As of writing this post, two major American banks have recently failed and Credit Suisse, Switzerland’s second largest bank, is teetering on the brink. There’s a fear of more runs on banks, and people are asking whether their savings and investments are safe.
I want to be clear to start off that this post is my opinion and you should come to your own conclusions. Nonetheless I have experience and education in finance and public policy so you can trust that the opinion I’m offering you is an informed one.
Part 1: “Easy money” and the 2008 bailout
To better understand why banks are now failing and what your options are for protecting your assets, it’s important we start by discussing the policies that got us to where we are now. First, we must go back to the financial crisis of 2007-2008, when the “quantitative easing,” or “easy money” policy was first introduced.
Literally, “quantitative” refers to an amount, or a quantity, of something, while “easing” refers to making something unpleasant more pleasant. The quantitative easing policy therefore seeks to make the quantity of money “more pleasant,” by increasing it.
Quantitative easing was not only adopted in the US but also in Japan and Western Europe, so it is unsurprising the current bank failure contagion is being experienced in other countries that followed the same policy.
Of course, while an easy money policy was advocated by opinion leaders including a majority of Congress and then-Federal Reserve Chairman Ben Bernanke, there were also many people that worried the policy could get out of control and cause serious harm.
Sheila Barr, who served as Chair of the Federal Deposit Insurance Corporation (FDIC) from 2006-2011, stated in regards to the failure of Silicon Valley Bank:
“We’re seeing a potential fragility in the system related to monetary policy. If we hadn’t been driving our economy for 14 years with easy money and then trying to really quickly undo that, no we wouldn’t be having these problems now.”
In fact, when quantitative easing was introduced in 2008, the policy was then presented as a temporary solution to kickstart the economy, since interest rate reductions had not worked, not a policy that would be continually expanded over the years ahead.
Thomas Hoenig, currently a Distinguished Senior Fellow at the Mercatus Center, served as President of the Federal Reserve of Kansas City when the quantitative easing policy was adopted. Hoenig stated:
“When you have a crisis that’s when you want your central bank to be willing to put cash in and so to avoid a major depression where everything just stops, you provide the cash, so I agreed with yes, you need to provide this money on the expectation that once we got through the crisis we would go back to a normal policy.”
In order to prevent the collapse of institutions they dubbed “too big to fail,” in 2008, policymakers spent $1.488 trillion on what they called the Troubled Asset Relief Program, or TARP. $440 billion went to bail out banks, $187 billion to bail out Fannie Mae and Freddie Mac, mortgage providers who remain under Federal conservatorship to this day, and $30 billion to bail out Bear Stearns, an investment bank that has since been purchased by JP Morgan Chase.
A further $831 billion was dedicated to tax reductions and other spending programs, some of which audits later found to have been spent wastefully.
The TARP program encountered strenuous opposition from many everyday Americans. They asked why they should finance a bailout for Wall Street with their tax dollars when so many American families were struggling themselves.
A rant by reporter Rick Santelli galvanized people into the streets in protest in what would become the Tea Party movement. Opposition to TARP and the Affordable Care Act (aka “Obamacare”) propelled Tea Party-backed candidates into office in the 2010 elections. While this victory restrained the “easy money” agenda, it would not stop it entirely, and eventually easy money would come roaring back in earnest …
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
