Paul Krugman: 'The bigger question is whether, by saving big depositors from their own fecklessness, policymakers have encouraged future bad behavior.'
A sign of a branch of the Silicon Valley Bank is pictured at an office building where the bank is located in Frankfurt, Germany, Monday, March 13, 2023.So the feds stepped in to protect all deposits at Silicon Valley Bank, even though the law says that deposits only up to $250,000 are insured and even though there was a pretty good case that allowing big depositors to take a haircut wouldn’t have created a systemic crisis.
Furthermore, having to rescue this particular bank and this particular group of depositors is infuriating: Just a few years ago, SVB was one of the mid-size banks that lobbied successfully for the removal of regulations that might have prevented this disaster, and the tech sector is famously full of libertarians who like to denounce big government right up to the minute they themselves need government aid.
In banking, insuring deposits means that depositors have no reason to concern themselves with how the banks are using their money. This in turn creates an incentive for banks to engage in bad behavior, such as making highly risky but high-yielding loans. If the loans pay off, the bank makes a lot of money; if they don’t, the owners just walk away. Heads, they win; tails, the taxpayers lose.
The savings and loan crisis had a lot to do with the very bad decision by Congress to relax regulations on those associations, which were in financial trouble as a result of high interest rates. There are obvious parallels to the crisis at Silicon Valley Bank, which also hit a wall because of rising interest rates and was able to take such big risks in part because the Trump administration and Congress had relaxed regulations on mid-size banks.
Now, you could argue that SVB’s depositors felt safe because they somewhat cynically believed that they would be bailed out if things went bad even if they weren’t entitled to any help — which is exactly what just happened. And if you believe that argument, the feds, by making all depositors whole, have confirmed that belief, creating more moral hazard.
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