Monday, March 13, 2023

Part I

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A Failed Bank, A Breach in Trust: Nation’s Second Largest Bank Failure Provokes Massive Worldview Questions

When you talk about a matter of vast worldview significance that comes out of the blue and catches people by surprise and hits them where it counts. That is to say in the bank account.

On Friday of last week, federal authorities shut down a major bank and what now amounts to the second-largest bank failure in the United States history. The bank in this case is in Northern California known as the Silicon Valley Bank. It’s considered a moderate size bank. It’s not one of the largest banks in the country covered by even more strict banking requirements and regulations, but this came as a big shock. It came as a big shock to the entire financial system and of course, it sets off a wave of tremendous concern about the health of banking in the United States.

Now, most people who know very much about the banking sector were rushing in to say, “There should not be much contagion about this. This is not a major failure of banking. This is not 2008 all over again. This is not the Great Depression in 1929. This is something that is limited to this one bank and to an understandable if regrettable set of financial circumstances.” We are talking about the failure of a bank and there are a lot of Americans who might not be aware that banks can actually fail.

The largest bank failure of all, took place back with the financial collapse of 2008. But one of the things we come to know about humanity is there are panics, there are catastrophes, and then we move on. And when it comes to our financial lives, one way or another, we tend to move on and the money continues to move either to or through banks.

This raises some really big worldview issues, and we’re going to be looking at the failure of this bank. We’re going to be looking at the government response. We’re going to be looking at the history of banking, and we’re going to be looking at how all of this functions in a moral and social context, because banks are financial institutions.

But there is no getting around the fact that the major currency of all economics is trust. And trust is what is required for a bank to exist, and trust is what is required for a bank to operate. And a lack of trust is what leads to the collapse of a bank or an entire banking sector. In this case, one bank.

Officially, what took place on Friday is that officials of the federal government, in particular over the Federal Deposit Insurance Corporation known as the FDIC, went in and took custody of the bank. They stopped deposits, they stopped withdrawals, they took control of the entire operation, and basically they federalized the reality that had been known as the Silicon Valley Bank. It is now a matter of federal concern.

Now, the FDIC you’ll recall, prevents the entire collapse of the banking industry. It also prevents the entire collapse of customer deposits there in covered banks. The FDIC covers up to $250,000, but there were accounts in the Silicon Valley Bank that were in the hundreds of millions of dollars. So we’re talking about something that is way beyond FDIC coverage.

There’s something more to what took place on Friday with the FDIC. When the Feds stepped in and took control of the bank, they actually froze all the deposits, they froze all the accounts, they then set up a new temporary bank known as the Deposit Insurance National Bank of Santa Clara there in California, and they transferred all of the accounts to that new bank.

Now, as of Friday, what was announced is that depositors up to the covered $250,000 would have access to their funds by sometime on Monday morning, but at least by last night, officials of the Biden administration were indicating that the coverage, through one means or another by the federal government could include coverage of all the deposits to full value. That’s going to be extremely controversial and we will need to take a closer look at why that is so.

Now, as we think about this, there are going to be some terms we’re going to need to use. Terms that have a deep worldview significance, even though they basically come from the banking sector. One of the most important of those words is moral hazard. In ethical terms, a moral hazard is what amounts to a financial or business incentive to do something that is not good, and that could be extended to something that even more fundamentally is not right, or it could also be applied to something that is not economically safe.

Moral hazard means more than anything else in this situation. Someone comes in to rescue someone from a bad business decision. Someone comes in to rescue someone from a bad business plan. Someone comes in to rescue someone from doing something that would be financially damaging or devastating. And the moral hazard category means, that when someone steps in to rescue in that kind of situation, the hard lessons of what doesn’t work and shouldn’t work and isn’t right are not learned.

Another word you’re probably hearing is one that you thought was related to illness, to the pandemic, to COVID-19. Many Americans heard the word contagion, but in this case, the contagion is not viral or bacterial. It is instead a contagion of financial problems all based in the collapse of one financial institution that leads to a collapse of trust. That means there’s a run not only on this bank but on other banks, and other financial institutions and sectors of the economy suffer by this contagion.

Another way of describing it would be the spread of a kind of financial panic. But perhaps at this point it would be interesting for Christians just to think about how banking came to be. And by the way, there are people who say, “Why don’t we just go without banks?” And the answer to that is, well, try it. It really isn’t possible in the modern age, but it is also very interesting to note that banks became very important and in some ways to many sectors of civilization. They became almost essential, a matter of millennia ago.

So as you’re talking about banks, most people tend to think of a place where there’s a lot of money stored inside, but actually they are financial institutions which are at least intended to preserve and to enhance wealth and savings. There’s more to it than that.

