If you’ve watched It’s a Wonderful Life a few times like I have, you’ll recall that it’s on some level a story about a good banker (George Bailey, played by Jimmy Stewart) versus an evil banker (Mr. Potter, played by Lionel Barrymore). The evil banker is greedy and heartless and is trying to ruin the small savings & loan and gain a monopoly over the town’s banking business. Spoiler alert: the good guy wins in the end thanks to a 1946 version of a GoFundMe campaign. It's a heart-warming conclusion, though from a historical perspective not the most likely outcome.
The movie was brought to mind by the collapse of Silicon Valley Bank and the general turmoil it has caused in the economy. Playing the role of Mr. Potter in this latest fiasco is Greg Becker, the CEO of SVB. Elizabeth Warren has rightly called him out for his role in the whole mess. Becker lobbied to exempt banks like his from strict government regulation, claiming that were too small to pose any “systemic risk” to the economy. This about a bank that was the 16th largest in the country and held $209 billion in assets at the time of its implosion. Supervisors from the Federal Reserve repeatedly issued citations warning of SVB’s precarious situation, but after regulations were loosened by the Trump administration in 2018, SVB came under no real pressure to heed them. It’s worth noting that Becker also sat on the board of the Federal Reserve Bank of San Francisco, which had oversight responsibility.
Still, you have to wonder why SVB’s manager ignored those warnings as their bank careened toward disaster. Was it incompetence or corruption? Instead of acting to save the bank, SVB executives were selling their stocks and handing out bonuses in the weeks before the collapse. For his part, Becker walked away with $9.9 million in compensation last year, including a $1.5 million cash bonus. That is the kind of reward executives get when they maximize short-term gains for stockholders, even when it means putting their depositors at risk. So maybe it was all about simple greed.
On the other hand, the bank might have survived if venture capitalists hadn’t panicked and caused a run on the bank that quickly exhausted its too-small cash reserves. Journalists have wondered whether this was “a bank-run by idiots” or “a bank run by idiots,” and maybe it was both.
So now the rest of us are on the hook to bail out the wreckage left by these bozos. And that is the problem with “too-big-to-fail” banks: even when they lose, they win. These bank bailouts are one of the major sources of the populist resentments that fueled the rise of the Tea Party after the Great Recession. Yet while Donald Trump and his ilk might talk a populist line, they are as much in service to wealthy corporate elites as more traditional Republicans.
There is, however, a longer history of populist animus toward bankers that is worth remembering. When It’s a Wonderful Life was made in 1946, memories of the Great Depression were still fresh, and people had not forgotten the bank failures and rampant foreclosures that had left so many destitute and homeless. That had led to the New Deal reforms that for a long time made banking boring. The reforms also helped pave the way for the great post-World War II housing boom that George Bailey’s savings and loan represents. We need more banks that are rooted in the communities they serve.
More broadly, we should recognize that banks serve a public trust that is vital to the health and stability of our economy, which is why we have regulation in the first place. Yet regulation has repeatedly failed because it is at odds with incentives to maximize shareholder wealth. That is something the original Populists grasped back in the late nineteenth century when they proposed a radical plan to create a government agency that would allow farmers to circumvent banks in obtaining credit on their crops. Ironically, the Bank of North Dakota, which was on offshoot of that Populist impulse, could provide a model for effective banking reform.