The NPR Politics Podcast - Moving Cash Is Faster Than Ever. It Makes Bank Runs Hard To Stop.

Episode Date: March 23, 2023

Top monetary officials including Federal Reserve chair Jerome Powell and Treasury Secretary Janet Yellen say things have stabilized in the two weeks since panicked depositors rapidly withdrew their money from Silicon Valley Bank and Signature Bank, causing both to fail. But on top of revisiting recently relaxed banking regulations, policy makers are pondering how to handle the risk of bank runs in the age of smartphone banking.This episode: White House correspondent Asma Khalid, chief economics correspondent Scott Horsley, and national political correspondent Mara Liasson.The podcast is produced by Elena Moore and Casey Morell. It is edited by Eric McDaniel. Our executive producer is Muthoni Muturi. Research and fact-checking by Devin Speak.Unlock access to this and other bonus content by supporting The NPR Politics Podcast+. Sign up via Apple Podcasts or at plus.npr.org. Giveaway: npr.org/politicsplusgiveaway Connect:Email the show at [e-mail] the NPR Politics Podcast Facebook Group.Subscribe to the NPR Politics Newsletter.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Hey there, it's the NPR Politics Podcast. I'm Asma Khalid. I cover the White House. The time is 1.39 p.m. on Thursday, March 23rd of 2023. And today on the show, we're going to try something a little different. A couple of weeks ago, you may have never heard of Silicon Valley Bank. It was the 16th largest bank in the country, mostly dealing with startups, small businesses backed by venture capital, that sort of tech sector money. But suddenly, Silicon Valley Bank seemed to be in the news nonstop. Silicon Valley Bank, the 16th largest bank in the U.S., has collapsed. It's the culmination of a dramatic 48 hours that witnessed a run on the bank when mostly tech workers... It had sold off a significant part of its bond portfolio to be able to handle these

withdrawal requests. And it took a massive hit doing that, a nearly $2 billion loss. There was a sudden run on the bank. It was sparked by a financial newsletter that suggested the bank was basically insolvent because rising interest rates made its bond investments less valuable. Then another bank, closely tied to cryptocurrencies, Signature Bank in New York, went under too. President Biden and his Treasury Secretary Janet Yellen sought to calm the situation quickly. No losses, and this is an important point, no losses will be borne by the taxpayers. Let me repeat that. No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the deposit insurance fund.

I can reassure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them. The Biden administration stepped in to rescue the banks and assure borrowers that all of their deposits would be protected, not just the $250,000 normally guaranteed by the FDIC, the Federal Deposit Insurance Corporation. But banks continued to wobble. Shares of U.S. Bank First Republic have plunged more than 50 percent, despite an earlier move by other banks to inject $30 billion to keep it afloat. S&P Global is domino to fall in the troubled banking sector. A deal worked out over the weekend whereby UBS will take over Credit Suisse

at the urging of Swiss authorities. Still, it's not entirely over yet, given that UBS shares plunged amid concerns it was simply taking on Credit Suisse's problems. Here to help us make sense of what exactly has been going on in the banking sector and the political implications for the White House, our chief economic correspondent, Scott Horsley, and national political correspondent, Mara Eliason. Hey there. Happy to be here. Good to be with you. So Scott, I want to start with you. These teetering banks pose a huge challenge to the

Biden administration. And I know you covered the White House during the 2008 financial crisis. You know, presumably, it seems like there were lessons learned from how the government responded then. And it seems like they were motivated to respond very quickly here. Yes and no. They learned the lesson in terms of sending a bigger and better fire engine. They didn't learn the lesson about the importance of smoke detectors and flame retardant building materials. By that, I mean the emergency response here was fast and aggressive to avoid letting this turn into an even bigger financial meltdown as we had back in 2008. But they failed to take heed of the lessons in terms of preventing banks from having these kinds of problems in the first place. So, Scott, what did they do here?

Well, the government took over these two banks, and they said that they would protect all of the depositors. Ordinarily, deposits are only protected up to $250,000 per account. But in this case, the FDIC and the Treasury and the Fed waived that cap. And so they said all the depositors will be protected, no matter how much money they have in the bank. And in addition, the Federal Reserve went out and said other banks could borrow money against their assets so they wouldn't have to sell those at a fire sale price the way Silicon Valley Bank did. Bailouts are politically toxic. We saw that, I think, in the aftermath of the 2008 financial crisis. Voters hate this idea. You know, I think the alternative, though, for President Biden could have been even worse, particularly as he gears up for what's expected to be a second run for the presidency in 2024.

I was speaking with Brendan Buck. He was an aide to former House Speaker John Boehner and Paul Ryan. I think this administration probably realizes that the biggest risk is erring on the side of doing too little. And that if this is a moment that we get through because they act aggressively and it's forgotten about in a few months, then this is not a problem for them. But if this becomes a story we're still talking about a year from now, if there are lots of consequences that last for a while and it grows, there could be a presidency-defining, changing moment. And Mara, it seems like the president is trying to navigate a pretty fine line here. Absolutely.

