A long time ago I told a story about a farmer during the depression times waiting behind the door of a bank to confront a banker who had bounced his $10 cheque written to his church.  He was a deacon in the church and the church was running a little bit low on funds as the collection plate was getting pretty dusty.  To solve the problem the deacons agreed to chip in a little bit of money to get the church over to the following week. He didn’t have any cash, so he simply wrote a check for $10.  Later, he found out the banker had bounced his $10 cheque as well as all his self esteem around the deacons table at the church. What was a good Christian to do!

As he waited for the banker to leave, he timed his approach right. As the banker left, he grabbed him and threw him against the bank wall and screamed at him about bouncing his $10 check to the local church.  So much for being a good churchgoer, I guess.  Needless to say, it painted that man’s view of bankers way into his future.

In farm country these days you don’t hear much about bankers like you used to. For instance, when I was borrowing money at over 23%, we knew the banker’s name. However, now and in the last several years of the low interest rate era bankers became ubiquitous. Credit was easy and the sources of credit were many and for a large group of Canadian farmers bankers lost their villainous nature.  Then last week we had a major bank failure in the United States with the Silicon Valley bank going down. It was the largest bank failure since 2008.  This was quickly followed by Signature Bank over the weekend.

This spooked the market. In fact, it spooked all markets and even going beyond that it should spook everybody. When I first heard of it all I could think about was the previous bank failures in the United States in 2008 when Bear Stearns bank and Lehman Brothers went under. I remember very clearly wondering at that time whether my money was safe and whether Canadian banks were at risk as well.

Simply put, when something happens that challenges your great assumptions about money and security people should start asking the hard questions. Did you ever imagine that your money could go poof?  Did you ever realize that there could be a bank run in 2023, which may spawn contagion?  Can you imagine credit being frozen like it briefly was in 2008 or as tight as it was in 1981?

I answer yes to almost all those questions. The reason that I do I think has to do with my academic background as an agricultural economist.  I sat through many “money and banking” lectures on my way to getting a couple degrees in the dismal science.  So, in 2008 when banks started to fail based on the no money down mortgages, it all made sense to me.  It also made sense to me after the fact at reading about the depositor run at Silicon Valley bank, there would be similar problems. Of course, the question in my mind now is how do the Americans stop the contagion?

We all got here with our eyes wide open. After the financial crisis in 2008 and the quantitative easing that followed governments flushed our economic system with money creating some of the lowest interest rates ever. This was followed by the pandemic where governments piled on and increased deficits tenfold.  Our societies were swimming in money to various degrees and then inflation took off.  Interest rates in a very short time went up 450 basis points.  It’s pretty clear now, some banks weren’t ready in the United States. As they are the leader of the free world, that nervousness gets translated everywhere and that’s exactly what has happened over the past week in our economic system

On this side of the border in Canada it is so different as we have some of the strongest banks in the world. They are strong because they are highly regulated and extremely profitable.  The bank act here is made to keep it that way.  Fees and charges continually go up and Canadians grind their teeth and look the other way. During the bank crisis of 2008, our Canadian banks shrugged it off. This past week they did the same thing.  They will not lose at this and already are scooping up some of the customers they were at Silicon Valley bank.

Keep in mind what we’re talking about here is the great assumption that your money will always be there. It’s never been guaranteed fully, but as Canadians it is the great default that we take for granted. However, our American friends I have never had quite the same assurance.  The bank failures of the last week have been testament to that.

The problem is credit is the lubrication that makes our economy work. It is based on trust and a whole set of rules.  When things breakdown like they did a little bit last week it raises volatility in other markets. Think of all that non-commercial demand apparent in the grain futures market right now. If there is the specter of that credit drying up because of bank failure and contagion, everything grows harder. Of course, it’s something that in this part of the world we rarely think about.  A few days later we learned Credit Suisse was having a few issues, which sunk bank stocks everywhere.  The question is will there be an end to it?

Let’s hope so. However, it is such a difficult problem because so much of it is based on trust and psychology. When a bank run starts, psychology takes over. We don’t want to go there.

Let the heavy lifting begin. That will be up to the central banks around the world.  My gosh, there are just so many problems out there aside from the Ukraine
Russia war.  Having said that, it’s not time to buy a bigger mattress to put your money in.  It’s not time to go up and hide behind the banker door.  This thing could get messy.  When it comes to the viability and transparency of real money, we shouldn’t take it for granted.