There’s plenty of fallout from the closure of (at least) two banks over the weekend and the government’s announcement it was guaranteeing all depositors’ money in those banks. The bottom line: this was a bailout with all the risks, moral hazards and rewards for very bad behavior we were told would not happen again following the 2008 financial crisis.
As The Wall Street Journal writes:
Treasury Secretary Janet Yellen said Sunday there will be no “bailout” for [the now-closed Silicon Valley Bank], but she is indulging in semantics. The feds said they will guarantee even uninsured deposits at SVB as well as at Signature Bank in New York. Typically in a bank failure those depositors would get their money back with a 15% to 20% haircut. This would no doubt be a hardship for many customers, but the $250,000 limit was known.
Will a universal uninsured deposit guarantee be next? This would be a monumental policy surrender, essentially admitting that the regulatory machinery established in 2010 by Dodd-Frank failed. We may be the only people in the world who still worry about “moral hazard.” But a nationwide guarantee for uninsured deposits, even for a limited time, means this will become the default policy any time there is a financial panic.
There’s also a question of the legality of such a guarantee. The FDIC created a “transaction account guarantee” program amid the 2008 panic, but Congress explicitly let it expire in Dodd-Frank. Congress set the $250,000 insured limit to protect average Americans, not venture investors in Silicon Valley.
As for those venture “capitalists” who stuffed their money, and that of the startups they funded, into SVB, Nassim Nicholas Taleb, author of “The Black Swan,” has a few words for them:
They are all libertarians until they are hit by higher interest rates.
This is the biggest story in finance and economics right now. Yes, it is bigger than the ongoing inflation story, too. More on this as it develops.
And regarding the moral hazard angle, the Federal Reserve, Treasury and FDIC had this to say – indirectly – about that:
Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
In plain English: those banks who played by the rules and adequately managed risk? They get to pay for SVB’s bad management and worse decisions. Privatized profits, socialized losses.
The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.
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