•
JPMorgan,
Citibank and other giants provided $30 billion in deposits to help shore up
First Republic Bank,
which makes them—guess what?—uninsured depositors. If First Republic were still to fail and be seized by regulators, would the $250,000 limit on insured deposits be waived for these conspicuously unsympathetic lenders? The politics would be harrowing. No wonder JPMorgan and friends are scrounging up an alternative private rescue for First Republic.
• Silicon Valley Bank failed because its “safe” assets declined in value because of higher interest rates and inflation. Now the Fed, for purposes of lending to the banks, is crediting this collateral with its original value. If you could sell 65 cents to the Fed for a dollar, why would you ever reverse the transaction? You wouldn’t. The Fed says the loan terms are limited to a year but the problem is unlikely to be solved in a year.
• The dollar is faltering amid the predictable global flight to safety. Dollar holders may be figuring out that they, and not just U.S. taxpayers, have volunteered for unlimited dilution if the government needs to print money to uphold the financial system.
A great imponderable was
Joe Biden’s
decision of Sunday, March 12. Would letting Silicon Valley Bank fail the normal way, with big customers required to accept modest haircuts on their uninsured deposits, cause a nationwide bank run and economic calamity?
Mr. Biden must think so but the information isn’t available to let us judge the matter independently.
We do know he got a lot of help in deciding to bail out Silicon Valley Bank’s uninsured depositors from its uninsured depositors, including tech entrepreneurs and venture capitalists who worked the phones and social media and skew heavily Democratic in their political giving.
We know that lobbying for the bailout was California Gov.
Gavin Newsom,
a Democratic up-and-comer whose personal business and nonprofit ties with Silicon Valley Bank were extensive.
Did the bank’s progressive dabblings contribute to its failure—or its rescue? Its investment in political window dressing at least tells you what management believed about its political environment.
No bank is safe if depositors run and keep running. A big capital cushion does zip. If depositors are running because of general economic conditions, or if the run itself tanks the economy, the assets a bank might hope to sell to pay off fleeing depositors are likely to be falling too if not unsellable altogether.
All banks exist on confidence that something like this isn’t about to happen. In one way, today’s nut is tougher than 2008’s. Then, housing assets on bank balance sheets, though greatly depreciated in the market, continued to perform. Banks were still in the black on the spread over their deposit costs. If there was no run, they could continue indefinitely and grow out of trouble.
Let’s just say the whole economy still has to solve the problem Silicon Valley Bank would have had to solve to stay alive. Financial institutions’ fixed-rate assets not only have been badly dinged in market value, the mingy income streams they generate can’t keep up with rising deposit rates and operating costs. This problem didn’t first surface with Silicon Valley Bank but with U.K. pension funds during the short, unhappy premiership of
Liz Truss.
Remember the cynical way the Biden administration piled on to suggest Ms. Truss’s garden-variety pro-growth nostrums were to blame?
Today’s banks can hardly be independent from the government that underwrites confidence in the insurance, regulatory and economic systems on which they rest. This also gives government an opportunity to bungle that confidence. We haven’t seen yet which the Biden administration has achieved, bracing up confidence in the banks or helping to weaken it.
In Mr. Biden’s shoes, any reader might have made the same better-safe-than-sorry decision to bail out a midsize California lender. I bet most, though, wouldn’t have made the decisions two years earlier that helped create the problem of two Sundays ago.
Mr. Biden essentially embraced the progressives’ modern monetary theory, which admittedly became universal amid the pandemic, positing that the U.S. government could print and spend money without inflation. Mr. Biden arrived, as I noted at the time, with an “overwhelming priority to pass a superfluous domestic bailout package, on top of those already passed, so [he] could claim credit for the pandemic recovery already visible around the corner.”
That recovery was shaping up to be a rocket ship. By pouring unnecessary fuel into its engines, Mr. Biden contributed to the destabilizing rise in inflation and interest rates that spawned today’s bank panic, the end of which may not be in sight.
FDR and Obama can rightly say they inherited their meltdowns. Mr. Biden can claim authorship of his.
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