Trust is hard to gain but is even harder to regain once lost: the Fed should speak up now
Without trust, our economy stops. Without trust, there is no banking system. The turmoil of the past week has tested our trust. The Fed should help answer the questions that people have.
Why is trust so important in banking?
We put our hard-earned money in a bank, and we expect that we can have our money back whenever we want it. We trust the bank. We do not expect to wake up one morning to see our bank shut down by the government and our accounts frozen. We do not expect to learn about the reckless actions of bankers we trusted with our money. Even if we know that we will get our money eventually, it’s a shock.
It’s a shock to the people’s trust.
And it doesn’t have to be your bank. If you see over and over and over again on the news about someone else’s bank shut down, it’s natural to ask: what about my bank? To put it mildly, the past week has been a shock to trust. That’s dangerous.
What’s happening? What’s coming?
For a recap: Last Thursday, a run on Silicon Valley Bank started. Friday, the FDIC shut down the bank and froze all deposits. A heated debate began that raged all weekend about the large, uninsured [over $250,000] deposits, mostly from start-ups and venture capitalists. Should they get all money back or part of it? Was the SVB failure a risk to other banks? Sunday night, the FDIC, Treasury, and the Fed announced that SVB customers would receive all deposits back, regardless of how large. That bank was deemed “systemically” important. And they told us the FDIC had also shut down the crypto-focused Signature Bank in New York. And the Fed had set up an emergency lending facility with generous terms to help other banks avoid SVB’s and Signature’s fate. Monday, Tuesday, and Wednesday have had their share of downs, ups, and more downs. Today, who knows? Next week?
It’s not 2008. It’s not 1929. It is 2023. But it’s not comforting to tell us what it’s not, and it’s not comforting to tell us it could have been worse. Tell us about now. We are not out of the woods, and it’s clear people and markets are skittish, and many are distrustful that more problems are lurking under the surface. That distrust itself is a problem.
People have questions. Answers would be helpful.
Bright and early on Tuesday morning, I spoke with Manny Munoz on NewsRadio 610 in Miami. Manny asked great questions about what happened with Silicon Valley Bank, whether it was a bailout, and what it meant to people.
One question made me take a deep breath:
Should people with money at a small bank move it to a big bank?
That’s exactly what we want to avoid now—we especially want to prevent many people from doing so simultaneously. Even if all their deposits are safe, a run on banks and bank failures would be terrible. Bank runs can cause a vicious cycle of more bank runs and failures. That would break a tremendous amount of trust in our banks.
Plus, our small banks are important in our communities. They sponsor the little league teams. Their leaders serve on the boards of the local hospital. Personal connections build trust. Big national banks have a different relationship with communities. The big banks, which the government has deemed ‘Too Big to Fail,’ are profiting from the crisis now because some people are transferring their money from other banks. It’s a sad statement about our financial system.
So, here’s basically how I replied to Manny:
No, you don’t need to move your money. I won’t tell you what to do, but I can tell you your money is safe where it is—regardless of how big or small your bank is. The FDIC, the Treasury, and the Fed have taken steps so other banks don’t get into the same trouble as Silicon Valley Bank. It could get worse, and if it does, they will do more.
I have heard smart experts argue that people with small deposits at banks are not the ‘flight risk’ now. They say people know that deposits under $250,000 are insured, meaning they would eventually get all their money back if their bank failed. I would be surprised if that’s the case. It’s likely that many people don’t know all the details of the FDIC insurance and some know very little about it. Plus, even a long weekend without access to your money is disruptive to some and unsettling to all. Manny would not have asked me unless it was something his listeners might want to know. Anything that puts trust at risk is serious.
The Fed could help answer people’s questions.
Fed Chair Jay Powell would’ve been so much better on that NewsRadio 610. He’s the one carrying out the promise to keep their money safe. And he knows best what’s going on and what the Fed is doing.
Politicians have been out in public telling us to stay calm, telling us our money is safe. They are also telling who or what is to blame. That’s standard politics, but now is not the time—also, politics is a deep divide in this country. Millions of Americans are already distrustful and angry at one side or the other. The politics muddy the message about our banks now.
The Fed is an institution that can rise above politics, but it has chosen to remain behind closed doors, presumably because Fed officials are in the “communication blackout” around next week’s FOMC meeting. It began last Saturday and extends through next Thursday. The Fed created the blackout around meetings in 2011. The Fed could, on its own, make an exception. Powell or another Fed official could speak in any format and at any time. So far, the Fed has chosen to communicate via a handful of press releases.
Some agree with the Fed’s silence and say that Powell speaking would cause more panic and signal that the situation is worse than it is. That’s a possibility, but the reason—and one that predates monetary policy—we have the Fed is to maintain the “safety and soundness” of our banking system. Protecting the trust that Americans have in our banks is essential. That’s not just a risk worth taking; it’s a duty of the Fed.
The Fed should talk with people. Trust is on the line.
If we lose trust in our banks, it will be hard to regain.
Things are uncertain, which scares people, especially those not steeped in financial jargon. The situation doesn’t have to spiral out of control, but silence doesn’t help. Silence says you don’t care about people; that’s worse than signaling worries.
Local radio is a great place to spread the word. Fed, go where people are listening.
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Addendum: A commenter pointed out that my answer on the radio should have included the caveat that only deposits under $250,000 were safe. We had already talked about the $250,000 limit for FDIC insurance in normal times and how it was suspended for Silicon Valley Bank and Signature Bank. Everyone got all their money back. What if there is another bank failure now? Given the state of the world, I would be shocked if the government didn’t do the same, but I could be wrong.
It turns out I am wrong. Listen to this exchange between Treasury Secretary Yellen and Senator Lankford from Oklahoma. It’s truly disconcerting.