LARRY KUDLOW: The leftist ideologues at the FDIC are still up to it

So far, the contagion from the bank closings has not yet spread, but the stock market bear is growling even louder. Last time I looked, the DOW is 400 points. Maybe not as we close. You have Credit Suisse’s anti-party and capital problems dominating the early morning session, but that will depend on the Swiss government, which will likely end up supporting them.

Here’s some good news for the US: The Fed-Treasury lending facility, which is an under-reported development, is actually a very good thing. It’s called the Bank Financing Program.

I mentioned this earlier in the week. It offers loans of up to one year to stop emergency liquidity needs. The seed corn is $25 billion from the Treasury’s Stock Market Stabilization Fund, and now it allows the central bank to tap into that almost as much as it wants or needs, just in case.

Just in case what? You know, just in case. Incidentally, this was how the Trump administration coordinated with the Fed during the days of the COVID shutdown for a series of emergency funds.

You might not like the idea, but you know what? You have to go back to the 19th century to famous Britons economic Journalist Walter Bagehot, who said in emergencies, “borrow freely, with good collateral, with a small penalty rate.”


That’s basically what the Fed and the Treasury have created: a small penalty rate that will be 10 basis points above the overnight paper called the OIS, which is the overnight index swap rate.

It’s basically the Fed funds rate. By the way, collateral paper is good collateral. They are bonds and mortgage-backed securities. There is some good news here to stem the tide that could prevent the fire, this emergency borrowing. Stop the transmission.

On the other hand, the bad is the FDIC insurance of uninsured deposits. The leftist ideologues at the FDIC, who still haven’t sold SVB despite many suitors like KKR, Apollo, Blackstone and many others, are still sitting on their hands.

You know they could bail out the taxpayers and the FDIC right away if they sell the damn bank. I don’t know what’s holding them back. Also bad – and this is worse – is the ongoing story of the utter failure of Mary Daly’s San Francisco Fed supervisors and examiners to intervene at SVB with their wild investment strategy and long-term bonds while interest rates were rising to heights or their unmatched assets- assumption of risk of liability.

I have not seen a word about the failure of the San Francisco Fed’s responsibilities. They have supervisors, they have examiners and they should have done their job. You know what? It wasn’t just the last three weeks or the last three months. People have known about Silicon Valley Bank’s problems for at least a year and where was the San Francisco Fed?

We have the chairman of the House Financial Services Committee, Congressman Pat McHenry to talk about it. Then there is such a large amount of crazy, left-wing content surrounding Silicon Valley Bank.

I mean, this is a weird bank. First of all, they gave $73 million to the Marxist BLM movement at the height of COVID and race riots in 2020. They had a board that was basically full of Hillary Clinton donors and virtually no bank management.

Then there’s this $5 billion commitment to various investments for climate and diversity and equity and inclusion, and they had a regional head of the Fed—that’s Ms. Daley again—who gave a speech in Washington and wrote a paper saying: “as monetary policy makers, our job is to navigate climate change”.

That’s not necessarily a sin, it’s just kind of weird when you throw it in with the rest Silicon Valley Bank crazy mix. It also contradicts this wise sentiment of Fed Chairman Jay Powell. This is important. Remember what he said a while ago?

Jerome Powell: We should stick to our knitting and not wander off to pursue perceived social benefits that are not closely related to our institutionalized goals and principles. We are not and will not be responsible for climate policy making. Taking on new goals, however worthy, without a clear, statutory mandate would undermine our case for independence.

Federal Reserve Chairman Jerome Powell speaks to the Senate Banking, Housing and Urban Affairs Committee as he presents the Monetary Policy Report to the committee on Capitol Hill, Wednesday, June 22, 2022, in Washington. (AP Photo/Manuel Balce Ceneta/AP Newsroom)

Now, that’s exactly what it is, one of Jay Powell’s finest moments. Now, whether Mrs. Daly heard him or anyone else involved in this crazy banking game, I don’t know.

Jay Powell is right. The Fed’s job is not climate change. Inflation should be zero or at least less than 2%. The problem here is, as we’ve said a million times, the Fed was in denial about inflation two years ago. They waited too long, zero interest rates, then they finally figured it out and of course they raised interest rates. A lot of banks probably have securities that are too underwater because they either didn’t see it coming or didn’t believe it. That’s the burden for the Fed to bear, but at least Jay Powell has got climate change right.


By the way, on the east coast of New York, we have Signature Bank, which also closed, but now, their executives produced a Broadway-style musical about the opening of the bank in 2001, talking about how to start a bank that would ” decrease and it will fail’, and another song, ‘How to build a bank for dummies’.

For me, I read this stuff and I can’t believe it’s true. I must be losing my mind. At least get us new private sector owners for these dumb banks so the public doesn’t suffer anymore. This story is very strange.

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