Republican Senator John Kennedy of Louisiana referred to banks as “sophisticated Ponzi schemes” when discussing the US banking crisis that recently affected several crypto-supportive financial institutions in the past two months.
The senator also addressed inflation and stated that the Federal Reserve needs to bring it down to at least 8% to curb the issue.
Banks, Ponzi Schemes and Vulnerability
During an interview with CNBC that aired in full on Friday, Kennedy emphasized that banks operate on trust and advanced communication technology makes them more vulnerable than ever before.
Kennedy said, “They’re really just – and don’t take this the wrong way – sophisticated Ponzi schemes. They work when everybody trusts each other.”
Kennedy explained that given the pace at which banking panics spread due to a single individual’s iPhone, a herd can “panic and stampede” to the extent that “anybody can go broke.”
Silicon Valley Bank was seized by the Federal Deposit Insurance Corporation (FDIC) in March after a run on deposits rendered it unable to satisfy all customers’ claims. Depositors were quickly bailed out in full by both the FDIC and Federal Reserve.
The initial bank run began when Silicon Valley Bank revealed that it had recorded a $1.8 billion loss following a $21 billion bond portfolio sale to restructure its balance sheet. Panic spread over the following two days, with PayPal’s co-founder Peter Thiel forced to take action by encouraging companies to withdraw from Silicon Valley Bank.
The ensuing panic also prompted withdrawal demand to surge at other banks including Signature Bank, which was put into receivership shortly after Silicon Valley Bank. Recently, most of First Republic Bank’s assets were sold to JP Morgan by the FDIC after it too was pushed to extinction.
Despite these banking crises, the Federal Reserve has reiterated that the banking system remains “sound and resilient.” However, former Coinbase CTO Balaji Srinivasan claims that the Treasury Department and the Federal Reserve often fail to warn markets of imminent danger until a profound recession occurs.
A Prolonged Inflation Fight
Kennedy believes that taming inflation will require significantly increasing interest rates, from the current level of 5% to 5.25%, to somewhere between 8% and 10%, unless both monetary and fiscal policies are employed.
“Powell’s gonna have to raise rates much higher than he normally would have if Congress would slow the stimulus of spending,” he said.
Rising interest rates are considered largely responsible for the collapsed bond portfolios that caused a bank like Silicon Valley Bank to become insolvent in the first place. However, market analysis suggests that Bitcoin may not be as affected by tighter monetary policies as it was last year.
Featured Image Courtesy of The Washington Post