Blame Biden’s spending, not depositors, for bank failures
Washington Examiner
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It is impossible to know what would have happened had Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin Gruenberg not announced on Sunday that they would guarantee all depositors’ assets at the Silicon Valley Bank, including accounts greater than $250,000.
The purpose of the depositor bailout was to stop a wider run on regional banks. Depositors might have reacted by moving assets to larger, safer institutions. Bank of America alone has reported a $15 billion surge in deposits this week. Undoubtedly that number would be much higher, and far more regional banks would be in trouble, if not for this intervention.
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Was prevention of a wider bank run worth the creation of new incentives for large depositors not to manage their own money properly? That is difficult to judge. But what can be safely said is that the failure of Silicon Valley Bank, Signature Bank, and Silvergate Bank are not anomalies.
First Republic Bank, PacWest Bancorp, Western Alliance, and even Zions Bank have all seen their stocks fall as markets freshly assess the health of their balance sheets. These banks are not all suddenly in trouble because they made bad loans or invested in fraudulent mortgage-backed securities. It would be one thing if Silicon Valley Bank had lent to risky green energy companies that suddenly went bankrupt and defaulted on their loans. But that is not what happened. SVB went under because it invested in what regulators consider the safest asset possible, long-term U.S. Treasury bonds, yet made the rookie mistake of not hedging this investment against the higher interest rates that nearly everyone saw coming.
The reason all these regional banks are in trouble is the record-high inflation for most of the past two years. Long-term bonds, considered extremely safe assets by everyone, including regulators who monitor banks, are now balance sheet black holes. That’s because massive inflation forced the Fed to raise interest rates, which slashed the value of investments in bonds bought when interest rates were low.
Democrats want to blame Republicans for rolling back bank regulations that would have increased capital requirements for smaller banks. But those regulations are irrelevant to the current crisis and would have done nothing to save SVB. They had tons of “safe” assets that, in the era of high inflation, turned out to be duds. Whose fault is that?
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” President Joe Biden said in a rare morning public appearance on Monday.
If Biden is eager to expose those responsible for the mess at SVB and across the whole banking sector, he needs to look in the mirror.
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He and his fellow Democrats brought us persistently high inflation with their reckless spending after the post-COVID-19 recovery was well underway. They drove inflation to record highs and forced the Fed to raise interest rates. This has weakened the balance sheet of every bank in the country that holds “safe” long-term government bonds.
The policy lesson Biden and Democrats need to learn to prevent future banking crises is to stop spending money they and we don’t have.