When First Republic Bank failed, the Federal Deposit Insurance Corporation organised a shotgun sale of its assets to JPMorgan Chase. That violated the FDIC’s cardinal rule that no bank owning more than 10 per cent of insured US deposits should be allowed to expand further by absorbing another US bank. But, because sparing taxpayers the cost of another bank bailout took precedence, the US authorities permitted, indeed helped, America’s largest bank, already a too-big-to-fail (TBTF) institution, to grow even larger.
In a rare show of bipartisanship, Democrats and Republicans alike applauded the FDIC’s actions, rejoicing that JPMorgan had stepped in with a “private sector” plan to avoid burdening the taxpayers. Unfortunately, the truth was less heroic: Jamie Dimon, JPMorgan Chase’s ubiquitous boss, negotiated a $50 billion credit line and a loss-sharing deal with the FDIC that will result in a $13 billion loss to US taxpayers. In short, the resolution of First Republic burdened Americans both with a hefty tax bill and with the larger systemic risks implicit in a bigger TBTF bank.
First Republic was small, but its fate is a harbinger of bigger things. Owing to the rise in prices and (to a lesser extent) wages, the US public debt as a share of national income shrank. But with the Federal Reserve boosting interest rates to arrest inflation, the value of Treasury bills sitting on the banks’ books declined (why buy a second-hand, low-yield bond when you can buy a higher-yielding fresh one?). And since most of the safe assets held by banks are Treasury bills, bankruptcies like those of Silicon Valley Bank, Signature Bank and First Republic ensued.
This dynamic is unlikely to end any time soon. More banks will fail, which will help TBTF banks pose even larger systemic threats to society. Besides misleading the public that their taxes are being spared, the authorities are setting the stage for a future banking crisis, which will force an exasperated public to pay even more.
There is an alternative to the tax-funded absorption of small banks like First Republic by megabanks like JPMorgan. And it would not shift the cost of backing uninsured deposits to the taxpayer: Fed deposit accounts or, equivalently, the gradual rollout of a Fed-issued digital dollar.
Consider how a US central bank digital currency, or CBDC, would have worked out in the case of First Republic. Instead of having the FDIC guarantee the bank’s deposits with taxpayer money, the Fed creates digital accounts (or wallets) for First Republic’s depositors and credits their balance to them. Depositors can keep the money in their new Fed account, making payments from it using a username and PIN provided by the Fed, or transfer the balance to any other bank account.
While on their Fed account, their deposits are de facto guaranteed by the Fed without any need to burden taxpayers or levy charges to other banks. If the Fed is worried that, by boosting the money supply, the associated increase in its balance sheet will be inflationary, it can sterilise the new money by selling an equivalent value of some of the mountain of assets (such as mortgages and bonds) it already owns.
At the end of the day, taxpayers are fully shielded while megabanks, like JPMorgan, are not allowed to grow even larger. In fact, Wall Street finally faces welcome competition from the Fed accounts, forcing them to raise their game.
I imagine outraged opponents of CBDCs rushing to their keyboards to denounce me for aiding Big Brother’s nefarious effort to gain control over citizens’ every transaction. But they are barking up the wrong tree. Digital money is already here, increasingly eradicating cash payments. At the drop of a hat, the IRS, the FBI, and even local police have instant access to our payments. Justin Trudeau, the Canadian prime minister, did not need a CBDC to freeze the bank accounts of protesting anti-vaccination truckers. Banks and Big Tech are regularly cutting off, or refusing to trade with, people whose views are deemed inappropriate.
In other words, we already live in a techno-feudal society where we need to ask our bank, and indirectly our government, for permission to pay. Our digital payments can be centrally interdicted by credit card companies, banks, bureaucrats and other unaccountable, opaque intermediaries.
Perhaps counterintuitively, CBDCs can enhance citizens’ privacy relative to the status quo and shield us from exorbitantly centralised power. Checks and balances can be introduced based on two separate and siloed data-management systems. The system that manages Fed accounts can be made totally anonymous (just as crypto accounts are anonymous and identified by a long string of numbers) while a separate system supervised by relevant authorities can check for illicit activity such as tax evasion and money laundering. Thus, a proper and democratically controlled CBDC rollout can bring the combined benefits of strengthening tax collection, fighting deflation, and enhancing protection against Big Brother (and his many little brothers).
So, why so much venom against CBDCs by those untroubled by the surveillance and control already exercised over us by Wall Street-controlled digital money? Who is really afraid of CBDCs?
Once upon a time, the greed of tobacco companies was channelled through libertarian outrage over the restriction of smokers’ freedom to choose cancer. This time, the outrage is serving the interests of bankers panicking at the prospect of Fed accounts. Dimon and other masters of the TBTF universe are right to be scared, because a Fed CBDC would threaten their empire building. And bankers around the world are right to fear that many of their lucrative services would no longer be required. With those services, holding deposits, processing payments, and so on, “disintermediated”, they would suddenly be unable to hold societies hostage.
Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 Party and professor of Economics at the University of Athens. Copyright: Project Syndicate, 2023.
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