Why are people so surprised about the current bank collapse? This is how capitalism is supposed to work. This is the way it would have gone in 2008-9 if people, who should have known better, just got out of the way and let the banks that had over-extended themselves go belly up as they deserved to do.
How dare they gamble with their customer’s uninsured money. But, they did and do. And, anyone believing the FDIC will bail them out, are living in La La land. There isn’t anywhere nearly as much money to pay off these risky bank shenanigans as most Americans think. A look at the history of central banking in America might explain how these things happened.
Alexander Hamilton’s grand experiment in central banking began in 1791 to assist a post-Revolutionary War economy. It ended after 20 years, the First Bank charter was not renewed. Not all of the Founding Fathers were in favor of central banking. Thomas Jefferson said that central banks were more dangerous than a standing army. He warned the people not to allow them to ‘get their hooks into America.’
The Second Bank of the United States ran from 1816-1834. By the 19th century, many governments gave banks a free hand to operate, based on the theories of economist Adam Smith. President Andrew Jackson was aware that the downturns and inflated rises were contrived, always benefiting the bank. Jackson called the central bankers a ‘den of thieves’. He took on the Second Bank of America, which he regarded as a dangerous monopoly, inimical to the majority of Americans and vetoed a B.U.S. charter bill in 1832, and by withholding government deposits from the bank, succeeded in ruining it. And their second charter was not renewed.
There was an attempted assassination of Jackson, which most people attributed to the wealthy bankers. But the assassin’s gun misfired twice. Jackson took his cane to the man. (Hmm, isn’t it funny how any president that stood in the way of Central Banks were either assassinated or the attempt was made. Jackson, Lincoln, McKinley, John Kennedy. It was said that Kennedy had pallets of U.S. Treasury notes already printed. I wonder what happened to those pallets?)
It’s true that the bank notes, backed by substantial gold reserves, gave the country a more stable national currency. But by managing it’s lending policies and the flow of funds through it’s accounts, the Bank could---and did alter the supply of money and credit in the economy and therefore the level of interest rates charged to borrowers.
These acts, which had effects similar to today’s monetary policy actions, can be seen most clearly in the national banks interactions with state banks. In the course of business, it would accumulate the notes of the state banks and hold them in its vaults. When it wanted to slow the growth of money and credit, it would present the notes for collection in gold or silver, thereby reducing state bank reserves and putting the brakes on the banks ability to circulate new banknotes.(paper currency) To speed up the growth of money and credit, the Bank would hold onto the state bank’s reserves and allow those banks to issue more banknotes through their loan-making process. There followed a series of bank failures that scared the public. Many state chartered banks went into bankruptcy.
Jackson was opposed to a central bank from a land deal that had gone wrong. Jackson had accepted paper notes-essentially paper money-as payment for some land he had sold. When the buyers went bankrupt, the paper he held was worthless. In Jackson’s opinion, only gold and silver qualified as an acceptable medium for transactions. Jackson also distrusted credit-another function of banks, believing people should not borrow money to pay for what they wanted.
Meanwhile, in Philadelphia, the former president of the Central Bank responded to Jackson’s actions by announcing that the Bank would not respond to the loss of government-deposits by attracting new private deposits or raising new capital. Instead the Bank would limit credit, because he believed that might create a backlash against Jackson and force the president to relent and redeposit government funds in the bank, perhaps even renewing the charter. But Biddle’s move backfired in the end. It helped to support Jackson’s claim that the Bank had been created to serve the interests of the wealthy, not to meet the nation’s financial needs.
The bank’s supporters failed to muster a two thirds majority to override Jackson’s veto in 1832. More damaging was the removal of federal deposits in 1833, resulting in a reduction of the size of the Central Bank and also it’s ability to influence the nations currency and credit. In April 1834, the House of Representatives voted against rechartering the Bank and confirmed that federal deposits should remain in state banks. These developments, coupled with Jackson’s determination to do away with the Central Bank and the widespread defeat of the pro-Central Bank Whig Party in the 1834 congressional elections, sealed the Central Bank’s fate.
It would be more than seventy-five years before there was another attempt at establishing a central bank in the United States. During that period, the U.S. economy suffered several trials, carried out by certain individuals in the hope that the government would agree to sign the Central Bank’s charter again. After the panic of 1907, which triggered a nationwide suspension of payments and a deep recession, the government was forced to come up with a solution. This source says Congress established a commission to look into ways to improve how the banking system responded to the shocks. The commissions findings led to the creation of the Federal Reserve System in 1913.
The real story probably began in England in 1912, as some of the world’s riches men met and discussed establishing a central bank in the United States once more. This time, a permanent central bank. Levi Strauss, Ben Guggenheim, John Astor and J. P. Morgan had all paid for passage on a new liner owned by Morgan, for her maiden voyage. The meeting had been contentious, as all except Morgan were against central banks. Strangely, the only one who failed to show up for the voyage was Morgan. Everyone knows the rest of the story in the fate of the Titanic.
As for how the Federal Reserve came together, that story was told in a wonderful book called, “The Creature From Jekyll Island” by G. Edward Griffin. I highly recommend it. It describes, in detail, the way the D.C.-Wall Street Swamp operates. Finally, after 250 years, the Central Bank was firmly embedded in our country like an Ozark Tick.
