Feb. 13, 2024 ⚜ Mardi Gras, a looming financial crisis, and some head-scratching Super Bowl ads
Plus: Israel bombs the last safe place in Gaza, King Cake capers in New Orleans, Trump tells Putin to invade Europe, and Toronto is overrun with raccoons
Happy Mardi Gras, Current Affairs readers! In addition to the actual parade you’ll hopefully get to enjoy, we offer a parade of news from our regularly scheduled briefing. In addition, we’ve sprinkled in some of our favorite Mardi Gras jokes and articles from years past!
Laissez les bons nouvelles rouler!
STORIES THAT SHOULD BE BIGGER
IS ANOTHER FINANCIAL CRISIS AHEAD?
In the Financial Times this week, we find two stories that have generated almost no attention in the wider press—but which suggest that things are going seriously wrong in the U.S. banking sector. In the first, journalist Stephen Gandel informs us that U.S banks now owe more than $1 trillion to “shadow banks.” The concept of a “shadow bank” is a bit complicated, but essentially they’re private financial institutions—including “hedge funds, private equity firms, direct lenders and others”—that lend money like banks, but aren’t technically banks, and thus aren’t subject to the same level of regulation. As Gandel explains, traditional banks lend money to these “shadow” institutions, who turn around and lend it to “a range of risky borrowers” which the banks themselves wouldn’t typically be allowed to do business with. Shadow banks have been around for a while, but they’ve started expanding rapidly in the last few years. In 2023 alone, lending to these “alternative” institutions rose by 12 percent, while overall loans increased by just 2 percent, making shadow banks “one of banking’s fastest-growing businesses.” Speaking to the Financial Times, Michael Hsu—the acting Comptroller of the Currency, and one of the country’s most important banking regulators—warns that shadow banks are creating a “race to the bottom” as traditional banks use them to take on more and more low-quality, high-risk investments.
We’ve heard this story, or a version of it, before: banks and other financial institutions pushing further and further into a form of investment they know to be inherently unstable, until eventually the whole financial system collapses around them. Back in 2008, the shady financial instrument in question was subprime mortgages. Now, it may be shadow banks. But that’s not the only story that should be ringing distant alarm bells this week. Also courtesy of Stephen Gandel (and coauthor Joshua Franklin) in the Financial Times, we learn that the profits of the entire U.S. banking industry dropped by 45 percent in the last quarter of 2023. At the risk of stating the obvious, that’s not supposed to happen. The steep decline was a long-term consequence of the “regional banking crisis” that wiped out Silicon Valley Bank, Silvergate Bank, and Signature Bank in the space of a few days last year. As Gandel and Franklin tell it, those banks’ failures “heavily depleted” the FDIC’s Deposit Insurance Fund, causing the government to collect a “special assessment” from the country’s largest banks to replenish it—to the tune of roughly $16 billion, which accounts for much of the fall in profits. This alone would be unusual, but more worryingly, there are signs the “regional banking crisis” might not be finished. As the Financial Times notes, Truist Financial—the “country’s seventh-largest lender”—suffered particularly bad losses in the last quarter of 2023, amounting to nearly $11 billion. And if it—or another mid-sized bank like it—suddenly goes under the way Silicon Valley Bank did, it’s unclear if the already-strained safeguards in place would be able to cover it.
In 2018, Matt Taibbi—the single most important journalist to cover the 2008 crisis—warned that “Ten Years After the Crash, We’ve Learned Nothing.” Well, it’s now 16 years, and that headline couldn't have been more accurate. Right now, the entire liberal political establishment is hell-bent on convincing us—and themselves—that “Bidenomics” has been a triumphant success, and that there’s nothing fundamentally wrong with capitalism. But quietly, in the dusty pages of the financial press, you can hear the rickety architecture of the whole system start to groan and warp under its own weight. When something load-bearing finally snaps—and it really is a question of when, not if—a lot of people won’t be ready for the fall.
AROUND THE STATES
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