to continue to pay me $100,000.
So, how can you find such a fool who can hedge risks for himself?
Banks that sell derivatives, futures and options also read the newspapers, and they see that the Fed is talking about raising interest rates to 4 percent and reducing the value of banks' long-term bond assets to only about 60 percent. So they'll say, OK, you give us a $100,000 mortgage, but you have to pay $40,000 in insurance premiums. No one wants to take losses.
Despite the Fed's raising interest rates to 4%, banks were able to survive for a few years.
The bank said: "Well, there is only one way we can avoid facing the fact that our assets are far below our liabilities and we continue to pay 0.2% interest to depositors as long as the deposit does not move." We hope that our depositors are really stupid and stupid, acting with inertia, and maybe this inertia will save us.
But we have to put the really stupid people in charge of the Fed, who don't know that the banks are bankrupt. We already have Fed advocates, like Paul Krugman, who say that there is no problem with our banking system at all, everything will be fine; Our financial system is great and there is nothing to worry about.
As long as the Fed can say that there is no problem with the banks, they will continue to raise rates. They forget the fact that when interest rates rise, long-term mortgage and bond prices fall.
If this basic fact is ignored, savers will happily continue to earn their 0.2% interest, even though smart people have taken their money out of the bank and invested in government securities with a yield of 4%.
Now, I know a lot of people who have taken money out of the bank and invested it in two-year government bills or short-term money market funds, and they've made a 4% gain. One of the reasons Silicon Valley Bank and First Republic Bank failed was that their depositors were the wealthiest high-income earners.
These people are smart, and they know that when banks go negative, they run the risk of not being able to pay interest on their deposits. Then I'd better take my savings out now, they still want to make 4%, and that's what the Fed does for us, rather than keep putting in the bank and eating a low interest rate of 0.2%.
As a result, the Fed itself was in trouble during quantitative easing: by lowering interest rates to almost zero, the Fed had promised to bail out banks through the expansion of capital markets, but at the same time, banks' assets were rapidly depreciating and they faced the dilemma of being unable to repay depositors' interest. Now, finally, it is time to address the bankruptcy that Obama, Trump, and Biden were able to avoid earlier.
It's just an arithmetic problem that a seventh and eighth grader can do. After the rate hike, anyone who compares the current market price of a bank's assets to the purchase price of the asset can realize that the bank has lost 30 or 40 percent. Smart people would say, let's take the money out of the bank and make more money by buying government two-year notes or 10-year Treasury bonds to lock in high interest rates.
Long-term bonds held by banks are at risk of losing money due to rapid interest rate hikes
That's exactly what's happening now. The newspaper said: "What a surprise, who could have guessed?" ”
Of course, some depositors' funds ended up moving to takeover bank accounts like JPMorgan, because the government said that no bank depositor, no financial investor would suffer; We assure you that there will be losses in the economy, not in the financial sector; We assure you that we have to pay more to support the financial sector, and we are willing to cut Social Security, Medicaid, social spending; The banks cannot afford anything to lose, because for us politicians, they are our campaign donors, they are the people we really work for, they are the ones we want to protect, and that's the job of us politicians.
Surprisingly, not many people come forward directly to tell the truth.
To avoid contagion, the government would have to create another $9 trillion in quantitative easing to bail out these banks. The entire economy will enter not only what Mr. Powell calls a recession, but a deep depression.
Because as long as the government says no bank depositors will lose money, the government will pay. But someone has to lose money, who do you think it will be, the Biden administration or the next Republican administration?
In the end, the U.S. economy would suffer huge losses, a disaster for the Fed's mismanagement. The government and the media have failed to confront the fact that debt has been leveraged to an unsustainable point because the financial system managed by the Fed has been privatized and financialized.
If some investors, and even some economists, can realize how insolvent the banks have become, the best thing to do is run away with our money. It can be expected that the richest 1% will make a very large contribution to the 2024 presidential campaign.
Who will regulate regulators?
Ben Norton: Well said. Michael, I want to highlight the issue of regulator capture. You talked about regulators essentially working for banks. Ironically, as noted in Wall Street on Parade, JPMorgan Chase, which took over First Republic Bank, has been rated by regulators as the riskiest bank in the United States, and that this also violates antitrust laws.
First, the U.S. government is further exacerbating JPMorgan's risks; Second, antitrust laws stipulate that a financial institution cannot further expand and acquire other banks if it holds more than 10% of all insured deposits in the United States. Clearly, JPMorgan, as the largest bank, clearly owns more than 10% of the nation's deposits.
I want to emphasize this fact again: according to the Federal Deposit Insurance Corporation's documents at the end of 2022, the company's deposit insurance fund has $128 billion. In just two months, it has spent $35 billion bailing out Silicon Valley Bank, Signature Bank, First Republic Bank. Now we are seeing the crisis spread further.
