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Question: What is a socialist?
Answer: A libertarian tech brother who had money at Silicon Valley Bank.
There is nothing funny about the second largest bank failure in the country’s history, which has rocked financial markets at a time when the economy is already unsettled. It’s ironic, however, to hear tech luminaries, after years of complaining that “big governments” are the problem, suddenly clamor for massive federal intervention and largesse.
I’m talking about the likes of David Sacks, an entrepreneur and venture capitalist who is a member of the so-called PayPal mafia, a group of founders and early collaborators that includes bombastic anti-government billionaires Elon Musk and Peter Thiel. On twitterSacks has railed against “Wasteful spending and money printing from Washington” and the evils of what he calls “bidenomics.”
But on Friday, Sacks desperately called for a big government to bail out the Silicon Valley bank. He tweeted: “Where’s Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors are safe. Place SVB at a top 4 bank. Do this before Monday is open or contagion will occur and the crisis will spread.”
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And I’m talking about people like another Musk confidant, investor Jason Calacanis, who was tweet in the same direction on Saturday, but in capital letters: “SHOULD YOU BE ABSOLUTELY SCARED NOW – THIS IS THE RIGHT RESPONSE TO BANKRUN & CONTAGION. @POTUS & @SecYellen MUST GO ON TV TOMORROW AND ALL DEPOSITS UP TO 10M
Shorter version: I want my salvation from the big government, and I want it now.
Federal Reserve Chair Jerome H. Powell and Treasury Secretary Janet L. Yellen acted decisively on Sunday, assuring depositors of the failed bank that they would have immediate access to all of their funds, not just Federal Deposit Insurance funds Corporation guaranteed $250,000.
It was the right move, and a number of other measures have so far been successful in preventing what could have been a disastrous run on regional banks. But these steps could only have been taken by a great government with vast resources and a willingness to use them for the common good. It turns out that “wasteful spending and money printing” aren’t always so bad after all.
Neither does prudent, effective government regulation. In 2010, following 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 operate and are audited. In 2015, Greg Becker, SVB’s chief executive – who he was until last Friday, when the bank collapsed and he was fired – joined lobbyists urging Congress to weaken mandatory protections 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 the SVB crisis might not have happened if the original Dodd-Frank rules had still been in effect. The bank “would have been required to maintain stricter liquidity and capital requirements and conduct regular stress tests that would have required SVB to shore up its business,” Warren wrote.
Becker had told Congress years ago that SVB should be exempt from federal regulators’ annual stress tests because the bank hired “highly skilled risk professionals” to spot signs of balance sheet problems. But eight months before the bank collapsed, Warren says SVB didn’t even have a chief risk officer. Whatever type of risk analysis the bank carried out, it was clearly insufficient.
Dodd-Frank has ordered banks with more than $50 billion in assets to undergo the most rigorous scrutiny, including annual stress tests. The 2018 Deregulation Act raised that threshold to $250 billion – meaning SVB, which had around $200 billion in assets when it collapsed, was exempt.
In retrospect, what would have been better for the SVB from Becker’s point of view: to bear the additional work and expense of an annual risk assessment by federal auditors, who may have seen the problem with the bank’s long-term bond portfolios before it became an acute crisis? Or race blindly up the cliff until it was too late to stop?
That’s a rhetorical question. Congress should quickly restore the tighter Dodd-Frank surveillance regime, which would give our financial system a better chance of spotting the next hidden financial land mine before it explodes.
The moral of this story is that when individuals are threatened and beaten by forces beyond their control, it is the government’s duty to step in and assist. That’s what progressives always say.