Privatized Profits and Socialized Losses?

By Robert Bernstein   |   April 4, 2023

The recent failures, negotiated bailouts, and buyouts of Silicon Valley Bank, Signature Bank, First Republic Bank, and Credit Suisse are a reminder of how life is different for different classes of people.

“Socialism for the rich and capitalism for the poor” is how Michael Harrington described it in his 1962 book, The Other America.

Detroit was the fourth largest city in America in the 1950s. Manufacturing moved out of the U.S. and people were replaced by robots. A third of the city was abandoned and over half the population left. There were no bailouts for these people. In fact, it actually cost the city money to tear down the abandoned houses. It would have been cheaper to pay the people to stay.

After the stock market crash of 1929, President Roosevelt created the Federal Deposit Insurance Corporation (FDIC) to prevent bank runs and panics during times of economic crisis. Each bank would pay insurance premiums to protect depositors’ accounts. To make this work, banks had to follow regulations regarding how much cash they had on hand to cover withdrawals. And they were restricted to certain types of investments.

As the memory of 1929 and the Depression faded, Republicans (and some Democrats) removed some of these regulations. What could possibly go wrong when you get to take risks as a bank to maximize profits, but you get bailed out if you fail?

We found out in the Global Financial Crisis of 2008. Part of that was the mortgage meltdown. Banks were making loans to people who could not possibly pay them off. They would bundle those loans into packages that would get sold off to other financial institutions. No problem, since there would always be a bailout to save whoever was holding the bad loans when it all came crashing down.

After that 2008 crisis, the Dodd-Frank Act was supposed to restore some of the regulation. But ten years later, banks like Silicon Valley Bank lobbied successfully to be excluded from those rules. Trump signed that deregulation.

FDIC was supposed to be insurance. But over 93 percent of Silicon Valley Bank assets were not insured. The government promised to cover those assets, too, in the name of stabilizing the economy.

Twenty percent of Americans either have no bank account or are otherwise forced to use “alternative financial services.” The latter includes “payday loans” and other “services” that charge outrageous interest rates and fees.

Talk show host Thom Hartmann has advocated for years that the U.S. Postal Service can and should provide basic banking services. It would earn a small profit for the USPS, and it would allow the poorest Americans access to true banking. Oh, but that would be called socialism.

It is worth looking at some details of the Silicon Valley Bank failure. They claimed they were investing in a “conservative” manner with various bonds. Well, they are “conservative” during a time of low interest rates. Not so much when interest rates rise and they lose value rapidly.

As recently as April 2021, Richard Clarida, a vice chairman of the Federal Reserve, said that low interest rates were expected to remain for years to come.

My primary degrees are in physics, and I have never taken an economics class. But I correctly predicted the failure of the stock market bubble of the late 1990s and the mortgage meltdown. It is not rocket science to see when pieces of paper are valued far above what they are supposed to stand for. Any reasonable person could also see that interest rates would eventually rise to historic norms.

Even a casual investor knows to diversify their holdings so that they can weather changing financial conditions. Yet Silicon Valley Bank had essentially no diversification at all. Meanwhile, their CEO Greg Becker was paid over $10 million a year. Much of it was tied to the high “return on investment” before everything fell apart. Yes, the CEO was incentivized to maximize risk in order to maximize his income. Literally, throwing darts to choose investments would have produced a better outcome, and saved $10 million a year.

I will point out another regulation problem: “Regulatory capture.” The fact that there is a revolving door between regulators and those who are regulated. Bernie Sanders pointed out that CEO Greg Becker was on the Federal Reserve Board.

I might be OK with bailouts in a well-regulated industry that fell on hard times. But, only if the little people get them, too.  


You might also be interested in...