Allysia Finley
WSJ, Mar. 19, 2023
“Why shouldn’t Silicon Valley have to bear some pain as the central bank corrects the ultra-loose monetary policies that enriched its technocratic class?”
Imagine a bank in Houston that caters to the oil-and-gas industry. It makes low-cost loans with credit-friendly terms to unprofitable shale frackers on the condition that they hold their deposits exclusively at the bank, where they earn an above-market return. It also manages the wealth of oil and gas executives.
The bank uses its enormous deposits to fund more risky loans to frackers and acquire Treasury bonds and government mortgage-backed securities. The latter obscure the credit risk on its balance sheet. As frackers burn cash, the bank struggles to redeem deposits and has to sell assets at a loss.
As news of the losses spreads, there is a run on deposits. The Federal Deposit Insurance Corp., with the approval of a Republican president, takes over the bank and guarantees all its uninsured deposits, including those of oil-and-gas executives. Wouldn’t Democrats scream “bailout”?
This essentially describes what has happened at Silicon Valley Bank over the past week. Democrats insist the FDIC’s guarantee of uninsured deposits decidedly isn’t a bailout. The truth is that the Biden administration not only bailed out Silicon Valley investors and companies. It also rescued California, whose budget depends on them, and the state’s liberal political class. It did the same for New York by back-stopping uninsured deposits at Signature Bank.
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