By the time you get into merchant banking and modern commercial banking, there is a lot more to it than just the bank trying to encourage deposits, using those deposits in order to invest those monies in order to gain a margin, in order to offer to consumers something of a financial incentive to keep the money in their bank, in terms of interest and the entire system we now know with loans and mortgages and all the kinds of issues that are involved with the financial sector in the banking industry. It is extremely complex, but the bottom line is actually quite simple.

You might think of a bank at one level as a cooperative that enables people to preserve their investments, to improve their financial standing, and if nothing else, to have a place to put money and to put value with at least the theory of preserving it if not putting it to work.

As you look at the development of banking, you come to understand that it becomes necessary for a couple of reasons. Number one, the banking industry has helped to ascertain value go all the way back. It’s not necessarily called banking back then, but when you look at the development of currency, what it really represents is some effort to try to create a way to save and to trade in a way that is recognizable, based upon some representation of value.

The moment someone said, “Look, I’ll give you these two rocks with these marks on it in trade for that cow.” That’s how currency basically came to be devised. Over time, it was not just local, it was not just private, it became corporate, it became governmental, and by the time you get to our own time in the United States, most currencies in the 20th century and beyond are issued by federal central banks or they’re in the name of nations.

In Western civilization, some people would argue that the very first bank you might call a bank, was actually that established by the Knights Templar in about the 12th century, the beginning of the 12th century. There had to be some way of moving money once you did have the aggregation of money into fortunes, and once that became at least translatable into some form of currency or at least into gold, you had to have somewhere to put that gold and you wanted to find some way of putting that gold to work.

Furthermore, lending became, at least at one point in Western civilization, very much a part of the banking industry, and that was when the Christian church came to terms with the fact that laws against usury did not forbid all commercial banking operations. The Medicis, many the other most famous family names in Europe were involved one way or another in the banking industry. For the Medicis, it was actually what was known as the Medici Bank of Florence, and that was established by the way in the year 1397, and it is believed to have operated for almost exactly a hundred years until 1494.

The first of joint stock company arrived in the year 1553. No question, it was in London. It was known as The Company of Merchant Adventurers to New Lands. The Dutch got in on the banking industry and on the stock exchange. By 1602, the Dutch East India Company was itself permitted and commissioned to print both stocks and bonds, which amounted to a different form of currency or at least a different form of exchange.

Bank notes were circulated here in North America by the 1690s in the name of the Massachusetts Bay Colony, the Bank of England was established in 1694. That’s just about four years later. The Bank of Scotland was created just one year after that. One of the great controversies in American history was over whether or not the United States should have itself a national bank, and it did until it didn’t, until something like it had to be created once again.

Banking across entire vast areas such as the continent really didn’t become possible until you had the development of more modern transportation and communications. Indeed, some modern political developments as well. The Rothschild family by the beginning of the 19th century was big time into banking across all of Europe. The Bank of France was established in the same year and not by accident, by Napoleon Bonaparte.

In the United States, you not only had the emergence of many different banks and of local control over some of the banking system, more state control, eventually more federal control. By 1913, the Federal Reserve Act had created what became known as the Federal Reserve System, and that became the central bank and the central banking system in the United States. And it is in the name of that central bank and by its authority that legal tender is issued in the United States, and at least control over the currency is, well, theoretically or hypothetically, it is in the hands of the Federal Reserve System.

One big change that came in terms of banking in the United States, it arrived in the year 1971. What happened then? Well, then President Richard M. Nixon unilaterally took the United States off of what was known as the gold standard. The gold standard meant that at least in theory, all of the banking reserves in the United States were backed up with gold bullion and of course, most famously stored at Fort Knox, not far from where I am speaking to you today on The Briefing.

But by 1971, President Nixon had come to a Keynesian economic conviction, that the economy needed to be freed from the limitations of the gold standard. And so we have been off the gold standard since that year in 1971. So what is behind the currency of the United States government? What is behind the full faith and credit of the United States government? Well, what’s behind it, is the United States government.

And thus there are people who say, “Well, that’s not good enough. What is behind the United States government?” And in this case, basically whatever assets the United States government may be said to own or might be confiscated, but by the time you get there, you are already broke anyway.

The reality is that for the vast majority of people in the United States, both banking and the use of currency are just decidedly essential. There’s no way around it. There are those who tried to come up with an alternative to that kind of currency, and that’s why cryptocurrency, at least in part, that’s why it was developed.

But needless to say, cryptocurrency has not, A, resolved the problem, nor B, has it become a genuine replacement in the sense that more people are using crypto than cash. Now, most people right now would evaluate their cost benefit analysis. They would look at their bank account, they would look at the balance, and they expect to see it represented in good old U.S. dollars.

But here’s where from a Christian perspective, we need to think about this for a moment. What is most essential to a banking system? Let’s think about it. What is most essential? Well, is it money? You might come up with some other way than say, paper currency or coin to evaluate and to measure, to keep a record of value. You might use, as I said, some kind of carved stone. You might use some little piece of metal, you might use some kind of document you would write, but the point is you have to come up with some medium of exchange.

