by I’m talking about people like David Sacks, an entrepreneur and venture capitalist who is a member of the so-called PayPal Mafia, a group of founders and early employees that included bombastic anti-government billionaires Elon Musk and Peter Thiel. On TwitterSacks has railed against “riotous spending and money printing coming out of Washington” and the evils of what he calls “Bidenomics.”
But on Friday, Sacks frantically called for the big government to bail out Silicon Valley Bank. He tweeted: “Where is Powell? Where is Yelle? Stop this crisis NOW. Announce that all savers will be safe. Place SVB with a Top 4 bank. Open this before Monday, otherwise there will be contamination and the crisis will spread.”
And I’m talking about people like another Musk confidant, investor Jason Calacanis, who was tweeting along the same lines on Saturday, but in capital letters: “YOU MUST BE ABSOLUTELY DANGERS NOW – THAT’S THE RIGHT RESPONSE TO A BANK RUN & CONTAMINATION. @POTUS & @SecYellen MUST BE ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO $10M OR THIS WILL SPIRAL IN CHAOS.
Shorter version: I want my bailout from big government, and I want it now.
Federal Reserve Chair Jerome H. Powell and Treasury Secretary Janet L. Yellen acted decisively on Sunday, assuring the bankrupt bank’s depositors that they would have immediate access to all of their funds, not just the $250,000 guaranteed by the Federal Deposit Insurance Corporation.
It was the right move, and with a range of other measures it has so far been successful in preventing what could have been a catastrophic run on regional banks. But these steps could only be taken by a big government with huge resources and a willingness to use them for the common good. It turns out that “wasteful spending and printing money” isn’t always such a bad thing after all.
And neither is sensible, effective government regulation. In 2010, after the financial crisis and the Great Recession, President Barack Obama signed into law the Dodd-Frank Act, which established a comprehensive set of new rules for how banks could operate and how they would be supervised. In 2015, Greg Becker, SVB’s CEO – which he was until last Friday, when the bank collapsed and he was fired – joined lobbyists in asking Congress to weaken mandatory safeguards for “medium-sized” banks like his. Congress complied by passing a deregulation bill signed into law by President Donald Trump in 2018.
In a letter to Becker this week, Sen. Elizabeth Warren (D-Mass.) wrote that had the original Dodd-Frank rules been in place, the SVB crisis might not have happened. The bank “would have been required to maintain stricter liquidity and capital requirements and conduct regular stress tests that SVB would have needed to support its operations,” Warren wrote.
Becker had told Congress years earlier that SVB should be exempt from annual stress testing by federal regulators because the bank had hired “highly skilled risk professionals” to look for signs of problems on its balance sheet. But according to Warren, the SVB didn’t even have a chief risk officer for the eight months leading up to the bank’s collapse. Whatever risk analysis the bank performed, it was clearly inadequate.
Dodd-Frank mandated the strictest scrutiny, including annual stress testing, for banks with assets in excess of $50 billion. The 2018 deregulation law raised that threshold to $250 billion — meaning SVB, which had assets of about $200 billion at the collapse, was exempt.
In hindsight, from Becker’s point of view, what would have been better for SVB: shouldering the added expense and hassle of an annual risk assessment by federal investigators, who might have seen the problem with the bank’s long-term bonds before is it an acute crisis? Or run blindly towards the cliff until it was too late to stop?
That’s a rhetorical question. Congress should quickly reinstate the tighter Dodd-Frank oversight regime, which would give our financial system a better chance of recognizing the next hidden financial landmine before it explodes.
The moral of this story is that when individuals are threatened and ravaged by forces beyond their control, it is the duty of the government to step in and help. That’s what progressives have always said.
