The Flinchum File

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Here We Go Again ?

In the 1980’s, the government encouraged lenders to get more aggressive in making loans, to stimulate the economy. That was especially true for Savings & Loan Associations, who were encouraged to “think like entrepreneurs”. Naturally, “anything worth doing is worth over-doing!” By 1990, there was a full-blown financial crisis. My chief memory was when the small bank on the first floor failed, and I could see the eyes of depositors waiting in line to get their money.

The Texas governor appointed me to the Texas State Depository Board, which was charged with supervision of all savings association. The four Board members were the State Treasurer, the State Banking Commissioner, State Controller, and myself. (In the course of finding fresh capital for the under-capitalized S&Ls, I made 14 (?) trips to Europe to meet with potential investors.)

By the time of the “internet crash,” I recognized the difference between a recession and a financial crisis. That particular crash was recessionary, not a financial crisis. However, the 2008/9 “global financial crisis” (GFC) was just that!. It was terrible and unfortunately traumatized many investors. Because I’ve seen this show several times, I think I can recognize the neighborhood.

Many of those traumatized investors are fearful that we’re on the verge of another crash. Fortunately, the government has the ability to prevent another crisis. The move to backstop all deposits (not investors) was very helpful. The President also promised additional regulation of banks, as if there isn’t enough paperwork already.

Bad things often happen to drivers when they leave too late and drive too fast. We raised interest rates too much and too fast! One good result of the current fiasco is that the Fed is very unlikely to raise interest rates by 50 basis points, as expected this month, and will likely raise it by only 25 basis points. Some pundits predict the first cut in interest rates is in the near future.

Some on Wall Street blame the collapse of SVB on social media, creating a run-on-the-bank. Another rumor on Wall Street is that someone shorted the stock of SVB and then spread rumors about the bank being in trouble, which caused a run-on-the-bank. By the way, that is strictly illegal.

Some traumatized investors smell a repeat of the 1929 crash. That bothers me, as it ignores all the new economic tools that have been developed since then, such as quantitative easing and/or tightening. You wouldn’t expect to fix a modern car with only the tools you had in 1929. It is easier to fix another financial crisis now than it was in 1929.

My nose smells a short and shallow recession but not another 1929.