There has to be something that exists in the place of currency, because you simply can’t carry around all your corn and all your cattle. You can’t carry around all your wealth in your pocket all the time. At least let’s hope you have more that can be carried around in your pocket all the time.

And so things are translated into value and that value is often expressed in currency. But then again, even if you have a piece of paper or you have an electronic record of that currency and of your balance, you’re not carrying that around. And so you really are trusting someone who you hope is trustworthy and is being watched by regulators. You really are counting on the fact that someone is protecting that value, at least as much as might be humanly possible in a fallen world. To put it another way, a collapse of a bank is a horrifying thing.

Now, there will be all kinds of analyses about first of all, the Silicon Valley Bank and how it got into this much trouble. The bottom line is, it got into trouble one way and say the moderate term, and in another way, in a very fast short-term, very short amount of time.

The longer-term problem, is that it was having to pay out more than effectively, it was taking in as you look at the interest the bank was having to pay, versus the interest it was itself earning, because the bank was holding an awful lot of long-term treasury bills that weren’t producing a lot. But in order to stay solvent and to stay in business, they were having to offer payouts that simply were not sustainable.

The more acute, the faster problem was that once word got out that the bank might fail. Well, it really did fail. It failed fast because you had so many people trying to take out so many millions and billions of dollars simultaneously far beyond what the bank had on hand. That is called classically a run on a bank.

But then things are going to get very, very interesting today. Federal regulators indicated last night after a whole lot of speculation and argument over the weekend that the federal government, one way or another was going to stand behind the total value of the accounts, that were a part of the Silicon Valley Bank and are now a part of this new temporary, federally controlled bank.

And so the federal government we are told is going to back up not only the $250,000 through the Federal Deposit and Insurance Corporation, but also the totality. And the reason for that people are going to say is, “Well, look at all these Silicon Valley companies. Look at all the value. Look at the damage to the entire economy, and look at the employees that aren’t going to get paid. Look at the collapse, which could lead to a contagion, which could lead to a vast financial crisis. And we don’t want to go back to 2008.”

But at the same time, there are going to be others in a very, very heated political debate that just has to take place who are going to say, “Look, you have just rewarded a bank and you have just rewarded an entire banking system, in this case for what was very bad behavior, very bad investment patterns.” Now, you’re going to have politicians say, “Look, we are saying that the depositors are going to be protected, not the officials at the bank and not the shareholders of the bank itself.”

But what’s really interesting is that by last night, there were huge loud voices of criticism about this moral hazard and about the federal government ensuring one way or another all the deposits in this bank. You had people on the right and people on the left saying, “That’s not fair.” You had people on the right conservatives saying it because they don’t believe the federal government should step in, in this kind of case and reward bad behavior.

But you also have people such as Senator Bernie Sanders, a democratic socialist and officially independent senator from the state of Vermont. Former presidential candidate Bernie Sanders, very much man of the left, not certainly of the right. He came out and said, “Look, this amounts to a bailout of the very, very sexy, very, very popular Silicon Valley crowd. You don’t see this kind of buyout of other people.”

The one thing that is going to put both parties and the leaders of both parties together is a determination not to be blamed for some kind of banking collapse, much less one that would spread beyond this particular bank there in the state of California, but there are others who are going to be pointing fingers very, very fast.

Part II

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Farmgate Avoided? South African President Cleared of Corruption Accusations After the Theft of Money from His Sofa Stash

But at this point as we transition to other news, I’d simply have to cite a news story out of South Africa because oddly enough, it does relate to the failure of a bank in Silicon Valley, but it’s not actually about a bank, and that turns out to be the point.

No kidding. Yesterday’s print edition of The New York Times included this article, the headline, Watchdog Clear South African Leader. And here’s the opening to the news story, “A powerful South African corruption watchdog is found that President Cyril Ramaphosa committed no wrongdoing in connection with the theft of more than half a million dollars stashed in a sofa at his game farm three years ago.” As the article says, and this is an understatement, “The fighting is a major victory for the president who has been bedeviled for the past 10 months by accusations that he tried to cover up the theft to avoid scrutiny over having such a large sum of US dollars stored at his property.”

I’m not going to go much further into this other than to say in Silicon Valley you had a major bank collapse, meanwhile, in South Africa, you had controversy over the fact that a half million American dollars was stolen from a stash in a sofa of the South African president on his game farm.

The controversy concerning the president there became known as Farmgate, named after the Watergate controversy and crisis in the United States. But it just goes to show that there’s no absolutely safe place to put anything of value, whether it’s in a bank in the United States or in your sofa on your game farm in South Africa.

