Commentary
The Federal Reserve creates booms and busts that make banks richer and leave citizens holding the bag.
In March 2023, the
U.S. Treasury approved the provision of at least
$300 billion worth of loans to Silicon Valley Bank (SVB) and other banks. Treasury Secretary Janet Yellen assured the public that this was not a bailout and that no taxpayer money would be used. This is stretching the truth, however, as the Treasury’s money comes from taxpayers.
In 2008, when Wall Street received
$700 billion of taxpayer money, they were at least honest enough to call it a bailout. And while the direct payments are coming from the Federal Deposit Insurance Corporation (FDIC) and the Treasury, the unsustainable economic situation that creates the need for bailouts is caused by the Federal Reserve and its control over interest rates.
On July 10, 1832, President Andrew Jackson vetoed the bill that would have transformed the Bank of the United States, the government’s first bank, into the Federal Reserve in its current form. Jackson stated that while having a national bank had certain advantages, he believed it was
unconstitutional, and encroaching on the rights of states and the liberties of the people. He saw the establishment of a Federal Reserve as a government-granted monopoly, stating: “Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to
receive a fair equivalent.” The establishment of a federal bank would favor some private companies, while hurting individual citizens.
The Federal Reserve oversees and regulates the banking industry. It also sets the federal funds rate, which is the interest rate that banks charge each other for overnight loans of their excess reserves held by the Fed. Changes in this rate can have a tremendous impact on the economy and can be used as a monetary policy tool of government to regulate inflation. When the country is in recession, the rate is set lower, to stimulate growth. And when the economy is experiencing inflation, as it is now, the rate is increased, to cool things off.
And while the mission of the Fed makes sense on some level, many economists feel that the Fed
distorts the economy by creating unnaturally low and high interest rates that result in booms and busts. After the 2008 global financial crisis, the Fed cut its
rate to zero, and it remained there for seven years. There were some increases in rates between 2008 and the most recent rash of bank failures, but rates remained unnaturally low. These low rates encouraged borrowing and investing in businesses that became unprofitable once rates were allowed to rise. This is exactly what happened to SVB. That bank’s bond portfolio
lost billions of dollars because the bonds were purchased when Fed rates were unnaturally low. After the Fed increased the rate, SVB had to sell the bonds at a discount in order to cover its liabilities.
Apart from setting interest rates, the Fed is also the lender of last resort, providing funds to banks in times of crisis. Banks can borrow money from the Fed to prevent a collapse. When the Fed creates money, either through manipulating interest rates or by lending money, it increases the money supply and devalues all currency held by all Americans. People’s savings lose value each time the Fed increases the money supply. This is an example of what President Jackson was opposed to, as he felt that the Fed would harm the public while helping bankers get richer.
If a bank collapses, the FDIC provides insurance, covering losses of up to $250,000 per depositor, per insured bank, for each account ownership category. After the 2008 crisis and again in 2023, the Treasury
approved funding to cover all deposits, even those in excess of $250,000. Together, the Fed, the FDIC, and now the Treasury, function as an insurance plan for banks. The Fed can set interest rates artificially low, to encourage borrowing and investing by banks. And if those investments go bad, the Fed, the FDIC, and the Treasury can step in and bail them out. The United States isn’t a socialist country and banks like SVB are not state enterprises. These are profit-driven private companies that provide returns to their investors. The combination of the Fed, FDIC, and the Treasury provides guarantees, with public money, for private companies.
If interest rates were left to the free market, as is the price of almost everything else in a capitalist society, banks would be less likely to set rates unnaturally low and also less likely to make bad investments. Additionally, if there was no expectation of a federal bailout, banks would be more careful about losing depositors’ money, and they would never be in a position to take money from taxpayers.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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