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sábado, 25 de março de 2023

Venture Catastrophists: bank failures and government regulation - Scott Galloway (Medium)


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In 1907, amidst rising interest rates and a declining stock market, two New York bankers attempted to corner the stock of a copper company. Their scheme collapsed, and depositors at the banks that backed them pulled their money. One bank, Knickerbocker Trust, lacked the capital to withstand the bank run and, four days later, shut down. The rout was on.

Largest declines in U.S. stock market history

J.P. Morgan, the nation’s preeminent banker and business leader, saw obligation and opportunity. He gathered the heads of New York’s banks at his Madison Avenue mansion and, the story goes, locked the doors and pocketed the key. “This is the place,” Morgan proclaimed, “to stop the trouble.” First he addressed his obligation: to save the system in which he’d built his wealth. He pledged an $8 million loan ($255 million in today’s dollars) to the next domino after Knickerbocker, the Trust Company of America. Then he convinced a dozen other banks and the U.S. Treasury to deposit $70 million into other vulnerable banks. The “Panic of 1907” subsided. Morgan saved the financial system. Fourteen years earlier, he’d done the same thing.


What J.P. Morgan understood was that banking, and by extension the economy, is not built on gold, labor, machinery, or spreadsheets, but on trust. Trust that deposits will be there when needed. That trust ruptured when the Knickerbocker Trust Company said, “We can’t.” Trust was restored when J.P. Morgan said, “We’ll ensure they can.” Once people trusted the banks again, the monetary crisis was solved. Fast forward to today: Can you imagine any part-time libertarian billionaire in the Valley pledging 5%, much less 50%, of their wealth to cauterize an emerging banking crisis?

Banks need your trust because they don’t actually have your money. When you deposit cash at the bank, it loans it to someone else. In fact, banks loan out more than they take in. It is a miracle and the cornerstone of our economy — turning short-term deposits into long-term loans. This is a good thing: Money sitting dormant does not fund startups, expand existing companies, or encourage consumers to…consume. It’s not useful.

Every bank is vulnerable to a run if enough people ask for their money on the same day. If Bank of America’s 67 millioncustomers simultaneously withdrew their funds, in the same day/week/month, it would fail.


But Bank of America doesn’t stand alone. It’s backed by a safety net of federal agencies — the Treasury, the Fed, the FDIC. Regulators, risk managers, and bank management are supposed to calibrate a sufficient level of liquidity to prevent insolvency — to “stress test” the bank. The Fed serves as a lender of last resort to troubled banks. Regulation moderates risk but can’t eliminate it.

This federal backstop exists, in substantial part, because J.P. Morgan didn’t see just obligation back in 1907. He saw opportunity. In the aftermath of the panic, Morgan called in the loans he’d made and went shopping for distressed assets: He acquired six banks, including the Trust Company of America, a steamship line, and the second-largest steel company in America (he already owned the largest). By 1913 officers of J.P. Morgan & Co. sat on the board of 112 public companies, representing 80% of the public market capitalization in the country.

We learned two lessons from 1907. The first was that the banking system needs a backstop. The second was that we shouldn’t rely on billionaires to be that backstop. In 1913, Congress passed the Federal Reserve Act, which created the central bank as we know it today. (The FDIC came along in 1933.) It’s no coincidence that the generations that followed 1907 made historic investments in the collective strength of America, from Social Security to the G.I. Bill to the Interstate Highway System. They understood their obligation to be part of a broader solution and rest it on the shoulders of democracy.

However, prosperity has a poor memory. By the 1980s, Morgan’s obligation was forgotten, and his opportunism became our model. Reagan and Thatcher branded the new (old) era: “There is no such thing as society,” said the Iron Lady. “There are individual men and women, and there are families.” Reagan added: “Government is not the solution to our problem; government is the problem.” Libertarianism, the political philosophy of a 19-year-old who’s just discovered Ayn Rand, became the governing ethos. Regulators were no longer backstops but impediments to be defunded or ignored.

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