So, who watches the watchmen and who regulates the regulators?
A First Republic Bank store in Manhattan, New York (March 13, 2023). Picture from Reuters
Michael Hudson: I think you're putting the blame on regulators, which is wrong. The problem is not that the banks control the regulators, they have seized the government, it is the government that appoints the regulators.
So you can't just blame the regulators, because if the government is captured by the financial sector, then they appoint new regulators who went to the same business school as their predecessors, who were brainwashed by the same neoliberal "Chicago School" economics, and who will do exactly the same thing as the previous regulators.
Regulators can only regulate within the existing legal system and the existing political system, they cannot change the political system, and the problem itself is systemic.
The existing financial system cannot survive in the way it is now structured because any increase in interest rates would bankrupt banks. And the government has said that we will not support local commercial banks or smaller commercial banks, they are not our campaign sponsors; We know who campaign donors are, Citibank, JPMorgan Chase and other big financial firms and private capital firms.
Therefore, the government announced that if you want to keep your money safe, transfer your deposits to five systemically important banks. "Systemically important" means that it is a bank that controls government financial sector policy in its own favor.
And you want to be part of a system where the banks where your deposits are located control who is elected to the government and who is appointed as Fed supervisors and various banking regulators.
This is what President Biden calls the key to American democracy, and he does not realize the semantic difference between democracy and oligarchy.
Is it an act of benevolence to inject capital into the First Republic Bank?
Ben Norton: Yes, that's a good point. We've mentioned Pam Martens and Russ Martens' Wall Street on Parade blog a few times, and they're so awesome that they didn't accept our interview. They recently published another article discussing the $247 trillion in derivatives risks faced by 25 U.S. banks.
They speculate that one of the reasons 11 major U.S. banks injected $30 billion into First Republic Bank in March was to try to bail out their own derivatives exposure. But at the time, this injection of capital was portrayed as a great act of benevolence to try to prevent the bankruptcy of the First Republican Bank. And they point out that the four largest banks that contributed the most to the rescue of First Republican Bank, namely systemically important banks, had a 58% share of the $247 trillion in derivatives, meaning they had derivatives risk worth more than $140 trillion.
That number sounds unfathomable, but what we can see is that the entire U.S. financial system is one big casino. And the entire US banking system is a bet several times the size of the US GDP.
So, I wonder, what might be triggered by the risks of these derivatives?
Michael Hudson: I described this in the preface to Killing the Host. Recall that when the Left Radical Alliance party (Syriza) was elected, Greece could not pay its $50 billion foreign debt.
The likes of Yanis Varoufakis, the incoming Greek finance minister, put a lot of pressure on the EU, saying you have to write down debt.
Yanis Varoufakis, former Greek finance minister
The European Central Bank is ready to write down the debt, and the head of the International Monetary Fund notes that Greek billionaires actually have $50 billion hidden in Switzerland to avoid taxes. The $50 billion could have been recovered by the government to pay off Greece's foreign debt.
At that time, Oba sent Tim Geithner, the President Ma finance minister, to Europe, and he spoke. He said to Europe, you can't let Greece default on these bonds, because U.S. banks are betting a lot on derivatives, and if they default they will lose money, and you Europeans will lose money too. This is how our democracy works.
So, the Europeans said, well, so that your American banks, that is, the donor banks that helped Obama President Ma campaign, don't lose a penny on bad derivatives, let Europe bear the loss.
This may be the most vicious of all the Obama administration's actions besides the destruction of Libya.
The debt crisis that occurred during the Left Radical Alliance government in Greece and the contagion of the crisis in Europe may also occur today, and on a much larger scale.
The job of the U.S. Treasury secretary is to protect big banks. Ms. Yellen has said that just as we supported a loser in Ukraine who couldn't survive, in the U.S. banking system, it seemed that we would support the loser who couldn't.
We will do whatever it takes to keep the big banks from losing money; Even if they had made a bad bet, that bet would have left them out and bankrupt, a bet that would have led them to be taken over by the Federal Deposit Insurance Corporation and transformed from a private bank into a government bank. We want to prevent that from happening, because that's socialism, and that's something we're against in the United States, just as we are against it in Europe.
So I don't want to generalize what kind of political system we are in, but the Treasury as a whole has been captured by the financial sector like the Federal Reserve.
Just now you mentioned the Wall Street on Parade blog, and I think Pam Martens was very clear when he introduced that balance sheets can be manipulated. When I had a question, I would call her and ask her to explain, and I found out that she was right. This site is the go-to site for observing Wall Street financial games.
