Silicon Valley Bank (SVB) has collapsed in the second-largest bank failure in U.S. history. The federal government has acted swiftly to try to keep other banks from suffering bank runs, with the Federal Deposit Insurance Corporation (FDIC) assuring SVB depositors that their money is safe. Ordinarily the FDIC only insures deposits up to $250,000, but in this case it has promised that all of the money in SVB accounts will be available to the bank’s customers, no matter how much the government has to pay.
Silicon Valley Bank was widely used, as you might expect, by tech industry startups (as well as a bunch of California winegrowers), and startup types are not generally known for their belief in generous government handouts to those screwed by the free market. But libertarians quickly become socialists when they’re the ones who end up on the losing end of one of capitalism’s frequent crises. Billionaire Mark Cuban swiftly went from denouncing regulators to asking “Where were the regulators?” Tech industry leaders immediately started calling for the FDIC to ditch its $250,000 cap on guaranteed deposits and guarantee everything including the nearly $500 million that Roku held at SVB. Venture capitalist David Sacks said it was unfair for depositors to be punished for opening a bank account at an institution that failed, and that he wasn’t asking for a bailout but merely for the government to “ensure the integrity of the system.” CNBC reported on those noting “the irony as some VCs with notoriously libertarian free-market attitudes are now calling for a bailout.” (At Slate, Edward Ongweso Jr. has more on the “tantrum” thrown by venture capitalists who demanded that the government step in when SVB went under.)
One of those notorious for his “free-market attitudes” is Larry Summers, the former Clinton treasury secretary and Jeffrey Epstein associate. Summers has previously had harsh words for those advocating a bailout for underwater student loan debtors. But when it came to Silicon Valley Bank, Summers said that the government should step in and “this is not the time for moral hazard lectures or for lesson administering or for alarm about the political consequences of ‘bailouts.’”
“Moral hazard” is the term that Summers and ilk use to refer to elimination of the incentive to avoid risk. In the case of student loans, the idea is that if people’s debts are simply forgiven, future borrowers will assume their debts will be forgiven, too, and therefore will take on debt that they shouldn’t take on, instead of rationally weighing costs and benefits. Here, one would say that if the FDIC’s $250,000 limit on deposit insurance is simply waived, nobody has any incentive to regard it as a real limit and to plan accordingly.
David Sacks, the VC, is actually correct when he says that it’s not fair that depositors should lose all their money if their bank fails. After all, he points out, all they did was open a bank account. They did a perfectly sensible thing. They didn’t engage in risky behavior. Why should they go broke because their bank made some stupid financial decisions? They didn’t have any say in those decisions.
But this logic applies equally well to everyone else. If the FDIC’s $250,000 limit on deposit insurance is unfair when applied to the tech industry customers of Silicon Valley Bank, then the cap is unfair for everyone. That’s why David Sirota of The Lever has suggested that the sensible response here is for the FDIC to guarantee all deposits going forward, and to raise the money to do so by charging fees to banks. Otherwise, “SVB’s tech bros get more expansive depositor insurance than everyone else in the United States.”
There are arguments right now over whether the FDIC’s guaranteeing of SVB deposits should be considered a “bailout” or not. Even the financial elite are divided on this: the Wall Street Journal’s editorial board says it is, while a prominent billionaire insisted it wasn’t, because taxpayer funds weren’t being “put at risk.” The FDIC has stressed that “the deposit insurance fund is bearing the risk — this is not funds from the taxpayer.” But as Sirota pointed out, if there were to be more bank failures, taxpayer funds would very much be at risk, because “the federal government’s Deposit Insurance Fund has a balance of just $128 billion against $9.9 TRILLION of insured bank deposits in the United States.” And if the government started holding deposit insurance strictly to the $250k maximum for everyone else, while exceeding it for the Silicon Valley elite, that would look deeply unfair.
I think it’s quite reasonable to beef up insurance protection for bank deposits, to avoid catastrophic bank runs. Outrageously, SVB and other banks fought proposals to increase the amount they had to pay into the deposit insurance fund, and Mark Cuban is not wrong that the question to ask right now is “Where were the regulators?” (He was just wrong to be anti-regulator before.) There is a major corruption story here. Former U.S. Congressman Barney Frank was paid a fortune by a bank, and had lobbied for deregulating it. That bank has now failed alongside SVB, and is getting the not-a-bailout emergency increase in its deposit insurance.
But in addition to the corruption, there is the inconsistency: the rich are considered “too big to fail,” because their economic woes can have cascading effects that hurt the whole economy, but when bad things happen to poor people, they are not similarly “insured” by the government. It was not the fault of SVB depositors that the bank collapsed—they trusted the institution—but nor was it the fault of student loan debtors that the value of their degree was less than what they were promised. It is not the fault of people who get sick that they rack up huge medical bills. They deserve to be insured against risk, too, through free government healthcare. The Federal Reserve acted within hours to try to ensure SVB’s collapse didn’t hurt the depositors, because this kind of harm is considered catastrophic and unacceptable. But there are plenty of harms to people that go on every day that are not treated with similar urgency, because there is an implicit hierarchy of how much different people matter.
It’s not absurd for the federal government to try to keep bank depositors whole—it would indeed be a disaster if a lot of people didn’t get their paychecks because their employer’s bank failed. But now that libertarians have discovered that free markets can completely fuck people entirely unfairly, and that when they do the government needs to step in and fix the situation to reduce the unfairness and the unnecessary harm, it’s time to apply the principle consistently. Poverty is just as outrageous as a business losing access to its bank deposits, and there should be a similar level of urgency and outrage when people who are not Silicon Valley Bank depositors undergo economic hardship.