He was clearly willing to risk the populist blowback from helping some Silicon Valley fat cats to risking a true bank run and terrible financial consequences of that. So he chose to shore up this bank. He doesn't want to call it a bailout, but the depositors are being made whole, even if they have deposits over $250,000. And the risk he took was that he's destroying moral hazard in the future, meaning he's sending them signal that banks can do all sorts of risky things because the government will come in and rescue them versus staunching the bleeding right now. I think Brendan Buck is absolutely correct. If he acts aggressively and it's forgotten in a few months, the politics of this will not hurt him. We should be clear here. What the administration did was to bail out the depositors at these two banks, but not the banks themselves.

The shareholders, the investors in the banks, the executives, they're out of luck. They're losing jobs. They're losing their investment. But the depositors were made whole even if they had more than that quarter million dollars on deposit. Right. And that's a distinction that's going to be lost on most voters on the left and the right who are angry about big government, big business, big tech, big everything. Sure. But the rationale for bailing out the depositors in this case was both to protect the economy of all the workers who depended on those deposits to pay their paychecks the next week or two, but even more importantly, to prevent depositors at other banks, big depositors with more than a quarter million

dollars, from feeling like, uh-oh, my money might not be safe either, and pulling it out and having then a wider national bank run. So one of the questions I was hoping we could answer is whether or not this is systemic in some way. And Mara, you just brought up this issue of a moral hazard. And, you know, Scott, I am left wondering what happens next if the rules don't change? Has the administration just created this situation where banks can engage in riskier behavior and assume that the government is always going to be there to help bail them out if they fail, if the rules don't actually change? Well, again, the banks here, the risky behavior by the banks is not being bailed out.

The bankers are out of luck, but the customers are being bailed out. And I think that's an open question whether all customers everywhere would get the same treatment that the customers at these two banks got. This is a question that a lot of bankers have been putting to Treasury Secretary Janet Yellen and to others in the two weeks since this all came to a head. In particular, smaller banks are wondering, would we get the same deference that these two medium-sized or semi-large banks got? Silicon Valley Bank and Signature Bank were not the giant banks. They weren't Citigroup. They weren't Wells Fargo.

They weren't Bank of America. But they're also not the mom-and-pop Main Street banks. These were big regional banks. And the small Main Street banks are wondering, hey, if we got into trouble, would our customers get the same deal? And if not, do our big customers now have an incentive to take their money elsewhere? So that's the thing that the policymakers are going to have to wrestle with. Scott, do you think that the government has redefined too big to fail or at least too big for depositors to have to take a haircut? Exactly. And what they've learned from this experience is that bank runs are more contagious than perhaps they thought before. In other words, a bank run on Silicon Valley Bank or a signature bank in isolation could have been tolerated. But the threat that that bank

run would extend to many, many more banks, that the contagion would spread, is what really prompted the aggressive action here by the government. Federal Reserve Chairman Jerome Powell said this week they're probably going to need some stricter rules on how they deal with banks, how they supervise banks, because what this has taught them is that a bank run can happen much faster than it ever did before. These Silicon Valley Bank customers, they were very wired. And in a single day, they pulled $42 billion out of that bank. The time it took from a worrisome text message from a business partner about your funds to switch over to your banking app and pull money out, it was seconds. And so we've never seen a bank run as fast as this. And the people that police banks are probably going to have to take that into account as they formulate some new rules. All right.

Well, let's take a quick break and we'll be back in just a moment. Some people in Ireland follow American presidential elections as if they were a sport. I think we knew all the counties by name. We knew Fulton County. That's the funny one in Wisconsin. There's a very funny name. Waukesha. Oh, there we go. Yeah, Waukesha.

But that does not mean their politics are just like ours. When an Irish politician arrives to America, they say, oh, I am Senator whoever. I am Senator Omar Khan. And the American person is like, wow, Senator. Whereas the Senate in Ireland is a much different kettle of fish. An Irish view of politics at home and abroad. That's in our upcoming bonus episode for NPR Politics Plus listeners. If that's you, be sure to check it out.

