The Lesson Learnt From Silicon Valley Bank
While policy makers have been quick to label the uncapping of the FDIC insurance limit as ‘not a bailout’, they have in effect introduced a new set of incentives that reward risk and poor governance, and punish fiscal restraint. If Silicon Valley Bank had been allowed to fail fully, it would have sent the signal to every other bank that they needed to protect their depositors with a highly conservative approach, capable of withstanding a massive liquidity draw-down in a crisis. While the new policy is better than bailing out the management, bond-holders as well as the depositors, the public is not buying the “It’s not a bailout!” line, as we’ve all been through this before in the 2008 meltdown.
The FDIC guarantee was first instituted with the 1933 Banking Act (Glass-Steagall), which protected deposits up to 100,000. The idea was that your everyday butcher, baker and candlestick maker wouldn’t have the time or ability to size up the solvency of the bank they chose, but people with larger and more complex financial holdings, would. For account holders with more than the 100k cap, they would need to make their own decisions and do their own due diligence to ensure that they didn’t end up losing their funds.
It’s a popular myth that a large number of banks went bust during The Great Depression of the 30’s, when only 2% of banks ran out of cash to pay back depositors. Banks would have acted more prudently and not taken as many risks, knowing that there would be no-one to bail them out if they were too reckless. By ‘saving’ individual entities that have taken too many risks or made poor decisions, it ultimately weakens the entire system incrementally, as the incentives to act responsibly are washed away with each successive government intervention.
President Roosevelt signing the Glass-Steagall Act alongside Senator Carter Glass and Representative Henry Steagall, the bill's co-sponsors,and others.
Many savers don’t believe that the entire system can get bailed out. There will be some banks that are prioritised over others. Realistically, Silicon Valley Bank was full of top 1%-ers that likely included a chorus of major Democrat donors. By saving this bank’s depositors, they are saying that if the bank is important enough, it will receive a rescue, but realistically there are only ever so many spots on a life-raft. We have seen huge outflows as a result from regional banks to mega caps the likes of JP Morgan, Citi and Bank of America. These banks, while certainly more fractional in their approach to depositors funds, are perceived to be the most likely to be protected when push really comes to shove. If the contagion does spread, they’re ‘too-big-to-fail’ status, and proximity to the Fed’s printing spigots will prove decisive.
Prior to last Sunday, deposits of more than $250,000 were not insured, but now, in an effort to curtail a sector wide run, this cap has been removed. But what will be the long-term result of the government effectively backstopping $18 trillion in deposits? For the government to bailout any significant percentage of the deposits, they would be doing so by diluting the purchasing power of all of the accounts at solvent providers.
One way or another, there needs to be a major clearing out of the poorly managed and overleveraged banks, or there is going to be hyper-inflation. Getting out of paper and into reliable physical assets such as gold and silver is one of the only ways for individuals to protect their purchasing power.