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The Global Financial Crisis 2? With Lyn Alden

Peter McCormack

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The Global Financial Crisis 2? With Lyn Alden - WBD640 Peter McCormack

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Lyn Alden is a macroeconomist and investment strategist. In this interview, we discuss the recent run of bank failures: the causes, the impacts on the banking sector, federal support and exposure, and the likelihood of continued stress in the system. We also discuss a coming decade of recurring inflation and the emergence of reserve currency competition in a multi-polar world.

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“The vast majority of commercial banks that have ever operated in the U.S. have disappeared… the slow and steady decline in bank numbers continues.” This 2021 analysis by a St Louis Federal Reserve economist is as applicable now as then. Whilst the dramatic decline in bank numbers (from over 30,000 in 1921 to circa 4,000 now) mostly occurred in the 1930s, the past 3 decades have been characterized by a continued contraction that shows no sign of stopping.

There are obviously inherent risks in banking centralization. As we have seen in recent years, governments are delegating more regulatory authority to private banks, bypassing democratic norms in the process. As banks require central bank permission to operate, they have no incentive to resist such demands. Nevertheless, banking centralisation is a symptom of a more fundamental issue: a fiscal spiral that’s creating an increasingly volatile economic environment.

Unsustainable levels of debt are hampering central banks' ability to address growing inflation. Restraining economic growth decreases the ability of governments to reduce deficits. Further, the political cycle results in difficult but necessary policy decisions around fiscal constraints being deferred. The result is a yo-yo-ing of rate rises and bailouts. This increases the risk for all types of investment, even traditional safe havens. Banks struggle, and depositors run.

A situation that begins with investors seeking safer banks, if not resolved, can lead to investors seeking to divest themselves of sovereign currencies. This is where capital controls kick in. The fundamental issue is that governments will seek to protect the system, not the individual. The denial of licences for narrow banks is part of the same toolbox that includes gold seizures and potential restrictions on Bitcoin. Prepare accordingly.

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00:01:49: Introductions
00:03:06: The liquidity problem with smaller banks
00:11:49: Banking regulations and full-reserve banks
00:17:08: Silicon Valley Bank
00:19:13: Narrow bank
00:25:41: Centralisation of banking
00:28:02: Shorting banks
00:29:54: Reserve ratios, and liquidity
00:41:05: A fiscal spiral, and a decade of inflation
00:48:00: Risk to dollar hegemony, and a multipolar world
00:52:50: Operation Choke Point
00:57:33: Rate changes, and being Jerome Powell
01:04:42: Final comments

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