There are leaders who rise to the moment. Think Churchill and Roosevelt facing down the Nazi threat. Ronald Reagan’s famously accurate assessment of the former Soviet Union as an “evil empire.”
The moment now is also in need of leadership. Does Joe Biden have the chops to face down multiple global threats and secure our borders? And does his economic team, led by Treasury Secretary Janet Yellen, understand what could be in store for the economy as yet another bank heads for failure?
Sleepy Joe, of course, has been such an obvious disaster, it’s hard for even the mostly coddling White House press corps to ignore his incessant bungling. Yellen, meanwhile, has been given a total pass even though her stewardship has been equally inept. No greater example of Yellen’s cluelessness can be found than her stuttering attempts to adequately deal with the still smoldering banking crisis.
Another big bank, First Republic, is heading for government receivership. As I reported earlier this week on Fox Business, top banking execs with direct knowledge of the matter knew that First Republic was a goner. It was just a matter of time because its business was beyond repair. Despite that, Yellen led a misguided last-ditch effort to save it for no other reason than to save face. She wanted to fool the American people into believing the banking system and even the entire economy is fine, when it’s not.
Consider that for weeks now, Yellen’s message has been one of optimism. Fed rate hikes caused some financial indigestion (aka two midsized bank failures) but the worst was over. The US economy was poised for a soft landing; slower growth to squeeze out inflation but no steep recession.
This rosy scenario was predicated in part on her belief that a significant banking crisis had been averted, and bank lending would soon resume at prior levels. The collapse of Silicon Valley and Signature banks weeks ago were one-offs because Yellen and her team swooped in and threw money at the problem, insuring all deposits — even those above the government limit of $250,000. It didn’t matter that it was a bailout for rich tech-company-types with ties to the Democratic Party. Systemic risk was averted.
Happy talk fools no one
That is, until we heard the recent news coming from First Republic — a large regional bank with a once-stellar rep also dealing with rich people and high-end businesses. It announced last week that despite an initial Yellen-inspired private-sector bailout, it too is on the brink again. Its clients saw through Yellen’s happy talk, yanked their money out and deposited it all in the nearest JPMorgan Chase branch. Within minutes, its stock tanked. More money headed for the exits, which meant First Republic was toast.
As this column goes to press, all my sources with direct knowledge of the situation describe First Republic as a “zombie bank.” It has enough cash maybe to hang around for a while but that’s about it. Because of its underwater assets depressed by rising rates and underperforming loans, it’s too weak to compete. If its stock continues to drop, insolvency isn’t far away.
These bank executives also say the right thing for Yellen & Co. to have done nearly from day one of the crisis was to put First Republic out of its misery and into government receivership where depositors are paid off at the $250,000 insurance limit and no more. Shareholders are wiped out, and its assets are sold at a discount.
That’s what is supposed to happen when you take too much risk. Meanwhile, Yellen should have turned her attention to the broader implications of the bank contagion, what it means for lending and the health of the US economy, which isn’t good if midsized banks keep failing and business lending is sharply curtailed.
Until Friday, Yellen was doing the opposite: Drooling happy talk about the banking system, and asking other banks to bailout the zombie. She’s also doubling down on her mistakes that caused this banking crisis in the first place, making it more difficult to escape.
Recall: Yellen and her team approved and devised all the Biden spending blowouts that sparked inflation. She prodded the Fed to keep printing money well into the COVID recovery, igniting more inflation she didn’t see coming until too late.
When the Fed needed to stamp out inflation through higher rates, Yellen didn’t have even a rudimentary idea of how the financial system’s plumbing was so damaged through easy-money risk-taking until banks began to fail.
First Republic almost became one of those failures along with Silicon Valley and Signature banks in the early stages of the bank tumult. At Yellen’s bequest, execs at JPM, BofA etc. extended the lender a lifeline, $30 billion in deposits on a temporary basis to prop up its finances.
Then Yellen wanted a do-over for First Republic, I am told, a k a another private-sector bailout. The bankers balked because unlike Yellen, they can read a balance sheet and First Republic, as a zombie, is impossible to save.
Yellen is finally listening. She and her team are working out a plan to shutter First Republic, selling the carcass of the bank to other, more stable players. Now Yellen needs to start focusing on other problem banks because they’re certainly out there, and figure ways to prop up the US economy. And by all means don’t cover all deposits over $250,000 like you did the last time. Doing so would just encourage more risky behavior.
If we have learned anything from all our financial crises over the years, it is that allowing the consequences of excessive risk-taking (losing money and worse) makes for the best type of financial regulation. The bailout-friendly Yellen may not be able to grasp this, but they’re harsh, teachable moments.
In the meantime, it would be nice if someone also taught Yellen to read a bank balance sheet.
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