In this inflationary environment where we’re basically waiting for a recession, isn’t a tech-focused recession the least bad option even if it puts other banks at risk? The risk of raising interest rates continually isn’t zero either, and it seems like an increasingly explicit bailout guarantee would be inflationary as it underwrites risks taken by financial institutions.
So I’ll caveat this comment by saying I largely agree about this post; need for a bailout, the political reasons “bailout” is a dirty word and the fact average Americans (correctly) got a big bailout in the pandemic.
In regards to the anti-bailout backlash, I really don’t think you can discount the fact that a variety of libertarian(ish) VC rich guys are yelling for a bailout is nauseating. I’m thinking specifically of David Sacks. He’s a Peter Thiel acolyte and an Ann Rand libertarian and here is he is screaming for a bank bailout that conveniently benefits him personally*
*Fun fact. I’m pretty sure David Sacks got my Twitter deactivated. Likely because I called him a pathetic Putin admirer and told him he was a complete shit of a human being. I should state not only do I not regret telling him this, I was being kind and holding back telling him this.
Josh you have made it to the pinnacle of financial journalism: a direct quote in one of Matt Levine’s footnotes. Please remember the little people who supported you on the way up.
Josh, in the absence of the intervention, tax revenues would have been significantly lower. The holders of SVB securities lost all their money. The same would have happened at FRB. If the venture-backed depositors had lost 20% of their money, that would have created large capital losses and downstream losses for employees. My guess is that, from a Federal and State government perspective, the decision to guarantee all deposits was a no-brainer. Re moral hazard, I doubt any bank executive wants to follow in the footsteps of the SVB team, independent of regulations. Jamie Dimon didn't go out and place all his chips on CMOs after the financial crisis so he could have his illiquid shareholdings increase in value. cheers, bill
I encountered a contrarian take from a financial blogger named Joseph Wang ("FedGuy12" on twitter) which disputed the idea that this bank was any more significant, or any less regional, than the hundreds of others that have failed.
I don't know about that but it does seem the depositors of SVB benefitted - er, so to speak - from their ability to magnify the bank's issues in the media, after first telegraphing their panic via e.g. at least one breathless longform tweet that described in detail - "this was my day" - all their steps involved in wiring their money to new accounts:
An issue raised by the NYT and not addressed here (aside from speculation about improved regulation) is the moral hazard of the feds stepping in to guarantee funds that were not supposed to be covered by FDIC. Doesn't this encourage riskier behavior by banks? And encourage businesses to deposit in nominally uninsured accounts to gain higher returns?
I suppose that this bailout will make bank runs less likely on other banks, but I think this downplays the fact that this bailout still causes bad incentives for banks and depositors who now know that their deposits are essentially fully guaranteed by the U.S. government, once again privatizing profits while socializing risks.
Not technically a bailout but infuriating that we're right back to private gains combined with socialized risk...which only can encourage unwise risk-taking in the future.
Nice rundown. I'm curious to see what the impact will be on the Fed's rate hikes. Do they pause or go with another 25? Will SVB's failure lead to tighter financial conditions as banks become more risk averse. Will the government make the implicit guarantee for all deposits explicit? Interesting times ahead
Great read as usual Mr. Barro. I agree that I don't like the fact that some people have coined the term "bailout" to equal something bad or not worth doing, don't even get me started on the PPP loan fiasco. That said you brought up a good point about how regulators missed this, but I'm not surprised as these are the same people that ignored Madoff's ponzi scheme for almost a decade. I tend to believe that the FDIC and SEC don't actually not know what is going on, I think they don't have the teeth to really go after people, banks and organizations that aren't following the rules because they aren't as independent or supported by our government as they should be. JPM released an analysis on SVB and it seems pretty spot on and even unsurprising from their POV.
> "S.V.B. suffered from a toxic mix of risky management and weak supervision. For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits. This meant that weakness in a single sector of the economy could threaten the bank’s stability." -> This I wholeheartedly agree with.
Good rundown! Though now I have another question:
If the federal government is now insuring all bank deposits, why can't I just open an account with the federal government and cut out the middle man?
In this inflationary environment where we’re basically waiting for a recession, isn’t a tech-focused recession the least bad option even if it puts other banks at risk? The risk of raising interest rates continually isn’t zero either, and it seems like an increasingly explicit bailout guarantee would be inflationary as it underwrites risks taken by financial institutions.