In 1933, after a series of financial manipulations that the FED is so good at, Congress was moved to pass the Glass-Steagall Act , effectively separating commercial banking from investment banking, and created the Federal Deposit Insurance Corporation, (FDIC) among other things. According to Julie Maues of the Federal Reserve Bank of St. Louis (one of the 12 branches of the Federal Reserve) Glass-Steagall followed the Emergency Banking Act of 1933, signed by Franklin Roosevelt on March 9, 1933, the legislation was aimed at restoring public confidence in the nation’s banking system after a week long bank holiday.
Many people after the crash of 29, were withdrawing what money they had left from banks and keeping it at home. In response, FDR called a special session of Congress the day after the inauguration and declared a four day banking holiday that shut down the banking system, including the Federal Reserve.
In one of his first ‘fireside chats’, FDR stated, “I can assure you that it is safer to keep your money in a reopened bank than under the mattress.” I wondered if people really believed him, but later reading stated that, as one newspaper put it, “Lines were long as people were waiting to put their money back into the bank.”
The new law allowed the twelve Federal Reserve Banks to issue additional currency on good assets and thus the banks that reopened would be able to meet every legitimate call. The Act also broadened the powers of the president during a banking crisis, divided into five sections.
1.Control of all transactions, including foreign exchanges, transfers between banks, hording, melting or earmarking of gold and silver coin.
2. The power to restrict operations of a bank that was, “going down for the third time.” Conserving the assets, pondering further disposition of it’s business.
3. Allow the Secretary of the Treasury to determine whether a bank needed additional funds to operate.
4. It gave the Federal Reserve the flexibility to issue emergency currency-Federal Reserve Notes, by any assets of a commercial bank.
5. Made the Act effective and took the United States and the Federal Reserve off of the gold standard, which created a new framework for monetary policy. It authorized the Reconstruction Finance Corporation (RFC) to provide capital to finance institutions.
The capital injections were similar to those under TARP, the program in 2008, but were not the same. In neither episode did the FED inject capital into banks, it only made loans.
The Frank-Dodd Act, otherwise known as The Dodd-Frank Wall Street Reform and Consumer Protection Act was legislation passed by Congress in response to the financial industry behavior that led to the financial crisis of 2008. It was supposed to make the financial system safer for it’s consumers and taxpayers. It was passed in 2010 during Obama’s presidency.
(It established just what we needed), a number of new government agencies tasked with reviewing the various parts of the law and by extension, aspects of the financial system. These included, but were not limited to banks, stock exchanges, and insurance companies. Glass-Steagall protection of consumers began to deteriorate in 1970 with the amendments to the Bank Holding Company Act. This allowed consumer banks to begin making commercial loans. This was the first move toward deregulation.
The first major deregulation was in 1978 with the Supreme Court decision that gave banks the right to make loans in states where they weren’t headquartered. (Hmm, the camel’s nose in the tent?) Lenders immediately began creating new loans in states with the least regulation like Delaware and South Dakota. In 1980, the Depository Institutions Deregulation and Monetary Control Act further changed banking regulations again. Deposit insurance was increased and the limits on interest rates for deposit accounts was eliminated.
Savings and loans institutions that focused primarily on taking deposits and providing mortgages were given more authority. Two years later, thrift banks were virtually deregulated by the Garn-St. Germain Depository Institutions Act. This was during Reagan’s administration with the approval of both party's. (I wonder what that costs the lobbyists?) By 1984, thrift banks began to fail, beginning in Texas with the oil boom failure. This was followed by the Federal Reserve in 1996, “reinterpreting the Glass-Steagall Act. The following year, the Glass-Steagall Act was repealed.
The United States has lost one in four local banks since 2008 crisis. Most were acquired and absorbed into bigger banks. Isn’t that what Janet Yellon just alluded to in response to the bank failure in Silicon Valley and the one in New York? “We will be able to protect the depositors of the big banks.” Community banks will be on their own. (Won’t the average consumer, hearing this message, take their money out of community banks and open accounts in J. P. Morgan, Well’s Fargo, etc.? Sounds like a Globalists Plot to me. )
So, Q E (Quantitative Easement) which has helped to create this disaster, is being used again, unofficially. Powell has folded. The FED has pivoted. Americans will pay for this bailout with much higher inflation. Depend on it. The dollar will tank and commodities will soar, especially gold. Watch as people will spend their nearly worthless fiat dollars on any tangible necessity as quickly as they can, creating Hyperinflation. So, this recent fiasco is brought to you by fractional reserve banking where the bank is only required to retain 10% of your loan/deposit and can invest with someone else.
Which is fine until both parties want their money back Oops! (It looks like the infusion of ‘funny money’ is about to run it’s course. (One thing I learned as a parent is, ‘You don’t reward bad behavior.’)
Tell me the bankers, lending to people who obviously wouldn’t be able to pay off their mortgage loans, didn’t know that up front! And the big banks of today weren’t aware of what a high risk loaning to the high tech industries would prove to be! I seem to recall Tim Guitner, at the time, Secretary of Treasury, declare that Frank-Dodd was supposed to keep 2008-9 fiasco from ever happening again. And once again the Central Banks have painted themselves into a corner. Whichever way they go, raise interest rates, or pour more funny money into the system, they will lose.
I think 2023 is going to be a very interesting year as we watch one domino after the other fall.
