Jay Powell kicked over a log, now everything's crawling out

The Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank announced tonight that the U.S. is going to loosen access to dollars for the rest of the world’s central banks, a repeat of a move made in 2009, also aimed at shoring up flagging confidence in the banking system.

It does feel like the contagion inside the system could be easier to contain than in 2008, because of how thoroughly the housing bubble and mortgage-backed securities had seeped into everything then. The toxicity this time seems to come from even simpler types of fraud, but it remains to be seen how pervasive it is.

Jay Powell hiking interest rates the past year is increasingly looking like a guy in the backyard kicking over a log, not prepared for everything crawling underneath. Think of quantitative easing and the loose money of the last decade as the rotting wood that hid and nourished a perfect ecosystem of corruption. 

If we look at the banks that have failed so far, we see a few common threads emerging, with fraud and Ponzi-like thinking at the heart of them. The question now will be how much of this toxic stuff there is tucked away inside other banks. If it’s largely isolated to the shadier side of the finance industry, the backstopping by the globe’s central banks might be enough to contain it. We’ll see. 

This week on Deconstructed I interviewed Damon Silvers, who was Elizabeth Warren’s deputy chair on the 2008 bailout oversight committee and has been active in the response to every financial crisis from Enron to this one. 

The story told so far about Silicon Valley Bank has missed some of its Ponzi nature. The bank specialized in making loans to startups that didn’t have any obvious way to pay them back, but had a decent likelihood of getting bought themselves by bigger companies as long as the easy money kept flowing. And SVB required those companies to keep those loans in SVB as deposits to be drawn down, which then allowed the bank to make even more loans off of the same money, and on and on.

It’s true that SVB was stupidly sitting on $120 billion in long-term Treasuries that lost value when interest rates jumped, but as one analyst, who writes on Substack and Twitter as Cryptadamus and who forecast the collapse of Signature Bank noted, they also held $61 billion in “other loan assets.”. Those are loans to tech bros and other super rich people who need liquidity. Federal investigators will learn more about those loans I hope, but they’ll probably find many of them were backed by things like crypto or NFTs or God-knows-what. What they were really backed by was the hope that more money would keep coming in, which is the essence of a Ponzi scheme. 

Signature Bank, on whose board Barney Frank sat, was taken over the same weekend as SVB, and had the same kind of loan operation going – not coincidentally run by former SVB executives. Signature was also heavily tied up in crypto, and it was also a favorite of clients who needed creative ways to move money, perhaps because they were running into trouble with sanctions, the DEA, or some other legal structure making their business inconvenient to run. The Trumps banked at Signature. 

It would not be a surprise that Credit Suisse would topple next. It has long held a reputation as one of the shadiest of the big global banks, willing to do what it took to find creative solutions to tricky client problems. UBS, no paragon of financial ethics itself, agreed Sunday to take Credit Suisse over to stabilize the global banking system. Ridding the world of Credit Suisse is probably a good thing.

We all know that since 2008, the bulk of the wealth gained has flowed to the very top. Crypto is only the most visible mechanism produced to move that wealth around the world outside the prying eyes of governments. And the U.S. government in particular has deployed sanctions in a much more aggressive way, producing in response an entire financial ecosystem aimed at dodging sanctions. We’ll find out over the next months and years just how much instability all of this has injected into the global financial system.

With Signature Bank folding, there are very few places left where you can trade crypto for dollars, with Cross River Bank in New Jersey being one of the last. The bank describes its mission as “[p]owering the future of financial services. We deliver innovative embedded payments, cards, lending and crypto solutions to millions of consumers and businesses.” Should be fine!  

This crisis also represents an extraordinary opportunity for the left. The global banking system in the ‘90s began breaking away from the state, and that has significantly increased economic instability, widened inequality, produced a new class of oligarchs, and fueled a populist response around the world. It has also made tax collection in many countries more difficult. This is a chance to bring the banking industry to heel. If the public is going to backstop even medium-sized banks like SVB and Signature, then we have a right to know what they’re doing so that we can enforce our laws. There’s no democratic system of government if the financial industry lives outside the law. 

And if we’re going to guarantee deposits at those banks, we risk basically nationalizing the banking industry but privatizing the profits and producing even more instability and recklessness. If bailouts are guaranteed – which they are now – then the only way to discipline banks is to personally make bankers liable for their mistakes. If executives blow up a bank, depositors should be made whole first from the wealth of the bankers until they’re bankrupt, then the public insurance can kick in. Get some skin in the game like that, and you’ll see a lot more sober banking decisions. 

Programming note: From now on, paid subscribers to this newsletter will get early, ad-free access to Counter Points, the morning show I co-host on Wednesdays with Emily Jashinsky. We produce about eight segments, a few of which are posted on Wednesday, then most of the rest roll out through the weekend. 

Counter Points is part of the Breaking Points network, which produces a daily, independent morning news show with two presenters, one left and one right, and we don’t really argue as much as offer different takes on the news. If you want daily ad-free access to the show, it’s $10 a month (and includes Counter Points). 

On Wednesday morning, I took a look at the origin of the 2014 Ebola outbreak, and you’d be surprised to learn how much of an open question that remains, particularly after a virologist confirmed last week there was indeed Ebola research going on in a lab near where the outbreak started. The segment posted this evening.