Regional Fallout
“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” – John Maynard Keynes
What makes for a successful economy? While the question has long been the subject of deep academic study, we have an admittedly simplistic view: its energy and banking industries. History and observation teach us ready access to cheap, abundant energy and a vibrant, properly incentivized banking sector are an infallible combination.
Look no further than Germany. Prior to its disastrous implementation of Energiewende, Germany had near-perfect access to surplus energy from ultra-secure sources. It produced 30% of its electricity from a domestic fleet of some of the best-run nuclear power reactors in the world and used its bounty of native coal deposits for another 50%. Germans met the balance of their needs using a mix of renewable energy and cheap natural gas from Russia, which arrived in-country via pipeline with an enviable regularity and an even more attractive price.
Germany paired this favorable energy profile with a robust and flexible banking sector, tailor-made to support industrial growth. This dual-engine construction allowed its economy to become the fourth largest in the world.
The beating heart of the German economy is its small- and medium-sized companies, known as the Mittelstand, that are strong drivers of the country’s innovation agenda. For color on the nature of Germany’s banking sector as it pertains to the success of Mittelstand development, we turn to Sir Steven Wilkinson, an entrepreneur who spent decades living and doing business in the country, in an excellent essay he wrote for his Pitchfork Papers (emphasis added throughout):
“In order to understand the Mittelstand you have first to understand the unique regionality of the BRD [Federal Republic of Germany] and its federal system of government which devolved a great deal of power and autonomy to the individual states. Each State has its own regional capital replete with its own banking system headed up by the regional Landesbank as well as a raft of special purpose financing institutions (Buergschaftsbanken and the like) whose purpose is to provide access to capital and capital-like financing options to local industry. Add to this the fact that Germany is significantly over-banked, with local Sparkassen (Savings Banks) and VR Banken (Cooperative Banks) along side Private Banks (like Deutsche and Commerzbank) overflowing with deposits and backed by implicit State guarantees (the explicit guarantees disappeared in 2008/09 as a result of Basel III and EU anti-subvention rulings) with implications for cost of and access to capital, then you will understand how Germany is institutionally constructed to provide support to industry in a way no other country is.”
Despite the best efforts of its coastal elites, the US has not yet committed national energy suicide like the Germans. Quite the opposite. With a bounty of fossil fuels and the technological prowess to develop them, the US has reclaimed the title of preeminent global energy superpower. The country also sports 92 operating nuclear power reactors which quietly and safely churn out carbon-free electricity with capacity factors exceeding 90%. Although the Inflation Reduction Act will waste much public funding chasing the Green Energy Santa™, we would be surprised if the US relinquishes its global energy advantages any time soon.
Instead, it’s the diversity required in a banking system meant to support economic growth both big and small that is about to be pushed off the ledge.
Although not quite as over-banked as their German counterparts, small- and medium-sized businesses in the US have a plethora of community and regional banks (CRBs) with which to partner on economic development. For these businesses, the relationship between owner and banker – a role still served by an actual human – is an irreplaceable catalyst for substantive growth. The recent and ongoing run on several regional banks risks destroying this important pillar of the US economy, with Treasury Secretary Janet Yellen dazed and confused as she pushes a button she didn’t seem to realize was connected to a wrecking ball. How close are we to the abyss, will regulators stem the crisis in time, and what happens if they fail to do so? Let’s head to the local credit union and find out.