Bank Failures and the Threat to Your Money

The Covid Hangover

We’re living in truly extraordinary times. We find ourselves just a few years out from a global pandemic where we endured social distancing, masking, vaccine mandates, food shortages and dramatic changes to life, liberty, and our personal space. We had always heard about super bugs, killer flus, and contagions — but never imagined that we would come face to face with one. These types of things always seemed to happen ‘somewhere else.’

But as our hospitals overflowed, travel came to a halt, commuters stayed home, businesses were shuttered, restaurants closed up and cities shut down — demand shock, supply shock and financial shock took hold.

The Fed stepped in with emergency interest rate cuts and Washington unleashed an avalanche of stimulus money in the forms of loans, tax credits, and direct household payments. Slowly, economic conditions eased. We went back to work, to school and to the supermarket but by early 2022, inflation catapulted to a 40-year high as gas, food, rent, and energy prices skyrocketed.

Soon we were confronting declining wages, tech layoffs, slumping economic growth, war in Europe, a bourgeoning border crisis, soaring crime, mounting threats to the dollar — and a series of cascading bank failures that have haunting parallels to economic crises of the past.

It’s all About the Banks

On March 10, 2023, Silicon Valley Bank headquartered in Santa Clara, California with assets of more than $209 billion failed, making it the third largest bank collapse in U.S. history. More significantly, it became the largest bank failure since the financial crisis of 2007 to 2009. But not for long.

Just two days later regulators seized Signature Bank of New York after customers withdrew billions of dollars. The seizure of Signature Bank’s $110 billion in assets marked the fourth largest bank failure in U.S. history.

Then on May 1, 2023, First Republic Bank of San Francisco with assets of $212 billion was also taken over by regulators with much of its assets being sold to JP Morgan Chase. It became the second largest bank failure in U.S. history, second only to Washington Mutual which collapsed in September of 2008 along with investment banks Lehman Brothers and Bear Stearns.

This disturbing series of events brings back rough memories of banks runs, bail outs and market free falls rattling investors, retirees, and everyday savers.

NOTABLE: The 2023 bank seizures had more combined assets than ALL the lenders that collapsed during the start of the Great Recession!

Banks are critical to our financial system and when one fails, it triggers concerns about business funding and individual borrowing. When three collapse consecutively, it raises fears about contagions and chain reactions.

Let’s not forget, it was a series of consecutive bank failures that triggered the perfect storm of insolvency that led to the Great Depression.

According to History.com

“Without all that uncontrolled and irrational market speculation, the 1930s might be recalled simply as a period when the economy and prosperity stalled. But just why—and how—could those gamblers dominate the stock market? And why did a crisis in the markets become a systemic decade-long economic catastrophe where unemployment skyrocketed to 25 percent and the cost of goods and services plunged?

By 1933, a dozen eggs cost only 13 cents, down from 50 cents in 1929. Banks failed—between a third and half of all U.S. financial institutions collapsed, wiping out the lifetime savings of millions of Americans … in the eyes of such luminaries as Ben Bernanke, an economic historian and former head of the Federal Reserve, the crisis was all about the banks —from the central bank (the Fed itself), down to the smallest savings institutions.” https://www.history.com/news/bank-failures-great-depression-1929-crash

So, who’s Really to Blame?

After the Silicon Valley Bank collapse, President Biden attempted to quell investor fears by claiming that the banking system is safe. He further promised that his administration was “taking action to contain the collapse,” https://edition.cnn.com/2023/03/13/politics/biden-banking-speech/index.html/ but then a second bank failed and then a third.

Federal reforms enacted in the wake of the subprime mortgage crisis of 2007-2010 required banks to back their deposits with low-risk assets like government bonds. The value of those bonds, however, falls as interest rates rise and Silicon Valley Bank was sitting on billions of dollars’ worth of long-maturity bonds whose value cratered. When strapped start-ups and venture-backed tech companies started withdrawing their money, the bank had to sell its bonds at massive losses — resulting in insolvency.

NOTABLE: A growing number of experts now contend that government programs and bad monetary policy directly contributed to recent bank failures and other historic collapses.

Zachary Karabell, author of Inside Money: Brown Brothers Harriman and the American Way of Power, places the blame for the current banking crisis squarely on the Fed:

“For the past year, the Federal Reserve has raised short-term interest rates at the fastest pace since the early 1980s … Which brings us to the real cause of what happened: a Fed that has been so focused on curbing inflation that it has essentially ignored the risks of its policy of raising rates more quickly than at any point in history.” https://time.com/6263723/blame-for-silicon-valley-bank-and-the-banking-crisis/

Norbert Michel, Vice President and Director of the Cato Institute’s ‘Center for Monetary and Financial Alternatives’ penned a similar post mortem on the Great Recession in a Forbes feature article back in 2015 called, “Government Policies Caused the Financial Crisis and Made the Recession Worse”

“Virtually every aspect of the meltdown can be traced to federal policies, many of which were designed to boost home mortgages … The practice of using federal agencies to make it easier for citizens to finance homes dates to the 1930s, and the 1977 Community Reinvestment Act significantly extended that idea. But when the S&Ls crashed in the late 1980s, and federal meddling in the mortgage market really took off … These policies ensured that risky mortgages would be spread throughout the financial system and magnify any liquidity problems that mortgage defaults may cause.” https://www.forbes.com/sites/norbertmichel/2015/01/26/government-policies-caused-the-financial-crisis-and-made-the-recession-worse/?sh=7fbeea64564e

A host of economists also contend that FDR’s much lauded ‘New Deal’ significantly prolonged the economic hardship of the Great Depression. According to a review of Jim Powell’s “FDR’s Folly” by the Foundation for Economic Education, an historical reassessment of the 32nd President’s role as economic savior is clearly warranted.

