The Daily Signal - INTERVIEW | 'Bail Out Rich People': Economist Shares What to Know About Biden Administration's Silicon Valley Bank Action

Episode Date: March 14, 2023

The “rich people” with money in Silicon Valley Bank are the real winners in President Joe Biden's handling of the California-based bank’s collapse, economist Peter St Onge says.  After the fall of Silicon Valley Bank over the weekend, the Biden administration announced that the Federal Deposit Insurance Corp. will cover all depositors' money there. Normally, the Federal Deposit Insurance Corp. is responsible for covering deposits up to $250,000, ensuring that most small businesses and individuals are financially protected from a collapse. But in this case, the FDIC is going far beyond that $250,000 cap to cover every deposit in Silicon Valley Bank, regardless of the amount.  “If the administration gets away with this, then we are going to start moving into a world where bankers, where Wall Street, feels like they can take any risk they like, because this is all going to get bailed out because you've got these human shields,” St Onge, a research fellow in economics at The Heritage Foundation, says. (The Daily Signal is Heritage's multimedia news organization.)  Ultimately, the federal government’s actions to protect Silicon Valley depositors probably will result in higher inflation, St Onge says. “I think we're very likely to see a lot more inflation,” he says. St. Onge joins this episode of “The Daily Signal Podcast” to discuss how Silicon Valley Bank collapsed and what Biden’s actions mean for the nation's economy.  Enjoy the show! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

You know, the pattern in this administration is that every time they break something, you know, they get all the interns to go and find something somewhere that Donald Trump did. So in this case, they're grabbing its straws here. This is the Daily Signal podcast for Tuesday, March 14th. I'm Virginia Allen. And that was Heritage Foundation Research Fellow in Economics, Peter St. Ong. Silicon Valley Bank has collapsed. So what does that mean for the economy? and for your money sitting in the bank.

Peter St. Aung joins the show today to answer those questions and explain how this bank collapsed. Stay tuned for our conversation after this. We get it. With big media bias, it's hard to find accurate honest news. That's why we've put together the Morning Bell newsletter, a compilation of the top stories and conservative commentary. To subscribe, just head to DailySignal.com slash Morning bell subscription or visit dailysignal.com and click on the connect button at the top of the page. We are joined today by Heritage Foundation Research Fellow in Economics, Peter St.

Aung. Peter, thanks so much for your time today. We really appreciate you joining. Thanks for having me here. So we are watching a very interesting situation unfold right now with Silicon Valley Bank. And honestly, what we're seeing, it's bringing up memories from 2008 and the bank bailouts there, but we've just seen this major bank fold in Silicon Valley. Before we kind of get too far into the weeds of how this happened and all the details, go ahead and let us know just a little bit about this bank. Who are the investors, specifically the tech companies that had money in this bank? Yeah, Silicon Valley Bank is almost a country club style bank where you've got to be a big shot to be there. So, you know, you've got to be a significant startup in Silicon Valley.

there were a lot of startups that would, you know, give them a call to try to get their sort of prestige membership in the bank. And they would be told, well, you know, you guys are kind of small. Come back when you've got more money. And so pretty much anybody who was anybody in Silicon Valley was doing business with this bank. A lot of those companies were doing business, a lot of the individuals. So people like Mark Cuban had a big chunk of change in this bank. and the way that they would work is if you had a relationship with Silicon Valley Bank, they would sort of expect that you do all of your banking there.

So your home mortgage, your personal accounts, the whole thing. And what it appears happened here is that Silicon Valley Bank was playing very fast and loose with a number of things that you wouldn't expect from banks. So, for example, they were accepting yachts as collateral boats. and, you know, yachts lose value very quickly. They're not very liquid. It's not like selling your used car. So that's kind of abnormal.

It seems that they had equity relationships with a lot of their depositors where they were, you know, getting shares and companies in exchange for these relationships. It seems as if there was a fair amount of shenanigans going down. The thing is, those are more the spark that cause the crisis at this bank. And by the way, there's a large bank, okay? This is one of the top 20 banks in the country. So they're looking at about $200 billion of deposits. So despite all these shenanigans, that's not actually, ironically, what brought them down.

