Silicon Valley Bank: Monday Morning Quarterbacking, Moral-Philosophical Reflections, & an Extended Shakespeare Quote
Is it a "bailout" if it doesn't cost the government anything to do it? And even if it is a "bailout", if it doesn't cost the government anything to do it is it still a bad thing to do?
I am not sure whether I have a bone to pick with my friend and sometime co-author Dean Baker here or not:
It is true that Dean Baker says nothing that is not 100% true here:
Dean Baker: SVB Was Donald Trump’s Bailout: ‘There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB): (1) It was a bailout, (2) Donald Trump was the person responsible.
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it. We will get a lot of silly game playing on this issue…. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t the bank’s large depositors something of great value…. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits…
[Second,] this is Donald Trump’s bailout… a benefit... [to] depositors… [who] are not insured and [who placed their money in a]… bank… not subject to the same scrutiny as the largest banks…. Donald Trump… deci[ded] to stop scrutinizing banks with assets between $50 billion and $250 billion…. Prior to the passage… SVB would have been subject to regular stress tests… would have required it to raise more capital and/or shed deposits. But Trump pulled the regulators off the job…
With respect to the second, it is not just Donald Trump. It is the whole Republican Party. And it is 17 Democratic Senators and 55 Democratic Representatives—although they can try to claim that they held their nose with respect to this “deregulation” provisions, and voted for the bill because it did other good things. But, as Fed vice chair, Lael Brainard and many others pointed out at the time: then was not the time to relax regulatory scrutiny on "medium-sized" banks, because a “medium-sized” bank usually has a geographic or an industrial sectoral focus which means that its failure is likely to have systemic, even if not macro economically significant effects.
With respect to the first—here is my big problem: If somebody is underwater, and if you do something that is costly to you and gets them out of trouble, and thus significantly benefits them, it is a “bailout”. If somebody is underwater, and if you do something that is beneficial to you and also gets them out of trouble, and thus significantly benefits them as well as benefiting you, it is not a “bailout”. You may argue that they should pay you for what you have done, and pay you handsomely, and thus redivide the surplus from your action. And you have a case, although not an immediately dispositive case. But if you say they got an undeserved “bailout” you simply look silly.
But how about when you are the government, and somebody is underwater, and you do something that is costless to you and gets them out of trouble, and thus significantly benefits them. Is that a “bailout”?
Dean Baker wants to say that every time somebody gets value in excess of what they have paid for, it is a “bailout”. He wants to imply that they are thereby scamming the system, and so getting good things that they do not “deserve”. It is a habit of thought that assumes as its groundwork that something is wrong when people get more than they “deserve”, that is more than they have “paid for”.
William Shakespeare critiqued this mode of thought, expressed by the character of the Duke in his judgment of Angelo in his play Measure for Measure:
DUKE: As he adjudged your brother—
Being criminal in double violation
Of sacred chastity and of promise-breach
Thereon dependent for your brother’s life—
The very mercy of the law cries out
Most audible, even from his proper tongue,
“An Angelo for Claudio, death for death.”
Haste still pays haste, and leisure answers leisure;
Like doth quit like, and measure still for measure.—
Then, Angelo, thy fault’s thus manifested,
Which, though thou wouldst deny, denies thee vantage.
We do condemn thee to the very block
Where Claudio stooped to death, and with like haste.—
Away with him…
In the end, of course, true mercy prevails over “the very mercy of the law”, and nobody’s head is chopped off. But the message is pretty clear—that “justice” and “fairness” can and do turn into dystopian traps, for what we all need sooner or later is true mercy.
So I, in my Benthamite mind, do not think it is terribly useful to object to steps that help some and hurt none as “bailouts” and thus as things that should not be done. We ought to cultivate habits of mind that start from the belief that anything Pareto-preferred to the present state of affairs is good thing to do, even though it is certainly not the best thing to do; and even thoug the best thing to do is almost surely not Pareto-preferred to the present state of affairs.
Dean might say that whie this position of mine might be fine as a general rule, it certainly should be suspended in this particular interest. He might say that the ecology of Silicon Valley Bank is overwhelmingly composed of those who have shown no true mercy to others. He might say, rather, that they exult, in their infantile libertarian techbro manner, in inequality that benefits them—that they say that those who have not benefited from the global value-chain and now the info-biotech economy deserve to be poor and thus to be subject to “evolution in action”.
If he were to say this, I would admit that he has a point.
I look at Peter Thiel, at Elon Musk with his “my pronouns are ‘Prosecute/Fauci’”, and at their fanboys. When I do so, I do think: These people are not members of my civilization. If we treat them as such we are asking for trouble. We should instead treat then as dangerous resources: things that we can exploit if it is possible to do so safely, but otherwise need to neutralize.
But, once again, I do not think that that is a good way to think: a very large circle of people doing all kinds of things will benefit from the costless support of the depositors of Silicon Valley Bank that the Biden administration undertook on Sunday.
Let's look at who is culpable in the downfall of SVB. It's easy to identify the first group of people, the management and board of directors who should have recognized that interest rates were not going to stay at zero and the purchase of any long term bonds without hedging was not a strategy for survival. The second group are the large depositors who started the bank run when they just could have sat tight. I do not pretend to know other than looking for yield why all of the sudden funds were pulled out of the bank. Did a group get together to conspire against the management (part of me thinks yes on this point).
Who is not getting 'bailed out'? Management, stockholders and likely bond holders as well. I hope the group that is unwinding the bank go after management for stock sales and bonuses when they knew the bank was on the ropes. Greed should always be punished, though often enough it isn't.
Depositors such as Roku and Etsy to cite two that I am aware of were victims here and the 'bailout' solves their problem of not losing cash reserves needed for payroll, investments, etc. This is as it should be. There should be NO expectation that depositors need to be cognizant of capital requirements, stress testing, SEC filings and financial statements as part of working with a bank. I post the 99% of all Americans' eyes would glaze over if you made this a common requirement of banking. This is the job of the regulators and Congress needs to insure that all banks regardless of size are under an appropriate regulatory regime.
There is another way to look at this. I have seen objections to the claim that the bailout "won't cost the taxpayer a penny" that run "yes, but all bank depositors will have to pay for this in the long run in the form of higher insurance premiums". That strikes me as right from a positive perspective ... and also from a normative one? If bank depositors shouldn't pay for deposit insurance, then who should?
Stepping back for perspective, in order to operate as an ongoing concern, it is necessary as a matter of arithmetic for a bank to earn more on its assets than it pays for its liabilities. According to orthodox financial theory, the only way to do this is to take more risk on the assets than is being sold in the liabilities. In principle, any bank must be subject to failure if its depositors withdraw their deposits in a coordinated way. The only way a bank has of controlling this risk is to break the possibility of coordination by diversification. This requires not only a large number of depositors but a large variation in their type. This runs counter to the specialization that, as you point out, makes mid-size regional banks viable.
I would like to know which end of this Baker is willing to sign on for. Would he prefer America to be banked by a small number of large national banks that charge a small deposit insurance fee? That is perfectly viable. Or would he prefer a larger number of more specialized but more vulnerable banks? That is also viable - with the support of more expensive insurance. But you can't have the benefits of both and the costs of neither.