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The Toll of Bank Failures on Main Street

The Toll of Bank Failures on Main Street

Jun 5, 2024

The Toll of Bank Failures on Main Street

Recent revelations from a CNBC report, citing a study by Klaros Group, have raised concerns about the potential failure of hundreds of regional banks. The study, which examined 4,000 US banks, identified 282 that are at risk due to the combined pressures of commercial real estate loan obligations and the erosive impact of higher interest rates on bond values.

The Federal Reserve, once instituted as a guarantor of financial stability, now faces criticism for encouraging risk-taking through its "lender of last resort" function. This dynamic has been linked to the downfall of large financial institutions, including the notable collapse of Silicon Valley Bank last year. The foundational principle of fractional reserve banking allows banks to maintain only a fraction of depositors' money, often lending it out for extended periods, leaving vaults virtually empty. This system, while efficient under normal circumstances, becomes precarious when depositors lose confidence and demand their funds, leading to a liquidity crisis only mitigated by Federal intervention.

The original mandate of the Federal Reserve, established in 1913, was to protect the integrity of the dollar. However, its subsequent actions, including the creation of an inflationary bubble in the 1920s that precipitated the Great Depression, suggest a departure from this singular focus. The introduction of the dual mandate, aimed at controlling inflation and promoting full employment, has been met with skepticism. Critics like author Jim Grant describe the Fed's role as alternating between the arsonist, who ignites economic bubbles with low interest rates, and the fireman, who extinguishes the ensuing inflationary fires by raising rates and triggering recessions.

The 2008 financial crisis marked a transformation in the Fed's priorities, with financial solvency emerging as an unofficial third mandate. In the current climate, decisions appear to be driven less by traditional concerns of inflation and employment and more by the necessity to support ailing banks and underwrite massive federal deficits. This shift in focus, exacerbated by the COVID-19 pandemic, suggests a Federal Reserve increasingly beholden to the financial sector, with policy measures that perpetuate inflation and potentially foster a cycle of crisis and intervention.

As the economy teeters on the brink of yet another crisis, the question looms: can the Federal Reserve navigate the treacherous waters of inflation control, job market stabilization, and financial sector solvency, or has it become a captive to the very institutions it was created to regulate?

CNBC Article


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