Now that Republicans have won the election, Project 2025 will become operative. Project 2025 plans to merge the FDIC with other banking agencies, which is a recipe for a financial disaster. The FDIC protects people against losing their deposits up to $250,000 per depositor per bank if an insured bank fails in the United States.
In my banking career, I saw how bank deregulation caused the double disasters of the Savings and Loan (S&L) crisis from 1980 to 1989 and the subprime mortgage crisis of 2008.
I started my banking career as a mortgage loan officer in Sunnyvale, California, after earning a BA in economics in 1984. Two years earlier, Congress had passed two disastrous laws to deregulate Savings and Loans (S&Ls).
When the principal owner of the S&L where I worked retired, his son — a Wall Street trader and his friend Michael Milken — decided junk bonds were more fun and lucrative than providing mortgages. At the same time, S&Ls were allowed to bundle their mortgage loans in bonds that could be traded. This policy mistake would eventually lead to the subprime mortgage crisis of 2008.
By 1989, my S&L had failed, and Milken went to jail. By 1995, more than 1,000 S&Ls had failed and had been closed. During the S&L crisis, the ill-fated Office of Thrift Management was formed to manage the crisis, but it just continued lax oversight and supervision. Only 11 years later, it was dissolved, and the remaining S&Ls were put under the supervision of the Office of the Controller of the Currency (OTS) and the Federal Deposit Insurance Corporation (FDIC).
A Government Accountability Office report noted, “a substantial minority of the firms OTS oversees—especially the large, complex ones—have primary businesses other than those traditionally engaged in by thrifts, such as insurance, securities, or commercial activities.”
By then, I had moved on to work for national and regional banks.
Deposits in banks represent our money supply, the bedrock of our economy. One dollar can double its value as it is lent out or used to purchase goods and services. Bank failures greatly shrink our economy.
Bank failures trigger depressions.
In 1933, after struggling for decades with bank failures that repeatedly wiped out personal wealth for thousands of families and triggered depressions, legislators passed the Banking Act of 1933, also known as the Glass-Steagall legislation.
The brilliant creation of the Act was the formation of the Federal Deposit Insurance Corporation (FDIC). Banks pay the FDIC for deposit insurance, which ensures that should a bank fail, deposits are returned to depositors. Thanks to Sheila Barr, the FDIC Chairman during the 2008 crisis, the amount of coverage per depositor doubled to $200,000, preventing the financial ruin of millions during the crisis. Almost 90 years since the FDIC was created, no depositor has lost a penny covered by the 1933 Act, and the fund remains sound.
However, with the nullification of Glass-Steagall by the 1999 Graham-Leach-Bliley Act, the definition of a bank was expanded to include investment firms like Goldman Sachs, which allowed for incomprehensibly complex activities. Investment firms gambled with deposits on Wall Street. Banks became difficult for regulators to audit. Further, when I worked with the FDIC, once the 2008 financial crisis started, many bank failures occurred, and it was evident that government audits warning about risky banks had been suppressed by political appointees.
The FDIC needs to be independent to serve as a voice of experience and caution as bank officers are tempted to take risks and regulators are influenced to look the other way.
There is a reason that those wise 1933 legislators put in banking regulation: to protect our deposits from the greed and hubris of Wall Street speculators and their politicians. Those legislators understood how to protect us from bank failures seriously hurting our economy by shrinking the money supply.
These risks still exist today. Fight for a well-regulated banking system. Fight against enactment of Project 2025.
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I agree with the industry insights offered here. Far too often ‘innovation’ and ‘market dynamism’ in such a fundamental part of the financial industry is simply cover for fraud and shady accounting.
Therefore, It is truly alarming to me that the MAGA movement has seemingly fully embraced crypto as a financial innovation. We have seen time and again that there is no bottom for crypto: it is merely fraud and insider advantage all the way down. The very idea of having a ‘national crypto reserve’ is truly courting the next big government bailout when the bubble of fraud and bullshit finally deflates. If we allow vital institutions to fold crypto into their valuations and reserves we are courting certain disaster.