Perhaps the Federal Deposit Insurance Corporation (FDIC) wanted to go viral on YouTube. Maybe the FDIC thought it would prevent a dire situation from forming. Or the government agency just showed poor judgment by failing to understand the inherent nature of many Americans: People do not trust the state. But we may have a clue as to why the FDIC published an oddly timed video discouraging depositors from withdrawing their money from the local bank and placing their hard-earned dollars under the mattress during the Coronavirus panic.
COVID-19 Era's First Victim
The nation has witnessed its first bank failure in the Coronavirus era. The First State Bank in West Virginia was recently shut down by the FDIC as it maintained too little capital to stay open legally. The company had four branches in the Mountain State, and all the locations were opened under the MVB Bank banner the next day.
According to a news release from the financial regulator, First State Bank suffered from "capital and asset quality issues" for five years before the FDIC took action. The organization lost roughly $3.7 million last year and had failed to turn a profit since 2013.
"December 31, 2019 financial reports indicated capital levels were too low to allow continued operations under federal and state law," the FDIC said in a statement.
With $152 million in assets, MVB Bank bought most of the total deposits and assets at a discount and purchased other real estate for less than half of the book value. The FDIC retained the remaining $5.2 million for later disposition. It is estimated that the Deposit Insurance Fund (DIF) will take a $46.8 million hit, and officials say MVB's "acquisition was the least costly resolution for the Deposit Insurance Fund."
Nebraska's Ericson State Bank was the only other American bank to fail in 2020. In February, the financial institution was closed by the FDIC and the Nebraska Department of Banking and Finance before the pandemic. While neither instance was a direct result of the Coronavirus, the headlines do not instill confidence in an economy that has witnessed unprecedented multi-trillion-dollar bailouts and Federal Reserve stimulus due to the pandemic.
Insolvencies to Come?
Is this the beginning of a tidal wave of bank failures comparable to the Great Depression and the 2008 financial crisis? Probably not. The difference between now and then is that the Fed did not understand the gravity of the situation and failed to ramp up the printing press in time. Just a week or two into the current liquidity crunch, the central bank intervened like a neighborhood busybody snitching on a lemonade stand operating without a license.
The Federal Reserve has already injected trillions of dollars of liquidity into the market, promising quantitative easing infinity to buy any asset at any cost to shore up the economy. The U.S. central bank and the Treasury Department also announced that they would begin to purchase debt issued by the banks that lend through the federal government's $349 billion small business program. So far, lenders have originated more than 28,000 loans worth $5.4 billion.
Of course, there will always be an outlier, such as a George Bailey-inspired institution a la It's a Wonderful Life that invests its deposits "into Joe's house and in the Kennedy house and Mrs. McClain's house." During the Great Recession, Washington Mutual was one of the few major banks not to receive a taxpayer-funded bailout from the Swamp. Instead, the FDIC swooped in, bought the financial institution, and sold it to JPMorgan Chase for $1.9 billion. If the Fed or Congress refuses to sign a check over to a bank, the FDIC can just take over the assets and flip them to any interested party.
Dominos
You do have to wonder how long the Fed can keep the show rolling. The Eccles Building has only just recently triggered the Powell Putsch, and the balance sheet has already topped $5 trillion. Even if the Coronavirus were eradicated by the end of the month, you would still have small businesses and consumers on the brink of insolvency, which would require some type of government bailout.
The official statistics have yet to be released, but it is easy to anticipate a tsunami of companies – large and small – permanently shutting their doors. When private firms are unable to repay their obligations, banks are left holding the bag. Since Washington never wants to leave a bank behind, policymakers will do whatever they can to prevent financial institutions from falling like dominos.
Thanks to a decade of historically low interest rates, private enterprise and consumers took on more debt than they could afford. Borrowing has become so immense that, if it were outlawed, America's gross domestic product would vanish. So, if they had a hard time servicing their red ink before COVID-19, then one can only imagine what will happen in an uncertain post-Coronavirus world. Unless the federal government wants to raise the national debt to $30 trillion and the Fed desires to collapse the U.S. dollar, the parties in Washington might not be able to perpetually open the public purse or run the printing presses 24/7. Yes, this may mean illiquid bank failures or household bankruptcy filings.
Banking on a Crisis?
After an 11-year bull run constructed on a foundation of IOUs, the bills were going to come due eventually – and we are paying them. Fortunately for the United States, the crisis unfolding in America as a result of the pandemic is premature. The real economic collapse may still be another couple of years away, when the training wheels are taken off and the nation is left to fall off the bicycle and lacerate its knees. Now that the country has taken on astronomical levels of debt and money creation, who knows what will happen during the next major downturn? The only strategies statists know are borrowing, taxing, and printing – repeat. When those tactics run out, the only thing left is to destroy the currency or declare bankruptcy. Pick your poison.
For now, there will not be a run on the banks, nor should there be. That does not mean you should not take a few months of expenses out of your account and store the cash inside a Paul Krugman book – no burglar would ever steal it.
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Read more from Andrew Moran.
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