3 and a half myths about bank bailouts

Last weekend, US policymakers stepped in to bail out two medium-sized banks: Silicon Valley Bank AND FirmaBank.

And yes, they were rescues.

I wish the Biden administration would not try to claim otherwise.

Yes, the shareholders have been cleared.

But legally, deposits are only insured up to $250,000; By choosing to compensate all depositors, the Feds did a big favor to large account holders.

It is true that any losses – it is not clear whether one of the two banks was insolvent or simply did not have the liquidity to face a run on deposits – will not be compensated by higher conventional taxes;

the money comes from the Federal Deposit Insurance Corporation, which will recover the funds, if necessary, by imposing higher fees on the banks.

But you are fees will be passed on to the publictherefore taxpayers are de facto the ones who pay.

Was it a bad decision?

I’ve heard four basic types of criticism.

One is ridiculous.

Two are doubtful.

But the last one worried me a little, even if I think I’m wrong.

Let’s start with the ridiculous.

On the right side of the political spectrum, many quickly rallied around the claim that the SVB failed because it was too smart – which is only marginally less ridiculous than the claim that the wakes up somehow causes the train to derail.

For what it’s worth, no, SVB hasn’t set itself apart from other banks by its focus on diversity, the environment, etc.

And the the banks have failed for centuries, long before human resources departments began including standard language about social responsibility in their mission statements.

so talk about it wakes up it tells us nothing about bank failures, but much about the intellectual and moral bankruptcy of the modern American right.

Let’s move on to a more serious criticism.

There is a reasonable argument, with which I broadly agree, that the bankruptcy of SVB did not pose a systemic threat in the way that the bankruptcies of financial institutions since Lehman Brothers in 2008.

So why bail out depositors?

Well, one answer is that whether we like it or not, Silicon Valley Bank has come to play a key role in what we might call the tech sector’s financial ecosystem.

In particular, if depositors lost access to their money, even temporarily, it would appear that many tech companies would be unable to pay paychecks and bills, potentially causing permanent damage.

It is true that ending the sector of cryptocurrencies it would be a public service, but there are also many good things that could be harmed.

In this sense, the rescue of SVB was something similar to the rescue of General Motors and Chrysler in 2009, also justified by the fact that it would have preserved a crucial piece of the economic ecosystem.

And while the car bailout was heavily criticized at the time, in retrospect it seems like the right move, even if it ended up costing taxpayers billions.

A third criticism is the claim that the feds have now established the principle that all deposits are effectively insured without imposing correspondingly stricter regulation on what banks do with those deposits, creating an incentive for irresponsible risk-taking. risks.

But policymakers haven’t explicitly guaranteed all deposits everywhere, and so far at least, we’re seeing an outflow of funds from the smallest banks to the more tightly regulated big banks.

You may not like it; Whatever one may say about big financial institutions, they are not lovable.

But overall, it appears that the financial system is reducingand not increasing, risk-taking.

Which brings me to the criticism I take seriously, even though I think it’s probably wrong:

argues that bank failures will undermine efforts to control inflation.

It is true that the bank failures have caused investors to rethink the future course of Federal Reserve policy:

A rate hike at the next Fed meeting, which looked like a given, now looks uncertain, with markets now pricing in the possibility of a rate cut and two-year interest rates (a good indicator of expected policy from the fed). future) to fall.

And some sensible people I talk to now warn of financial dominance, in which heto the Fed it gives more priority to protecting Wall Street than stabilizing inflation.

But given the way the banking system is reacting to the SVB affair, there are actually good reasons for the Fed to limit rate hikes, at least for a while.

The Fed has tried cool the economy; Well, the increased risk sensitivity of banks and a shift of deposits to more regulated banks will likely cool the economy even if the Fed does not raise rates.

Some financial bulletins even predict a recession.

And market inflation expectations have, if anything, declined.

The fallout from the banking woes has further clouded a murky economic situation, and it will be some time – perhaps an eternity – before we know if the politicians have made the right decision.

But I’m hearing a lot of doomsday rhetoric right now, none of which seems justified by the available facts.

c.2023 The New York Times Society