BEN NORTON: Hi, everyone. I’m Ben Norton, and this is Geopolitical Economy Report. Today, I have the pleasure of being joined by Michael Hudson, the brilliant economist and author of many books.
Michael is also the co-host of a program here, Geopolitical Economy Hour, that he does every two weeks with friend of the show Radhika Desai. I will lix to that show in the descxtion below.
I had Michael on in March to discuss the collapse of three U.S. banks in just one week. That was Silicon Valley Bank, Signature Bank and Silvergate Bank. And yet the crisis has continued since then.
And I knew I needed to bring back Michael to talk about the latest developments.
In just two months, four banks in the United States have collapsed. And we now see the latest example this May is First Republic Bank, which is the second biggest bank in U.S. history to collapse, went down and was taken over by J.P. Morgan.

本···诺顿:大家好。我是本·诺顿,这里是地缘政治经济报道。今天,我很荣幸邀请到杰出的经济学家、著书颇丰的迈克尔·哈德森(Michael Hudson)。迈克尔也是《地缘政治经济时间》节目的联合主持人,他和节目的朋友拉迪卡·德赛(Radhika Desai)每两周做一次。我将在下面的描述中链接到那个节目。

And this is the biggest bank to collapse since 2008 when Washington Mutual collapsed. Although, as Michael has often pointed out, what we should be saying is, the biggest bank in the U.S. that was “allowed” to collapse because he pointed out that many banks were actually insolvent but weren’t allowed to collapse.
Now, First Republic Bank had $207 billion in assets. And there are similarities between this collapse and the previous collapses.
Like those banks, a similarity with First Republic is that the majority of its deposits were uninsured. About 68% of its deposits were above the federally insured limit of $250,000. So that means that there are $120 billion worth of uninsured deposits.
And what’s interesting about First Republic compared to other banks is it had very wealthy clients and many of them had long-term low interest mortgage loans. So as an example, the CEO of Facebook, Mark Zuckerberg, had a $6 million mortgage with First Republic Bank, and that was at 1% interest. So very low interest.


Now, when I had Michael on last time, he explained how one of the reasons that Silicon Valley Bank collapsed is because it had invested a lot in long-term bonds. And because the Federal Reserve has been aggressively raising interest rates, the value of those bonds has significantly decreased.
So when there was a run on the bank, the bank had to sell those bonds that had lost value and use that to try to pay the depositors. But it didn’t simply have enough at the end and it collapsed.
Now, in the case of First Republic Bank, it wasn’t too exposed to bonds like Silicon Valley Bank was, but it did have a lot of long-term mortgages, about $100 billion worth.
So now we see that JPMorgan is taking over First Republic Bank and JPMorgan has been given a sweetheart deal. In fact, JPMorgan reported that it expects to make $2.6 billion off of this deal.


As part of the agreement, JPMorgan does not have to pay First Republic Bank’s corporate debt. And the Federal Deposit Insurance Corporation (FDIC), the U.S. government backed company, has agreed to a loss-sharing agreement.
So if because of some of the long term mortgages that have lost value, if JPMorgan ends up losing some of the value on mortgages and commercial loans, the FDIC agreed to bear 80% of the credit losses.
Meanwhile, the FDIC is estimating this is going to cost $13 billion to its deposit insurance fund.
And that means that in just two months, since the beginning of March, the FDIC’s deposit insurance fund has paid out around $35 billion to save Silicon Valley Bank, Signature Bank and now First Republic Bank.
So, Michael, those are the basic facts.


Now, that doesn’t explain what’s happening at a macro scale on the economy, but it does show it’s another example of how these private banks are getting bailed out by the government when large banks like JPMorgan, the largest bank in the United States, is given a sweetheart deal where it’s going to make billions of dollars.
The FDIC is bearing the cost. And this is despite the fact that, as Pam Martens and Russ Martens pointed out at Wall Street on Parade, JPMorgan is actually ranked by regulators as the riskiest bank in the United States.
So giving JPMorgan Chase control over this bank that already had finance issues makes it even riskier for the U.S. financial system.
So I talk about a lot of things there, but those are the basic points.
I want to get your analysis, Michael, and especially in response to the JPMorgan takeover and the increasing concentration of these large banks, the sweetheart deal it got, and the FDIC bailout.
What do you think about all of that?


