In Edgar Allan Poe’s short story, “The Imp of the Perverse,” written in 1845, a man inherits an estate by using a poisoned candle to commit an undetectable murder. After getting away with the crime for years, fearing neither discovery nor lawful apprehension Poe’s protagonist begins to feel invincible, invulnerable to 19th-century police detection. Emboldened, he starts committing other offenses simply because he knows they’re wrong, eventually proclaiming his earlier homicide, not out of sense of guilt but because he wants credit for having committed a perfect murder.
Long underappreciated by American versus European audiences, Poe’s tale is among his best that prefigure psychoanalytical concepts Sigmund Freud and Carl Jung would postulate later, especially the role of the id in subconscious minds. Chillingly, it erases coveted reassurances that humans never commit horrible crimes simply because they feel like it. Instead, Poe’s central character begins the story narrating how the entirety of our species sometimes acts precisely “for the reason we should not.” Deep within, metaphoric imps keep tempting us with self-destructive impulses, making everyone capable of what Coleridge called “motiveless malignity.” The phrase Coleridge turned to describe Iago in Othello, one of literature’s quintessential bad guys, can apply to oligarchic politics as well. Such perversity clearly bedeviled the Clinton administration and GOP-controlled congress in 1999 when they “triangulated” to repeal portions of the landmark Glass-Steagall Act.
Glass-Steagall was enacted during FDR’s presidency as part of the 1933 Banking Act. For decades, it effectively separated commercial and investment banking, provided Federal Deposit Insurance and restored confidence in U.S. banking by establishing a firewall against undue diversion of savings into risky speculative ventures. In essence, it protected depositors’ money from the kind of reckless leveraging that contributed to the 1929 stock market crash, subsequent bank failures and dawning of the Great Depression. While most of the 2008 financial crisis was attributable to nearly $5 trillion worth of ill-advised subprime mortgage loans, housing market meltdowns and speculative overreach, repeal of Glass-Steagall was at least a contributing factor by allowing banks to grow “too-big-to-fail.”
You may have noticed how some banks and credit unions aren’t offering certificates of deposit at newly increased API rates for 6- or 8- month maturities unless it’s new money. Existing accounts can only be converted into CDs for much longer maturity dates, which they in turn invest for higher and shorter turnarounds. These stingier banks may have existing accounts locked into investments predating the Federal Reserve’s boost of key interest rates to combat inflation. Banks aren’t designed to withstand large-scale removals or transfers of money without commensurate infusions of funds. Defaults on loans, for all intents and purposes, to say the least, destabilize assets. That’s because assets tallied and accounted in ledger sheets and bankbooks don’t exist in vaults as tangible cash and coin. Adding to financial fragility, today’s lightning-fast digital transactions push capital out their doors at warp speed. In It’s a Wonderful Life, when Lionel Barrymore’s Mr. Potter absconds with $8,000 in bank assets Uncle Billy (Thomas Mitchell) misplaces, Jimmy Stewart’s George Bailey has a full afternoon to dole out honey moon savings to tide over his depositors and dissuade them from bankrupting his Savings and Loan. Today’s runs on banks occur in digital time, electronically exposing shortfalls. Stalls and delaying actions notwithstanding, on-line withdrawals quickly reach a transactional critical mass.
Just 15 years ago, Wall Street’s greed propelled this country into its worst financial crisis since the Great Depression, causing U.S. households to lose over $13 trillion in savings. The collapse of Silicon Valley (SVB) and Signature Banks, followed by instability requiring life support for First Republic, Credit Suisse, and in all likelihood a few regional banks to come, may not be history repeating itself. But as Mark Twain is often quoted, without proven attribution, “it certainly rhymes.” This time a primary cause was the 2018 bank deregulation bill, signed into law by Donald Trump. The bill eased regulations on large banks. Despite Congressional Budget Office warnings passage made imminent a few failures of financial firms with assets between $100 billion and $250 billion, the law was still signed.
Financial sector deregulation and bailouts of failed banks continue to socialize risk while privatizing profits, incentivizing reckless behavior by bank executives. Periodically, depositors’ savings are thusly put at risk The Biden administration’s recent protection of SVB’s failed bank deposits upwards of $250,000 FDIC limits may have been a defendable, if perfunctory, emergency stopgap. But, considering working class citizens forego health insurance and higher education due to prohibitive costs let’s revisit how Rev. Martin Luther King aptly described comparable scenarios: “socialism for the rich and rugged individualism for the poor.” In Moral Man and Immoral Society, Reinhold Niebuhr examined attitudes of privileged classes as a group, reaching conclusions that economic standing determines a group’s ethical and social perspectives, and how “moral attitudes of dominant and privileged groups are characterized by universal self-deception and hypocrisy.” Oppression by privileged classes, for instance, can be justified by that dominant group believing their privileged status is compensation for being more important and useful in their occupations. I wonder if bankers, financiers and Wall Street moguls suffer such delusions. Manifestations of like attitudes, of course, ultimately lead to financial disparities between the “haves and have-nots” and major differences in qualities of life. Lacking fidelity to commonwealth, concentration of wealth and capital in the hands of a few undermines society.
