by Lew Rockwell, Lew Rockwell:
On Sunday, March 12, regulators shut down the Signature Bank. They reason they gave for doing this is incredible. They said that the entire financial system night collapse if they didn’t. What kind of insane system is it in which a run on one bank can cause such a disaster? The crisis shows once more that the great Murray Rothbard was right. We need to end the Fed and fractional reserve banking and restore the gold standard. Then the financial system will be safe from collapse.
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Here is what happened, according to the New York Times March 12, 2023: “Signature Bank, a New York financial institution with a big real estate lending business that had recently made a play to win cryptocurrency deposits, closed its doors abruptly on Sunday, after regulators said that keeping the bank open could threaten the stability of the entire financial system.
To some extent, Signature is a victim of the panic around Silicon Valley Bank, which regulators seized on Friday. Its closing underscores the challenges that face small and midsize banks, which often focus on niche lines of business and have a narrower base of customers than Goliaths like JPMorgan Chase or Bank of America. That leaves them especially vulnerable to old-fashioned bank runs.
Silicon Valley Bank, a lender to start-ups, imploded on Friday after some ill-timed financial decisions left it struggling to meet customer withdrawal requests — and just as slowing venture capital funding prompted fledging companies to tap their accounts more. Similarly, Signature became one of the few banks to welcome cryptocurrency deposits, just before the overheated industry blew up last year.
As word about Silicon Valley Bank’s troubles began to spread last week, business customers of Signature began calling the bank, asking if their deposits were safe. Many were worried that their deposits could be at risk because, like business customers of Silicon Valley, most had more than $250,000 in their accounts. The Federal Deposit Insurance Corporation, the entity that seized Silicon Valley, insures deposits only up to $250,000.”
Paul Craig Roberts offers further background: “The failure of Silicon Valley Bank (16th largest bank in US) last Friday resulted from depositors withdrawing their funds in response to a drop in value of the bank’s bond portfolios caused by the Federal Reserve’s ill-considered hikes in interest rates. The mindless policy implemented by the Federal Reserve cures inflation by producing bank runs, failed banks, and unemployment. The Federal Reserve and neoliberal economists are still stuck in the worn out thinking of 20th century Keynesianism.
Yesterday federal regulators seized New York’s Signature Bank which was overwhelmed by deposit withdrawals. The banks’ failures, with troubles reported afflicting Republic Bank (14th largest in the US) and reports that many Wells Fargo depositors experienced zero balances due to a glitch of the digital revolution has left those fortunate enough to have bank balances an entire weekend to work themselves into a panic about the safety of their own bank deposits. The question is whether panicked depositors rush to withdraw their money today (Monday, March 13, 2023). Hoping to avoid this, the Federal Reserve announced yesterday on Sunday that it would provide banks with cash to meet withdrawals. The Federal reserve announced that all depositors in Silicon Valley and Signature banks, including those with deposits above the insured amount, would be protected.
With the Federal Reserve backstopping the banking system as it is supposed to do (and failed to do during the Great Depression), bank problems and the panic they produce will hopefully be contained. In the last 14 months, bank reserves have declined by $1.3 trillion. This means that banks are short the cash to meet withdrawals and would have to sell financial assets to meet withdrawals. These sales would depress the prices of the financial assets, and impair the banks’ balance sheets.
Of course, as during the previous financial crisis, government and financial executives will make reassuring statements, such as the one made by Treasury Secretary Yellen last Friday when she reassured the public that the American banking system is resilient and well capitalized.
But is it? The five banks labeled “too big to fail” have $188 trillion in derivatives. The brutal fact is that 5 US banks have risk exposure that is twice the size of the GDP of the entire world. It is incomprehensible that 5 US banks have sufficient capital to back derivative bets that are twice the size of world GDP.”
Faced with this disaster, we must return to first principles. What would people use for money in a genuine free market? A lot of people answer the question in this way. We really don’t know the answer for sure. It would be up to the people who live in that society. Because in a genuine free market, there would be no state at all, there would be no money mandated by the state. People would compete to establish the money they liked best. Maybe people would settle on a gold or silver standard, as they had done in the past. But maybe they wouldn’t. They might prefer electronic currency like bitcoin. Or maybe there would be all sorts of different monies, with no clear winner.
Murray Rothbard doesn’t agree with this. He was aware of competitive money, because F.A. Hayek had suggested it. People have the right to offer competing monies, as Hayek advocated. But Murray thought they would be unlikely to do this. The competition had already taken place, and precious metals were the winner. Why go through the same process again? As Murray explains in his great article, “The Case for a Genuine Gold Dollar”:
