Does America Have a Financial Crisis?

The internet and the airways are filled with news of banks failing. We learned last week that Silicon Valley Bank was shut down by the feds. A few days later, Signature Bank failed. Are these bank failures local problems, or are they the “canary in the mine” or a sign of worse things to come?

The Biden administration reacted to the bank failures in the same way that they always do. They threw money at it. Biden assured depositors that they would not lose their unsecured deposits, and the Federal Reserve launched a new program – Bank Term Funding Program – to create additional reserves for the banks. Biden claims that he stabilized the banking system. Ben Shapiro explained the problem as follows. 

To understand just why throwing money at the problem with the banks won’t solve the underlying issue, we need to understand just why SVB failed in the first place.

It failed thanks to three specific factors: from 2020 to 2022, the federal government injected more liquidity into the American economy than at any time in history, bar none; SVB, trusting that the liquidity would keep on coming, socked away a large among of the liquidity into bonds, which bore a low interest rate; the federal government, having now created an inflationary wildfire, had to count on the Federal Reserve to cut inflation by raising interest rates. Those increased interest rates made SVB’s bond holdings lower; when depositors, hampered by the lack of easy money, started to withdraw their cash, SVB had to liquidate the bonds at a loss, essentially bankrupting them.

So, what happened? Simply put, the federal government created a carousel of easy cash; investors thought the carousel would never stop; it stopped. Now, the federal government blames capitalism – and in the process, claims that by injecting more liquidity into the system, it will prevent capitalism from melting down the banks.

But instead, the federal government has created two new problems: First, the Federal Reserve has now given itself the unenviable task of simultaneously quashing inflation (which requires raising interest rates) and shoring up the banks (which requires lowering them and/or injecting more liquidity). Second, the federal government has created a new and massive moral hazard, whereby bank managers know that if they promise outsized returns to their depositors, they can gain their business – and worst-case scenario, the government will bail out the depositors anyway.

Now the experts tell us that the Biden team will achieve a soft landing, that it’ll somehow square the circle, lowering inflation while preventing bank assets from depreciating, incentivizing financial responsibility while simultaneously backstopping bad decision-making, and promoting fiscal responsibility while proposing $7 trillion budgets.

Shapiro and most clear-thinking adults understand that “No one has this kind of power.” This is particularly true of the team that “brought America four-decade-high inflation, the highest interest rates since before the 2007-2008 financial crash, and an ever-soaring national debt.”

The bumbling Biden administration has America standing at the brink of war, while at the same time facing a financial crisis in our nation. To use an illustration used by Shapiro, it is difficult to change one’s course after one has jumped off the ten-story building. “Biden and the economy are not immune to the forces of financial gravity.”