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March 14, 2023

I’m From the Government and I’m Here to Help Them

There’s no such thing as a free bailout.

Disclosure: I would probably have lost money indirectly if the Fed had not bailed out uninsured depositors at Silicon Valley Bank (SVB). Nevertheless, I don’t think there should have been a bailout. We will (almost) all lose from this escalation of #wealthfare and #cronycapitalism in the not very long run.

There are actually two bailouts going on: one for uninsured depositors at SVB and Signature Bank and the other for bankers and bank investors at other banks who made the same mistakes which SVB and Signature did but who will now be held harmless by a special Federal Reserve program which shields them from the consequences of their mismanagement.

The Uninsured Deposits Bailout

It is true that this part of the rescue is not a bailout of bank executives and shareholders like TARP during the last recession. Executives at the two failed banks are out of work; the bank investors are out their capital. However, it is a bailout of those who had uninsured balances at the banks. They benefited from the higher than average interest rates paid by the two banks and access to loans offered by the banks to companies (and their executives) which promised to do all of their deposit business with the bank. The companies took a risk to get these benefits. With hindsight, too much risk. We are only entitled to the gains of capitalism if we actually bear the risk of loss.

The Federal Deposit Insurance Corporation has restored the full amount of all bank balances to all SVB and Signature depositors. Normally all insured deposits (up to $250,000 per account) would be available immediately and uninsured deposits would be paid proportionally from whatever the bank or its assets were sold for in bankruptcy. Typically at least 50% of the uninsured deposits are available immediately and much of the rest (usually all of it) dribbles in over time as assets are liquidated.

The FDIC used cash from its insurance fund both for its intended purpose of reimbursing insured deposits and for the “emergency” purpose of restoring all uninsured deposits. It is true, as Janet Yellen says, that this is not “taxpayer” money. The fund is quite properly established from fees paid by banks directly and by us depositors or borrowers indirectly. However, the fund will have to be increased to cover this unintended use. That means bigger fees to banks so lower interest rates on deposit accounts and or higher interest for loans. We won’t pay for this bailout as taxpayers; we’ll pay for it as bank depositors and borrowers. There’s no such thing as a free bailout.

Had Washington not blinked, it is quite possible that Silicon Valley would have taken effective and proper steps to protect its own ecosystem with its own money. Responsible VCs (and those who were just self-interested) were working through the weekend to make sure that short-term funds for payroll and the like were available to the companies they invested in. Just as J.P. Morgan used to get his cronies together to save the banking system they had a stake in, tech titans might well have prevented the companies with uninsured funds from catastrophe. That is the way capitalism is supposed to work. But, once the FDIC took responsibility, Silicon Valley tycoons could keep their own purses shut.

The Real Bank Bailout

The Federal Reserve also announced a bank bailout program which will save the jobs of irresponsible bank executives and the funds of bank investors just as TARP did 15 years ago. The Bank Term Funding Program uses the Treasury’s (our) exchange-stabilization fund to make loans to banks based on insufficient collateral  to avoid the banks having to take the same sort of losses which drove SVB into receivership. These banks, like SVB, bought treasury securities which have declined in value as the fed pushed interest rates up. The Fed will nevertheless lend them money as if the decline in value had never happened. This is an out-and-out subsidy. It uses our money to keep these banks “solvent” even though they are really underwater and unable to meet withdrawal demand.

If this doesn’t make you mad, think of it this way. If you bought a 10-year treasury bond two years ago and suddenly needed the cash, you’d have to sell your bond at a significant loss just as SVB did since rising interest rates have pushed down the current value of the bond. The Fed deliberately raised interest rates to fight inflation. Many of us have paid some price for this. However, mismanaged banks no longer pay this price. They get a get-out-of-bankruptcy-free card at our expense. They can monetize their bonds as if rates had never gone up. If they can’t pay back their loans at the end of a year and aren’t bailed out again (wanna bet in an election year?), we’re on the hook for the losses.

At the very least the Fed ought to decree that, so long as a bank has loans outstanding under this program, no executive bonuses or dividends to shareholders can be paid.

And So…

The Fed raised interest rates to tame inflation. Might or might not have been the right decision but the motivation was good and in line with the Fed’s mission. They wanted to cool the job market to slow wage increases (questionable socially but traditional policy). Now it turns out that they didn’t really want to lose identifiable politically connected jobs in Silicon Valley or in the banks. They’d prefer more diffuse less-traceable job losses throughout the economy.

Will we have an Occupy Silicon Valley Movement? Will the Tea Party rise again? In this case the #cronycapitalism center is wrong and the anti#wealthfare fringes on the right and left are correct. We really don’t have to repeat the mistakes of 15 years ago, which have damaged capitalism, general prosperity, and civil discourse.

See also:

Election Analysis: It Was TARP that Boiled the Tea

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