I may have been myopic about my initial interpretation of the goings on at Silicon Valley Bank (SVB). I misread several critical clues. While SVB was not liquid, they were also not insolvent. There was no credit crisis. The bank was not making a lot of risky investments. The long-term treasury bills they invested in are usually considered safe. However rising interest rates from the Fed lowered their value making them a liability to sell short-term. Why SVB did not have a plan in place to offset this strategy is unclear. SVB’s clientele of tech startups and venture capitalist firms have strong financial potential which may be part of the reason why their assets at the bank were guaranteed by the FDIC. Their assets could be moved in whole to larger banking institutions without major loss.
Signature Bank was shuttered with $16.5 billion in crypto-related client deposits. The inexplicable crash of FTX shocked a lot of people because so few really understand what happened or what it will mean. There may be a desire among the established financial system to bring Crypto currency under control. Fear surrounds big tech and crypto due to their size, influence, lack of transparency, and lack of meaningful regulation. A desire to bring these entities under control is understood. They are growing rapidly and their impact on the economy and society is still being discovered. They represent a blessing and a threat to the economy. Due to their size they can quickly sow instability. Big tech has been before Congress to explain accusations of monopolistic practices, censorship, data privacy, the lack of will to weed out bad actors who want to influence democratic processes and plan domestic and foreign terror. In July and November of 2020 Congress had Big Tech give testimony.
Centralized Banking
Could economic stability be attained through centralized banking from the Federal Reserve? The failure at SVB may have helped to create an opportunity to test this theory. The potential closing of community banks as depositors move their money to the “safer,” large, too-big-to-fail financial institutions, now back stopped by the generous new FDIC plan, may help to influence depositors.
During a Congressional hearing the week of March 13, Senator James Lankford of Oklahoma, asked Treasury Secretary, Janet Yellen, if large depositors at smaller banks would get the same treatment as SVB depositors. She explained that not all bank depositors will be protected by the new FDIC limitless funding policy. The decision for which banks will be allowed to participate is up to the Treasury Secretary, the President, and a super majority of the board of the FDIC, and the Fed Board. Only banks deemed too-big-to-fail will be included. Senator Lankford is concerned about the collapse of community banks as large depositors are encouraged to move their money to a larger bank that has the new protected status of the FDIC. He is concerned about the concentration of banking in the hands of a few institutions selected by the Fed. Banks are already consolidating, and this new FDIC policy would help hasten the process, aiding the probability of centralized banking.
Central Bank Digital Currency
March 9, 2022, President Biden created an executive order for the Fed to begin analyzing the probable effects of deploying a government-wide Central Bank Digital Currency (CBDC). The Board of Governors of the Federal Reserve System are studying the possibility now. CBDCs would help make it so much easier for the Fed to control an economy with fewer banks. Inflation would be less of an issue if you were able to control spending in real time with CBDCs instead of relying on interest rate manipulations. It takes time to see how effective the raising or lowering of interest rates. There is a time lag before the results show up in the economic system and tell you if things are working or if you have overshot your mark. Digital currency would allow for immediate analysis and replace the paper dollar and its costly production.
CBDCs can be both advantageous and disadvantageous. If the currency is mandatory and the U.S. becomes a cashless society, then there may be issues with privacy. All transactions are digitally tracked with data about the who, what, when and where of a purchase/transaction, and the amount involved. Potentially, your account can be frozen, or a transaction blocked instantly, if it is deemed unlawful or outside the established norms. For example, if it is decided that all birth control is illegal, then you could easily be kept from purchasing birth control items with CBDCs, and as the only means of monetary transaction, you would not have recourse. On the other hand, the ability to track transactions more easily may make detecting bribery and illegal sources of dark money in campaign donations. It could lessen money laundering. It could give the Fed better control over inflation with the ability to increase and decrease currency value almost at will and not have to wait months or years to see the results of the manipulation of interest rates. However, like everything else, this digital form of payment could easily be abused and used for control instead of encouraging an easier flow of currency. Congress must approve the use of CBDCs to the public sphere. The Fed is already rolling out the use of CBDCs within the government. The program is called FedNow. In July of this year the Fed plans to implement, a leading-edge payments system that will be used by the government to speed up and lower the cost of making payments and disbursements from the government. It will be easier to implement among the public if everyone is using the same small handful of banks.
There appears to be confusion about what is ailing our capitalist economic system. The system seems to be on life support and requires frequent interventions to revive it. Instead of getting to the root of the problem, we slap a band aid on it and continue hoping for the best. The disease it has comes with many symptoms that misdirect diagnosis. We believe by attempting to treat the obvious outbreaks, like bank failures and high inflation, we are curing the disease of income and wealth inequality. It has been with us a long time, ever since genocide and slavery were thought to be a sound foundation upon which to build a nation. We have the Constitution and desire a for democracy, but right now plutocracy rules. Great wealth is not shared but concentrated in the hands of a few. Its excess can be trickledown from the top when it is deemed appropriate.
The economy has been through a series of booms and busts since the 80s: the housing bubble that burst, the savings and loans bubble that burst, the dot com bubble that burst, and the mortgage-backed securities bubble that burst. The economy has been anything but stable apart from wages. According to the Economic Policy Institute, real median hourly wages for the U.S. worker has essentially been unchanged from 1979 to 2019.
July 1981 to November 1982, recession and 10.8% unemployment
July 1990 to March 1991, recession and 7.8% unemployment
June 2003, recession and 6.3 % unemployment
October 2007–2009, the great recession and 10% unemployment
April 2020, COVID-19 pandemic recession 14.8% unemployment
Central Bank Digital Currency is likely another band aid rather than a real solution. It may allow more control over the flow of money, but it also has the potential to allow for more control over people and their money. Plans to control people have always failed. Not one of them has worked so far. Hitler failed in Germany and Putin is failing in Ukraine. Success is temporary at best. It is not sustainable. Control based on fear eventually dissipates—fear that the banks will fail. Fear that some group is going to take jobs away. Imagine how much richer the U.S. could have been if it had fully allowed everyone to engage equally in the economy. So much potential wealth has been wasted by investing in systemic racism and classism.
I am not trying to guess the motives of the Fed. I don’t know what they are. If this is a sincere effort to improve the lives of the average American there may be a chance that centralized banking could be helpful. If the desire is to gain more control for the sake of maintaining the status quo, it will eventually fail.