The regulators have been asleep on the job
Historians may one day look back on today’s American bank runs and wonder what all the fuss was about. What’s happening was always bound to happen. The mystery is only why so few of those responsible saw it coming, then did such a bad job of dealing with it. No less a figure than Warren Buffett has said in recent days that the directors of such banks should face “punishment” for their failures.
Writing the narrative of the messy hangovers that were bound to follow the decade-long cheap-money party, those future historians would start with asset values that soared beyond reasonable levels. To that, they’d then add regional banks keen to ride the boom by loading up on commercial real estate, one of the mainstays of their business model. They’d stir in a bit of Trump-era deregulation that loosened controls on these same banks so that they could engage in riskier, higher-return activities — great for their profit margins and share values, but predicated on the misguided assumption that all-but-free money would last forever.
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To that already volatile brew they’d then add global changes to labour markets that enabled workers, for the first time in decades, to begin clawing back just some of the rising asset inflation they’d had to absorb (especially in housing costs). Finally, as if all that were not cause enough for concern, they’d sprinkle in the profound and permanent changes to the way we work, shop and play that happened during the pandemic, all of which reduced corporate demand for commercial space, with falling commercial real estate values following.
Anyone with an ounce of foresight could have seen where this would go next. Once rising wages pulled the floor out from disinflation, prices began rising across the board, and central banks were forced to backtrack rapidly and jack up borrowing costs. That further cut demand for property, locking in the pandemic-induced losses on commercial real estate. This all happened as the clients of regional banks, themselves needing more cash to cover their own higher debt charges, began withdrawing money. When the first banks began falling, the disco was obviously over.
Unfortunately, there has been no clean-up. With the politicians in Washington, D.C. engaged in some dangerous brinkmanship over the debt ceiling, the Biden administration has been constrained in what it could do. Meanwhile, the Federal Reserve is led by a chairman who flip-flopped in his communications about the direction of monetary policy, leaving depositors and investors alike unsure as to what might happen should things actually turn nasty. So it won’t surprise them that into this vacuum stepped some opportunistic short sellers, who spied an opportunity to drive down the share values of smaller banks, sowing panic among their depositors and creating a self-fulfilling policy that left them laughing all the way to their (large and secure) banks.
That’s how the future narrative will be written. How it ends, and in particular whether the rolling panic turns into a full-blown crisis, will be determined by those around today. Perhaps the key actors in this drama, like the central bankers who pushed easy money, the deregulating politicians, and the economists whose models predicted that asset prices would continue rising endlessly without any deleterious effects on the economy, will one day tell us what they were thinking. Because from today’s vantage-point, the primary temptation is to conclude that they weren’t.
For Americans living through this anxious time, they’d do everyone a favour if they got their act together, took the necessary steps to stem the contagion, and then finally cleaned up some of the mess still left over from the 2008 crash. This includes, most likely, taking a far greater regulatory interest in the banks they’re constantly having to rescue.