The news of the last few days about the collapse of the Silicon Valley bank was fairly familiar to anyone who remembers the days of the financial crisis. In 2008-2010, the Federal Deposit Insurance Corporation ate up regional banks every few weeks.
It was eerily amusing to see Silicon Valley’s self-proclaimed masters of capitalism and apostles of libertarianism clamoring for unconditional government aid after their own bank fell victim to a run on venture capitalists themselves — especially given how my colleague did it David Dayen writes that the SVB itself was a key lobbying force behind bank deregulation in 2018, which allowed it to engage in riskier deals. Less amusing were the all-caps tweets from prominent venture capitalists, who claimed that all of the regional banks would soon go bankrupt in a clear attempt to create a broader panic that would camouflage their desired bailout.
Sure enough, SVB depositors are at least made sane. The Treasury Department and the FDIC announced Sunday that they have drawn up a plan to resolve the bank’s problems “in a manner that fully protects all depositors.” As Philip Bump writes in The Washington Post, the Biden administration is desperate to avoid the global “bailout” over this action, but while shareholders and executives are being wiped out (which is good), it’s a dumb distraction.
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Basically, this is an exercise of government power to protect some big financial accounts – the kind of government power that underpins the entire economy. Silicon Valley’s robber barons asking Uncle Sam for help when a crisis hits is just a more blatant portrayal of what is always the case.
Just think for a moment about how businesses work. Your facilities are on land whose status as property is established by the state – “owning” land (or anything else) means you have a government document that allows you to call armed government agents or sue through government courts if anyone step on it. This land, of course, was largely stolen from Native Americans and Mexico by the US military, or stolen from France or Spain and then bought by the government.
Customers buy products with money created entirely by the government, whose value is maintained by a government agency with broad economic powers. Companies ship their products via infrastructure that is either built directly by the government (roads and bridges) or is extensively regulated by the government (airports). When the government fails to oversee this infrastructure, the result is routine disaster, as we saw recently with low-maintenance rail freight companies in eastern Palestine. Corporations themselves are legal entities created by the government which are granted, among other things, reduced legal liability. The integrity of the stock market is protected by sophisticated regulations.
Silicon Valley in particular was virtually created by the government. It was military orders, particularly for nuclear missiles, that sparked the semiconductor industry. The precursor to the Internet was developed by the Department of Defense. From this day to this day, government contracts are a major source of income for the technology sector.
Finally, there is a tacit expectation that the government will be there with a bailout should the economy run into trouble. We saw that at SVB and during the 2008 financial crisis, but also during the pandemic. Without the CARES Act and the other bailouts, the economy would almost certainly have plunged into a mass unemployment crisis worse than the Great Depression.
Silicon Valley in particular was virtually created by the government.
So when tech oligarchs rush to Congress with sacks of cash in hand to advocate for looser capital requirements rules and easier Federal Reserve oversight for their private bank, it in no way weakens government control of the banking system. In reality, this is a private fence of state power – allowing the capitalists to run wild and make stupid decisions with the implied guarantee that Uncle Sam will catch them if they run into trouble, which is what actually happened.
Well, as Steve Randy Waldman writes, it can be argued that the Biden administration did the right thing here on the narrow SVB issue. Although its management made foolish decisions by not hedging its interest rate risk, and its depositors foolishly (or corruptly) failed to obtain alternative insurance for their large deposits, imposing losses on depositors would likely “cause a run on the banks on hardest to discipline, those widely considered ‘too-big-to-fail’.”
In any event, the justification for any SVB rescue (whether by this method or the normal FDIC settlement process) is that it will have broader benefits to society. If its depositors were wiped out entirely, it could have terrible repercussions on the rest of society. In the pre-FDIC era, devastating bank panics, spreading from institution to institution, were common. Good thing that doesn’t happen anymore.
The problem is that this reasoning is rarely applied to other forms of state power today. When it comes to Biden’s student debt forgiveness plan, for example, some of the same venture capitalists begging for handouts howled at his alleged injustice. This type of attitude is so ingrained in American culture that policymakers are allergic to clear and direct government action. Instead, they’re trying to cover their tracks – instead of social democratic welfare programs, we’re getting benefits buried in the tax code so people can pretend they’re not recipients of government aid.
This also applied to the SVB rescue operation. The Treasury Department/FDIC statement insists that no taxpayer funds are at risk because any “losses made by the Deposit Insurance Fund to assist uninsured depositors will be recouped through a statutory special assessment of banks.” But as Waldman points out, this effectively means that “all deposits are effectively mutually insured by the industry as a whole.” But banks will pay for it by imposing additional costs on their customers — a de facto tax, except one that “deprives the public of any opportunity to shape the tax, to shape its impact, and to hold those accountable to who provoke the costs the tax must be refunded.”
Financial crises are events in which the governmental structures and policies that create and protect the wealth of the oligarchic class are made explicit and therefore unpopular. With that in mind, this is an excellent opportunity to take these people off the peg – Congressional Democrats should impose tough new financial rules and taxes on the wealthy – and for Americans as a whole to demand similar treatment from the state. If the mental factories of Silicon Valley deserve a bailout, then by rights the American people should also get Medicare for All and a comprehensive welfare state.
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