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 includes bombastic anti-government billionaires Elon Musk and Peter Thiel. On TwitterSacks has railed against “proflit spending and money printing coming out of Washington” and the evils of what he calls “Bidenomics.”
But on Friday, Sacks frantically called for big government to come to Silicon Valley Bank’s rescue. He tweeted: “Where is Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do this before open Monday or there will be contagion and the crisis will spread. “
And I’m talking about people like another Musk confidant, investor Jason Calacanis, who was tweets in the same direction on Saturday, but in all caps: “YOU SHOULD BE COMPLETELY SHOCKED RIGHT NOW – THAT’S THE CORRECT REACTION TO A BANK RUN & INFECTION. @POTUS & @SecYellen MUST GO ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO 10 MILLION OR THIS WILL SPIRAL INTO CHAOS.”
Shorter version: I want my big government bailout and I want it now.
Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Janet L. Yellen acted decisively on Sunday, assuring the failed bank’s depositors that they would have immediate access to all their funds, not just the $250,000 guaranteed by the Federal Deposit Insurance Corporation.
It was the right move, and with a number of other measures, it has been successful – so far – in preventing what could have been a disastrous run by regional banks. But these steps could only have been taken by a large government with enormous resources and the will to use them for the common good. It turns out that “dividends and money printing” aren’t always such bad things after all.
And neither is prudent, effective government regulation. In 2010, after the financial crisis and the Great Recession, President Barack Obama signed the Dodd-Frank Act, which established a comprehensive set of new rules for how banks could operate and how they would be investigated. In 2015, Greg Becker, SVB’s chief executive — who he was until Friday, when the bank collapsed and he was fired — joined lobbyists asking Congress to weaken mandated safeguards for “mid-sized” banks like his. Congress complied by passing a deregulation bill signed by President Donald Trump in 2018.
In a letter to Becker this week, Sen. Elizabeth Warren (D-Mass.) wrote that if the original Dodd-Frank rules had still been in place, the SVB crisis might not have happened. The bank “would have been required to maintain stronger liquidity and capital requirements and conduct regular stress tests, which would have required SVB to strengthen its business,” Warren wrote.
Becker had told Congress years earlier that SVB should be exempt from having to undergo annual stress tests by federal regulators because the bank had hired “highly qualified risk professionals” to detect any signs of problems on the balance sheet. But for eight months prior to the bank’s collapse, SVB did not even have a chief risk officer, according to Warren. Regardless of the type of risk analysis the bank may have carried out, it was obviously insufficient.
Dodd-Frank imposed the strictest controls, including annual stress tests, on banks with more than $50 billion in assets. The 2018 deregulation law raised that threshold to $250 billion — meaning SVB, which had assets of about $200 billion at the time of the collapse, was exempt.
In hindsight, from Becker’s point of view, which would have been better for SVB: To bear the added cost and hassle of an annual risk exercise by federal examiners who might have seen the problem with the bank’s long-term bond holdings before it became an acute crisis? Or hurtling blindly toward the cliff until it was too late to stop?
It’s a rhetorical question. Congress should quickly restore the more stringent Dodd-Frank supervisory 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 affected by forces beyond their control, it is the government’s duty to step in and help. Which is what progressives have been saying all along.