In his book Collapse: How Societies Choose to Fail or Succeed (2006), Jared Diamond explains how environmental abuses not only ruined past societies, but continue to threaten us today. Diamond discusses 5 major causes of societal collapse directly related to environmental degradation, including human ecological impacts, climate change, hostile neighbors, and societies unwillingness to adapt to changing conditions, often reaching their zeniths just before an ecological catastrophe occurs, whether soil erosion, flooding, deforestation or crop failures severely limiting resources, especially food. Diamond explains how some civilizations, misunderstanding or choosing to ignore widespread environmental warnings, suffered catastrophic failures. Others, similarly stressed, made smarter decisions and managed to survive.
One such unwise society was Mayan, which came to a screeching halt because of deforestation, over-farming, warfare and changes in rainfall patterns. Other researchers, including historians, anthropologists and bio-geographers have added an additional correlate. Prior to ecological degradation and climate change, the Mayan civilization had been a fairly egalitarian culture in which distribution of resources rarely exhibited major disparities. About 1,000 BCE, however, similar to globalization trends today, imports dramatically increased and a new economy emerged, run by a markedly powerful, solipsistic Mayan ruling class. As wealth and resources became concentrated in a Mesoamerican, self-indulgent 1%, disproportionate access to necessities of life produced social unrest. Worsened by ecological destruction and climate change, those widening disparities ultimately led to societal breakdown, mass exoduses and collapse.
While the Federal Reserve’s year-long boost of interest rates to stop inflation occasionally comes under fire, putting off that day of reckoning would have magnified its impacts. Low interest easy money went much too far and far too long, creating “debt bombs” for which defusing was belated. Dramatic corrections were finally made to mitigate inflation, and individuals, banks and businesses most-leveraged (i.e., indebted) suffered repercussions. Financial institutions fail where multiple misguided policies converge, emboldening bankers to take bigger and bigger risks: deregulation, interest rates too low for too long and financial hazards of socializing risk by bailing out big banks. Over-leveraging became commonplace because, since Glass-Steagall was repealed and banks became diversified behemoths, taking big risks with depositors’ money hasn’t had a downside. With taxpayers covering bank losses, that “all-in” casino mentality stresses breaking points of an avaricious financial sector, exceeding the limits of capitalism without conscience.
President Biden’s emergency bootstrapping was designed to prevent a banking collapse chain reaction and to keep innocent depositors whole. It wasn’t an attempt to transform the banking system into a regulated utility, not that state- and federally-owned banks aren’t good ideas to at least compete with private lenders and savings establishments. The Bank of North Dakota, for instance, has a great track record about which I’ve written in the past. Connecticut should emulate it, especially to fund state and municipal infrastructure projects. In hindsight, the Fed kept borrowing rates at a ridiculously low 0% for much too long and should have eased rates back to 5% or more much earlier, not only to curb inflation, but to reward and encourage saving, and gradually level economic peaks and valleys as central banks should do. Perhaps then, higher interest rates, which finally provide rewards and incentives for savers, would not have created asset-liability duration mismatches that chipped away at regional bank security values.
Unfortunately, we’re a capitalistic economy propped-up by encouraging over-consumption, credit-purchases, debt, interest charges and artificially high demands for products, all of which fuel inflation. Ultimately, of course, the fault for collapse of Silicon Valley and Signature Banks and needed infusions of other firms’ money to walk First Republic and Credit Suisse back from the precipice lies not in the stars, but in bankers’ poor judgment. Congress must act to tighten, not loosen banking regulations, even taking on Wall Street to largely restore and upgrade Glass-Steagall. Clearly, Dodd-Frank, as amended, isn’t enough for stability, and banks have been woefully under-regulated for five years. Furthermore, Congress must substantially lift the FDIC insurance cap, at least to $1 million per depositor, perhaps much higher with tiered pricing, so businesses as well as individuals can count on getting their money back if a bank goes under. Both measures will bolster America’s confidence in institutions where our savings reside.
Deshefy is a biologist, ecologist and two-time Green Party congressional candidate.