- - Monday, May 31, 2021

When he delivered his first radio address to the American people, on March 12, 1933, President Franklin Roosevelt explained his plan to save the banking system. A month-long, panic-induced run on savings deposits had produced a cascade of bank failures, leading FDR to declare a bank holiday on March 5.

The new president, just eight days after his inauguration amid the worst economic crisis in U.S. history, encouraged his radio listeners to trust their neighborhood banks once they reopened. FDR’s words, along with the Emergency Banking Act passed by Congress, worked.

As institutions started reopening, customers lined up to redeposit their hoarded cash, confident, thanks to Roosevelt’s 15-minute radio address, that the federal government would provide enough currency to insure their deposits.

The public trust that undergirded Roosevelt’s successful campaign to halt the banking collapse may seem quaint from our jaded perspective in 2021. Faith in American institutions, from big banks to federal regulatory bodies, has fallen. The crash of ‘08, caused by reckless behavior made possible by the deregulation of financial markets, may have permanently damaged the reputation of Wall Street.

So then it is no surprise that some Americans believe it is just a matter of time before another financial crisis rocks the economy. Recent headlines make clear the financial system is loaded with minefields.

Take Bitcoin and other cryptocurrencies. In today’s world of stimulus-induced liquidity, cryptocurrencies have become speculative bets prone to volatility. How can any “currency” drop 30 percent in a single day and be taken seriously? Moreover, there are growing concerns that Bitcoin and others are creeping into retirement accounts as big companies add them to their balance sheets.

“Let’s take seriously the word currency, that this is something to be used by individuals or businesses to pay for something. The fact that the price gyrates so wildly is clearly a mark of something nobody would want under ordinary circumstances to pay for anything,” said Harvard economist Benjamin Friedman in the latest episode of History As It Happens podcast.

“I don’t believe that anybody would use these so-called currencies for payments unless they are doing something that is criminal,” added Mr. Friedman, the author of “Religion and the Rise of Capitalism.”

While Bitcoin’s wild fluctuations make daily headlines, another story with major implications for the banking and regulatory systems has slipped from the public’s attention.

Because of one bad trade, Bill Hwang’s Archegos Capital Management imploded in March, costing Credit Suisse $5.4 billion in losses. Other banks lost billions, too.

Mr. Hwang operated his family fund outside the regulatory structure created by the Dodd-Frank Act with disastrous consequences. He lost everything, and banks were forced to liquidate assets to avoid losses on par with Credit Suisse’s.

“Should anybody be upset that this one individual lost his shirt? My answer is no!” Mr. Friedman said. “Several banks lost an enormous amount of money because they had lent far too much to him without understanding what he was doing.”

“If enough banks are invested in the same kind of instruments and have to be liquidating instruments at the same time, that can create a market panic or crash. That is the level at which we need to be very concerned, and that is precisely what effective bank regulation is supposed to solve,” Mr. Friedman said.

For more of Mr. Friedman’s observations on the current perils of our financial system, as well as the lessons learned (and not learned) from past crashes, listen to this episode of History As It Happens.

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