MICHAEL HUDSON: Well, the entire U.S. banking system is just as insolvent as the banks that you’ve just mentioned.
What’s amazing is that all of this is treated as if somehow it was unforeseeable. And people are saying, like Queen Elizabeth said in 2008, did nobody see this?
Well, I’ve been writing about this, exactly how this would occur for the last 15 years, ever since I wrote Killing the Host.
And the reason the banks are insolvent now is because of President Obama’s program and his Secretary of the Treasury, Tim Geithner, who appointed the current Federal Reserve President, Powell.
When President Obama decided to bail out the banks, instead of writing down the bank loans to what would have been reasonable levels, instead of saving the junk mortgage victims from their houses, he decided to go along with his boss, Robert Rubin, the former Treasury Secretary under Bill Clinton, and save Citibank and the other big banks that were the most troubled banks of all.

当奥巴马总统决定救助银行时,他没有把银行贷款减记到合理的水平,没有把垃圾抵押贷款的受害者从他们的房子里救出来,而是决定和他的老板,比尔·克林顿政府的前财政部长罗伯特·鲁宾(Robert Rubin)一起,拯救花旗银行(Citibank)和其他陷入困境的大银行。

And they’re still the most troubled banks of all, except they have a government guarantee, just like Obama gave them, that no matter how much they lose, they will not lose the money. No matter how much the banks lose in negative net worth, the economy will lose, not the banks.
All of that became implicit when the Federal Reserve decided to help the banks that were insolvent in 2008 and 2009, to help them recover their net worth by quantitative easing.
That is creating $9 trillion worth of Federal Reserve balance sheet support of the banks to enable the banks to drive down interest rates to near zero, 0.1%, which is about what banks were paying their depositors.
And the banks used all of this increasing liquidity. What were they going to do with the [liquidity]?
Well, they lent them out largely to private capital firms. In other words, they lent them out to operators on Wall Street who borrowed from the banks to buy out companies and take them private.

银行利用了所有这些增加的流动性。他们打算如何处理(流动性)? 他们主要把钱借给了私人资本公司。换句话说,他们把它们借给华尔街的经营者,这些经营者从银行借钱,买下公司并将其私有化。

Then they would have the companies borrow money from the banks for billions of dollars of money and pay this money out as special dividends to the private capital companies that had bought them out, leaving companies as bankrupt shells, such as Bed Bath & Beyond.
Well, as long as interest rates were just about zero, you had free credit and you had a debt-fueled stock market boom, the biggest bond market boom in history, and a real estate boom.
All of these things you and I have been discussing for many years now, and I’ve been discussing it on my website and my Patreon group.
What happened then was that the Federal Reserve, under the lawyer, Mr. Powell, he’s not an economist, he’s a lawyer, serving his clients, which are Chase Manhattan, Citibank, and the big banks, to decide, well, there’s a danger of wages rising and we’ve got to keep wages down in order to maintain the profit of the stocks that are fueling the stock market gains.
The Federal Reserve decided and announced that it was going to begin raising interest rates from 0% to 4%.

然后,他们会让这些公司从银行借款数十亿美元,并将这笔钱作为特别股息支付给收购它们的私人资本公司,让这些公司成为破产的空壳公司,比如Bed Bath & Beyond。

Now, at the time this was publicly announced, I talked to many businessmen, many investors, many CEOs, and every single individual that I knew said, — Oh, they’re going to raise the interest rates. That means that if we hold a long-term government bond, like a 30-year bond, or a 5-year bond, or a 10-year bond, the price is going to go down, because when interest rates go up, the price of bonds go down.
Everyone I knew moved into short-term government bonds, that is, Treasury bills, three-month Treasury bills, or maybe two-year Treasury notes, because they didn’t want to take the loss that occurred if you’re holding a 30-year bond.
And holding a 30-year mortgage is just like holding a 30-year bond. All of a sudden, interest rates are going up, but you’re holding a security, a mortgage or a bond that pays a very low interest rate and whose price has fallen by 30%, maybe even 40%.
Now, that means that if you’re a bank and you have depositors and your assets are reduced in market price by 40%, what are you going to do if your
deposits aren’t reduced? You have negative equity.