So I’ll caveat this comment by saying I largely agree about this post; need for a bailout, the political reasons “bailout” is a dirty word and the fact average Americans (correctly) got a big bailout in the pandemic.
In regards to the anti-bailout backlash, I really don’t think you can discount the fact that a variety of libertarian(ish) VC rich guys are yelling for a bailout is nauseating. I’m thinking specifically of David Sacks. He’s a Peter Thiel acolyte and an Ann Rand libertarian and here is he is screaming for a bank bailout that conveniently benefits him personally*
*Fun fact. I’m pretty sure David Sacks got my Twitter deactivated. Likely because I called him a pathetic Putin admirer and told him he was a complete shit of a human being. I should state not only do I not regret telling him this, I was being kind and holding back telling him this.
Josh you have made it to the pinnacle of financial journalism: a direct quote in one of Matt Levine’s footnotes. Please remember the little people who supported you on the way up.
Josh, in the absence of the intervention, tax revenues would have been significantly lower. The holders of SVB securities lost all their money. The same would have happened at FRB. If the venture-backed depositors had lost 20% of their money, that would have created large capital losses and downstream losses for employees. My guess is that, from a Federal and State government perspective, the decision to guarantee all deposits was a no-brainer. Re moral hazard, I doubt any bank executive wants to follow in the footsteps of the SVB team, independent of regulations. Jamie Dimon didn't go out and place all his chips on CMOs after the financial crisis so he could have his illiquid shareholdings increase in value. cheers, bill
Is that DALL-E pic real? Because it really made me laugh once I got it.
I encountered a contrarian take from a financial blogger named Joseph Wang ("FedGuy12" on twitter) which disputed the idea that this bank was any more significant, or any less regional, than the hundreds of others that have failed.
I don't know about that but it does seem the depositors of SVB benefitted - er, so to speak - from their ability to magnify the bank's issues in the media, after first telegraphing their panic via e.g. at least one breathless longform tweet that described in detail - "this was my day" - all their steps involved in wiring their money to new accounts:
https://twitter.com/torrenegra/status/1634573234187407369
Oh well, water under the bridge now. We're once again in a new world, but that's nothing new.
An issue raised by the NYT and not addressed here (aside from speculation about improved regulation) is the moral hazard of the feds stepping in to guarantee funds that were not supposed to be covered by FDIC. Doesn't this encourage riskier behavior by banks? And encourage businesses to deposit in nominally uninsured accounts to gain higher returns?
I suppose that this bailout will make bank runs less likely on other banks, but I think this downplays the fact that this bailout still causes bad incentives for banks and depositors who now know that their deposits are essentially fully guaranteed by the U.S. government, once again privatizing profits while socializing risks.
Not technically a bailout but infuriating that we're right back to private gains combined with socialized risk...which only can encourage unwise risk-taking in the future.
Do you think we will ever learn to stop pushing the pain out to the next generation?
Slavery and the 3/5 clause.
Abandoned Reconstruction.
Now out of control National Debt.
Shame on us.
Nice rundown. I'm curious to see what the impact will be on the Fed's rate hikes. Do they pause or go with another 25? Will SVB's failure lead to tighter financial conditions as banks become more risk averse. Will the government make the implicit guarantee for all deposits explicit? Interesting times ahead
Great read as usual Mr. Barro. I agree that I don't like the fact that some people have coined the term "bailout" to equal something bad or not worth doing, don't even get me started on the PPP loan fiasco. That said you brought up a good point about how regulators missed this, but I'm not surprised as these are the same people that ignored Madoff's ponzi scheme for almost a decade. I tend to believe that the FDIC and SEC don't actually not know what is going on, I think they don't have the teeth to really go after people, banks and organizations that aren't following the rules because they aren't as independent or supported by our government as they should be. JPM released an analysis on SVB and it seems pretty spot on and even unsurprising from their POV.
https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/silicon-valley-bank-failure-amv.pdf
Additionally, what did you think of Warrens write up in the Times about this? https://www.nytimes.com/2023/03/13/opinion/elizabeth-warren-silicon-valley-bank.html?smid=url-share
> "S.V.B. suffered from a toxic mix of risky management and weak supervision. For one, the bank relied on a concentrated group of tech companies with big deposits, driving an abnormally large ratio of uninsured deposits. This meant that weakness in a single sector of the economy could threaten the bank’s stability." -> This I wholeheartedly agree with.