Biden Bails Out the Rich and the Reckless

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KEY TAKEAWAYS

  1. While these banks have been reckless, government intervention set the stage for this disaster and threatens to compound it with bailouts.
  2. The Fed is now expanding bailouts to even solvent banks by lending against their failed investments at the original purchase price.
  3. Taxpayers should not be forced to bail out millionaires, venture capitalists, and the reckless banks that cater to them.

Once again, American families are worried that their bank deposits are no longer safe. Just a few days ago, Silicon Valley Bank (SVB) became the second largest bank failure in American history. This was followed shortly by Signature Bankโ€”now the third largest bank failureโ€”with possibly more to come. While these banks have been reckless, government intervention set the stage for this disaster and threatens to compound it with bailouts.

SVB was the 16th largest bank in the country, but it engaged in highly speculative trades fueled by easy money and near-zero interest rates courtesy of the Federal Reserve. These speculations were profitable in the short run, yet doomed to fail as rates rose in the face of historic inflation. SVB actually seemed to recognize the risk and bought financial instruments to protect itself, but sold them off in 2021, leaving depositors unprotected.

This meant that when rates did rise, SVBโ€™s entire business model collapsed. In response, the government is now bailing out SVBโ€™s rich Silicon Valley depositors.

The Federal Deposit Insurance Corporation (FDIC) has long guaranteed all deposits up to $250,000. But because SVB catered to the Silicon Valley elite, 96 percent of its depositors were above that threshold. These depositors knew the risk; indeed, they could have purchased private insurance to cover the rest of their deposits. Most chose not to.

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But now the Treasury department, Fed, and FDIC have stepped in to bail out these rich depositors, raiding the FDICโ€”intended to cover only smaller depositorsโ€”to do it. The administration is claiming these bailouts wonโ€™t cost taxpayers a penny, that they will be paid by a special โ€œlevyโ€ on the FDIC, bolstered by $25 billion in freshly printed money.

This amounts to raiding every bank account in America, rich and poor alike, to bail out the Silicon Valley elite. And if the FDIC levies and Fed handouts canโ€™t cover all the losses? Last time, in 2009, the FDIC simply got Treasury to give it $500 billion in borrowing authority as a direct cost to taxpayers.

Worse, the Fed is now expanding bailouts to even solvent banks by lending against their failed investments at the original purchase price. This is effectively pretending those losses never happened. Imagine buying a car, driving it for 100,000 miles then claiming itโ€™s worth the original price. For you that would be illegal. For bankers itโ€™s a friendly favor. Not only does this reward recklessness, it compounds the losses to Americans unless banks can miraculously reverse the very interest rate gambles that is sending them off the edge one by one.

Finally, markets are now saying the Fedโ€™s fight against inflation is now crippled: Interest rate expectations have plunged in the past week, signaling that Wall Street expects a quick return to the same easy money that launched near-double digit inflation.

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And so, in a repeat of 2008, reckless banks egged on by reckless policy have created catastrophic losses for the rich and powerful that, once again, will be torn out of regular Americans. This โ€œheads I win, tails you loseโ€ bailout cycle is a recipe for more risk, more failures, and more crises.

Without even an executive order, let alone an act of Congress, the FDICโ€”the bedrock insurance of Americansโ€™ life savingsโ€”is being raided to bail out the rich and the reckless. Banks now have a green-light to assume any risk whatsoever, safe in the knowledge American families will cover the tab.

Taxpayers should not be forced to bail out millionaires, venture capitalists, and the reckless banks that cater to them. Imprudent banks should be allowed to fail according to the long-standing rules of the game: Covering depositors up to $250,000, leaving the rich to get whatโ€™s left after FDIC resolution, and letting failed banks be bought by more prudent competitors.

Bailouts beget more bailouts. It is far past time to stop the cycle.

Commentary By

EJ Antoni
Research Fellow, Regional Economics

Peter St Onge
Research Fellow, Roe Institute for Economic Policy Studies

The Heritage Foundation
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