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Who’s Afraid of Central Bank Digital Currencies?

Once upon a time, the greed of tobacco companies was channeled through libertarian outrage over the restriction of smokers’ freedom to choose cancer. Today, the outrage is serving the interests of bankers panicking at the prospect of central bank digital currencies.

ATHENS – When First Republic Bank failed, the Federal Deposit Insurance Corporation organized a shotgun sale of its assets to JPMorgan Chase. That violated the FDIC’s cardinal rule that no bank owning more than 10% of insured US deposits should be allowed to expand further by absorbing another US bank. But, because sparing taxpayers the cost of another bank bailout took precedence, the US authorities permitted – indeed helped – America’s largest bank, already a too-big-to-fail (TBTF) institution, to grow even larger.

In a rare show of bipartisanship, Democrats and Republicans alike applauded the FDIC’s actions, rejoicing that JPMorgan had stepped in with a “private sector” plan to avoid burdening the taxpayers. Unfortunately, the truth was less heroic: Jamie Dimon, JPMorgan Chase’s ubiquitous boss, negotiated a $50 billion credit line and a loss-sharing deal with the FDIC that will result in a $13 billion loss to US taxpayers. In short, the resolution of First Republic burdened Americans both with a hefty tax bill and with the larger systemic risks implicit in a bigger TBTF bank.

First Republic was small, but its fate is a harbinger of bigger things. Owing to the rise in prices and (to a lesser extent) wages, the US public debt as a share of national income shrank. But with the Federal Reserve boosting interest rates to arrest inflation, the value of Treasury bills sitting on the banks’ books declined (why buy a second-hand, low-yield bond when you can buy a higher-yielding fresh one?). And since most of the safe assets held by banks are Treasury bills, bankruptcies like those of Silicon Valley Bank, Signature Bank, and First Republic ensued.