Help for depositors? Yes. Help for debtors? No.

13 March 2023

This week the Biden administration moved swiftly to contain the fallout from the collapse of Silicon Valley Bank, reassuring depositors and other wobbling institutions.

Biden wants to head off a financial crisis, which could spark a recession and potentially harm millions of people. The government's decisive actions here are reasonable and probably necessary.

But it's hard not to notice how quickly the government moves when there’s a threat that the wealthy may lose some money, versus the much less urgent response to non-billionaires in trouble.

Bank bailouts happen instantly.

Bailouts for student debt, or medical debt or for children in poverty occur on a much longer, and in many cases infinite, timetable.

We shouldn't let a bank collapse destroy the economy. But if we have the money and the will to protect the wealthy, we should find the money and the will to protect those who are struggling as well.

High interest, high recklessness

Silicon Valley Bank was done in by rising interest rates and its own short-sightedness.

It's the main banker for Silicon Valley technology and life sciences companies. As interest rates rose, its Treasury bond investments became less attractive.

In addition, startup funds dried up, and tech firms and executives started to withdraw money.

The problem was exacerbated by the fact that SVB had many depositors with large accounts over $250,000, the cap (in theory) for Federal government protection. A majority of its deposits were uninsured.

SVB lobbied to put itself in this precarious position.

CEO Greg Becker urged the government in the mid-2010s to weaken Dodd-Frank so that smaller banks like SVB would no longer be subject to yearly stress tests.

Trump complied with that request in 2018, rolling back regulations, and setting the stage for SVB's disaster.

When the bank's precarious position became clear last week, tech investors with uninsured deposits — most notably billionaire Republican donor Peter Thiel — panicked.

The bank couldn't find a buyer, and the Federal Deposit Insurance Corporation stepped in and took it over.

Protecting depositors

The administration moved swiftly to try to contain the crisis of confidence. It protected all deposits at SVB and another struggling institution, Signature Bank — even those over $250,000.

The funds come from a bank levy established in Dodd-Frank.

The government also made it easier for mid-size banks to obtain funding.

The goal is to show the public that funds are available and that the federal government is serious about protecting depositors (though not the bank's investors and owners).

We still don't know whether this will work or whether more funds will be needed.

Stocks in First Republic Bank plunged on Monday. The market remains nervous, and there is a possibility of more bank failures, though it seems clear that the government is taking this seriously and will respond with further measures if needed.

Help for the wealthy, no help for you

Again, a run on the banking system could have economy-wide repercussions. No one wants a repeat of 2008. It makes sense that Biden wants to act decisively.

However, the fact remains that the people directly benefiting here are mostly people with more than $250,000 in deposits in individual accounts. They have a lot of money.

In addition, many of these people have warned vocally about moral hazards and have argued strongly against government aid.

Thiel has backed candidates like Ohio Senator JD Vance. Vance has tried to claim (falsely) that student debt relief benefits the rich.

He's notably not on the rooftops right now demanding that Biden refuse to help tech billionaires like Thiel, though.

Obama-era National Economic Director Larry Summers insisted that Biden needed to bail out banks. Now is not the time for "moral hazard lectures," he insisted.

But when Biden announced his student loan forgiveness program, Summers was all about the moral hazard lectures, arguing that student loan relief was a giveaway to the affluent.

Similarly, wealthy investor Jason Calacanis claimed that bailouts "remove accountability" when student loan debt was at issue.

But this weekend he was screaming in all caps that "MAIN STREET" was going to lose their bank deposits, even though most people on main street don't have accounts with over $250,000.

People who aren't rich

Thiel, Summers and Calacanis are hypocrites. But they also sincerely believe that the wealthy are more important than everyone else.

In their view, you don't need to bail out students — or those with medical debt or children in poverty — because the middle class and the poor don't create jobs and can't swiftly destroy banks by abandoning their over-$250,000 accounts.

The truth, though, is that instability in the US economy is in large part due to the fact that we funnel so many resources to irresponsible reckless tech-bro billionaire gamblers, rather than investing in a strong, stable middle class.

The US has very high rates of inequality compared to its peers. That inequality almost certainly slows economic growth.

It also undermines innovation — that supposed idol of Silicon Valley billionaires.

When students leave college with massive debt, they can't take risks and pursue new ideas or projects. When people's health care is tied to their jobs, they are going to be afraid to pursue new opportunities.

When a country has high child poverty rates, it means that millions of children live in precarious circumstances, and lack nutrition, time, and stability needed to take full advantage of educational opportunities.

Main street vs. the worst people

The US should be giving everyone the tools they need to contribute to the economy and help each other.

Instead, we funnel money to Peter Thiel, who spends it on putting unqualified right-wing nutjobs in the Senate, and Elon Musk, who spends it on bringing Nazis back to Twitter.

Biden has tried to move towards greater equity with his student debt relief plan and the Expanded Child Tax Credit for poor children — both initiatives now stalled or gutted by conservative lawmakers.

Part of the government's job is to safeguard the economy.

That sometimes means bailing out banks. But it should also mean helping students, children, working people and poor people.

An economy built for Larry Summers and Peter Thiel is an economy that will always be in crisis.

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