What brought them down, and this is the bigger concern, is something that's going to really impact every bank in America with something called duration risk. That means when you buy treasuries, right, government debt. So government debt basically underpins the entire banking system. Regulators love it. Of course, they want you to buy government bonds because they'd like somebody to soak all that money up. And the problem is that those bonds, they're different than cash, right? Cash, a dollar is always a dollar. But when it comes to government bonds, when the interest rate moves around, those bonds can either get more or less valuable. Now, what happened over the past year is that since the Federal Reserve caused all of this inflation, they basically stumped on the accelerator to try to convince voters to accept lockdowns.

They stomped on that accelerator, and that led to inflation, of course. At that point, the Fed panicked, and they said, my goodness, to stop the inflation, we're going to have to ramp rates up. There's a historic surge in interest rates. And that's essentially stomping on the brake pedal now. Okay. And so when you do that, then all of those banks that had all of these treasury bills as, you know, basically what's in their vaults, those treasury bills across the board have dropped by about 20 percent. Right.

So imagine if you're a bank and you got a bunch of money in the vault and all of a sudden 20 percent of it evaporated. You are going to have problems. Now, in the case of Silicon Valley Bank, I guess they were the cleverest guys in the room. so they were very aggressive about that duration risk. So it looks like they may have losses closer to 40% on a lot of that collateral. But the concern here is that this may be something that we are seeing across the entire banking system. The FDIC recently come out with estimates. They think that there are $620 billion of unrealized losses,

largely in the form of those bonds that have now changed in price, meaning that a lot of these banks, banks typically skirt along with a pretty low sort of buffer between the deposits, which for a bank is debt, and the assets they hold. So $620 billion, there may be a lot more banks that are in trouble because of this. So on Monday, we saw that Senator Elizabeth Warren, she wrote in a New York Times op-ed that these recent bank failures are the direct result of leaders in Washington weakening the financial rules. Do you agree with that? I mean, should we be looking to Washington to blame?

Or is this just these bank leaders making poor decisions about where they're putting investors money? Yeah, you know, the pattern in this administration is that every time they break something, you know, they get all the interns to go and find something somewhere that Donald Trump did. So in this case, they're grabbing its straws here. They're trying to get this little archaic thing in the Dodd-front. bank bill where you had the definition of systemic risk. They're playing games. What caused Silicon Valley Bank to collapse was at duration risk that according to the FDIC, that would be the Biden FDIC,

that is what's creating systemic risk here. That is what is, you know, all of the regulators in Washington right now are in a state of absolute panic because of those structural sort of deficiencies that the Fed and the Treasury together planted into our financial system. Okay. Now, I want to talk in just a few minutes a little bit more about what all of this means for the average American, for our bank accounts, for the future of the economy. But let's take a moment right now and just talk about the steps that the Biden administration is taking and what's happening.

So Biden is, he's not bailing out the bank, but the Treasury Department says that they are taking steps to protect all depositors. that had money sitting in Silicon Valley Bank. So they're saying, though, the Biden administration says, taxpayers are not going to be on the hook for this. So where exactly is the money coming from in order to pay these depositors who are looking at massive financial loss?

Right. So that's the trick. Every time that you have some sort of financial panic, they're going to sort of use, you know, depositors and businesses as kind of human shields. Just try to get some kind of bailout. That's exactly what's happening here. So there are two different types of depositors in a bank. There are the small depositors, okay, those who hold less than $250,000.

That's almost all the people in America, right? How many people have $250,000 cash sitting in the bank? All right, so all of those regular depositors, they are already covered under the FDIC. Okay, no further bailout, no nothing is needed. They are fine. The issue here was that because Silicon Valley Bank was this kind of country club bank, almost all of the money in that bank were large depositors, so over 250,000. Mark Cuban had 10 million, right? And so the issue here is that the Biden administration is proposing to bail out all of those big people, all of those rich people. And that would be a huge. And that would be a huge. change in how our financial system works, what it would functionally be doing is saying to banks, look, you guys can be as reckless as you want, you can, you know, play with equity stakes, you can play with yachts, you can do all these things because don't worry about it. We are going to cover everybody.

The traditional way that our FDIC has worked is that it has said, if bankers are riskless, then they're going to suffer and the large depositors are going to suffer, and the FDIC is going to take care of the widows and orphans, okay, the regular people who've got, you know, middle class, working class, all right, that was, that was the bargain on the FDIC. What they're trying to change that into is they want to drain the FDIC rated of billions of dollars so that they can bail out rich people, all right, so that's step one what they're proposing here. And then step two what they're proposing is that the Federal Reserve would then step in and lend, right, remember all those treasuries, right? All that money in the,

back in the vaults that has gone down 20% or 40%. What the Fed wants to do is step in and pretend that all that, all those bad investments are still worth what they bought them for, and they were to lend on that. The reason they want to do that is that they want to bail out all of these reckless banks, all these banks that played with duration risk that did not buy insurance, which is widely available, right? So they want to bail out everybody to come.

