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Have We Failed?

May 16, 2023
Our economic structure once promoted participation in order to establish stability and fuel grow. Now, the goal is to minimize instability by enforcing compliance.

There was a reason that 19th and 20th Century banks were built to resemble Greek temples, emblems of permanence, seats of probity, repositories of certainty and trust. Bankers wanted depositors to have confidence in the services they provided, and to assume a similar responsibility in the conduct of their own lives and businesses. That was then. Today, those surviving temples are repurposed as hotels or food emporiums, and banks apparently prefer that we contact them only electronically, remotely. They are apps, not institutions.

So what does it mean when such a bank “fails”? The banking sector seemed to be holding up fairly well during the past decade, its prime directive seeming to be “stability,” despite the federal government’s determination to pump unimaginable volumes of “money” into the economy over the past three years. The recent spate of banking collapses (total losses of $548.5 billion since March 1, including the two largest bank failures in U.S. history) are explained as the consequence of banking customers withdrawing their accounts. Those customers apparently have some serious anxiety about the stability of the system.

The history of bank failures is part of any basic grasp of how U.S. society “works.” Knowing how and why the 1929 Crash and the 1933 Bank Holiday happened is part of understanding the relationship of our financial system and our regulatory state – which is necessary to understanding our position as both citizens and consumers. Bank failures are anomalies, we were meant to understand. How they are resolved is more proof of our system’s strength. They reassured us because they wanted us to return, with our deposits and home loans. Knowing that the banking system is sturdy and reputable, and that the regulatory safeguards are effective and transparent, encourages consumers/citizens to emulate those qualities. And that keeps the economy growing steadily and safely.

And while the explanation for the banking failures in recent memory seem to point to irresponsible behavior by banks and their customers, they are most memorable for how they were fixed – with the U.S. Treasury Dept. and Federal Deposit Insurance Corp. expanding their regulatory control over the system and expanding the risk of failure over more and more of the system. A wave of failures at savings banks in the 1980s was blamed on poor asset management and dicey lending practices. FDIC folded S&Ls into the asset-insurance coverage.

Similarly in 2008, the unraveling of “money center” banks revealed a system built to reward risk and expedite profits more than to build trust and breed stability. The U.S. Treasury Dept. absorbed the losses and handed the remaining assets over to surviving banks – and seemingly no one was punished for the failures. The resolution seemed to reward the audacity (or irresponsibility) of the banks.

Which brings us back to the present moment. Note that there were no U.S. bank failures during 2021 or 2022, but in the space of two months there have been three of them. What conditions led to those failures? And what role, if any, is played now by individual borrowers in the banking system? Can individual borrowers truly be responsible for a $209-billion loss at Silicon Valley Bank, or a $229-billion loss at First Republic Bank?

It seems apparent that the Treasury Dept. and FDIC, and the banks that are taking over the assets of the defunct institutions, are determined that we should not draw any particular conclusions about these developments. As in the past, we should draw assurance that the “problem” has been addressed.

Presumably, then, they expect the consumer/citizen to accept that it’s normal for federal authorities to close up a bank during the Saturday/Sunday off-hours and hand those assets to institutions that are slightly more liquid. It’s comparable then to a merger of airlines or retail chains.

If that is the message, then the banks and the regulators no longer view banking customers as relevant players in the sector. The consumer/citizen is not a valued part of the economic structure, they are indicating, and not anyone to whom a justification or resolution is owed. As in the airline and retail sectors, every interaction is a transaction. They may describe it as a relationship, but it’s an incident.

The institutions that formerly worked to earn our trust simply want our business. If that’s so, then more than banks have failed.