Trust — A Greater Value than Money
Politicians and pundits are always shocked when banks fail, but they shouldn’t be
In Donald Trump’s 2020 state of the union speech, he derided what he cast as a drift toward “socialism” in the Democratic Party.
“Here, in the United States, we are alarmed by new calls to adopt socialism in our country . ... Tonight, we renew our resolve that America will never be a socialist country,” he said, prompting applause from congressional Republicans as they stared at the Democratic side of the House chamber. This, after he signed the biggest rollback of bank regulations since the 2008 global financial crisis. Until Trump came along, the Dodd-Frank Act required the Federal Reserve Fed scrutinize banks with assets valued at $50 billion or more.
Interestingly enough, Gregory W. Becker, the CEO of the now failed Silicon Valley Bank, was among those who lobbied to raise the regulatory threshold to $250 billion. Keep in mind that only 38 of the approximately 6,500 banks in the United States have assets exceeding $50 billion — the top fraction of a percent of banks. Becker along with the other techy libertarian free marketeers all believe that government regulations stifle innovations, never giving any thought to the value of protecting the public interests in the marketplace or the havoc they create when their investments turn sour.
One has to wonder exactly what Trump, the Silicon Valley billionaires and his MAGA supporters don’t get about the Federal Deposit Insurance Corporation, Social Security, Medicare, free public education . All of these and more are a form of “socialized” protections for the people of this nation. Actually, when you come to think about it, public health, police and fire departments as well as libraries are all government-owned enterprises. So why should banking be any different? The money that they use is printed by the U.S. Treasury and backed by the full faith the U.S. government will continue in perpetuity — a faith enshrined in the antiquated words “In God We Trust” on the dollar bill. Perhaps it should say “In the People We Trust” because when you get down to it, it’s the people through this government that creates the trust and backs up the value.
If the Federal Reserve Bank and U.S. Treasury had not stepped in to guarantee deposits following the failure of Silicon Valley bank, there would have been a significant collapse in trust. But oddly enough, it will be the Fed’s own rate hikes that will be seen as the cause of the bank’s collapse along with speculation on risky investments. What caused the run on these two banks is the “panic” to withdraw cash. In the case of Silicon Valley bank it was $42 billion in 48 hours! Nobody has that much cash locked up in their vaults except the U.S. Treasury.
However, financial panics are contagious, just like pandemics, but caused by the psychology of distrust in the marketplace. Simply put, it’s caused by fear. And the history of this country is punctuated with panics and depressions dating all the way back to The Panic of 1819, followed by another one in 1837 and then 1873 and 1907.
After the last one of these, the Federal Reserve was created to stem the tide of these panics in which all depositors lost everything. Then came the stock market crash of 1929 after a decade long binge on Wall Street speculations commonly known as the Roaring ‘20s and the banks failed again. In all, 9,000 banks failed — taking with them $7 billion in depositors’ assets. In today’s dollars you could add several zeros to realize the significance of this disaster. In the 1930s, there was no such thing as deposit insurance — this was a New Deal-era reform. When a bank failed, the depositors were simply left penniless. The life savings of millions of Americans were wiped out by the bank failures.
When President Franklin Roosevelt instituted a banking holiday in 1933, all banks were ordered to cease operations until they were deemed solvent. This was the beginning of the end of the bank runs, but the pain was far from over, but it was the beginning of the end of bank runs and since the 1933 creation of the FDIC, no depositor has lost a penny when a bank has failed — bank investors suffer the losses.
Roosevelt was called a socialist for this and for Social Security too, as well as the Works Progress Administration. But most of this created a new economic foundation for America and one that the working classes have supported ever since. It’s the one percenters who castigate this as “communism” or “creeping socialism” and yet what it has done is protect the vast majority of people from having their life savings ripped off by unscrupulous and unregulated market speculations.
The bottom line is that the value of money is not based on the numerical denominations on the dollar, but whether there is trust in the system to freely transact business knowing that a dollar is a dollar and that when you go to pay your bills that the vendor and the banks will accept your payments as legal tender and that there’s actually money in your bank.
Without trust, all of this is just fancy printed paper, plastic cards and a bunch of numbers on your bank statement — the problem with cryptocurrency is that it is not backed by the full trust of anything at all.
In the end... after all the free market apologists are done wringing their hands and scratching their behinds — the Franklin Deleno Roosevelt quote used during his inaugural address as he assumed the presidency at the depth of the Great Depression, remains true to this day... “The only thing we have to fear is fear itself.”
I might add that we also have to fear billionaires who are prone to wild speculations, exaggerated numbers on their spreadsheets and disgraced former elected politicians who use “socialism” as a scare tactic to persuade people from voting against their own best interests!