ATHENS – When First Republic Bank failed, the FDIC organized a forced sale of its assets to JPMorgan Chase. This violated the FDIC’s core rule that no bank with more than 10% of insured deposits in the US should be allowed to proceed by acquiring another US bank. But, as the concept of saving taxpayers the cost of another bank failure prevailed, US authorities allowed the nation’s largest bank to become already too big to fail (TBTF). He really contributed to doing that.
In a rare display of bipartisanship, Democrats and Republicans alike applauded the FDIC’s actions, saying JPMorgan had stepped in with the “private sector” plan to avoid excessive burden on taxpayers. Unfortunately, the truth was less heroic: Jamie Dimon, the omnipresent boss of JPMorgan Chase, negotiated a $50 billion credit facility and loss-sharing agreement with the FDIC that would result in a $13 billion loss to American taxpayers. In short, the First Republic regime inflicted on Americans a higher tax bill and increased systemic risks inherent in a large TBTF bank.
The Republic was small at first, but its fate is a harbinger of bigger things. Due to rising prices and (to a lesser extent) wages, the US public debt shrank as a percentage of national income. But now that the Federal Reserve is raising interest rates to curb inflation, the value of Treasuries on banks’ books has fallen (when you can buy a new one with higher performance, a lower-yielding, older Why buy bonds?) And since most of the safe assets held by banks are Treasuries, bankruptcies like Silicon Valley Bank, Signature Bank, and First Republic have gone up.
This dynamic is not likely to end anytime soon. There will be more bank failures, with TBTF banks posing an even greater systemic threat to society. In addition to deceiving the public that their taxes are being saved, the authorities are setting the stage for a future banking crisis, which will force a desperate population to pay even more.
One option is the tax-financed takeover of smaller banks like First Republic by megabanks like JPMorgan. And this option would not incur the cost to the taxpayer of supporting uninsured deposits: Fed deposit accounts or, similarly, the phased launch of a Fed-issued digital dollar.
Let’s take a look at how a United States Central Bank Digital Currency, or CBDC, would work in the case of the First Republic. Instead of letting the FDIC guarantee bank deposits with taxpayer money, the Fed creates digital accounts (or wallets) for First Republic depositors and credits their balances. Depositors can keep money in their new Fed account, and make payments from there with a username and PIN provided by the Fed, or transfer the balance to another bank account.
As long as they are in your Fed account, your deposits are virtually guaranteed by the Fed without the need to burden taxpayers or impose fees on other banks. If the Fed fears that the associated increase in its balance sheet from boosting the money supply will prove inflationary, it can sterilize the new money by selling a mountain of assets already of equal value (such as mortgages and bonds). Is.
Finally, taxpayers are completely protected while megabanks like JP Morgan are not allowed to grow up. Indeed, Wall Street is finally facing welcome competition from the Fed’s accounts, which has forced it to improve its performance.
I imagine the angry CBDC haters rushing to their keyboards to vilify me for collaborating in Big Brother’s nefarious effort to monitor every citizen’s transactions. But they are missing the mark. Digital money is already with us and is rapidly displacing cash payments. In no time, the IRS, FBI and even the local police have instant access to our payments. The Canadian Prime Minister, Justin Trudeau, did not require a CBDC to freeze the bank accounts of truck drivers who oppose vaccines. Banks and Big Tech often sidestep people whose opinions are deemed inappropriate, or refuse to do business with them.
In other words, we already live in a techno-feudal society where we need to ask our bank, and indirectly our government, for permission to make payments. Credit card companies, banks, bureaucrats and other irresponsible and opaque intermediaries can block our digital payments.
Perhaps counterintuitively, CBDCs can improve citizen privacy from the status quo and protect us from overly centralized power. Checks and balances can be offered based on two separate and distinct data management systems. The system that manages Fed accounts can be completely anonymous (in the same way that crypto accounts are anonymous and identified by a long series of numbers), while a separate system overseen by relevant authorities tracks any illegal activities such as tax evasion. activity and money laundering. As a result, a democratically controlled and appropriated CBDC could bring the combined benefits of strengthening tax collection, fighting deflation, and improving protection against Big Brother (and his many little brothers).
Why, then, is there so much venom against CBDCs from those who don’t care for the oversight and control that Wall Street-controlled digital money already imposes on us? Who’s Really Afraid of CBDC?
Long ago, the greed of tobacco companies was channeled through liberal outrage over the lack of freedom of smokers to choose whether to get cancer. This time, the outcry is serving the interests of bankers who are jittery at the prospect of Fed accounts.
Dimon and the other masters of the TBTF universe are right to fear that a fed CBDC would be a threat to their empire building. And bankers around the world rightly fear that many of their lucrative services will no longer be in demand. If these services—taking deposits, processing payments, and so on—become “fuzzy,” they would suddenly lose their ability to hold corporations hostage.