3 and a half myths about bank bailouts

This past weekend, US policymakers jumped in to bail out two midsize banks:

and

.

And yes, they were rescues.

I wish the Biden administration didn't try to claim otherwise.

Yes, the shareholders were cleared.

But legally, deposits are only insured up to $250,000;

By choosing to indemnify all depositors, the feds have done

large account holders a

It is true that the losses, if any - it is not clear whether either bank was insolvent or simply lacked the cash to meet a run on deposits - will not be offset 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.

US Treasury Secretary Janet Yellen answers questions about the Biden administration's plans following the collapse of three US lenders, including Silicon Valley Bank and Signature Bank, as she testifies before a Finance Committee hearing of the Senate.

REUTERS/Mary F Calvert/File Photo

But these

, so taxpayers are de facto those 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 has me a bit worried, although I think I'm probably wrong.

Let's start with the ridiculous.

On the right side of the political spectrum, many have quickly rallied around the claim that SVB failed because it was excessively awake - which is only marginally less ludicrous than claiming that wokeness somehow causes train

.

For what it's worth, no, SVB was not distinguished from other banks by its concern for diversity, the environment, etc.

And

for centuries, since long before human resources departments began including boilerplate language about social responsibility in their mission statements.

So talking about

tells us nothing about bank failures, but it does tell us a lot about the intellectual and moral bankruptcy of the modern American right.

Let's move on to a more serious critique.

There is a reasonable argument, with which I largely agree, that the failure of SVB did not pose a systemic threat in the way that the failures of financial institutions starting with Lehman Brothers in 2008

.

So why bail out depositors?

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

In particular, if depositors had lost access to their money, even temporarily, this would appear to have left many tech companies unable to pay their payrolls and bills, potentially causing lasting damage.

It is true that killing the cryptocurrency sector

be a public service, but there are also many good things that could be harmed.

In this sense, the SVB bailout was something like the General Motors and Chrysler bailout in 2009, which was also justified on the grounds that it would preserve a crucial piece of the economic ecosystem.

And while the auto bailout was heavily criticized at the time, in hindsight 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.

But policy makers did not explicitly guarantee all deposits everywhere, and at least so far, we are seeing an outflow of funds from smaller banks to the more tightly regulated large banks.

You may not like this;

Whatever one may say about the big financial institutions, they are not lovable.

But overall, it appears that the financial system is

, not increasing, risk taking.

Which brings me to the criticism that I take seriously, although I think it's probably wrong:

claims that bank failures will undermine efforts to

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

A rate hike at the next Fed meeting, which seemed 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 Fed policy). the Fed in the near future) plummeting.

And some sensible people I talk to are now warning of the financial dominance, in which the

places more priority on protecting Wall Street than on 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 been trying

;

Well, banks' increased sensitivity to risk and a shift in deposits to more heavily regulated banks will likely cool the economy even if the Fed doesn't raise rates.

Some financial bulletins even predict a recession.

And market inflation expectations have, if anything, diminished.

The fallout from the banking troubles has further clouded a murky economic situation, and it will be a while - perhaps an eternity - before we know if policymakers 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 Company

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