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Last weekend, U.S. policymakers went all in on bailing out two medium-size banks: Silicon Valley Bank and Signature Bank.
And yes, they were bailouts. I wish the Biden administration weren’t trying to claim otherwise. Yes, stockholders were cleaned out. But legally, deposits are insured only up to $250,000; by choosing to make all depositors whole, the feds have done holders of big accounts a major favor.
It’s true that losses, if any — it’s not clear whether either bank was insolvent, as opposed to simply lacking the ready cash to handle a bank run — won’t be made up with higher conventional taxes; the money is coming from the Federal Deposit Insurance Corporation, which will recover funds, if necessary, by imposing higher fees on banks. But these fees will be passed on to the public, so taxpayers are de facto on the hook.
But was it a bad decision? I’ve heard four basic kinds of criticism. One is ridiculous. Two are dubious. But the last one has me a bit worried, although I think it’s probably wrong.
Let’s start with the silly stuff. On the right side of the political spectrum, many have quickly rallied around the claim that S.V.B. failed because it was excessively woke — which is only marginally less ludicrous than claiming that wokeness somehow causes train derailments.
For what it’s worth, no, S.V.B. didn’t stand out from other banks in its concern for diversity, the environment and so on. And banks have been going bust for centuries, since long before H.R. departments began including boilerplate language about social responsibility in their mission statements. So the talk about wokeness tells us nothing about bank failures — but a lot about the intellectual and moral bankruptcy of the modern American right.
On to more serious criticism. There is a reasonable argument, one that I largely agree with, to the effect that the failure of S.V.B. didn’t pose a systemic threat in the way that the failures of financial institutions beginning with Lehman Brothers did in 2008. So why rescue the depositors?
Well, one answer is that, like it or not, Silicon Valley Bank had come to play a key role in what you might call the financial ecosystem of the technology sector. Notably, if depositors had lost access to their money, even temporarily, this would apparently have left many technology companies unable to meet their payrolls and pay their bills — which might have done lasting damage. True, killing the crypto industry would be a public service, but there’s also a lot of good stuff that might get hurt.
In this sense the bailout of S.V.B. was something like the bailout of General Motors and Chrysler in 2009, which was also justified on the grounds that it would preserve a crucial piece of the economic ecosystem. And although the auto bailout was harshly criticized at the time, in retrospect it looks like the right call, even though 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 tighter regulation on what banks do with those deposits — creating an incentive for irresponsible risk taking. But policymakers explicitly didn’t guarantee all deposits everywhere, and at least so far, we’re seeing an outflow of funds from smaller banks to more tightly regulated large banks. You may not like this — whatever else you may say about big financial institutions, they aren’t lovable. But on balance we seem to be seeing the financial system move toward reduced, not increased, risk taking….(read more)

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Three and a Half Myths About the Bank Bailouts – Paul Krugman

The 2008 financial crisis left a lasting impact on the global economy, prompting policymakers to take unprecedented steps to prevent a complete collapse of the banking system. One of the most contentious measures taken during this time was the bank bailouts. However, there are several misconceptions surrounding this controversial topic that need to be addressed. In this article, we will examine three and a half myths about the bank bailouts and shed light on their true implications.

Myth 1: The bank bailouts were a reward for irresponsible behavior.

Contrary to popular belief, the bank bailouts were not a reward for the reckless behavior exhibited by major financial institutions. While it is true that many banks engaged in risky lending practices and contributed to the crisis, the aim of the bailouts was to prevent a complete collapse of the banking system. Without financial institutions functioning properly, the entire economy would have suffered severe consequences.

The decision to bail out the banks was not taken lightly, but it was necessary for maintaining stability and preventing a deeper recession. To ensure that taxpayers were not footing the entire bill, some measures were put in place to penalize the banks and recover part of the costs. The bailouts allowed for increased oversight and regulation, aiming to prevent future crises and hold financial institutions accountable.

Myth 2: The bank bailouts were a waste of taxpayer money.

Another common myth is that the bank bailouts wasted taxpayer money, benefiting only the financial institutions. While it is true that the bailouts involved a massive infusion of public funds, their purpose was to stabilize the economy and prevent an even greater loss of wealth for ordinary citizens.

The costs of a complete financial collapse would have far outweighed the price of the bailouts. By preventing mass bankruptcies and unemployment, the government’s intervention protected the broader population from the devastating consequences of a collapsed banking system.

Additionally, many of the funds provided to the banks were eventually repaid, reducing the overall cost to taxpayers. In fact, in some cases, the government even made a profit from the bailouts. This dispels the notion that the bank bailouts were a wasteful endeavor.

Myth 3: The bank bailouts created moral hazard.

One recurring argument against the bank bailouts is that they created moral hazard by signaling to financial institutions that they would be bailed out in the future, therefore incentivizing risky behavior. However, this belief neglects the extensive regulations and safeguards implemented post-crisis to prevent a repeat of such behavior.

The bailouts were accompanied by an increase in banking regulations and stricter oversight, intended to hold financial institutions accountable for their actions. The Dodd-Frank Wall Street Reform and Consumer Protection Act was put into effect to mitigate the risks associated with the banking industry and limit the chances of moral hazard taking place.

Half Myth: The bank bailouts significantly contributed to income inequality.

While it is true that the bank bailouts exacerbated income inequality to some extent, it is incomplete to solely attribute this issue to the bailouts themselves. Income inequality has been a long-standing problem and is influenced by various factors, including globalization, technological advancements, and systemic issues.

The bank bailouts were a response to an immediate crisis and an attempt to prevent economic collapse. The root causes of income inequality require a more comprehensive and sustained effort to address, rather than solely blaming the bank bailouts.

In conclusion, it is crucial to dispel these myths surrounding the bank bailouts to have a clearer understanding of their purpose and impact. The decision to bail out the banks was a complex and necessary measure to prevent a complete collapse of the financial system and protect the broader economy. While the bailouts were not without their flaws, they played a pivotal role in stabilizing the economy and laying the groundwork for regulatory reforms to prevent future crises.