Dear readers,

There’s this sort of inane discourse about whether the rescue of Silicon Valley Bank constitutes a bailout. For example, Bill Ackman says it’s not a bailout, because the benefits aren’t flowing to SVB shareholders or bondholders, SVB executives aren’t keeping their jobs, and taxpayers allegedly won’t bear the cost:

Bill Ackman @BillAckman

This was not a bailout. During the GFC, the gov’t injected taxpayer money in the form of preferred stock into banks. Bondholders were protected and shareholders were diluted to varying degrees. Taxpayer money was put at great risk. Many people who screwed up suffered minimal to… https://t.co/mjwcnVRV9X

2:45 AM ∙ Mar 13, 2023

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I think a fair definition of a “bailout” is when people or entities receive an ad hoc financial rescue to which they were not legally entitled before the event that necessitated the rescue. So what the government did over the weekend was not a bailout of SVB’s shareholders or executives. But it was certainly a bailout of SVB’s depositors, who are receiving a guarantee of their deposits that were not supposed to be covered by FDIC insurance. Perhaps more importantly, it’s a bailout of other mid-size banks, which now benefit from a clear promise of future rescue — and that bailout provides benefits not just to their depositors but also to their shareholders, their executives, and their borrowers, who will still be able to access credit from them.

As for the idea that the funds being used here are not taxpayer funds, that’s basically semantic. This bailout isn’t being paid for with our income taxes. But to the extent the federal government bears the cost to make SVB’s uninsured depositors whole, that cost will be financed with an assessment on insured banks — an assessment that will ultimately be borne by some combination of those banks’ customers, shareholders and employees.

So why don’t we just admit this was a bailout? It’s because “bailout” is one of these nouns that gets a weird normative layer — the feeling is that “bailouts” are inherently unjustified, and so if something has bailout characteristics but is also the right thing to do, it has to be transmuted into a “not-bailout.” But sometimes, when things go wrong, a bailout is just what the situation calls for. This is the lesson of TARP — a wildly successful program that prevented an even deeper financially driven recession and ultimately turned a profit — and is also, if you pay close attention, the message of the musical Hamilton.

Another weird thing I’ve been hearing over the last few days is that it’s always Wall Street that gets a bailout while ordinary people have to bear the cost of their own troubles. Have people forgotten the last three years of public policy? A key part of the policy response to COVID was literally trillions of dollars of bailouts, most of it aimed in one way or another at the general public. Unemployment insurance was enhanced so that many laid-off workers collected payments exceeding their prior wages, for months. Households were sent multiple rounds of stimulus checks. States and localities received hundreds of billions of dollars of aid payments, nominally to plug their budget deficits, though the payments were so excessive they threw all 50 states into surplus. And of course, there was the very broad PPP bailout of much of the private sector — the terms of which were tied to continued employment to ensure the largess would be shared with workers.

And while there were significant errors in the design of these programs — including, in the end, their excessive size, which led to inflation — they constituted a financial rescue that was broadly appropriate to the situation. Something had gone gravely wrong, and absent bailouts, there would have been much worse knock-on damage to the economy. The bailouts were the right thing to do.

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Is that the kind of situation we’ve been in over the past few days? I don’t know what would have happened if SVB had been allowed to fail in a way that meant haircuts for its uninsured depositors. But I am concerned that more mid-size banks might have failed on Monday if the government had not taken decisive action to show depositors that their “uninsured” deposits are safe because they are effectively insured. A slew of midsize bank failures wouldn’t just be bad for shareholders and depositors in those banks — it would be bad for people who rely on those banks to be able to issue credit, and therefore ultimately bad for the economy.

Even when a bailout is justified, it’s also always a sign that something has gone wrong. We need to assess how we ended up in this situation so we know how to prevent the next one. I’m particularly interested to know how the Federal Reserve Bank of San Francisco and the California Department of Financial Protection and Innovation

Wise choices on those fronts will help us avoid the need for the next bailout. But we don’t need to pretend we didn’t just do yet another one.

Very seriously,

Josh