A Bailout Most Crooked, Part 2

One of the great truisms of economics is that the state cannot regulate its way out of bad money. That’s what the bank failure imbroglio of the past few days was all about, symbolized almost farcically by the failure of Signature Bank, the board of which was graced by former Congressman Barney Frank.

If there was anyone who embodied Washington’s deeply erroneous policy response to the Great Financial Crisis—the notion that the dangerous financial speculation fostered by the central bank could be cured via stringent regulation of financial institutions—it was the author of the Dodd-Frank Act.

The whole convoluted edifice of capital and liquidity standards legislated by Barney Frank and his colleagues was built upon the predicate that greed, imprudence and criminality among financial institution executives and insiders caused the mortgage and securitization disaster of 2007-2009, not the mad-money printers in the Eccles Building. Therefore, reining-in the bad apples within financial institutions via a tight and comprehensive financial harness would allegedly keep banks on the straight and narrow in the future.

It obviously didn’t, and as we said in Part 1, right under Barney Frank’s nose from his perch on the Signature Bank (SBNY) board of directors.

Then again, there is no reason to believe that ex-Congressman Frank would have recognized a financial trainwreck had it blown smoke straight up his nostrils. After graduating from college he went to work for Boston Mayor Kevin White in 1968 and never got off the public teat until he retired from Congress in 2013.

So what did he really know about the persistency of deposits or the price sensitivity of bond duration?  We doubt very much at all, but when he was appointed to the bank’s board in 2015 you would have thought he was some kind of financial Einstein from the company’s press release:

“With a 32-year career devoted to government and his distinguished expertise in financial services, we believe Barney will be an asset to the board, bringing keen insights, far-reaching industry knowledge and vast intellect to his role as well as to our institution and the bank’s shareholders”.