The Latest from the Prospect
 ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌
 
MAY 8, 2023
Kuttner on TAP
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. 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, 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 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
Everyone Thinks the Debt Ceiling Is Someone Else’s Problem
On today’s X-Date, the epidemic of buck-passing breaking out in the nation’s capital BY DAVID DAYEN
Senators Want Delay in Rural Letter Carrier Pay Program
The Democratic members are trying to stop implementation of a system that could cut worker pay by thousands of dollars. BY JAROD FACUNDO
California’s Legislature Made Prison Phone Calls Free—Utility Regulators Can Handle the Rest
On the heels of groundbreaking federal prison phone call legislation, public utility commissions across the country can also regulate exploitative prison telecoms. BY KALENA THOMHAVE
Writers Face a New Deadline: Their Industry’s Survival
This time, Hollywood’s striking writers think they may just win. Will cross-union solidarity be enough? BY DAVID DAYEN
 
Click to Share this Newsletter
Facebook
 
Twitter
 
Linkedin
 
Email
 
The American Prospect, Inc., 1225 I Street NW, Suite 600, Washington, DC xxxxxx, United States
Copyright (c) 2023 The American Prospect. All rights reserved.

To opt out of American Prospect membership messaging, click here.
To manage your newsletter preferences, click here.
To unsubscribe from all American Prospect emails, including newsletters, click here.