Big Government set stage for bank’s collapse
WASHINGTON — President Ronald Reagan said that the nine most terrifying words in the English language were “I’m from the government and I’m here to help.” Well, he’s been proved right once again, this time by the collapse of Silicon Valley Bank (SVB). The bank’s failure — the second-largest in U.S. history — was a direct result of its own gross mismanagement, combined with a series of well-intentioned government interventions run amok that created the conditions for its catastrophic failure.
Government intervention No. 1: In December 2008, the Federal Reserve cut its benchmark lending rate to near zero for the first time, and then kept interest rates artificially low (below the economy’s natural rate) for an extended period. Instead of an emergency measure, abnormally ultralow rates were a fixture of the U.S. economy for more than a dozen years. This created incentives for banks such as SVB to hold Treasury bonds — whose value depends on low interest rates — under the belief that they were “safe” assets because low interest rates would continue in perpetuity.
Government intervention No. 2: When COVID-19 hit, government-imposed lockdowns effectively brought the economy to a standstill, forcing businesses to close, too many of them permanently. These shutdowns did immeasurable damage, putting millions of Americans out of work.
Government intervention No. 3: During the shutdowns, the federal government pumped more than $5 trillion into the economy — providing direct cash payments to businesses and individuals. With his $1.9 trillion American Rescue Plan, President Biden continued this miasma of spending long after it was needed: sending millions of Americans stimulus checks, the largest child tax credit payments ever, and absurdly generous unemployment supplements that paid many Americans more to stay home than to work. Because people were getting free money but had nowhere to spend it, personal savings rates soared to the highest level on record, with households amassing $2.7 trillion in excess savings. The result? When the economy opened up again, consumer spending skyrocketed — but supply could not keep up with demand, producing the worst inflation in 40 years.
Government intervention No. 4: After Congress hit the accelerator, overheating the economy, the Fed slammed on the brakes and began raising interest rates in an effort to tamp down spending-induced inflation. This had the effect of driving down the value of Treasury bonds — because as interest rates go up, bond values go down. This proved disastrous for SVB, which had invested tens of billions of dollars of its clients’ venture capital money in Treasury bonds. Ironically, these were supposed to be safe investments. But because of this disastrous sequence of government actions, they were suddenly deeply devalued. This left the bank with billions of dollars in unrealized losses on the books, and sparked the bank’s collapse.
Government intervention No. 5: Now, the FDIC has stepped in to create a new lending authority and to guarantee the assets of all Silicon Valley Bank depositors, even though less than 10 percent of the bank’s deposits qualified for FDIC insurance under the $250,000 limit Congress set to protect the assets of average Americans.
The FDIC decided to extend this coverage to SVB’s wealthy uninsured tech investors anyway, bailing them out and thus rewarding risky behavior. Worse, by guaranteeing deposits above the $250,000 limit, the government is creating a new moral hazard — effectively establishing a universal uninsured deposit guarantee. Once the FDIC guarantees the deposits of all SVB clients, it cannot justify not doing the same for other banks as well. The result will be a nationwide no-risk banking system that we will one day come to regret.
And, so, the chain will go on. Some on the left are arguing that it was a lack of government intervention that led to the bank’s collapse, and are blaming Donald Trump and the 2018 partial rollback of the DoddFrank banking reforms he signed into law as president. This is incorrect. The DoddFrank rollback — one of the few bipartisan pieces of legislation passed under Trump — still left SVB subject to lots of regulation and oversight. As Sen. Jon Tester (D-Mont.), who led the bipartisan effort to reform DoddFrank in 2018, told Politico, “If you read the bill, you’ll know that it doesn’t let them off.” Higher capital requirements wouldn’t have mattered, and the bank’s money was in the what most considered the lowest-risk assets possible: Treasury bonds. Just two weeks before SVB’s collapse, KMPG, one of the big-four accounting firms, gave the bank a clean bill of financial health. The problem wasn’t poor regulation. The problem was that the bank was terribly managed.
But absent this domino-like series of government interventions — starting with unprecedented near-zero interest rates which encouraged SVB to buy Treasurys, and followed by unprecedented lockdowns, government-stimulus-fueled consumer spending, runaway inflation and rising interest rates that devalued those Treasurys — this bank failure would never have happened. It’s just the latest evidence that Reagan was right when he warned us: “Government is not the solution to our problem, government is the problem.”