Well, just about every bank in the country moved into a negative equity position, because all the banks have made fairly long-term loans.
And as the Federal Reserve raised interest rates, that lowered the price of the mortgages that banks held, the Treasury securities that banks held. All of this was going down.
Now, after Silicon Valley Bank went under, for instance, Yves Smith on Naked Capitalism, which is my favorite financial site to follow on these things, said, — Well, Silicon Valley Bank just hopelessly mismanaged their portfolio in holding on to these long-term government bonds. Why did they do it?
Well, here’s why they did it. Imagine what would have happened if Silicon Valley Bank or any bank in America would have acted just like the private individuals who move their personal retirement accounts or their personal financial accounts into short-term treasuries.
They all would have begun to sell their 30-year mortgages or other long-term mortgages. This by itself would have crashed the price of 30-year mortgages.

比如,在硅谷银行破产后,伊夫·史密斯在我最喜欢关注的金融网站Naked Capitalism上说,硅谷银行持有这些长期政府债券,对他们的投资组合管理不善,这是无解的。但他们为什么要这么做?

If they would have sold their 30-year Treasury bonds and said, — Well, we’d better move into short-term treasuries, imagine if all the banks would have decided, we heard what the Federal Reserve said, they’re going to raise the interest rates to 4% and lower the value of these securities by 30 or 40%. Let’s all dump them.
Well, the act of selling them would have caused the prices to decline to a point where indeed, right away, they would have been yielding this 4%. Obviously, there’s very little they could do.
That’s because finance and credit in the United States are privatized.
The crisis that we’re going through today is not the kind of crisis that China would experience because China has made money and credit and banking a public utility.
In the United States, it’s all privatized and part of it is subject to the balance sheet constraints of: What do you do if interest rates go up, the value of your assets goes down, while your liabilities, that is what you owe depositors, continues high?
Well, some of the newspapers said, — Well, why didn’t Silicon Valley Bank and other banks simply take out an option and hedge?


In other words, the suggestion was, — Well, if you know you’re going to have a $100,000 mortgage that’s going to be worth $60,000, why don’t you just get someone to guarantee that in two years or so when the Fed increases interest rates to 4%, you can still go to the counterparty that’s holding the derivative and say, — Okay, now this is only worth $60,000. I want you to pay me $100,000 for it.
Well, how are they going to find a sucker who would have gone into that?
Because the banks that write the derivatives and the futures and the options read the newspapers also and they all read that the Federal Reserve says it’s going to raise the interest rates to 4% and reduce the value of assets to only about 60%.
So they would have said, — Sure, we’ll write it. You’ll have to give us a $100,000 mortgage. That’ll cost you $40,000 for the insurance.
In other words, nobody wants to lose any money. And the fact is, whoever held these long-term securities was going to lose money.


this is exactly what happened to the savings and loan institutions in the 1970s, in the 1980s. There was nothing the banks could do.
The banks were able to survive for a few years despite the fact that the Fed was raising interest rates to 4%.
The banks said, — Well, there’s only one way that we can avoid facing the fact that our assets are much less than our liabilities by just keeping the deposits there. Let’s keep paying the depositors what we were paying all along, 0.2%.
We hope our depositors are really, really stupid and inertia, and it’s so hard to change a bank account and take money out and buy a government security short term or to buy another financial security. Maybe this inertia will just save us and nobody will do anything.
But we’ve got to get really stupid people in charge of the Federal Reserve who don’t realize that the banks are insolvent. We’ve got to get flacks, public relations people, for the Fed, like Paul Krugman, who said, — No problem at all. Everything’s going to be okay. Our financial system is great. Nothing to worry about.


And as long as you can get the Fed saying there’s no problem and the newspapers saying interest rates are going up, forget about the fact that when interest rates go up, the price of mortgages and bonds go down.
If you can just ignore that basic balance sheet fact, depositors are just going to be quite happy earning their [0.2%] on their savings account, even though anyone smart has already taken their money out of the bank and invested in government securities that are yielding 4%.
Now, I know many people, friends of mine, who’ve taken their money out of the bank and invested in two-year government notes or short-term money market funds, and they’re getting 4%. Why on earth would they leave the money in the banks?
Well, Silicon Valley Bank and the New York Bank that just went under, went under largely because they cater to the wealthiest depositors, the high-income depositors.