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Part I of II

The recent turmoil that has roiled the global banking sector has placed central bankers in an impossible position: Cut rates and avert a domino-style disaster in the industry and a possible deep and prolonged recession in the wider economy or stay the hiking course to combat the still untamed inflationary pressures? Arguably the great losers in both cases will be the taxpayers and the average working household. 

The recent turmoil in the banking sector, both in the US and in Europe has captured public attention and understandably so. The lessons learned in 2008 are still crystal clear in the minds of many people (especially those who were directly affected) and the mere prospect of a repeat of that experience is truly unconscionable. 

When news that the Silicon Valley Bank went bust first made the headlines, most people were not concerned since they most probably had never heard of the lender before. But when their news providers informed them that SVB was the second bank to collapse since 2008, a lot more people started paying attention. After a second lender, Signature Bank, followed only a few days later, they became seriously concerned about the possibility of contagion. Despite the fact that the government responded quickly and sought to reassure both investors and the public, a meaningful and impactful number ordinary depositors, even those with accounts in banks that were unaffected and still deemed safe, began to withdraw their savings. 

All of this exploded to a whole new level of a global emergency when Credit Suisse collapsed, sparking fears of a systemic crisis.

As the readers who follow my writings and as all the students of monetary history doubtlessly know, mass withdrawals are the worst nightmare of any bank. And arguably more importantly, this is also the worst nightmare of any government too. This is because most people don’t know how banks actually work and have never even heard of the fractional reserve system. To this day, hard-working, tax-paying, productive and contributing members of society still believe that when they deposit their savings in their bank accounts that money actually stays there. Even in these modern, sophisticated times, they still think of their bank accounts as some kind of safe deposit box. They have no idea that practically and legally they are really lending their savings to the bank and more pertinently, they are entirely oblivious to the fact that their bank does not have all their money on hand if they all ask of it back at any given time. 

One can only assume that the rules allowing this were passed because of extreme and very dangerous arrogance on the part of the regulators, as they most likely believed that they and their equally omniscient bureaucratic peers would be able to control and to direct and manage the economy in perpetuity so there could never be any reason for the pubic to question the liquidity of their lenders. Surely there was also considerable hubris on the part of the bankers too of course, as they obviously must have been convinced that they can safely and confidently make a buck by playing with the borrowed money of the depositors who trusted them and that all those naive and compliant citizens would surely never demand to cash out all at once. 

One can only imagine the surprise of both parties when their assumptions proved wrong, once again and so quickly after the last crisis and all the “lessons” they supposedly learned from 2008. The panic that surely quickly followed and spread in the entire establishment was also evident. Because the implications of a real bank run are not just financial. Such an event also entails the understanding by the wider public that what they thought they knew, what they thought they could and should trust, was all a cheap fraud, directed, orchestrated and perpetuated by the very same people they elected. Once they recognize this aspect of the fraud, it is only a matter of time before they start asking other questions too and they eventually uncover all the other deceptions: Collapsing pension funds, actual taxation rates and how their hard earned money are really spent, and all the other broken campaign promises. 

It is therefore understandable that a State in this position would be facing an existential threat and that it would do practically anything to avert and to avoid the consequences of its own actions. Of course, after the 2008 crisis, the “easy way”, namely making the taxpayers pay for the mistakes and the crimes of the crony capitalists, is no longer an option – not yet at least, as this trick is still too fresh in the public memory. In fact, they it is so fresh that all the governments involved in the current crisis knew they had to distance themselves from this policy route at all costs and to ensure the voters believe that “this time it’s different”. 

This is precisely what the Biden administration did in the US. Minutes after the first bank collapse, officials scurried to reassure the public – not just domestically, but globally-  that this time is indeed different. Quickly recognizing the severity of the risk of an investor “stampede” and a mass exodus from the banks, they went one step further. They announced the US government is prepared to go above and beyond the guarantees it is legally obliged to extend to the customers of bankrupt bank. It will not just cover deposits up to $250.000, it will guarantee all deposits. Quire predictably, this bold strategy proved successful, at least from the State’s and from the bankers’ perspective. It soothed investors’ fears to a certain extent and perhaps it can be credited with averting a mass bank run. 

The Swiss government also followed a similar playbook in its rescue of Credit Suisse: it arranged an acquisition by rival UBS and moments after the deal was announced Swiss finance minister Karin Keller-Sutter rushed to highlight that “This is no bailout. This is a commercial solution.” However, is that really true? Or are we simply seeing a new kind of bailout, one that’s more sophisticated and more difficult to spot?

I will write about CS and what lessons we can learn from it in an upcoming article. However, that being said, the most important lesson was that within today’s global banking system, private property rights are only of a temporary nature and that the rule of law can be broken by the politicians at any time, especially when this is done under time pressure and under the guise of the “greater good”, to protect the people against a global economic crisis (which is coming anyway).

Claudio Grass, Hünenberg See, Switzerland


In the upcoming second part, we’ll take a closer look at problems with the recent rescue operations and at the severe dangers that the new, indirect bailout strategy entails. 

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

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