America has crisis of confidence

Gordon L. Weil

Welcome to this month’s crisis of confidence.

A bank failure, the debt ceiling conflict and the proposed Maine state budget have something in common. They all raise doubt about our confidence in institutions on which we depend.

The underlying cause is politics.  The effect of this loss of confidence in our government may be more important than how each issue is resolved.

The Silicon Valley Bank failed because of truly poor management.  Its executives invested their depositors’ funds unwisely, making it impossible for them to get their money out of the bank when they needed it.  What started with a trickle of withdrawals became a flood, and the bank failed.  Depositors in other banks panicked.  The problem spread, endangering the economy.

In 2008, banks got into trouble and some failed. The federal government shored up others. The lesson was learned, and Congress added new rules improving the chances that banks would hold enough available reserves to meet stepped up depositor withdrawals.

The biggest banks, the ones considered “too big to fail” because of the possibly massive effect of failure, are subject to “stress tests” to ensure their reserves are adequate.  So were other medium-size banks, but many, including SVB, disliked being checked.  The Trump administration backed off the scrutiny on all but the biggest.

The reversal was pushed by a dislike of what was claimed to be government overregulation. Unfortunately, the banking system turned out to need the safeguards.  Fortunately, there was a back-up.

To stop the panic right away, federal government regulators took over SVB and said depositors would get all their money.  Remember that little sign on the bank that says “Member FDIC.”  It means something. The Federal Deposit Insurance Corporation, funded by banks, has the cash to cover the crash.

Nobody complains when the FDIC and the Federal Reserve, both government agencies, save the banking system.  But Republican deregulators now warn against using tax dollars to bail out the banks.  The federal agencies are not using taxpayer money and don’t need to.  But, if attacking “big” government scores political points, the opponents of regulation don’t back off.

Similarly, the partisan battle over raising the debt ceiling calls into question whether Washington will do a backdoor reversal, this time of spending decisions it has already made.  That raises doubts about the federal government’s ability to pay its debts, and the world’s financial system loses confidence in the most important currency – the U.S. dollar.

The reason why the dollar is the world’s main money is that the U.S. has a long history of paying what it owes lenders.  Plus, it’s the world’s largest economy. That creates great confidence in the dollar and, as a result, in the U.S.

If the U.S. defaults on its debt, weakening confidence in the dollar, number-two China is ready to offer its currency as the alternative.  American world power probably depends as much on the strength of the dollar as on the strength of the armed forces.  It boils down to a question of confidence: can the world still rely on America?

President Biden might solve the problem himself and ignore GOP attempts to hold the debt ceiling hostage to reversing previous spending decisions. The Constitution says the U.S. pays its debts. So, there may be no need for a debt ceiling bill at all, and Biden could prevent a crisis of confidence.

This can even happen in Maine.

In a 2004 referendum, Maine voters decided that the state should pay 55% of basic school costs. In another vote, they raised taxes on the wealthiest to pay for the added state budget cost.  The Legislature promptly overruled the voters and reversed the tax increase but capped state spending plus making a start on reaching 55%.

Under Gov. Janet Mills, the state now has enough money to pay the 55% and stay under the cap, which it has observed aside from funding the school adder.  Now, as part of her budget, she proposes to break the deal that had been made.  Flush with funds, state government seems to believe the cap, now almost 20 years old, can also be flushed.

The Maine GOP says the state should keep to a deal that was made after the Legislature overruled two referendums. If Mills wants to bury the deal, she could either ask for a clean vote on the issue by the Legislature or send the question back to the voters.

The governor has the legislative votes to do what she wants. But the action, as in the other two cases, explains a frequently heard citizen reaction to government.

Some voters say that politicians don’t keep their word, abandoning promises meant to reassure voters when they think the voters aren’t looking.  Lacking confidence in government, why vote?

The real message: low trust in government can threaten democracy.