So the entire U.S. economy is sacrificing because of these bad big bank gamblers. If their bet goes wrong, the Treasury will come to the rescue and say, even if your bet is bad, no matter what damage it does to the economy, we will save you no matter what. This is the hard iron fist of today's U.S. financial system that controls the economy.
Finance is like an economic parasite
Ben Norton: Yes, we see that this crisis in the U.S. banking system is spreading to medium-sized banks. The latest report shows that PacWest Bancorp is on the verge of collapse. In addition, the Western Alliance was targeted, and their stock fell very fast.
Back to Wall Street on Parade, which focuses specifically on short sellers. Short-sellers target these banks, they say, because they have the potential to be the next to fall and they want to make money by selling short.
Pam Martens and Russ Martens believe that the U.S. government is putting the stability of the financial system at risk by putting its own national security at risk by not stopping their short selling. So, what do you think of the argument that if these short selling practices are not stopped, they will help the US banking crisis worse?
Pam Martens and Russ Martens posted on their blog that Biden was ignoring U.S. national security by allowing short sellers to short risky regional bank stocks
Michael Hudson: It's kind of like asking the government to ban horse racing betting or digital extortion. Banks can always sell short, and if the U.S. doesn't allow them to sell short, they do so in the offshore areas of the Cayman Islands. Therefore, it is very difficult to reform.
Even a first-year business student knows what short sellers are saying. The government could certainly hire a business intern, or Pam Martens himself, to look at the banks, and if it finds any bank with negative equity, the government can take over immediately.
But the government will not do this, because they will say that this is socialism. And socialism, we used to call it democracy, now they think it's a bad word. They said, no, we have to let private industry take over. And private companies are gambling.
Most banks don't make big money if their interest spread income is as much as investment income. Banks benefit the most from derivatives, short selling and options trading.
As a result, the financial sector does not like to lend to industrialists to build factories and hire labor to produce more goods. The U.S. financial system is designed to provide loans to gamblers, because most of their benefits are earned by placing bets, which is the nature of the financial system. Speaking of the financial system as part of the economy is a myth created by our time.
Finance is like an economic parasite, using the government to grab money from the economy or use their own money creation to ensure that enough money is created to save wealthy financial institutions from losing money. Small financial institutions may suffer losses, but it doesn't matter to the government because big fish eat small fish, and small banks can be taken over by big banks.
So the logical end result is that if there were only four or five systemically important banks, the government would not let those banks fail, and no matter how much they lost, their money in those banks would not be lost. It's like saying, hey guys, take your money out of the local bank and put it in the big bank because they're still operating "healthy."
This is the message of the U.S. banking crisis. I don't know why newspapers and media don't come out and say it, or why the big banks themselves don't say it. Why didn't Chase put out an ad in The New York Times and The Wall Street Journal saying, "Notice how the government bailed us out?" Keep your money in our bank and you won't lose anything. This is a good advertising slogan, why didn't they think of this?
Ben Norton: I want to summarize by quoting JPMorgan CEO Jamie Dimon after taking over First Republic Bank. "There may be smaller bank failures, but all the problems are basically solved and the rescue of the crisis is over," he said. ”
JPMorgan wants us to know that we're past our worst and that the problem is largely resolved. What do you think of Jamie Dimon's judgment?
Michael Hudson: Starting with Silicon Valley Bank and other bankrupt banks, all banks have had the same problem.
All the banks have seen the market price of their mortgages and Treasuries fall so much that their losses are equal to their net worth. It's technically bankrupt, it's just that the government doesn't require banks to report the actual market price of their assets.
It's a secret. Because if people look at the market value of bank assets and their liabilities, they will see that they are worse than the average homeless person on the New York subway.
The truth is that we are still in the problem of a zero-interest rate trap of the Fed's own making. Any increase in interest rates leads to a collapse in real estate and bond prices, like someone gambling money at a racecourse or casino and losing money. If the government doesn't bail out the banks, they won't be able to pay back.
So Jamie Dimon would certainly say that everything is fine now. But that means he wants to tell depositors that keeping their money in the bank can safely earn 0.2% interest; Don't withdraw money to buy government money market funds or treasury bills, that's fine.
Educate bank depositors and the public to continue being fools so they will be fine. That's where the New York Times and The Washington Post, among other media, come in.
The best way to make the public fool when it comes to finances is to let them learn those stupid economics in college, as the Chicago School did. They don't look at debt issues, they don't care about balance sheet exposure. The problems of the U.S. financial system today do not appear in economic courses, which have long been considered essential to see how the economy works.
It's a mythical story, you could say it's some kind of superstition of our time, I don't call it a religion, although many banks look like temples in ancient Greece and Rome. It's just a superstition that the financial system is booming to help the economy, no. On the contrary, financial system crises show us how the financial system can make a lot of money from the economy by controlling the government, not just the regulators.
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