Republican Senator John Kennedy of Louisiana called banks “sophisticated Ponzi schemes” while discussing the US banking crisis that’s claimed multiple crypto-supportive financial institutions in the past two months. 

The politician also spoke on the state of inflation, which he believes the Federal Reserve will need to bring to at least 8% to cool down. 

Banks Are Ponzi Schemes?

In an interview with CNBC that aired in full on Friday, Kennedy stressed that banks “exist on the basis of trust,” and have been made more vulnerable in the era of advanced communications technology. 

“They’re really just – and don’t take this the wrong way – sophisticated Ponzi schemes,” he said. “They work when everybody trusts each other.”

Given the speed at which banking panic can spread beginning from a single person’s iPhone, Kennedy said a herd can “panic and stampede” to the point where “anybody can go broke.”

Silicon Valley Bank (SVB) was seized by the Federal Deposit Insurance Corporation (FDIC) in March after a run on deposits rendered it unable to satisfy all customers’ claims. Depositors were quickly bailed out in full by both the FDIC and Federal Reserve.

The initial bank run began when SVB revealed that it had realized a $1.8 billion loss following a $21 billion bond portfolio sale to restructure its balance sheet. Panic spread over the following two days, with PayPal co-founder Pether Thiel encouraging companies to withdraw from SVB. 

The surrounding panic also caused withdrawal demand to surge at other banks, including Signature Bank, which was placed into receivership shortly after SVB. Earlier this week, First Republic Bank was also pushed to extinction, with most of its assets being sold to JP Morgan by the FDIC. 

The Federal Reserve reiterated on Wednesday that the banking system remains “sound and resilient.” Former Coinbase CTO Balaji Srinivasan, however, has argued that the Treasury Department and Federal Reserve have a history of not warning markets of impending danger until a deep recession actually occurs. 

A Longer Inflation Fight

According to Kennedy, taming inflation will require raising interest rates much further, from its current 5% to 5.25% level to the realm of 8% to 10% – unless the problem is tackled from both a monetary and fiscal angle. 

“Powell’s gonna have to raise rates much higher than he normally would have if Congress would slow the stimulus of spending,” he said. 

Rising interest rates are considered largely responsible for the cratered bond portfolios that caused banks like SVB to go insolvent in the first place. After the latest rise, however, market analysis suggests that Bitcoin may not be so affected by tighter monetary policy as it was last year. 

Featured Image Courtesy of The Washington Post