So who's going to pay for it? Step one is the FDIC is going to get raided. Now, the FDIC is your money. When you have money in the bank, the FDIC effectively taxes that every year. It's like an insurance program, but you, the bank depositor, funded it. This did not come out of Wall Street billionaire's pockets, the FDIC. That is your money. So that's the first step is that they're going to raid every other bank account in the United States,

and they're going to use that to bail out the rich people in Silicon Valley Bank. Right? Because remember all the regular people are already covered. That's not an issue. Nobody disagrees with that. Issue here is to bail out the rich people. That's step one. Now, the problem is that if the FDIC only has about $120 billion and the total deposits in the U.S. are north of $20 trillion, it's not much money. So what happens when the FDIC or if it runs out of money? Well, we know what happens because it happened in 2009. They went directly to Treasury and they said, hey guys, we're going to need to. some money. All right. Now, in that case, they gave them a $100 billion lending line, and it was temporarily back then, as in March of 2009, it was increased to $500 billion. So what's going to happen is step one, they're going to raid all of the bank accounts in America to pay off these country club boys. They take it out of FDIC by draining it out of all the other bank accounts.

Step two, they then go to Treasury, and they get Treasury to issue more debt. Now, remember, Treasury is already debt limited. In theory, they shouldn't be playing these games. They shouldn't be handing out $100 billion here, $500 billion there. And then step three is that by encouraging, by bailing out banks, by encouraging to take these risks, you then raise the odds that we're going to go back to the high inflation that the Fed's been fighting in the first place. So we go back to square one. And all of this at the end of the day then converts into,

you know, a bailout that's funded by taxpayers, by all bank depositors in America, including the small ones, and by inflation, so it comes out of your grocery bill. Okay, so Peter, I want to make sure I'm understanding this all correctly. So the FDIC, the Federal Deposit Insurance Corporation, they have a pool of money that set the standard is to give $250,000 to individuals to the small fish when situations like this occur, when banks go belly up. And once though you start going above that and lending out, they run the risk of running out of money. When that happens, then they go to the Treasury Department to say, hey, help us cover our costs. Well, the money that the Treasury Department has is our tax dollars, is

Americans' money. And so then if that starts getting pulled on, that affects the larger economy as a whole. So in all likelihood, where does this path take us? What are the short term and the long-term effects on the economy and on my money sitting in the bank? Right. Short-term, what we are certainly already seeing is that the Federal Reserve is already giving up the fight against inflation. They are scared. They have panicked. And so we are likely to go back down on interest rates that will take some of the stress off the wider economy. But at that point, they really don't have any way to fight inflation. They just use the standard inflation fighting playbook, which is choke the real economy. And now at this point, they have found that it's a lot easier

to break things than I think they expected. At this point, if they truly want to fight inflation, the only tool they have left is to reduce government spending. And that, of course, is the one thing they have not wanted to do. We at Heritage have been saying that since the beginning. The minute inflation took off, we said, don't squeeze the real economy. You've got to cut government spending. At this point, having run through the playbook, they've got nothing left. So I think we're, you know, we're very likely to see a lot more inflation. We're going to see these losses socialized. If the administration gets away with this, then we are going to start moving into a world where, you know, bankers, where Wall Street feels like they can take any risk they like

because this is all going to get bailed out because you've got these human shields. And, you know, something important remember is that in finance, risk always pays. Okay, risk return. If you are a bank, you will always make more money lending out riskier loans, buying riskier things. That is an iron rule of Wall Street. And so if we move into a world where the government is bailing out everybody, no matter how risky they were, we are inviting financial panic after financial panic. And how similar is this situation to the financial crisis of 2008?

It is very similar. What happened in 2008 is that a bunch of assets that were underpinning the banking system, so in other words, they were in the vault. called mortgage-backed securities, those were mispriced. Everybody was pretending that there were one value, but they were actually worth less. So the dynamics of it are very similar. I think what's different here is that treasuries are even larger than MBSs were, mortgage-backed securities. The scale of the problem is bigger.

