On the CBS Sunday morning interview show, Facing the nation, Treasury Secretary Janet Yellen clearly stated that the federal government would not bail out the failed Silicon Valley Bank. Many of us thought that meant there would be no bailout. But Yellen said in the same interview that the federal government would try to meet depositors’ needs. Translation: there would be a bailout, not of SVB shareholders, but of depositors. This would include those whose deposits were above the FDIC insured limit of $250,000.
The bailout is a terrible idea. It increases moral hazard. This creates uncertainty about the rules. And it suggests to participants in a market economy that if they get into trouble with those in power, they will get special treatment. The bailout adds, in short, to what philosophical novelist Ayn Rand called “the aristocracy of attraction.”
These are the first two paragraphs of David R. Henderson, “Why bailing out SVB is a bad idea“, define ideasMarch 16, 2023.
Another excerpt:
On March 12, former Treasury Secretary Lawrence H. Summers tweeted“Now is not the time to lecture on moral hazard or administer lessons or be alarmed at the political consequences of ‘bailouts.'” In fact, now is exactly the time for all of that.
And:
But imagine what would have happened if the federal government had followed the rules. Yes, there would have been pain. Yes, several Silicon Valley companies would have struggled to meet their payroll. But the reason SVB was not deemed a “too big to fail” bank was because the federal government had deemed that there would be no system-wide run on banks if the SVB depositors had taken a large discount. The impact would almost certainly have been regional, not national. In short, the “contagion” would probably have been limited. Then banks, depositors and others would have given much more thought in the future to what to invest in.
The FDIC, Janet Yellen and the rest of the federal authorities involved had a chance to do something good for the economy: stand firm on existing FDIC rules. They ruined everything.
Read it the totality.