The old view on democracy is that it is the worst form of government, excluding all others.
For now, the same applies rescue operations Aiming to avoid economic panic – as we’ve seen with Silicon Valley Bank (SVB) End of this week.
There is a semantic dispute as to whether the US government guarantees SVB deposit holders (Including Vox Media) will get all their money back instead of just $250,000 per account protected by law, or new lending facilities Which other banks can take advantage of to stave off problems, it’s a bailout. President Biden deny this term, and there are differences from the much-disliked 2008 rescues. It’s a free state and you can call it “rescue” instead if you like, but I’ll stick to salvage for simplicity’s sake.
The point is, most people in the political system say they hate bailouts. Many on the right denunciation It is questionable government interference in the free market. Many on the left see it as an addiction to greasy cats and complain that ordinary people in financial difficulty do not get such special help. The beneficiaries, whether they are irresponsible Wall Street bankers or… arrogant venture capitalists, She is often unsympathetic. The whole thing just feels so wrong.
But it happens constantly. And there is a very simple reason, which is not corruption. Policymakers believe that the alternative, of letting the institution in question fail without private intervention, would be much worse and do much more harm than panic.”Contagion“The spread is elsewhere in the economy — damage that shouldn’t really happen.
Back in 1991, Jerome Powell was just starting out at the Treasury Department when the Bank of New England, Bank of New England 33, was on the brink of collapse. Nick Timeraus Tells What happened next writing Trillion dollar count.
One adviser argued that bailing out depositors would lead to “Moral dangerEnabling more irresponsible behavior and that they need to lose at least some of their money. Then the Fed governor replied:
Here’s what we think would happen if we liquidated uninsured depositors. There will be a run for every US bank when it opens on Monday, and all of these money focused banks will be on our doorstep. Do you really want to take this test?
Spoiler: They didn’t want to do this audition.
Bailouts like this are usually an attempt to stop further unnecessary damage to the economy — damage that doesn’t have to happen, but could happen if people start to panic too much. In theory, larger structural reforms could prevent at least some bailouts from becoming necessary, but for now, there is rarely a better option.
The logic – and the irrational – of managing banks and economic contagion
Bank flows and economic panic are a mixture of rational and irrational behaviour.
The logical parts of racing SVB was that, yes, the bank’s books had real problems, and yes, the interests of any individual depositor would have been better served by withdrawing money.
The nonsensical part is that, according to Bloomberg Matt Levine, SVB “It would probably have flopped and would have been profitable if people kept their money in the bank.” But worrying about SVB once began to spread Among the VCs and founders chatting on Slack and WhatsApp, it became a self-fulfilling prophecy as everyone tried to withdraw their money at once.
The logic of government intervention is to restore confidence in the financial system – to convince people that they do not need to panic and that panic is not actually the rational option. This weekend’s bailout was an effective message to depositors in other regional banks that they will be fine and that there is no reason to flee for an exit.
The ugly logic of this was also on display this weekend – before they hand out the bailout, policy makers must be convinced that there is in fact a risk of panic contagion into the financial system. So, over the weekend, as he looked to bail out, several VCs raised concerns with nationwide bank management that they claimed would arise if SVB deposit holders were not integrated.
You must be totally freaked out by now – this is the proper reaction to run bank and hook up POTUS & @tweet You gotta get on TV tomorrow and guarantee all $10 million in deposits or it’s going to get you in a mess
-jason (Jason) March 12, 2023
Some have scoffed at these claims, calling them irresponsible as well as clearly self-interested. Obviously, they were self-interested — but that doesn’t mean they were wrong.
The reasoning — that if it remained unclear that depositors’ money in small and medium-sized banks would be protected, they would probably flee to “too big to fail” banks — sounded convincing. We can never know the counter reality of some small bank stocks It was a tough day In the markets on Monday even after the bailout happens.
It is also difficult for policymakers to know for sure how bad things will happen in advance if they choose not to bail out. After the US government decided to let Lehman Brothers fail in September 2008, The New York Times reported editorial that the decision was “strangely reassuring”, suggesting that “the system may be robust enough to absorb its own collapse”, and praising regulators for being “finally willing to hold Wall Street accountable for its wrongdoings”.
The system was not strong enough. Two weeks of chaos ensued in the financial markets until Congress finally approved passage of the Troubled Asset Relief Program (TARP). The program became infamous with its $700 billion bank bailout, and populist politicians sabotaged it for years. (about $426 billion He ended up spending itYears later, the government recovered $441 billion, eventually making a profit on it.)
So for the time being, the bailout rationale is often compelling – or at least more compelling than no bailout. But there is still something disquieting about the whole dynamic calling for greater reforms, as summed up by journalist Matthew Klein in the Another Substack post.
“Banks are speculative investment funds grafted on top of critical infrastructure,” Klein writes. “This structure is designed to extract support from the rest of society by threatening civilians with crises if the bank’s bets are ever allowed to fail.”
The US government’s response to the SVB failure “is a reminder that these threats usually succeed.”