Power & Market

More Supervision and Regulation to Prevent Bank Runs?

After raising rates by 25-bps on Wednesday, in addition to lending $300 billion to bankrupt institutions last week, Federal Reserve Chair Jerome Powell reassures the public that the banking system is “sound and resilient” to quell concerns over recent bank failures. Reiterating:

In addition, we are committed to learning the lessons from this episode and to work to prevent events like this from happening again.

Talk of bank runs never happening again is pure fantasy. Anyone following the financial system long enough realizes such talk is akin to putting an end to stock market crashes or recessions. It’s an impossible claim, unless a central bank would commit to always supplying unlimited funds to the market…

When asked if the Fed has “considered changing reserve requirements,” currently at zero, Powell responded:

Yeah, we know that we have other tools in effect, but no, we think our monetary policy tool works…

This crisis illustrates the problematic nature of the fractional reserve banking system, which relies on the central banking system. In a truly free market, there would be no mandatory reserve requirements because there would be no Federal Reserve. If/when a bank fails, there would be no central bank to step in with a bailout. It stands to reason that full reserve banking would be the viable solution.

Yet we don’t have a free market. Rather, when the fractional reserve banking system fails the Federal Reserve acts quickly to socialize losses by way of monetary inflation, hurting the poorest members of society the most.

Powell shows no regard for the free market solution. Instead he offers to “strengthen supervision and regulation,” as a viable alternative. This would grant the Fed more power but not fix the inherent problem with fractional reserve banking.

The world according to Powell is easy, as explained:

So, at a basic level, Silicon Valley Bank management failed badly, they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, didn’t hedge that risk...

So, as for us, so for our part, we’re doing a review of supervision and regulation, my only interest is that we identify what went wrong here. How did this happen is the question. What went wrong? Try to find that. We will find that. And then make an assessment of what are the right policies to put in place so that it doesn’t happen again…

We’ve seen this before: A bank becomes insolvent, whether by ignorance or error. The Fed saves the financial system by giving the same failed bank more money; this is socialism-lite, it is not capitalism.

Any system which works great until it collapses, then requires a government/central bank bailout is neither sensical nor sustainable. Anyone holding a position in academia should not support this; but many do because it works so well for those on top. So here we are.

As far as putting an end to bank runs are concerned, only two fool-proof methods exist: either a bank adopts full reserve banking so that it will never be short on client funds, or we are forced to adopt Central Bank Digital Currency (CBDC). The first method requires no Federal Reserve while the second absolutely does. The Fed didn’t speak much about CBDC’s during this latest crisis or in Powell’s press conference. But we can bet that within the highest ranks of the Federal Reserve, they are waiting patiently for the release of their new digital dollars.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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