Janet Yellen Blames Everybody Else for the Financial Panic

Regulation failed to prevent bank failures, but the Treasury secretary wants more regulation

WSJ editorial. Excerpts:

"Ms. Yellen has an admittedly heavy explanatory lift because this financial trouble wasn’t supposed to happen. The economy was in great shape, she and President Biden kept telling us. Inflation was transitory, and when she suddenly had to admit it wasn’t, she said it would fall soon enough.

The banking system was also supposedly strong thanks to the Dodd-Frank Act regulations that she and the others now in power had written. Yet here we are with major banks failing, and the government having to bail out uninsured depositors and offer lifelines to protect bank assets that are underwater.

What went wrong? In Ms. Yellen’s telling, the failures of Silicon Valley and Signature banks are really signs of strength. “It is notable that neither of these events triggered the worst-case scenario—a financial meltdown like we saw in 2007 and 2008,” she told the National Association for Business Economics. “In large part, this was due to the post-crisis reforms we put in place.”

Are we now measuring regulatory success by anything that doesn’t become a once-a-century meltdown? Apparently she is. But even the Treasury secretary has to concede that responding to the bank failures required “substantial interventions” to prevent a larger panic. And, wait for it, “this means that more work must be done.”"

"What didn’t work this time? Well, she says, “when the President and I took office in January 2021, we inherited a financial stability apparatus at Treasury that had been decimated.” Of course: It’s Donald Trump’s fault."

"Here’s how the FSOC [Financial Stability Oversight Council] home page at Treasury’s website describes its work in the Biden years:

“In 2021, the Council identified three key priorities related to significant vulnerabilities in the financial system: nonbank financial intermediation, climate-related financial risk, and Treasury market resilience. In 2022, the Council identified a fourth key priority: risks related to digital assets.”

None of these caused the failure at Silicon Valley Bank or the deposit run at midsize banks. The main culprit was duration risk from the failure to properly hedge against rising interest rates."

"The systemic risk she fails to mention is what caused the rapid rise in interest rates that has imperiled the financial system: the fiscal and monetary excesses that produced inflation."