Stockman: Raiding The Taxpayer Piggy-Bank

The article discusses the idea of "moral hazard," or the idea that people are more likely to take risks if they know that they will not be the ones to suffer the consequences.

Janet Yellen is a constant anti-prosperity horror story. The reason is clear enough.

In the late 1960s, she was indoctrinated at Yale by James Tobin, the grandfather of Professor Keynes' US disciples. Since then, she has spent her time pontificating in academia and dictating from Fed.

Now, with screaming evidence that the US banking system desperately needs the disciplining effects of depositor flight to survive, she is all set to end the $9 trillion in uninsured deposits.

Let's get to the point.

Banks that are not disciplined by depositors and at no risk of deposit flight are dangerous institutions.

These rules allow bank executives to move freely for the asset-side of the balance sheets, without worrying about whether attentive depositors might take their money to safer places.

For crying out loud. It was enough that deposits were scarce in the past few years and SVB's knuckleheads decided to stockpile their balance sheets with assets of 10-30 year duration against overnight demand deposits. Most of these assets were uninsured.

They were able to make huge profits and enjoy the benefits of stock options that are soaring at the moment.

These 'profits’ were as fake as a two dollar bill.

They were generated from long-term fixed-income assets, whose prices had no other direction than down.

Here is the inflation adjusted yield on the 10-year UST from March 2022, when the Fed began its tardy anti-inflation campaign. No one in their right mind should have believed these deeply underwater yields were sustainable; and no banker capable of running even a credit union in Podunk Iowa would have matched up overnight deposits with these long-duration securities--investments which were absolutely heading for a nose-dive in value.

In fact, at the bottom of March 2022, the real 10-year UST yield was at


The chart shows the lowest rate in 60 years. It is also the most recent. This is undoubtedly the lowest ever rate, since the central bank of the country believed in sound money and zero inflation.

Anyone who bought agency securities or long-term Treasurys at the bottom of this chart should have their heads examined. They shouldn't have run a multi-billion dollar bank.

Inflation-adjusted Yield on 10-Year UST, 1962-March 2022

Janet Yellen, along with her Washington colleagues, got warm-up last week by bailing out $155 billion in uninsured SVB deposits that were put at risk by reckless stock-pumping joy rides.

SVB's assets almost doubled between 2020-2021, from $115 billion and $211 billion. Meanwhile, the HTM (securities that are held to maturity) section of the balance sheet exploded from $17 million to $98 billion. More than 95% of the massive HTM book had maturities exceeding 10 years.

Here's the deal. These idiots mismatched their books without deposit insurance. What the hell is going to happen if deposits are 100% insured

Importantly, career-threatening penalties can't be replaced by the incompetence that led to the collapse of banks like SVB. In this regard, it turned out that SVB's senior financial officer had apparently received his financial training at Enron and Lehman.

Deposit flight and bank failures are essential to eliminate the incompetents, reckless cowboys, and bad actors from the banking industry. The de facto policy now is that no depositor can lose money, no bank cannot fail and no one should be smirked.

It doesn't represent market-based capitalism, no matter what it may be. It will lead to huge waste and misinvestment, not bank-fueled wealth.

The chart below shows, however, that the banking system has already been extremely dangerous and that adding 100% deposit insurance to increase the risk would be like lighting the match.

In other words, the Fed has literally drowned the banking system in excess reserves and deposits over the past decade. The historical average bank system deposit was around 40% of GDP. However, since the turn of century, that ratio has risen to over 70% during the most intense periods in money printing during 2020-2021.

Since November 2007, the pre-crisis peak, the flooding of the area with deposits has been particularly acute. In the 15 years that have followed, total bank deposits rose from $6.6 trillion up to $17.6 trillion.


Per annum. In the time since March 2020, this growth rate has almost doubled.


Per annum

In contrast, the nominal GDP has increased by only 1% since Q4 2007.


Per annum. All things being equal, savings and the resulting banks deposits would have grown at the exact same rate as GDP. Because the Fed was printing so hot, the savings rate was almost twice that of GDP. Instead, the new money backed up into the banking system and never left the financial system.

From 1962 to 2022, Bank Deposits as a Percent of GDP

All of the deposits needed to be used, and aggressive managements quickly figured it out. The post Dodd-Frank regulatory system saw the banking system change from one that was restricted by cash reserves (to cover a surge of depositor withdrawals), to one that was capital-driven according to the standards set by the Bank for International Settlements.

The new regime may not have been such a disaster if regulators had opted for plain vanilla capital ratios. The bank lobbyists seized control of the rule-writing process, and decided that a spade wasn't a spade.

This means that not all assets were considered equal in terms of capital ratios. Government debt was found to be free from risk and did not require capital backing. Banks did as regulators expected them to do: they loaded up on government and agency debt, which required significantly less capital backing.

This 'capital-light" regime also had a positive effect on stock prices and executive stock options.

Instead of putting a large portion of their earnings into capital growth, they instead allocated it to dividends or stock buybacks. Stock market gamblers were delighted.

JPMorgan's net income of $258 billion over 2015-2022 is an example.

$189 billion

73% of the total was paid to shareholders via stock buybacks ($102 Billion) and dividends ($87 billion). JPM's total assets increased from $2.352 Trillion in 2015 to $3.666 Trillion in 2022.

The Fed was promoting asset inflation and depressing money market rates over the same time period. This 56% increase in total assets was equivalent to a printing press. The bank's net margin rose, which caused its net income to boom and its market cap it to rise from $225 billion in 2015 up to $500 billion by the end of 2021.

