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**MAY 8, 2023**
Kuttner on TAP
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**** The Silver Lining in the Latest Bank Panic
The run on regional bank stocks will bring tighter regulation and lower
interest rates.
The late Hyman Minsky was one of my favorite economists because of his
warning that capitalist economies, absent stringent regulation, are
chronically vulnerable to financial collapses
<[link removed]>. Old lessons are forgotten
in the euphoria of new fads, which invariably end in crashes.
The lesson of the Crash of 1929 was so potent, and the New Deal's cure
so effective, that it took half of a century for the lesson to fall into
the national memory hole. But beginning in the 1980s, new schemes such
as leveraged buyouts, which had not been anticipated by New Dealers,
were tolerated by Reagan's anti-regulators.
In the 1990s, Bill Clinton gave a free pass to credit derivatives and
subprime loans. It took until 2008 for the pyramid to come crashing
down. In that crisis, the Fed was culpable for keeping money too cheap
and regulation too light, a combustible combination. When the house of
cards gets shaky, investors head for the exits and the crash feeds on
itself.
The latest impending disaster is an instructive variation on the theme.
It's a different sort of bank run, one caused by a run not on bank
deposits but on bank stocks.
The collapse of three badly mismanaged and poorly regulated regional
banks, Silicon Valley Bank, Signature Bank, and First Republic Bank,
caused financial speculators to bet against other regional banks whose
balance sheets are basically sound. Last week, the value of the stocks
of PacWest, Western Alliance, Zions, and Comerica swung wildly
<[link removed]>,
as speculators bet on their collapse, then reversed their bets.
A collapse of regional banks could become a self-fulfilling prophecy
caused by speculation. And the technique that the speculators used,
short selling, is itself a plague that the Roosevelt administration
tried and failed to ban.
In the run-up to the 2008 collapse, the Fed was culpable for keeping
interest rates too low. This bout of financial instability has been
exacerbated by the current Fed's stubborn determination to keep rates
much too high, which reduces the value of securities held by banks, and
also weakens the real estate sector, adding to the stress on banks.
There are two silver linings to this mess.
First, Fed Chair Jay Powell is now rethinking his obsession with an
inflation target of 2 percent, which led the Fed to raise interest rates
to the point where they threatened the solvency of several banks and the
economy. At the Fed's most recent policy-setting meeting, the Open
Market Committee signaled that it will soon cease raising rates.
Powell will have to live with inflation moderately higher than 2
percent. That will be good for both the banking system and for the
economy.
Second, Fed Vice Chair Michael Barr's April 28 report on the Fed's
grossly inadequate bank regulatory policies
<[link removed]>
is a rebuke to the regime of his Republican predecessor Randy Quarles
and to Quarles's crony and partner in weak regulation, Chair Jay
Powell. The report discredits and isolates Powell and gives Barr and
other regulators a basis for much tougher bank regulation going forward.
~ ROBERT KUTTNER
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