There is increasing concern among experts about the potential consequences of the ongoing bank crisis. Some individuals have expressed alarm that freezing bank accounts could be the next step taken by authorities to save failing banks. Luke Groman, for instance, described this scenario as chaining the theater doors shut before setting it on fire. Not long ago, money manager Hugh Hendry cautioned on Bloomberg that the continuous flow of money out of bank deposits and into money markets could lead the government and the Federal Reserve to restrict access to bank accounts, advising people to be prepared for such a situation by panicking.
Isabella Kaminski, a former editor of the Financial Times, tweeted that banks seemingly do not hedge interest rate risk, which is contributing to their current struggles. She predicted that regulators might conclude that reintroducing banking frictions, making it difficult or impossible to withdraw money, could be the only way to stabilize the banking system. Kaminski speculated that “friction tech” or other similar concepts might emerge as the next big thing in financial technology. The background to these concerns is the Federal Reserve’s preoccupation with addressing the speed at which bank runs occur. What previously took weeks in 2008 now takes days or even hours. The underlying message is that the Federal Reserve would like to slow down or prevent bank withdrawals.
Saul Omarova, despite being a Marxist, was nominated by President Biden as a top regulator. She even advocated for establishing direct individual accounts, which would effectively nationalize the entire U.S. banking system. With advanced digital capabilities, freezing and seizing assets could be executed swiftly and precisely. The Federal Reserve, in a paper on central bank digital currencies (CBDCs) last year, explicitly cited the risk of bank runs. However, even the existing banking system possesses such powers, thanks to the Bank Secrecy Act of 1970 and the Patriot Act, which grant authorities extensive control over the movement of funds. Canada, for instance, demonstrated this power by blocking hundreds of accounts supporting peaceful protests. The U.S. government has similar tools at its disposal and could employ them during a financial crisis.
Throughout history, American taxpayers have often been relied upon to bail out the banking system. The current bailout measures involve trillions of dollars and deposit guarantees, alongside providing cheap loans based on undervalued bank assets. The problem is that these bailouts do not actually address the core issue: depositors are withdrawing their funds from low-interest bank accounts and moving them to higher-interest money markets. This results in banks having to sell their underperforming assets, leading to a breakdown in the system. The only solution seems to be to reduce interest rates, potentially even approaching 0.2%. However, the Federal Reserve cannot take this step because it knows it would trigger high inflation, prompting Congress to intervene. With the Federal Reserve running out of options, the responsibility ultimately falls on individuals.
Regarding dollarization and capital controls, such measures would not only affect Americans but also foreign individuals who would lose access to their dollars. This would have severe consequences for the U.S. dollar’s status as the global reserve asset, which is already under strain. The impact of capital controls and restricted access to funds would be detrimental to the U.S. economy. These developments warrant close observation, and the situation will continue to unfold in the future.
