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Silicon Valley Bank and Joe Biden’s $19 Trillion Monday

I'm sick and tired of all the complaining. Hey, I hope I make as good a President when I'm 80. Only 15 more years to go. I'm planning on beginning my career in politics around 2036.

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Silicon Valley Bank and Joe Biden’s $19 Trillion Monday

His latest bailout is a solution for him now and a problem for us later.

Holman W. Jenkins, Jr. hedcutBy Holman W. Jenkins, Jr.Follow

March 14, 2023 6:01 pm ET

Your bank deposits are safe from bank failures. They aren’t safe from inflation.

We will never know if there would have been a generalized run on the nation’s banks, at least the small and medium-size banks the public perceives as not too big to fail. But notice that the giant rout in bank stocks on Monday came after, not before, Washington stepped in with funding help and an implicit universal deposit guarantee in the wake of the federal seizure of California’s struggling Silicon Valley Bank and New York’s Signature Bank.

If Monday’s rout in bank stocks further spooked uninsured depositors, it was just one more way government was working against itself. Shareholders had reason for fright as the government suddenly and unilaterally rewrote the terms of their investments. In essence, out of the blue, the risks that large, sophisticated uninsured depositors had willingly accepted were shifted to bank shareholders and U.S. taxpayers so Joe Biden could have a pleasanter start to his week than otherwise would have been the case.

One bird has flown, and that’s moral hazard, or the idea that bailouts only encourage the behavior that makes bailouts necessary. Don’t buy the claim that bank shareholders and CEOs are being taught a lesson. By guaranteeing all deposits, government actually makes banks an even more attractive source of funding for swing-for-the-fences bets by politically adroit, high-rolling bank entrepreneurs and executives.

This problem regulation will then try to solve by dictating which bets banks can make with customer deposits. Somehow the necessary clairvoyance is never found and bank failures keep happening. In a weekend, dispensed with has been a guardrail that served the economy well. As the title of a 1986 paper by the Chicago Federal Reserve Bank succinctly put it: “Uninsured deposits [are] a source of market discipline.”

The ability to fail was also once a strength of the U.S. economy, and that includes banks testing out new business models (i.e., aside from trying to be too big to fail).

The government doesn’t actually eliminate failure; it transfers the risk to itself. With enough risk transference, its own solvency and ability to maintain the value of its currency are placed at risk. We aren’t there yet but hard to miss are whispers that the Fed should now back off its inflation fight to support the administration’s priority of avoiding any more politically noisome bank failures.

Even progressives have started to speak respectfully of Mancur Olson. He saw where all this was heading as advanced, wealthy societies become paralyzed by vested interests and bureaucracy.

The problem isn’t just environmental lawsuits, zoning restrictions, union rules and endless naysayers making it impossible to build anything, including new power lines and wind farms. It’s more than just the malign magic by which too big to fail in the last crisis became, in the latest crisis, runs on smaller banks that Mr. Biden had to fix by making small banks too big to fail as well.

Twenty years ago a presidential candidate could succeed while talking about the unsustainability of entitlements. Now the subject is verboten. Congress enacted a debt ceiling law so it would have to stop, think and debate before digging the hole any deeper. Now the hole is so deep, many in Congress don’t want to talk about it at all for fear of triggering a financial panic. Or take the disputed problem of climate change: The debate now is owned by two lies, exaggerating the problem and pretending green handouts will fix it.

The biggest problem of all is the size, inefficiency, indebtedness and unsustainability of government. Our political class has a silent strategy here too: Hope it blows up on somebody else’s watch. Already written into law are 25% cuts in Social Security benefits. Medicare can always balance its books by cutting reimbursements to doctors and hospitals and letting declining service and wait lists drive patients to seek care elsewhere. The solution for global warming, in the unlikely event the warming lives up to the hype, Congress might as well admit now will be a mad rush for cheap geoengineering to cut the amount of sunlight falling on the earth.

Which brings us to one imponderable concerning President Biden and our super-elderly leadership class.

A well-known behavioral reality of older people is their shortened time horizons. Look who’s making choices to engage in short-term, can-kicking exercises like forgiving student loans or guaranteeing bank deposits regardless of size—for that’s what last weekend’s sweeping $19 trillion implicit bank guarantee was, a short-term choice aimed at helping Mr. Biden’s Monday go better.

Mr. Biden may even be too young to be president. By now, perhaps only a 90- or 100-year-old can be sure of being safely out of the picture when all our can-kicking blows up in the country’s face.

Appeared in the March 15, 2023, print edition as 'Joe Biden’s $19 Trillion Monday'.

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