We practice a strange sort of hybrid capitalism here in the United States: socialism for the rich and rugged individualism for everyone else.
Other nations also practice hybrid capitalism/socialism. But by our lights, they get the socialism part backwards: they extend its benefits to everyone.
Our capitalism operates on collective amnesia, as this month’s banking crisis attests. Nothing has become less surprising than the failure of lawmakers, bankers and regulators to sensibly manage a capitalist economy that works for everyone.
Their eye-popping response to the latest banking crisis? Remove the supposedly “inherent” risks of capitalism for investors.
Foolishly gambled away other people’s money? We’ve got you covered. Privatize profits but socialize costs? Ingrained in our economic DNA.
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000. Silicon Valley Bank of California was seized by the FDIC after a depositor run on the bank. Its customers were mostly uninsured tech startups with seven-figure deposits; similar story at Signature Bank in New York. Yet uninsured depositors in both banks were made whole.
Hello?
“Having bailed out depositors of two banks in full, how will the government refuse others?” financial journalist Roger Lowenstein rightly wonders.
Taxpayers won’t cover these losses, the Federal Reserve Board promises. Major banks will make amends for the magical thinking regulators discovered, but apparently ignored, at Silicon Valley Bank in 2021.
Still, watch your bank statements for additional fees. Consumers may end up reimbursing the rescue banks; we rugged individualists routinely underwrite coddled capitalists’ follies. (It’s an unheralded aspect of the “trickle-down” theory of economics.)
Revolving regulation
What’s wrong with unfettered American capitalism was made plain in the 1920s by highhanded robber barons. Teddy Roosevelt had tried to harness them, but it wasn’t enough to prevent the 1929 market crash and mother of all depressions.
It fell to Teddy’s cousin Franklin Delano Roosevelt to tidy up. FDR imposed the first meaningful regulation of American banks. In 1933 alone, 4,000 banks failed.
But that year the Glass-Steagall Act established FDIC-managed deposit insurance. It became gold-standard assurance of deposit safety. It was meant to avoid the panicked, dangerously contagious depositor bank runs that felled Silicon Valley.
By the 1960s, though, savings and loan banking had become much too safe for bankers. They wanted to be freed from regulatory guardrails that prevented speculation in risky, higher-yield investments using loans and depositors’ money. Congress liberated them.
Back in the 1960s when “banking was boring,” as former U.S. Labor Secretary Robert Reich puts it, the financial sector accounted for only 15% of American corporate profits. By 2001, it represented 40% of all U.S. corporate profits.
Red alert, people.
In the early 1980s the Federal Reserve’s efforts to avoid recession inadvertently stressed the S&L banks. Awash by then in exciting investments, 32% of them failed. Taxpayers spent $132 billion to sort that crisis.
The death warrant for Glass-Steagall was signed in 1999 by Bill Clinton, urged on by luminaries of high finance: Treasury Secretary Robert Rubin, economist Larry Summers and Timothy Geithner, president of the Federal Reserve Bank of New York.
Ironically, then-Treasury Secretary Geithner and Summers were soon advising Barack Obama on what to do about the 2008 mortgage lending catastrophe Obama inherited.
During that Great Recession, 165 banks failed, the stock market tanked, unemployment rose to 25% and economic losses totaled $8 trillion.
During this unpleasantness, Congress agreed that taxpayers should spend $700 billion to purchase “toxic assets” of mismanaged, sloppily regulated banks. This turned out to be a profitable investment.
But not so much for investors in our huge, homegrown Washington Mutual, founded in 1889. In 2008 WaMu became the biggest bank failure in American history. Stockholders swallowed their losses.
Alan Greenspan, chairman of the Federal Reserve, admitted that the 2008 sub-prime home mortgage derivatives meltdown caused him to reconsider certain free-market investment assumptions. “I have found a flaw,” he told Congress. “I made a mistake … I was shocked.”
Huh.
Shifting costs
And the four million mortgage holders pleading for help to avoid ruinous foreclosures that were triggered by the nation’s best financial minds’ “misunderstanding” of prudent mortgage banking? More than three million of them got nothing.
“Obama thereby shifted the costs of the bankers’ speculative binge onto ordinary Americans, deepening mistrust of a political system increasingly seen as rigged in favor of the rich and powerful,” says Reich.
The 2010 Dodd-Frank banking reform bill didn’t prohibit banks from injudicious gambling with depositors’ money. But it did impose stress tests to ascertain that banks had enough cash on hand to withstand unforeseen financial difficulties.
Greg Becker, chief executive of Silicon Valley Bank, was seated on the Federal Reserve Bank of San Francisco until March 10. Becker was among those who, once again, lobbied Congress for a regulatory pass for banks such as his, this time from stress tests. In 2018, Congress capitulated.
Marxists argue that capitalism cannot succeed without exploiting workers and consumers. They were proven spectacularly wrong about their antidote, communism.
But American capitalists seem hell bent on proving that Marxists are spectacularly right about capitalism.
If our capitalism is to succeed, we must salvage its upside — which has brought so much progress — and eradicate its downside, which brings so much pain.
Otherwise, I believe it’s not just our banking system that will fail. So will our democracy.
Solveig Torvik lives near Winthrop.
