Yesterday, I wrote my first post in a while about the bank failures, government response, and the implications for real estate. In it, I wrote:
Now, every depositor at every bank in the United States is guaranteed by the FDIC and that $250K limit simply does not exist in practice. So if you’re Roku, and your moron CFO has left $487 million in SVB knowing that the FDIC limit is $250K… you’ll be made whole by the FDIC. I see no reason whatsoever that the same wouldn’t apply to some construction company in Iowa who left $25 million in the bank instead of doing basic treasury management stuff. What is the rationale for making Roku whole, but other rich people and companies not?
Events move fast. It turns out, I was wrong. The construction company in Iowa who left $25 million in the bank is actually screwed, quite unlike Roku which left $487 million in SVB.
Except that politics will now step in. Either that construction company is not screwed, or every depositor will be screwed. Given the nature of politics and politicians, I think it will be the former. But let’s think through this together.
The Lankford Revelations
This four minute or so video has been making the rounds all over the finance side of the Internet, because it is literally jaw dropping. The video is Senator Lankford of Oklahoma questioning Treasury Secretary Janet Yellen about the bailout of SVB and how that plays out for local banks in Oklahoma. Watch from about the 1:12 mark:
The question Lankford posed was a simple one: Will community banks in Oklahoma and their depositors get the same treatment that SVB and its depositors got?
The answer is stunning: No.
Yellen’s answer is that a bank only gets that treatment if a supermajority of the FDIC’s Board plus a supermajority of the Federal Reserve’s Board plus Yellen plus the President agree that there would be “systemic risk” if that bank’s depositors are not made whole.
Ah, so there are two tiers of banks in the American financial system now. There are the Privileged Nobility of banks who are “systemic” and whose depositors will be fully insured, and then there are the Peasants and Serfs banks whose depositors are not fully insured.
Naturally, if you have more than $250K in bank deposits, you will be moving your money to the Privileged Nobility banks. I wrote about that possibility in yesterday’s post:
Second, one possible (probable?) outcome of these moves is that the small banks and even midsized regional banks all go bust as people move their money to the TBTF (Too Big To Fail) banks. That’s great for those few big banks, but it’s not great for the economy as a whole and probably not great for housing either. Think about the mortgage market if the number of underwriters drops from dozens to four, and those four are the biggest banks in the country. Now apply the same logic to small business loans. Your local community bank might lend to some guy who wants to start a pizzeria; will JP Morgan Chase? This way lies economic recession… which many analysts are now predicting is closer than ever.
Lankford, given that he’s the Senator for Oklahoma and not SVB, naturally pushed back. He points out that this discriminatory policy will encourage large depositors to move funds to the Privileged Nobility banks. Yellen stutters, tries to dance around the question, but more or less concedes that depositors will do exactly that.
This is known as “saying the quiet part out loud” and should go down in history as one of the most important contributions that Janet Yellen has ever made to our country.
What Comes Next
Now the question is… what will Congress do about this. There are two choices here.
One, Congress can rollover and play dead and let the world know that Congress no longer exists as an important institution. The Executive branch decides to create two classes of banks, the Privileged Nobility and the Peasants, and Congress will do nothing about it.
Why even have Congress then? Plus, each individual House and Senate member has to go home to his or her constituents, including all of those locally very powerful bank executives, and tell them that they couldn’t do jack diddly squat and so sorry, but all of you are going to have to go bankrupt so that BofA and JP Morgan Chase can take over the financial system. Those Congresscritters won’t remain Congresscritters for long, so that do-nothing outcome seems unlikely to me.
There’s also this weird phenomenon that our Founders specifically thought of when they created the inefficient form of government that we have based on separation of powers: institutional jealousy. Democrats and Republicans in Congress go at each other’s throats all day, every day, until Congress’s own power and privilege are threatened… at which point they form a united front and attack the Executive branch or the Judiciary. And vice versa. No President in history of any party has ever allowed the other branches of government to intrude on his authority once he gets into office, even if he spent his career until getting into office trying to destroy the power of the Presidency. Congress will do something, anything, to fight for its own power.
Two, Congresscritters can start throwing their weight around and force the FDIC, the Fed, and the Treasury to treat all banks equally so that their local banks (which contribute to their election campaigns way more than BofA does) can survive.
That could either take the form of (a) not allowing the FDIC, the Fed, and the Treasury to bail out any depositor a la SVB and Signature, or (b) forcing the FDIC, the Fed and the Treasury to bail out every depositor at every bank. Since (a) means hurting big depositors (read as “big donors”), even in their local jurisdictions, that seems like too courageous a thing for Congresscritters to do. So it will be (b).
Third Order Effects
I will now take it as a given that every depositor in an American bank — even if a Chinese company or investor, as the Lankford video above proves — is fully insured by the United States.
Unless I’m completely misreading things (which is entirely possible), I can’t imagine why any wealthy individual anywhere in the world or any company of any size would use any bank that isn’t an American bank except for local currency transactions. If you are BMW, why in the world would you repatriate any of your dollars earned by selling cars to Americans back to Germany? If you deposit them into German banks, will the German government fully insure your deposits? Because the United States will fully insure your deposits in any US bank.
Action begets reaction. I think we all can imagine what the other nations of the world would do in response, especially once their wealthier citizens and bigger companies start moving money out of their banks to U.S. banks. Capital controls, fully insuring their own banks, banning US banks from operating in their countries, etc. etc.
The End of the World (aka, end of the Dollar reserve fiat money system) is a step closer. Because you cannot have global trade if nations are terrified of the U.S. hoovering up all of the money from their companies into U.S. banks.
Revising A Few Predictions
After watching that video, I have to revise the prediction I made about the United States ending up with a few Too Big to Fail banks like Canada. I think the politicians will not let that happen, because no matter what, Congresscritters are not elected nationally. They are elected locally. The local banks and local businesses will make sure that only those critters who promise to protect them would get into power.
I still think the 30 year mortgage is likely not long for this world because of the dynamics of what insuring all bank deposits means vis-a-vis the value of agency MBS guarantee… but there will still be hundreds or even thousands of local banks making mortgage loans.
In fact, once all deposits at all banks are guaranteed, I think it’s entirely possible that we see a real spike in mortgage availability. Local community banks should have far more free rein in making aggressive loans since their depositors are fully covered, and some of those loans will include mortgages. Those might be short-term 7/1 ARM or something, but they’ll be more readily available.
Which means home prices should march on steadily upwards since home prices are a function of money supply, and fully insuring bank deposits is as inflationary as fuck. We can talk about the fourth order effects from that development, namely political repression, in future posts.
Party on, people. But do prepare for that inevitable End of the World.