The Recent Bank Bailouts: A Wake-Up Call to Rethink the Banking System
The recent troubles at Silicon Valley Bank and Signature Bank have highlighted problems with the current banking system.
The US government’s response to these issues –removing the $250,000 limit on deposit insurance and allowing cheap borrowing against false asset values – shows how banks can extract subsidies from society.
Banks are essentially speculative investment funds attached to critical infrastructure.
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- Banks are speculative investment funds masquerading as critical infrastructure providers.
- Recent bank bailouts highlight the need to separate banking from investment activities.
- The public sector should manage money and payments, while banks focus on lending.
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The Recent Bank Bailouts: A Wake-Up Call to Rethink the Banking System
This means their bets can’t be allowed to fail, which would have severe consequences for people.
But this creates a moral hazard, where banks are encouraged to take excessive risks, knowing they’ll be bailed out if things go wrong.
There is a better way.
The public sector should manage the payment system and money as public goods.
Banks should focus on identifying creditworthy borrowers and making profitable loans.
They don’t need trillions of dollars in uninsured deposit financing or government-guaranteed bonds and cash equivalents to do this.
These default-free assets could be moved to the Federal Reserve while money market funds could better manage money-like claims.
Bond funds and ETFs could absorb fixed-income assets at new prices, reflecting market realities.
Even parts of banks’ core lending franchises could be separated from insured deposits without too much disruption, given the investor appetite for “private credit.”
The recent bank bailouts should prompt policymakers to rethink the banking system and prioritize the public good over private interests.
Separating the critical infrastructure of money and payments from speculative investment activities can create a more resilient and equitable financial system that serves everyone’s needs.
