The collapse of Silicon Valley Bank last week sent the financial world into turmoil, and has started to bleed into politics.
This is a companion discussion topic for the original entry at https://talkingpointsmemo.com/?p=1450993
This is a companion discussion topic for the original entry at https://talkingpointsmemo.com/?p=1450993
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Just how much damage did the DFP inflict on this country? It’s going to take years to clear us from the stench of T****. (I don’t type out his full name because he probably reads every sentence in which it appears.)
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What drives me nuts is the constant Republican friendly frame that the media takes on all subjects that involve regulation. Train wreck with actual trains, due to Republicans and Trump. Train wreck that involves a bank, due to Republicans and Trump. Somehow though the train had woke wheels and the overpaid idiots that collateralized the bank with highly interest rate sensitive mortgage backed securities, well I guess they were just too woke.
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I get a kick out of the San Francisco Federal Reserve homepage. Ground Zero in a financial incident that rocks world markets and not a mention when thousands are focusing on poor supervision. Indeed, Greg Becker had been sitting on that board since 2019, and now just a “vacant” on the organization chart. I would think Omarova would not have to speculate on the deeper problems as she could point to a task force looking into one of the global crucibles of creation and destruction of capital.
https://www.thestreet.com/technology/svb-ceo-quietly-and-swiftly-removed-from-powerful-board
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Had half a Wall Street been placed in jail in the Bush years maybe this would not have happened.
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"The lesson I would take from S.V.B. is that banks need to be strongly regulated whether or not their deposits are insured. The bailout won’t change that fact, and following that wisdom should prevent more bailouts.
And you know who would have agreed? Adam Smith, who in “The Wealth of Nations” called for bank regulation, which he compared to the requirement that urban buildings have walls that limit the spread of fire. Wouldn’t we all, even the ultrarich and large companies, be happier if we didn’t have to worry about our banks going down in flames?" Paul Krugman.
So the feds stepped in to protect all deposits at Silicon Valley Bank, even though the law says that deposits only up to $250,000 are insured and even though there was a pretty good case that allowing big depositors to take a haircut wouldn’t have created a systemic crisis. S.V.B. was pretty sui generis, far more exposed both to interest risk and to potential runs than any other significant bank, so even some losses for larger depositors may not have caused much contagion.
Still, I understand the logic: If I were a policymaker, I’d be reluctant to let S.V.B. fail, merely because while it probably wouldn’t have caused a wider crisis, one can’t be completely certain and the risks of erring in doing too much were far smaller than the risks of doing too little.
That said, there are good reasons to feel uncomfortable about this bailout. And yes, it was a bailout. The fact that the funds will come from the Federal Deposit Insurance Corporation — which will make up any losses with increased fees on banks — rather than directly from the Treasury doesn’t change the reality that the government came in to rescue depositors who had no legal right to demand such a rescue.
Furthermore, having to rescue this particular bank and this particular group of depositors is infuriating: Just a few years ago, S.V.B. was one of the midsize banks that lobbied successfully for the removal of regulations that might have prevented this disaster, and the tech sector is famously full of libertarians who like to denounce big government right up to the minute they themselves needed government aid.
But both the money and the unfairness are really secondary concerns. The bigger question is whether, by saving big depositors from their own fecklessness, policymakers have encouraged future bad behavior. In particular, businesses that placed large sums with S.V.B. without asking whether the bank was sound are paying no price (aside from a few days of anxiety). Will this lead to more irresponsible behavior? That is, has the S.V.B. bailout created moral hazard?
Moral hazard is a familiar concept in the economics of insurance: When people are guaranteed compensation for losses, they have no incentive to act prudently and in some cases may engage in deliberate acts of destruction. During the 1970s, when New York, in general, was at a low point and property values were depressed, the Bronx was wracked by fires, at least some of which may have been deliberately set by landlords who expected to receive more from insurers than their buildings were worth.
In banking, insuring deposits means that depositors have no reason to concern themselves with how the banks are using their money. This in turn creates an incentive for banks to engage in bad behavior, such as making highly risky but high-yielding loans. If the loans pay off, the bank makes a lot of money; if they don’t, the owners just walk away. Heads, they win; tails, the taxpayers lose.
This isn’t a hypothetical case; it’s pretty much what happened during the S.&L. crisis of the 1980s, when savings and loan associations, especially but not only in Texas, effectively gambled on a huge scale with other people’s money. When the bets went bad, taxpayers had to compensate depositors, with the total cost amounting to as much as $124 billion — which, as an equivalent share of gross domestic product, would be something like $500 billion today.
The thing is, it’s not news that guaranteeing depositors creates moral hazard. That moral hazard is one of the reasons banks are regulated — required to keep a fair bit of cash on hand, limited in the kind of risks they can take, required to have assets that exceed their deposits by a significant amount (a.k.a. capital requirements). This last requirement is intended not just to provide a cushion against possible losses but also to give bank owners skin in the game, an incentive to avoid risking depositors’ funds, since they will have to bear many of the losses, via their capital, if they lose money.
The savings and loan crisis had a lot to do with the very bad decision by Congress to relax regulations on those associations, which were in financial trouble as a result of high interest rates. There are obvious parallels to the crisis at Silicon Valley Bank, which also hit a wall because of rising interest rates and was able to take such big risks in part because the Trump administration and Congress had relaxed regulations on midsize banks.
But here’s the thing: The vast bulk of deposits at S.V.B. weren’t insured, because deposit insurance is capped at $250,000. Depositors who had given the bank more than that didn’t fail to do due diligence on the bank’s risky strategy because they thought that the government would bail them out; everyone knows about the F.D.I.C. insurance limit, after all.
