'Moral hazard': economists sound alarm over Biden's bank bailout

 March 15, 2023

Economists are sounding the alarm over President Biden's bailout of Silicon Valley Bank, warning his dramatic actions could hasten a federal takeover of the banking system.

Biden spoke in broad terms in a speech Monday, pledging to do "whatever is needed" to restore consumer confidence after two of the biggest bank collapses in U.S. history at Silicon Valley Bank and New York-based Signature Bank.

Most of the depositors Biden is looking to rescue were uninsured, meaning they had balances larger than the Federal Deposit Insurance Corporation's (FDIC) guarantee of $250,000.

The Biden administration created an exception to rescue the banks by marking them as "systemic risks."

Biden's big takeover

The Federal Reserve has also set up a $25 billion emergency lending program to provide liquidity to troubled banks.

While even Biden's critics concede that it's necessary to stop panic from spreading, they say his economic response -- which Biden has declined to call a "bailout" -- doubles down on the "too big to fail" philosophy that inspired the rescue of big banks at taxpayer expense following the 2008 financial crisis.

Biden's extraordinary measures, skeptics say, will encourage "moral hazard" by assuring risky depositors that the government will always have their back.

“With the Biden bank bailout, and it is a bailout, banking is becoming a government-backed business — if that’s what you call a business,” economist Steve H. Hanke, who served in the Reagan administration, said.

“And if that’s not bad enough, the Biden administration has just injected another massive infusion of moral hazard into the banking system, as have past Republican and Democratic administrators. Who picks up the moral hazard tab? Taxpayers do."

The "not a bailout" bailout

Biden has said that he isn't bailing out investors, only depositors, and that taxpayers won't bear any of the burden of his "not a bailout" bailout.

"No losses will be borne by the taxpayers. Instead, the money will come from the fees the banks pay into the Deposit Insurance Fund,” he said.

But skeptics say that costs will be passed along to taxpayers in the form of higher fees levied on banks that pay into the Deposit Insurance Fund (DIF).

The DIF only has about $128 billion in it, which is only enough to cover roughly half the estimated $240 billion in uninsured deposits at SVB and Signature Bank.

“At some point in time you have to put depositors on notice,” Senator Ron Johnson (Wi.) said. “These people are sloppy because they just expect a bailout."

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