Bailing Out SVB Was a Really Bad Idea

On CBS’s Sunday morning interview show, Face the Nation, Treasury Secretary Janet Yellen stated clearly that the federal government would not bail out the failed Silicon Valley Bank. Many of us took that to mean that there would be no bailout. But Yellen said in the same interview that the feds would try to meet the needs of depositors. Translation: there would be a bailout, not of the shareholders of SVB, 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. It creates uncertainty about the rules. And it suggests to participants in a market economy that if they have ins with the people in power, they will get special treatment. The bailout adds, in short, to what philosophical novelist Ayn Rand called the “aristocracy of pull.”

These are the opening two paragraphs of David R. Henderson, “Why Bailing Out SVB Is A Bad Idea,” Defining Ideas,  March 16, 2023.

Another excerpt:

On March 12, former treasury secretary Lawrence H. Summers tweeted, “This is not the time for moral hazard lectures or for lesson administering or for alarm about the political consequences of ‘bailouts.’ ” Actually, it is exactly the time for all of that.

And:

But imagine what would have happened if the federal government had stuck to the rules. Yes, there would have been pain. Yes, several Silicon Valley companies would have had trouble meeting their payrolls. But the reason that SVB was not counted as a “too big to fail” bank was that the federal government had judged that there would not be a system-wide run on banks if SVB’s depositors had taken a large haircut. The impact would almost certainly have been regional, not national. In short, “contagion” likely would have been limited. Then banks, depositors, and others would have thought much harder in the future about what to invest in.

The FDIC, Janet Yellen, and the rest of the feds who were involved had a chance to do something good for the economy: stand firm on existing FDIC rules. They blew it.

Read the whole thing.