Subhead: The Worker opposes bailouts for rich depositors. Photo: Unemployment Center, Massachusetts
By Dr Robert Daly, PCUSA Political Economy Committee
March 22. The ongoing banking crisis that felled three US banks and Switzerland’s Credit Suisse in the past 12 days slowed today the rate of increase of the interest rates controlled by the Federal Reserve Board (hereafter, “the Fed”) in its fight against inflation. The Fed raised its key interest rate only one quarter of 1 percent (0.25%), as if it is testing the waters, before pursuing further rate increases, to see if this modest rate increase has a deleterious effect on the banking system. For inflation is far from tamed.
“The CPI [Consumer Price Index] for services inflation without energy services jumped by 7.3% in February year-over-year, the worst increase since 1982 and the third month in a row above 7%, according to the CPI data released today [March 14] by the Bureau of Labor Statistics.,”1 reports Wolf Richter. Inflation in services is accelerating, not slowing down. Even with today’s hike, the Federal Reserve interest rate stands at only 5%. That’s still lower than the overall rate of inflation (6.4%). To tame inflation, the Fed must raise its rate to above the rate of inflation. The Fed has to raise rates at least another point and a half to have any effect. But the core of US inflation is in services, for we are a services economy, and the rate of inflation in services is 7.3%. The Fed has work to do if it’s going to tame inflation.
But there’s a problem: Rising interest rates reduce the value of U.S. Treasury bonds held by banks, that the banks bought before the rates went up, because those bonds are compared to the newer bonds recently issued that carry a higher interest rate: When they try to sell their old bonds to meet depositor withdrawal demands, they lose money and the banks could become insolvent, as happened to Silicon Valley Bank (SVB), according to a Social Science Research Network research paper.2 In other words, the very fight against inflation makes some banks insolvent. As Sputnik said, “financial institutions have a significant amount of their assets in interest rate-sensitive financial instruments like government bonds and mortgage-backed securities. The Federal Reserve’s aggressive rate hikes have had a tremendous impact on these instruments by eating away at their value.”3 According to the Social Science Research paper, “Nearly 200 American banks face similar risks to those that led to the implosion and bankruptcy of Silicon Valley Bank.”
So, the US economy is now in the crisis predicted by The Worker last September when we wrote: “Watch the Fed raise rates higher and higher as inflation rages…But now the financial system is so interlocked, that if one bank or corporation fails, many more follow. So, the Fed might scale back its rate hikes before it tames inflation in order to avoid a financial blowout.”4 The Fed cannot fight inflation as hard and fast as it would like. It is no longer talking about “ongoing rate increases.” In response to the recent crisis, the Fed has entered a “new regime: tightening monetary policy while providing liquidity support for banks,” says Richter.5 The European Central Bank is following the same policy. Richter compares this to “stepping on the brake with one foot and putting an arm around the baby to keep her from hitting the dashboard.”
As part of its policy, the government is orchestrating a bailout for millionaire bank depositors, and this we must oppose. (No bailout is needed for small depositors like you and me, for our deposits are insured by the Federal Deposit Insurance Corporation.) For example, Silicon Valley Bank was a bank for millionaires. Ninety percent of their depositors had over $250,000 in the bank, which is the limit for insured deposits. Senator James Lankford said on the senate floor, “That’s not normal!” Now the government is expecting small banks across the country to pay a special fee “to bailout a bank for millionaires in San Francisco,” said the Senator. Another problem is that new government policies are protecting big depositors in big banks, but not in small rural banks, so that government policy is encouraging big depositors in small banks to shift their funds to large banks, the Senator pointed out to a nervous Treasury Secretary Janice Yellen in a hearing March 21. Despite what he said on the Senate floor, Lankford now seems to want a bailout for big depositors in rural banks as well.
The Worker opposes any bailout for large depositors and the enactment of any bank bailout fees. Dishonest, speculative gains should be wiped out. Most of those who have been calling for interest rate cuts are either speculators, e.g. the disgraced former Lehman Brothers vice-president Lawrence McDonald,6 or government officials from the hoopla of banking deregulation (1980 to 1999). These are the people who rode the expanding balloon of the US money supply ‘under the Fed’s outrageous “Wealth effect” policy,’ as The Communist 2022 issue explains. Such was SVB, for Fed chair Jerome Powell called that bank “an outlier,” that is, they engaged in speculation in volatile assets and other activities that used to be barred by the Glass-Steagall Act which the drive for deregulation repealed in 1999. SVB’s depositors benefited from the bank’s casino banking. No need to bail them out. Bring back Glass-Steagall! During this crisis, many people are buying gold to protect themselves and their families if there’s a crash.
1 https://wolfstreet.com/2023/03/14/services-inflation-rages-at-four-decade-high-sticky-entrenched-fueled-by-rents-auto-insurance-repairs-airfares-hotels-pet-services-food-services-delivery/ “Month-over-month, core CPI jumped by 0.5%, the third month in a row of acceleration, driven by raging inflation in services.”