And thank you for your support. If it's not, be sure to check it out. And thank you for your support. If it's not, it could be. Sign up and support public media at the link in our episode notes. And we're back. You know, so earlier we were talking about lessons learned from 2008. And one of the key financial reforms that came out of the 2008 financial crisis was something called the Dodd-Frank Act. It was supposed to prevent a situation like the one that we've seen unfold this month. And so, Scott, I think we all have this question of why did it not? Right. Well, we're going to be asking that question and hopefully getting more clear answers. But what we do know now is that supervisors, bank supervisors at

Silicon Valley Bank had raised alarms about some of the risky practices there. And those risky practices were they had a deposit base that was very concentrated in one industry, the tech industry. So a lot of their customers suddenly needed money at the same time. A lot of those customers had more money than insurance would typically cover. So they had an incentive to pull their puns out when they had the first whiff of trouble. And the bank was heavily invested in these long-dated securities, which, as you noted, lost value when interest rates rose. These were not hidden problems. They weren't mysterious problems. They are problems that the bank supervisors knew about and warned about, but they weren't corrected in time to head off this run. So certainly bank

supervision is going to need to be tightened. The other question is whether these sort of mid-sized banks, not the very giants, but not small banks either, should be subject to more strict oversight and regulation. And that's something some Democrats have been saying, right? Like Massachusetts Senator Elizabeth Warren. Some Democrats, Massachusetts Senator Elizabeth Warren has been leading the charge on that. And initially, banks as big as Silicon Valley Bank would have been subject to stricter, more rigorous government oversight. They were in the years right after the great financial crisis. After a passage of time, you know, if you don't have a banking crisis for a while, people start to get complacent.

People start to forget what that feels like. Rules get relaxed. The law was changed in 2018 to say that midsize banks like this would be excused from some of the most severe stress tests. And that might get looked at as well. I think it's no question that the supervision will be reviewed and probably strengthened. Whether mid-sized banks are subject to stricter regulation, we'll see. That would take an act of Congress. So you were talking there about supervision and regulation, but some Republicans, especially those who I would say are eyeing the 2024 presidency, are putting the blame for what happened with these two banks squarely on the

shoulders of President Biden. You have to connect this, too, to the failed policies of President Joe Biden and his administration on this economy. I mean, we're looking at another rate increase, those rate increases trying to deal with the worst inflation in 40 years, which has been driven by the gusher of spending by the Biden administration. That's putting incredible pressure on banks. So that was former Vice President Mike Pence, who, by all accounts, is potentially likely looking at a presidential run in 2024. And just in layman's terms, what he's saying there is that the Biden administration spent a bunch of money that led to inflation. The inflation

led to higher interest rates that led to, say, a bank like Silicon Valley going down. Yeah, not surprising that the Republicans would try to pin all this on the Biden administration and a Democratic Congress. It's certainly true that there was a lot of spending in the first year of the Biden administration, and that had something to do with the high inflation that we're having, but it's certainly not the sole cause. I mean, inflation in the U.K., for example, is much higher than it is here in the United States, and they didn't have a Biden administration or a Democratic Congress. So there's obviously other things going on there, the war in Ukraine, the aftereffects of the pandemic. But let's say spending had something to do with inflation, and certainly inflation is why we've had higher interest rates and certainly higher interest rates were one of the stresses that helped bring down Silicon Valley Bank.

But bankers are supposed to be able to deal with higher interest rates. That's their job and they didn't do it here. And Democrats, of course, are blaming the weakening of Dodd-Frank in the Trump administration for these problems. A lot of Democrats voted for that bill that we can Dodd-Frank too. But there are a lot of people who are trying to make some political points out of this. You know, Mara, it seems like one of the president's challenges, though, is that these bank failures are not happening in isolation, right? They're happening in an environment in

which already a whole bunch of Americans feel pretty down on the economy. You know, I was speaking with Democratic pollster Celinda Lake the other day, and she said 75% of Americans have a negative view of the economy. Two-thirds already think the country is in a recession, though I should be clear it is not in a recession. And it feels like because this banking turmoil is happening in this environment, it kind of reinforces the pessimistic view people potentially have on the economy. And that feels like a very big challenge for this president. Yes, absolutely. I mean, presidents rise and fall with the economy,

although not as much as they used to. When Donald Trump had a great economy, he still was doing pretty bad. And at times when the economy is good, modern presidents don't benefit by it as much. So this is a problem for Biden, but it's going to be hard for him to fix it because even if people have a job, even if their wages went up, as long as there's inflation, they certainly are going to feel that things aren't as good. But certainly the economy is always going to be a big problem for any president running for reelection and especially inflation. Inflation is the economic indicator that defeats presidents. So Scott, before we wrap up today's show, I just want to get a sense from you of where the economy is now. Has the banking contagion been contained?

It's probably premature to say it's totally been contained, although both the Fed chairman and the Treasury secretary have said the run on bank deposits has stabilized. That's the word they used. So we're seeing our way perhaps through this banking crunch. And that's one reason the Fed thought that they could sort of resume their regular programming and raise interest rates this week to battle the longer term challenge, which has been inflation. All right. Well, that is a wrap for today's show. We'll be back in your feeds tomorrow with our weekly roundup. Thank you, as always, Scott Horsley, for joining us. Great to be with you.

I'm Asma Khalid. I cover the White House. I'm Mara Liason, national political correspondent. And thank you all, as always, for listening to the NPR Politics Podcast.