Bank failures conjure up a dreaded B-word: bailout
Nathaniel Meyerson, CNN
“Salvation” became a dirty word in American politics after the 2008 global financial crisis, drawing backlash from people who believed that the risks and potential consequences of capitalism did not belong to large corporations or the wealthy.
Now, the recent collapse of two major banks, Silicon Valley Bank and Signature Bank, as well as federal intervention to support uninsured bank savers, have returned the B-word to the center of the national political and economic debate.
While the debate over whether this intervention was a bailout can be chalked up to semantics, it raises key questions about the structure of the financial system and who the government protects in times of crisis and who it leaves out.
“Part of what’s going on has to do with the belief that the system is against the little guy,” said Gerald Epstein, a progressive economist at the University of Massachusetts Amherst and co-director of the University’s Political Economy Research Institute. “That’s why there’s so much controversy. People think, “Here we go again.”
According to Epstein, salvation is a popular term, not a technical one, and there is no universal definition for its meaning. He added that financial assistance is generally considered to be compensation for damages when reckless, irresponsible or heinous behavior has occurred.
However, the term still has social and political implications. This was partly the result of the 2008 crisis, when the federal government poured in taxpayer money to bail out banks that were engaging in risky lending practices. Most executives who watched the crash experienced little to no consequences.
“Salvation is a dirty word. People think there is something nefarious or unfair about it,” Epstein said. “When homeowners in California die in a wildfire and the government comes to their rescue, no one calls it a bailout.”
Experts say this latest response was a lifesaver, but there are major differences from 2008.
Rescue Policy
The bailout policy returned in response to the collapse of Silicon Valley and Signature.
Over the weekend, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation moved to pay off uninsured depositors – removing the $250,000 limit on insured deposits – Silicon Valley and Signature in full through the tax-funded FDIC insurance fund. on bank deposits.
The agencies have taken these steps to try to prevent bank runs and help businesses that have deposited amounts in Silicon Valley and Signature continue to receive wages and fund their operations. They said that the shareholders of the two banks and some holders of unsecured debts would not be protected and top management would be fired.
The Fed also said it would create a new facility, the Term Bank Facility, to provide up to a year of loans to eligible banks secured by US Treasuries and other assets at their original cost. The move, essentially lending to banks at a discount, was designed to prevent any financial contagion from spreading to other banks, unlike in 2008.
President Joe Biden and administration officials have tried to distinguish between the measures they are taking to protect savers and stabilize the financial system from a response similar to that of 2008.
“Taxpayers will not suffer any losses. Let me reiterate: taxpayers will not suffer any losses,” Biden said in his speech on Monday. “The management of these banks will be fired. If the bank is taken over by the FDIC, the people running the bank should no longer work there.”
But Republicans were quick to link Biden to a previous taxpayer-funded bailout.
“Joe Biden pretends this is not a bailout. That’s the way it is,” said Nikki Haley, former governor of South Carolina and Republican presidential nominee in 2024.
Epstein of UMass Amherst does not believe small savers and firms that relied on banks for basic services were getting bailed out. But it is not yet clear whether these were venture capital funds or other contributors who engaged in reckless practices. According to him, if these depositors recover, it will mean salvation.
“You don’t want to bail people out for bad behavior and create moral hazard,” he said.
He also said that the bailout debate has distracted from more important questions: what caused it and how we can prevent it from happening again.
Amiyatosh Purnanandam, a professor of finance at the University of Michigan who studies bank bailouts, sees the move as a bailout because the government – the lender of last resort – stepped in and gave savers what they couldn’t get in the market.
He warned that taxpayers could also suffer down the road in fees or other costs as banks add to the FDIC’s deposit insurance fund.
To restore public confidence in accountability, regulators and legislators could try to impose additional costs on executives who may have been involved in the reckless behavior that sparked this latest crisis, Purnanandam said: “Are we returning bonuses? Will they be able to work in the financial sector in the future?”
– Matt Egan of CNN and Phil Mattingly contributed to this article.
The-CNN-Wire
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