The amount of debt that we have, both as a country, in the financial system and in the government, the levels of debt are far higher than they were. So essentially, the sort of risks that we had back then that we have this giant almost Ponzi balanced, you know, very delicately waiting to topple over, those risks are all higher today. And, you know, the interventions that they're proposing are actually more reckless than they were in 2008.

So I don't think that we're going to see a generalized bank panad here. The Federal Reserve has the ability. to print unlimited money. I don't think that this is the end of the Republic or the end of the financial system. What I do think there's a very big risk of is that Wall Street is going to get paid again. They are going to break it and they are going to get trillions of dollars. The administration is already proposing that. And what about the similarities specifically to tarp the troubled asset relief program that we saw in 2008? It's very similar to that is what the Fed is doing, right? So they are basically stepping in and saying, look, I know you guys made all these

bad bets, but we're going to pretend that it never happened. You know, we're going to lend you money on that. And you do that so that on paper, they all look like they're solvent, even though they're not really solvent. So it would be like if you went to, uh, to, to an individual and you said, okay, I know that your Bitcoin has lost half value, but, you know, you're my friend. So I'm just going to pretend that it's still worth the amount you paid for it. That would of course be corrupt, and that is not something that regular people, you know, we don't get to do that. Only the powerful apparently get to do that. And, you know, I think the sort of wider risk here is that we want to keep in mind that bank failures occur all the time. They shouldn't, but they do.

They happen year in, year out. And what I think the market is sort of looking at this, the financial markets, they're looking at and they're saying, well, wait a minute. We always, you know, work out, Bank failures, typically the FDIC takes them. The large depositors take a haircut. In other words, they lose some of their money. Typically about 15, 20 cents on the dollar. The small guys are protected. So FDIC knows how to do it.

They do it all the time. Again, it's sad that they do it all the time, but they do. And so it begs the question, what's different here? You know, why this time are we moving heaven and earth to bail out everybody under the sun when bank failures happen all the time? and I think the answer that Wall Street's going to walk away with is it's starting to look like everybody is too big to fail, right? So that crushes community banks. Community banks might not have that pipeline.

They do go down all the time, and when they fail, they fail alone. But in this case, what we're seeing is that if you have, you know, rich depositors, if you have rich friends, if you're part of the in crowd, we will change all of the rules in order to bail you out. President Joe Biden spoke at the White House on Monday, and he said that the American people, should feel confident in our banking system. Should we feel confident or is this just the first domino to fall in a possible coming financial crisis? In the banking system itself, I think that people can be confident. For better or for worse, they can bail out an absolutely unlimited number of financial institutions. That converts into inflation, potentially catastrophic inflation, very, very high inflation. We might see, you know, double digit or higher inflation.

So it is coming out of your pocket. However, in terms of the actual financial system collapsing, the only way that could happen is if they are absolutely incompetent in Washington. They know how to deal with bank failures. They cause them all the time. And they know how to work them out without crushing the system. Is there any financial guidance that you would give to the American people who are a little bit worried about their money right now? Right. If your bank account is less than $250,000, you're going to be fine.

Those will be bailed out. They will be covered. If your securities account, like your Schwab account or something, those are also covered. They are going to cover all of those things. I don't think they have to take any assets out. It's a little trick here if you have a large or a business, right, where you have a business account at the bank. Those, you know, historically were covered up to $250,000, which should be happening in this situation is that the FDIC should essentially take over the bank.

From your perspective, it would run normally, but you would eventually get a haircut on it. If you were a small business owner, that is something to be aware of. But for regular people, they're going to play shenanigans behind the scenes, but I believe your money will still be there. Peter, we really appreciate your time today. for all of our listeners, if you want to read Peter's reporting on this, you can find him at the Heritage Foundation website. You can also follow him on Twitter at P-R-O-F-S-T-O-N-G-E. And Peter, we just really appreciate your insight today.

Thank you. And that's going to do it for today's episode. Thanks so much for joining us here on the Daily Signal podcast. Again, if you want to learn more about this situation, what's happening with this Silicon Valley Bank, be sure to follow Peter St. Ong on his Twitter, and also you can follow his research and writing at heritage.org. Hey, if you haven't had a chance before, be sure to check out our evening show right here in this podcast feed where we bring you the top news of the day so you can stay on top of things happening, like the collapse of the Silicon Valley Bank. Also make sure

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