DANIEL VAUGHAN: Yellen promises the moon but delivers a mirage

March 24, 2023

When it comes to consistent messages of reassurance, Treasury Secretary Janet Yellen is giving George Santos a run for his money these days. It's not that she's going around popping up in random headlines with a mad-libs set of scenes and characters. It's that her assurances to banks and the public shift daily, which drives everyone crazy.

At the center of all her statements, walk backs, and clarifications is whether or not the Treasury, Federal Reserve, and FDIC want to insure all bank deposits in America above the $250,000 statutory line. The WSJ Editorial Board summed up her week by saying Yellen "walked back her comments from the day before that walked back her remarks the day before about providing a de facto guarantee on all U.S. bank deposits."

One day it appears all deposits are guaranteed. The next day, no one knows. By the third, we know some are definitely guaranteed, but also Congress has to do that. And at the end, she tells us that the Treasury and Federal Reserve will do everything possible to prevent problems.

Between a rock and a hard place.

I don't begrudge the Treasury Secretary for these slip-ups. She and Federal Reserve Chairman Jerome Powell are balancing the fate of the banking industry on the one hand and statutory requirements from Congress on the other. By law, Congress sets the FDIC insurance guarantee at $250,000. For the longest time, the statutory insurance amount was $100,000. After the 2008 crisis, Congress upped the limit.

The FDIC, Treasury, and Federal Reserve can declare an emergency and lift that limit, which is an extreme measure. The FDIC used this when bailing out Signature Bank and Silicon Valley Bank depositors - no luck if you used Silvergate. But the question everyone naturally has is: if they get total protection, who else gets it?

Well, the answer depends on which day you catch Janet Yellen.

What Yellen and Powell want to do is imply that all deposits are guaranteed without ever saying it. They would love it if markets were optimistic that full guarantees were real without ever being forced to ask Congress. Ultimately, the only group that can guarantee every deposit is Congress. The Treasure, Fed, and FDIC lack the power to declare taxpayers are backstopping every dollar in bank depositories unilaterally.

A noble lie for banks.

And we should want it that way! It would be categorically insane to allow bureaucrats to control Congressional purse strings to that extent.

But that hasn't stopped Yellen from using rhetoric to set up a noble lie for markets to believe. The problem is that Yellen has to disavow that the Treasury could or would do such a thing when pressed directly. "In response to a direct question about whether the Treasury would circumvent Congress to insure all deposits, Yellen replied, 'I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.'"

After that, she tried softening that statement and suggesting the Treasury and Fed would still do more. But markets aren't run by people investing in hopes and dreams. First Republic Bank and several other regional banks in trouble closed near the lows they hit at the peak of the banking crisis.

Yellen is trying to prevent panic with well-crafted statements that sound great on paper but vanish the moment you get up close. The banking crisis may settle here, but not because her promises have merit. It'll be because the monetary policies the Treasury, Fed, and FDIC launched to contain the mess they created worked for now.

From transitory inflation to a strong and resilient banking sector.

In the meantime, a credit crunch is brewing as the next crisis, even as inflation data shows little sign of letting up. Yellen is holding on tight that her attempts to triage the American economy will get us through this crisis. Everyone hopes she can, but it's hard to watch her performance and not remember her and the rest of the government believing in transitory inflation.

Maybe this time is different, and the experts get it right. But if you bet in the opposite direction, you're undefeated so far. The Fed, which arrived late to inflation, has run to catch up, and is now fighting inflation, bank runs, a credit crunch, and a looming recession, doesn't have the tools necessary to get the job done.

That's not doom and gloom-ism; it's just a historical fact. No central bank has threaded this needle without causing chaos and damage. We're headed right into that maelstrom, even if we get a brief reprieve here in the eye of the economic storm.

Yellen can't promise the moon to investors or American citizens because she can't under the law. What's unfortunate for her is that she's the reason she can't even imply she could give the moon. Her noble lie collapsed by her own admission.

" A free people [claim] their rights, as derived from the laws of nature."
Thomas Jefferson
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