All that shareholder magic wasn't just because Jamie Dimon is a financial genius of the future. The capital-light regulatory system was partly responsible for JPM's half-trillion dollar market cap.

In 2015, JPM's ratio book equity to total assets was at


This would make it minimally secure in a world that doesn't have too many big-to-fail. It turned out that its equity ratio was actually just 2% by 2022.


The bank stocked up capital-free government securities.

This is the obvious implication. JPM would have been required to maintain the 2015 equity ratio.

$385 billion

It reported book equity at $292 billion by 2022. To achieve the strong asset growth that drove its impressive earnings gains, it would have to keep $93 billion more in net income during the period.

This means that its dividends and stock-buybacks would have been paid to Wall Street.

cut in half!

They would have been disappointed.

It is obvious that this illustration demonstrates why banks bought long-duration government bonds. This greatly conserved capital and allowed for generous payouts of stock buybacks and dividends.

The Fed's apparent reason for flood the financial system in cheap credit was to increase bank lending and thus fuel economic growth. It is clear that JPM was not the case.

Its loan book was $824 billion in 2015, which accounted to


One-third of the $1.28 trillion in deposits. However, the loan book had only grown modestly to $1.11 Trillion by 2022.


Deposits soared to $2.34 Trillion

Even if artificially stimulating more loans was a good idea, which it isn't, it didn't happen despite all the Fed's reckless money printing. Instead, the new money flooded into banks and bought government bonds, which aided Congress' borrow-and-spend contingent. However, reckless bank managements were able to take on huge amounts of long-term Treasury and Agency securities at rock bottom of an interest rate cycle that will be unrepeatable for many decades, if not ever.

Despite these facts, Yellen launched a campaign last Sunday to further weaken the banking sector by essentially eliminating any vestiges of depositor scrutiny or discipline.

This refers to the feckless bailout of Signature Bank and SVB depositors, as well as the Bank Term Facility Program (BTFP). This program allowed banks to borrow 100c per dollar in exchange for 30-year bonds that had lost 40% last year.

Now Yellen has gone all retard and suggests outright guarantees for all deposits, regardless how large:

"The actions we took weren't focused on helping specific banks or banks classes. Yellen stated that her intervention was needed to safeguard the U.S. banking system as a whole.

"And similar actions could also be justified if smaller institutions experience deposit runs that pose the danger of contagion."

The following are the

Wall Street Journal

This AM, 'the noise and fury of requests for universal deposit insurance are increasing'. Bill Ackman is a Wall Street whiner and entitled brat who demands 100% deposit insurance to save his bacon. Elon Musk, however, is a sensible man (on public policy).

The financial press reported this morning that the Treasury Department staff was reviewing whether the federal regulators have sufficient emergency authority to temporarily insure deposits exceeding the $250,000 limit on most accounts.

Without formal consent from a deeply divided Congress

According to those who know the talks, it is.

This bolded statement tells all. After at least 40 years of Congress refusing to insure bank deposits at 100%, regardless of their size, how can you legitimately make a decision to assume a $9 trillion liability on behalf of taxpayers through executive decree?

Indeed, this is a decision that the representatives of the people have to make.

The $125 billion FDIC fund would guarantee $18 trillion in deposits if it had 100% deposit insurance. Although they can claim that the FDIC insurance premiums would provide the funds necessary, it is not true. This would be a huge tax under any other name, because it would include all

108 Million

The premium would be paid by US households that have bank accounts.

It's not surprising that the Washington lobbies are already heavily involved in trying to force through this deeply anti-democratic action.

According to Bloomberg's March 17 review, the Mid-Size Bank Coalition of America (which includes banks with assets of up to $100 billion) urged regulators not to lower the current limit on deposit insurance. According to the organization, they are concerned that if another regional lender fails more depositors could move their money to the nation’s largest banks regardless of the health of smaller competitors.

You can do it!

These small-time bankers who were virtuous should have thought about the possibility of deposit flight when they loaded their balance sheets with high yielding assets that carry both credit and interest rate risks. These factors aside, it is unlikely that a conservative bank would face deposit flight, or even be unable to weather temporary flight by borrowing from the Fed's discount window.

This is exactly what happened over the past week. The weekly increase in discount window borrowings reached $138 billion. This is almost the same as the $180 billion gain experienced during the horrific first week of October 2008.

Weekly Change in Fed Discount Window Borrowings from 1980 to 2023

The discount window is not liked by the bankers in small and medium-sized banks. They believe it has a stigma and the current rate of 4.75% is well above their average deposit cost. They want Uncle Sam to give them some money so they can create an asset/liability mismatch and book large profits.

We are really getting to the end with this type of crony capitalism, socialization of losses and a long-pants-wearing big guy.

While all the bipartisan suspects are busy trying to pass legislation to increase the deposit insurance limit from $250,000 to $350,000, the House Freedom Caucus is still able to see the stakes and has decided against a 100% guarantee.

They were granted the option to demand Speaker McCarthy's resignation at the time of his election. Let's hope that they will be able to make use of it when the House considers any 100% deposit insurance legislation. This is how important it all is.


Any universal guarantee on bank deposits, implicit or explicit, creates a dangerous precedent that encourages future irresponsible behavior.

In a statement, the House Freedom Caucus stated.

Reprinted with permission

Contra Corner by David Stockman