A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Call it what it is
It is understandable that the Federal
Reserve and FDIC are
reluctant to use the “b-word” to describe the operations announced at the
weekend to respond to the crises at Silicon
Valley Bank and Signature
Bank of New York. As bailouts go,
they don’t look particularly expensive.
The FDIC has extended its guarantee to cover uninsured deposits at these
two banks (which won’t cost anything if the assets are good). And the Fed will use the Treasury’s Exchange
Stabilisation Fund to backstop a funding program to allow any other banks with
similar problems to trade out of their unrealised securities losses in a
reasonably graceful way.
Neither of these programs will cost taxpayers’ money, as the
press releases identify. As long as we
pretend that FDIC premiums aren’t taxes, that the ESF is costless unless it
takes a loss and that credit from the Fed doesn’t count, then the economy is
getting all the benefit of stabilising the system, for free. It’s good policy.
But a bailout is what it is, and what it ought to be
called. The credit lines represent a
subsidy to bad treasury management on the part of banks who should never have
allowed themselves to get so badly overextended in terms borrowing short and
lending long. (They also, perhaps
conveniently, avoid anyone having to ask impertinent questions about why the
bank supervisors allowed these positions to develop in the first place).
The extension of the FDIC guarantee, though, is not just a
bailout – it’s specifically a bailout for billionaires. It undermines the whole point of limiting
deposit insurance, and exposes the fund to risk. And the benefit of this risk assumption mainly
goes to the venture capital investment industry.
That industry has, frankly, done the exact opposite of
having covered itself in glory over the last week. We have discovered that major VCs put
pressure on their portfolio companies to deposit at Silicon Valley Bank. Then they encouraged those same companies to
run on the bank. And then some of them
spent the weekend attempting to raise panic about the rest of the financial
system, in order to put pressure on the government for a bailout. All after having spent the previous decade
talking about “moral hazard” with respect to student loan forgiveness, and
praising themselves for “disrupting” the old fashioned financial system with
If there had been no bailout – if the FDIC had operated
normally and not extended insurance to people who hadn’t paid the premium –
then the bill would have arrived at the VCs’ door. They are the owners of the tech startup
companies, and they would have been the ones responsible for ensuring that
those companies could make payroll if they had lost money in a bank failure
through no fault of their own. It might
not have been pleasant for the VCs to put up more funding, or to admit
that their contribution of management expertise and financial acumen had been
so spectacularly negative, but they would still have done it. To let a good
investment go bad in this way would, as Professor John Cochrane points out, a
clear example of the sunk cost fallacy.
The venture funds were the source of the cash that was at risk in the
SVB failure; it’s their loss that has been socialised.
And the fact that the VCs were able to use their portfolio
companies as human shields in this way – a natural extension of the pretence
that venture capitalists are in the tech industry rather than the financial
industry – shows us what the real long-term cost of our current system of
bailouts is, in terms of policy. Because
the Fed and FDIC will always find a way to stabilise the system, populist
yahoos and libertarians can rail against “bailouts” and pass legislation to
“protect the taxpayers”, all on the understanding that it is purely playtime;
that when things get serious, someone will find a way to bail them out.
This is no way to run a financial system, particularly since
there is the constant risk that one day the anti-bailout loudmouths will
accidentally succeed. The Fed needs to say, loud and clear, that “Yes, this is
a bailout, and that is good. A bailout
is often the best and cheapest way to prevent a catastrophe. The people benefiting from it may be quite
comically unattractive and undeserving, but finance is not a morality
play. Take your bailout and try to be
less silly next time”.
this item posted by the management 3/13/2023 06:03:00 AM