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KUDLOW: Where Was The San Francisco Fed?

Mary C. Daly President and Chief Executive Officer, Federal Reserve Bank of San Francisco, Source: San Francisco Fed

So far, bank shutdown contagion hasn’t spread, but the stock market bear is growling ever more loudly. Last I saw the Dow was off 400 points, and it closed down almost 300.

Credit Suisse counterparty and capital problems headlined the early morning session, but that’s going to be a problem left up to the Swiss government. Here’s some good news for the U.S.: The Fed-Treasury lending facility, which is an underreported development, is in fact a very good thing. It’s called the Bank Term Funding Program.

I mentioned it earlier in the week. It offers loans up to a year to backstop liquidity emergencies. The seed corn is $25 billion from the Treasury’s Exchange Stabilization Fund — which allows the central bank to leverage off that almost as much as it wants, just in case.

Just in case of what? You know, just in case.

By the way, this was the way the Trump administration coordinated with the Fed during the Covid shutdown days for a number of emergency funds. Also, you might not like it, but you kind of have to go back to the 19th century, to a famous British economic journalist, Walter Bagehot, who said that, in times of emergency, “lend freely, on good collateral, with a small penalty rate.”

That’s what the Fed and the Treasury have set up: a small penalty rate that will be 10 basis points above overnight paper called the OIS, the overnight index swap rate. It’s basically the Fed funds rate. So that part is good.

On the other hand, the FDIC is insuring uninsured deposits. Not good. Also not good: The left-wing ideologues at the FDIC — who have not sold SVB despite plenty of suitors, such as KKR, Apollo, Blackstone, and others — still sitting on their hands.

You know, they could take taxpayers and the FDIC off the hook instantly if they just sell the darn bank.

Also bad is the ongoing story of the absolute failure of Mary Daly’s San Francisco Fed supervisors and examiners to step in on SVB with its wild investment strategy and long-term bonds while interest rates were soaring. Or its mismatched asset-liability risk-taking.

I haven’t seen a word about the failure of the responsibilities of the San Francisco Fed. They have supervisors, they have examiners, and they should have done their job. Because you know what? It wasn’t just the last three weeks or the last three months. People knew about Silicon Valley Bank’s problems for at least a year. And where was the San Francisco Fed?

Then, there’s such a slew of crazy left-wing stuff surrounding Silicon Valley Bank. I mean, this is one weird bank. It gave $73 million to the Marxist BLM movement at the height of Covid and the race riots of 2020. It had a board of directors that was basically chock full of Hillary Clinton donors and virtually no bank management expertise. It made a $5 billion commitment to various climate and diversity, equity, and inclusion woke investments. And it had a regional Fed head — that’s our Ms. Daly again — who gave a speech at AEI and wrote a paper saying “as monetary policy-makers, our job is to navigate” the risk of climate change.

That’s not necessarily a sin; it’s just kind of odd when you throw it in with the rest of the Silicon Valley Bank mix.

Also, it’s at odds with this wise sentiment from the Fed chairman, Jerome Powell: “We should ‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities. We are not, and will not be, a climate policy maker. Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.”

That is exactly right. It was one of Mr. Powell’s best moments. Has Ms. Daly heard from him or anybody else involved in this crazy bank game? I don’t know. But Mr. Powell is correct. The job of the Fed is not climate change.

As we’ve said a million times, the Fed was in denial about the inflation problem two years ago. It waited way too long before finally figuring it out. Of course, they ratcheted up interest rates. And a lot of banks probably have securities that are way underwater because they either didn’t see it coming or didn’t believe it. So that’s the Fed’s burden to bear. But at least Mr. Powell has got the climate change part right. By the way, one last thought.

On the East Coast, in New York, executives at Signature Bank, which has also been closed, produced a Broadway-style musical to launch the bank in 2001, talking about how to start a bank that will “diminish and fail” and another song, “How to build a bank for dummies?”

For my part, I read this stuff and can’t believe it’s true. I must be losing my mind. At least get us new private-sector owners for these dumb banks, so the public doesn’t have to suffer anymore. This story is too weird.

From Mr. Kudlow’s broadcast on Fox Business News.

Larry Kudlow was the Director of the National Economic Council under President Trump from 2018-2021. His Fox Business show "Kudlow" airs at 4 p.m &. and his radio show airs on 770 ABC from 10:00 a.m. to 1:00 p.m.