They failed to do due diligence because, well, it never occurred to them that bankers who seemed so solid, so sympatico with the whole venture capital ethos, actually had no idea what to do with the money placed in their care.
Now, you could argue that S.V.B.’s depositors felt safe because they somewhat cynically believed that they would be bailed out if things went bad even if they weren’t entitled to any help — which is exactly what just happened. And if you believe that argument, the feds, by making all depositors whole, have confirmed that belief, creating more moral hazard.
The logic of this view is impeccable. And I don’t believe it for a minute, because it gives depositors too much credit.
I don’t believe that S.V.B.’s depositors were making careful, rational calculations about risks and likely policy responses, because I don’t believe that they understood how banking works in the first place. For heaven’s sake, some of S.V.B.’s biggest clients were in crypto. Need we say more?
And just in general, asking investors — not just small investors, who are formally insured, but even businesses with millions or hundreds of millions in the bank — to evaluate the soundness of the banks where they park their funds is expecting too much from people who are, after all, trying to run their own businesses.
The lesson I would take from S.V.B. is that banks need to be strongly regulated whether or not their deposits are insured. The bailout won’t change that fact, and following that wisdom should prevent more bailouts.
And you know who would have agreed? Adam Smith, who in “The Wealth of Nations” called for bank regulation, which he compared to the requirement that urban buildings have walls that limit the spread of fire. Wouldn’t we all, even the ultrarich and large companies, be happier if we didn’t have to worry about our banks going down in flames?
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We’re still suffering the afteraffects of Nixon, and of Reagan.
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Investors pricing bank stocks say and said otherwise, and they’re voting with their own real money. A cascade bank run would have burned trillions in depositors’ money.
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" The evil that men do lives after them;
The good is oft interred with their bones;"
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Reagan was Right about Trickle Down Economics…
Losses at the top Trickle Down to lower income people…
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This is by far the most cogent and helpful explanation I have seen of the issues underlying the SVB implosion. Thank you.
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Word in the press that relaxing Dodd-Frank bank requirements in 2018 was “bipartisan.” Try p. 14 of this Congressional Record PDF if you like & wade through & see what the party affiliations of the Yeas and Nays are: https://www.congress.gov/115/crec/2018/05/22/CREC-2018-05-22.pdf . It’s really “not just Trump” at fault here. I haven’t had the time / energy to go through the debate documented in the Record (I do pick up some noise on the amount of debate the leadership allowed or something to that effect, so, some contention), but there it is.
Our society is almost built on the premiss that exceptionally powerful individuals and institutions get to do as they please. It’s a quiet, often covert authoritarianism that runs underneath all the pretenses to “freedom” – think of it as a kind of freedom that everyone else has to go along with. Here we went in 2018 with a solid House majority letting a lot of pretty big dogs off of their leashes.
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And a cascade bank run would be highly unlikely. Two banks down-- one big in silicon valley pie-in-the-sky startups, one that did a bunch of crypto scams.
Nazi Gold might be next, but they’ve been very questionable for years.
No, we didn’t need to save the billionaires to prevent the whole system from collapsing.
But we did, so now we’re all going to pay up as the FDIC has to build up its insurance to account for all deposits, not just a portion of them.
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Are you really asking whether a FDIC-insured banking institution is subject to federal regulation? Seriously? This is 2023, not 1923.
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Shoot, man, all I do is read the WaPo, the Times, and TPM, and I knew that Silicon valley was cratering. Ten thousand layoffs here, ten thousand there. Hard to believe there weren’t some big donors telling the Biden admin to leave the job creators at SVB alone.
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The problem with looking at this through the lens of finance, exclusively, is it misses the point that the aborted run was a form of political sabotage taking advantage of the lax supervision. (Which, given the people involved, was not likely to be a coincidence).
The banks main investors were the ones driving the run, Trump was trying to convince his troggs to go clean out their accounts everywhere, and there was a steady drumbeat that somehow, it would be wrong for the government to respond in any way. This was a VERY obvious attempt by the Jan 6th Crew to start and drive a catastrophic contagion. Any review of whether or not it “was really a threat” that doesn’t include “A former President actively rooting for failure” is incomplete. And now we’ve got people pretending that using the FDIC for the exact purpose it exists is a bailout, which is like saying unemployment insurance is a bailout of the unemployed. (Don’t miss the fact that the talking point moved from A 2008 style bailout is bad to any response whatsoever is bad, that’s because the sabotage failed and the existing controls were able to mitigate the losses).
If you’re obsessing over whatever Platinum Coin Tricks are being used to cover the deposits over 250k, you’ve been successfully distracted from the sabotage.
If you ever want to see how propaganda works, just look at the fact that in 2023, a largely left leading audience is debating whether using the signature protection of the New Deal to protect deposits is actually a form of elitist corruption.
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I’m glad my small pile of investments don’t include bank stocks.
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Ummmmm, no. The FDIC insures accounts up to $250K. That’s literally in the law. Was a temporary jump from $100K made in the wake of the 2008 crashes, made permanent in 2010.
What happened here was that the administration guaranteed accounts to an unlimited amount. $400 million in an account is slightly more than $250K.
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222-184 with 20 abstentions. in a House that was elected 241R to 194D. So whatever the democrats voted was irrelevant to the outcome. But you’ve got your bothsider talking points and you’re going to run with them.
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All the reports I’ve read say nothing about that former guy. Just Peter Thiel.
No, we’re asking why deposits over the $250K limit are being protected.
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