As the old saying goes, if it looks like a duck, walks like a duck, and quacks like a duck, it’s probably a duck.
Well, if it looks like a bailout, walks like a bailout, and talks like a bailout, it’s probably a bailout.
In the aftermath of the Silicon Valley Bank and Signature Bank failures, nobody in the Biden administration or at the Federal Reserve wants to call the actions they took a “bailout.”
But make no mistake — it was without a question a bailout.
As Peter Schiff pointed out in a podcast, “Nobody wants to admit it’s a bailout because, obviously, the bailouts were not popular, and so they want to distance themselves from that language. But this absolutely is a bailout.”
What exactly is a bailout?
Investopedia defines it this way:
A bailout is when a business, an individual, or a government provides money and/or resources (also known as a capital injection) to a failing company. These actions help to prevent the consequences of that business’s potential downfall which may include bankruptcy and default on its financial obligations.”
Of course, individuals can be bailed out as well as companies.
Bailing Out Depositors
The FDIC insures bank deposits up to $250,000. But there were a lot of accounts in both SVB and Signature Banks above that threshold. Under the Treasury Department plan, bank customers won’t lose one dime – and that includes their uninsured deposits over $250,000
On the Sunday after government regulators took over the two institutions, the FDIC created “bridge banks” to handle both insured and uninsured customer deposits. Banking regulators assured depositors that they would have full access to all of their funds.
Since the FDIC will be covering deposits that weren’t originally covered, how can you call it anything other than a bailout? The government rode in on a white horse and saved wealthy depositors who stood to lose millions in uninsured deposits with an injection of government money.
As Mises Institute senior editor Ryan McMaken pointed out in an article, the government effectively backstopped bad banking decisions made by rich people and corporate leaders. He pointed out that the $250,000 FDIC insurance already covered most average depositors.
Moreover, it is extremely easy to acquire deposit insurance on much more than $250,000 by simply keeping money at more than one bank. That $250,000 limit applies to the deposits at each bank where a depositor keeps funds. For customers with high liquidity needs, the financial sector offers tools for dealing with the risk of exceeding FDIC limits.
In an illustration of the laziness and arrogance that so characterizes our modern financial class, however, many of the wealthiest depositors at Silicon Valley Bank couldn’t be bothered with managing their deposits, and they essentially ignored the deposit-insurance rules that even a ten-year-old understands when opening his first bank account.
By bailing these people out, the government incentivizes even more lazy decision-making in the future.
And as Schiff pointed out, the bailout effectively raised FDIC protection from $250,000 to infinity….