Bailouts are back, and capitalism is crumbling before our eyes
Jeremy Warner
6 min read
Silicon Valley Bank
Here we go again. The circumstances may be different, but the underlying causes are much the same. A well-functioning banking system is an essential backdrop to any successful market economy, but banks themselves are intrinsically dangerous, interconnected beasts that once off the leash almost invariably end up creating financial havoc.
Most famously, it was an unsafe banking system that lay behind the misery of the Great Depression in 1930s America and Europe. And but for massive taxpayer interventions, it might have happened again during the banking crisis of 2008-10. As it was, the fallout was quite bad enough.
It therefore barely seems credible that, little more than a decade after the financial system last went belly up, we should once again be peering over the cliff edge into the abyss of another cascading outbreak of destabilising insolvency and financial market contagion.
Yet here we are, and though the scenery is not the same – and we can be fairly certain that this is not yet another Lehman Brothers moment – the underlying issues are eerily familiar.
Up went the cry after the catastrophe of the last banking crisis; never again should the taxpayer be on the hook for the excesses of casino-style finance.
A veritable straitjacket of new rules and regulations was applied on both sides of the Atlantic to prevent the mishaps of bankers from ever again leaking onto the public balance sheet.
Jeremy Hunt, the UK Chancellor, was at pains to stress when announcing that HSBC was taking on responsibility for SVB's UK arm that there was no taxpayer involvement. Janet Yellen, the US Treasury Secretary, was similarly keen to emphasise in underwriting SVB deposits that any loss to the taxpayer would be recouped via a levy on other banks. There will be no government bailout, she insisted.
Joe Biden was equally unequivocal. “Investors in the banks will not be protected,” he said. “They knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”
In the sense that shareholders and bondholders in SVB will have lost all their money, the US President is right. But in every other respect, this is just a pretence. What else is the Federal government's promise to pay all depositors in the two failed banks all their money, regardless of whether it exceeds the federal insurance limit of $250,000 (£205,000) per account, other than a massive additional insurance policy kicking into action which, if bought in the market, would cost hundreds of billions of dollars but is being provided gratis by the US government?
The message is clear. All depositors throughout the US banking system are now underwritten by the state. This may have been the right thing to do to prevent a domino effect of bank runs, but let's not pretend it is anything other than a bailout.
Similarly with the announcement by the US Federal Reserve that it will provide as much funding as banks need to meet deposit withdrawals, with lodged collateral valued at par, not the seriously eroded value much of it now commands in the markets. Again, this is a massive effective subsidy by the state.
Ken Griffin, founder of the hedge fund Citadel, did not mince his words. “The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” he told the Financial Times. “There’s been a loss of financial discipline with the government bailing out depositors in full,” he went on. Quite so.
It's always the same old story. Whatever the safeguards, however big the required capital and liquidity buffers, when push comes to shove there is only one choice that beleaguered governments can make when faced by a full-on financial crisis.
You can either underwrite the system, the finance minister will be told by his advisers as the maelstrom builds, or you can face chaos in the markets the following morning and certain defeat come the next election for the economic devastation so caused.
For the bankers at the centre of it all, it's a two-way bet. The profits and gains of finance are privatised, but the losses are socialised – heads I win, tails you lose.
For economic purists, the effect is shamefully unfair. The system seems inherently stacked in favour of the already wealthy; the reckless are protected at the expense of the largely ignorant toiling masses.
Such interventions are always justified in the name of preventing systemic risk; the economic damage resulting from mass liquidation would be far in excess of the costs of propping things up, it is claimed.
No doubt this is true in the short run, but you cannot expect finance to learn its lesson and stop going for broke unless it suffers some kind of punishment. As it is, a gun is repeatedly held to the head. Bail us out, the financial elites say, or the taxpayer really gets it.
An arrogant lot these self-proclaimed disruptors tended to be, too, with their right-on libertarian views and their destructive attitude to the stuffy old economic and business establishment. Even traditional money itself wasn't sacred. This too was to be blown away by the virtual world of crypto, now shown to have been little more than a ponzi scheme.
Strange how quickly they all ran for the relative safety of fiat money and the protective insurance of big government the moment their riches seemed to be at risk.
Nobody deserves to have their money mismanaged, however pretentious they might be, but unless institutions that take bad bets are allowed to fail, nobody ever learns the lessons, and the same old misallocation of capital persists.
It sticks in the craw to see the taxpayer bailing out some of the wealthiest people in the land, but that's what is effectively happening here, even if thousands of largely innocent positions in tech companies which may or may not turn out to be viable were also under threat.
The idea of creative destruction in capitalism is frequently bandied around, particularly among techies, but rarely is it ever allowed to work its magic in today's world, where seemingly everyone is looking for a handout, from the biggest auto companies to the tiny little community coffee bar at the end of the street, and from the wealthiest financier to the poorest welfare claimant.
Small wonder that Western economies are becalmed in a low productivity funk. When you de-risk the entire economy, insulating investors from loss, that's inevitably where you are going to end up.
