Thursday, August 24, 2023

"Yanis Varoufakis – Time to Blow Up the Banking System"

Via Brave New Europe, April 2023:

The banking system we take for granted is unfixable. The good news is that we no longer need to rely on any private, rent-seeking, socially destabilizing network of banks, at least not the way we have so far.

Yanis Varoufakis is a former Finance Minister of Greece, Professor of Economics at the University of Athens, and author of several bestselling books including most recently “Another Now: Dispatches from an Alternative Present.” Get the book:

This time the banking crisis is different. It is, in fact, worse than in 2007/8 when we could blame the banks’ sequential collapse on wholesale fraud, widespread predatory lending, sickening collusion between rating agencies and shady bankers to peddle derivatives whose value was always going to vanish – not to mention a regulatory mechanism that Wall Street-bred politicians, like Robert Rubin, had only recently dismantled.

Today’s bank failures cannot be blamed on any of this. Yes, the Silicon Valley Bank had been foolish enough to combine a strategy of taking on severe interest rate risk while serving mostly uninsured depositors. Yes, Credit Suisse had a sordid history with criminals, fraudsters and corrupt politicians. However, unlike in 2008, no whistleblowers were silenced, banks complied (more or less) with the post-2008 beefed-up regulations, and their assets were relatively solid. Moreover, again unlike 2008, none of the regulators in the United States and Europe could credibly claim to have been blind-sighted.

In fact, regulators and central banks knew everything. They enjoyed full access to the banks’ business models. They could see vividly that these business models would not survive the combination of significant long-term interest rate rises and a sudden depositor flight. And yet, they did nothing. Why? One explanation is that they failed to foresee herd-like panic-stricken flight by large, and thus uninsured, depositors? Perhaps. However, the real reason central banks did nothing when confronted by the fragile business models of the banks under their purview is even more disturbing: It was the central banks’ response to the 2008 financial crash that had given birth to the banks’ fragile business models. And they knew it!...


He does have a point in that last bit, the regulators had to know what was happening.