Biden and Powell top inflation gaffe with an emergency gift to banks

In March, when Treasury Secretary Janet Yellen testified before the Senate Finance Committee, she tried to project strength. I can reassure the members of the committee she said that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them. Yellen was referring to the federal government’s extraordinary attempt to stabilize the banking system. It all began on March 10, when the largest bank collapse since the global financial crisis. 15 years ago, Silicon Valley Bank went under its sudden demise shocked investors into reexamining the financial sector. The largest banks may rest on firm capital cushions. But what about regional banks? Fear of instability caused depositors to flee these midsize firms shareholders did to Signature Bank of New York was caught in the Whirlpool It drowned.

To stop the contagion from spreading further. On Sunday, March 12, the federal government announced that it would guarantee deposits at signature in Silicon Valley Bank. Up until that point, the FDIC insured deposits up to $250,000. No longer. The ceiling was blown away in a cyclone of panic over SVB. President Biden and Yellen won’t say it’s a bailout. Of course it’s a bailout. In some ways this bailout is worse than in 2008. After all, Congress passed the Troubled Assets recovery program or tarp. Congress is a bystander here, and tarp said economy wide rules and qualifications. Biden’s intervention is discretionary and selective. When she appeared before Congress on March 16, Yellen admitted that the unlimited deposit guarantee doesn’t apply to every bank. It applies to systemically important banks, who decides which bank is systemically important? She does as circumstances dictate.

The chaos in the banking system is the result of decades of low to zero interest rates and $6 trillion in fiscal stimulus since 2020. That flood of money and credit produced the worst inflation in four decades. In 2022, the Federal Reserve began raising interest rates to restore price stability. The Fed should have acted sooner. It waited because it operated under the assumption that inflation would be temporary. That assumption was false. The feds complacency made the situation worse. By the time it started raising rates inflation expectations were becoming fixed. The past year fed hikes may have slowed inflation. What they haven’t done is kill it.

Biden Yellen and Federal Reserve Chairman Jerome Powell want a soft landing. They are after the magic formula that will quell inflation and avoid recession, they will be disappointed. No one likes inflation, it lowers the standard of living. But the Federal Reserve solution a contraction of the money supply through higher interest rates is nasty to high interest rates can cause a recession or something worse. Now Biden in the Fed are caught in a stimulus trap. Higher interest rates increase the likelihood of financial instability, while keeping rates pat or cutting them will prolong the inflation. Doing nothing will perpetuate the current mix of declining standards of living amidst periodic financial instability.

Norther other options supply side measures such as deregulating energy and reducing means tested income transfers are off the table in a Democratic administration. Immigration is not about to be liberalized, trade barriers won’t be reduced. Biden, Yellen and Powell have gifted America with another emergency measure that will last long after the crisis subsides. Republicans are eager for a piece of the action. After all, why did Gavin Newsom and Silicon Valley tech giants get this guarantee? Well, midsize banks and rural areas do not rather than limit and sunset the deposit backstop and force market discipline and reassert the Feds commitment to price stability. The same team that brought America the worst inflation in a generation is entangling itself further in a key sector of the economy. It would be foolish to trust in their judgment. Look at the record. Soft Landing, afraid not. Brace for impact.