Part III

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Totalitarianism with No Rivals, No Successor in Sight: Xi Jinping Begins Unprecedented 3rd Presidential Term

But next, we need to understand that in the world today, there’s not only a battle for economic supremacy. There’s an even more fundamental battle for political and for power supremacy. And right now, the two superpowers that are most important on the world stage in this conflict are the United States of America on one side, and communist China on the other side.

And what’s important for us to note is that over the weekend, Xi Jinping, the head of the Chinese Communist Party and the head of the government, at least in terms of power, unquestioned power in there in China began his unprecedented third term. This required a constitutional revision, but given the autocratic power of the Communist Party and its rule there in China, there was no way to deny, Xi Jinping and the party that unprecedented third term.

Mr. Xi is now 69 years old, and he, as The New York Times indicates, will keep holding the three main crowns of power in China party, military, and state with no rivals or potential successors vying for attention. Now, that’s what’s so important.

When you look at the United States, you’re already looking at speculation about who will and won’t run in the 2024 presidential campaign. It is already described as chaotic. You have at least two declared candidates on the Republican side for the Republican presidential nomination, not going into names today. And there is almost every assurance that the current President of the United States, Joe Biden will be running for reelection and thus is likely to run in a basically uncontested way for the Democratic presidential nomination.

This is going to be a very interesting election cycle, but it’s going to be a real election cycle. It will be a real battle of ideas. But when you look at an autocracy, you look at a totalitarian form of government, the party is everything, and in China, it is the Chinese Communist Party. That is everything. And at the top of that party is Xi Jinping, and effectively he is now everything. It is right, he wears all three crowns of power. He is head of the state, he is head of the military, and he is also head of the party itself. No rivals, no successor in sight.

Now, on the one hand, you might look at this and say, “Well, at least a former superpower, which was the Soviet Union now represented by Russia.” Well, Russia is also, you might say something like an autocratic or totalitarian power. Yes, but not in the same sense, because the power there is not centered in a party. It’s actually centered in a person, Vladimir Putin. And furthermore, Vladimir Putin can be checked.

He has nearly unlimited political power, and evidently he has enough military supremacy in the entire Russian system to personally launch a war on Ukraine. But even though Vladimir Putin has a lot of control, or at least a lot of influence over the economy, there are a lot of people in Russia with a lot of economic power. And so at least on the economic front, he does not have unilateral power.

Meanwhile, contrast that with the Communist Party. The Communist Party in the name of the people basically controls the entire economy. And over the course of the last several years, it has even been tightening its grip. Even in more recent times, it used the COVID-19 pandemic as justification for an even tighter hold upon the entire economy.

What makes this situation most urgently of interest right now is because in public statements made this very week that he began his third term. Xi Jinping has actually been very open, very vocal, and very specific about seeing the United States as the major competitor to China on the world stage.

Part IV

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A Shift Towards More Chinese Power on the World Stage: China Brokers Deal Between Iran and Saudi Arabia — What Does This Mean for the U.S.?

But speaking of the world stage, something very big happened on that stage and I’m not talking about a bank collapse in California. I’m talking about a deal between Saudi Arabia and Iran brokered quite surprisingly, but quite publicly by the Chinese.

And what makes that picture so very interesting is the fact that in recent years in the Middle East, the big world power that would’ve been standing on that stage with the two parties having achieved some agreement would’ve been the United States of America. But now it is China, and China turns out now to be the biggest economic trading partner with the Middle East. So guess what? Where all that money flows, political influence flows as well.

But there’s more to it than that, because when you look particularly at Saudi Arabia and Iran, you’re talking about one nation very close to the United States and one nation very opposed to the United States, Saudi Arabia, very close. Iran, very much declared as an enemy of the United States, but what both of them share are issues that China would look away from, even as the United States would not. And so morally, there’s a big difference between the United States of America and China, and politically there is a lot at stake.

But the United States has no formal relationship whatsoever with Iran, and so to bring these two parties together, Iran and Saudi Arabia, now recognizing one another formally after years of conflict. That doesn’t mean the conflict goes away, but it does mean that something has happened on the world stage.

And what’s even more interesting than this agreement between Saudi Arabia and Iran is the fact that the nation that made this happen and brought the two countries together is not the United States, but China. You can be guaranteed that the world is watching and it understands that changing picture.

Part V

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The Velocity of the Headlines: The Troubles of Today Were Often Unknowns Just Yesterday

But next, just very quickly in closing, thinking about how fast the world is moving with the last edition of The Briefing for last week, here are two big stories.

Two of the biggest stories as we begin the week that we didn’t know anything about last Friday morning. We didn’t know about the collapse of the Silicon Valley Bank, and we didn’t know about what would happen on that stage with Saudi Arabia and Iran making this announcement in the deal brokered by China.

Just a reminder that the world now moves very, very fast, and you don’t know today what you’ll be thinking about and talking about tomorrow.