“Tax rates were hiked, which scooped capital out of investment and dumped it into dozens of hastily conceived government programs. Those programs quickly became politicized and produced unintended consequences, which plunged the American economy deeper into depression.” https://fee.org/articles/fdrs-folly-how-roosevelt-and-his-new-deal-prolonged-the-great-depression/

In the wake of the demise of Silicon Valley Bank, Signature Bank and First Republic Bank, the Biden administration dismissed the notion that government played any role — writing it off as bad decision-making. The Government Accountability Office stated that, “Risky business strategies and weak risk management contributed to the failures of Silicon Valley Bank (the 16th largest U.S. bank by asset value) and Signature Bank (the 29th largest).”

President Biden has assured bank customers and consumers alike that “your deposits are safe,” and “we’ll do whatever is needed” to contain the crisis. But bank investors who’ve racked up over $54 billion dollars in losses — find little comfort in Presidential platitudes.

Here We Go Again!

Aside from the ongoing threat of a deepening bank crisis, there is perhaps a greater risk to our financial system that may sound eerily familiar — the rise of non-bank intermediaries and unregulated middlemen known as shadow banks. According to CNN Business.

“The term encompasses financial firms, other than banks, that provide all manner of financial services, including lending to households and businesses. It’s a diverse cast list: non-banks range from pension funds and insurers, to mutual funds and high-risk hedge funds.” https://www.cnn.com/2023/04/06/business/non-banks-shadow-banks-risks-explainer/index.html

The name was coined back in 2007 by economist Paul McCulley in his speech at the annual financial symposium in Jackson Hole, Wyoming. When testifying before the Financial Crisis Inquiry Commission in 2010, McCulley described how these unregulated, bank-like entities took down the economy during the subprime mortgage crisis.

“The shadow banking system essentially dis-intermediated many of the activities of the conventional banking system: deposits became un-insured, money market instruments and loans became securitizations. And like the conventional banking system prior to the establishment of the FDIC and the Fed, the shadow banking system was inherently vulnerable to runs, if its liabilities were to become “informationally sensitive” – that is, if the holders of the shadow banking system’s shortdated liabilities concluded they could no longer take it on faith that they could get their money back on demand at par, a run could ensue.” https://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0506-McCulley.pdf

Shadow banks sit outside the purview of regulators and escape the liquidity restrictions that govern traditional banks. They played an infamous role in the subprime mortgage and credit crisis of 2008, and now they are back!

Just how much of a comeback has this murky banking sector made? According to the Financial Stability Board (FSB), non-banks had about $239 trillion on their books in 2021 (up 7% from 2008) representing nearly half of the world’s total financial assets

The International Monetary Fund recently sounded the alarm on non-banking activities citing the potential for a liquidity crunch due to rising interest rates. Bank of America, JPMorgan Chase and a group of global investors suggested that non-banks were indeed the source of the recent credit crisis and the contagion that took down Silicon Valley Bank, Signature Bank and First Republic Bank.

Desmond Lachman, Senior Fellow at the American Enterprise Institute, echoed this sentiment,

Since the Dodd-Frank regulations in response to the 2008 Lehman bankruptcy, risk has migrated from the US banks to the largely unregulated so-called US shadow banks, including the hedge funds and the equity funds. This makes the shadow banking system particularly vulnerable to a world of rising Federal interest rates to quell inflation. It also raises the possibility that while regulators are fighting the war on the banking sector front, the real war will have moved to the shadow bank front.” https://www.ft.com/content/fc4d0905-5772-4e5a-96cf-f5a4f2982f28

Gold is Chaos Insurance

It wasn’t all that long ago that the U.S. housing market collapsed — triggering one of the worst economic downturns in American history. The Great Recession lasted about 18 months but the impact on economic growth, lending, home ownership and retirement security are still being felt today. Back in 2007, the oldest Baby Boomers were just reaching retirement age – and the loss of their savings, investments and home values required many to work longer and harder to recover any sense of financial security.

History has taught us that Bank Collapses, Seizures and Meltdowns are recession triggers and gold has functioned as a viable hedge against the economic fallout that follows:

• Some 9,000 banks failed during the Great Depression and the price of gold skyrocketed as Americans turned in paper money for the safety of physical gold. https://thegreatdepressioncauses.com/facts/facts-banks/
• Between 2008 and 2012, some 465 banks failed and after the collapse of Bear Stearns gold hit an all-time high of $1,011/oz rising over 50% in just nine months. https://www.sec.gov/Archives/edgar/data/1222333/000095012309004884/y01039ffwp.htm
• After three of the largest bank failures in U.S. history occurred within a 6-week period in the spring of 2023, gold surpassed $2000/oz for the first time in a year.

As economists mull the government’s role in the current banking crisis, further questions arise about other federal programs and their impact on the deficit, energy prices, small business, taxation, the financial markets, and the retirement holdings of every day Americans.

Banks runs and contagions are a direct threat to your money and gold is a historic store of value that offers protection against downturns, volatility, and economic chaos.

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