The bailout of Silicon Valley Bank’s depositors means every dollar in U.S. bank accounts is insured by the federal government.
Customers in line outside the Silicon Valley Bank headquarters in Santa Clara, Calif., on March 13, 2023.
Photo: David Paul Morris/Getty Images
FOR EVERYONE WHO’S fought and bled for years to get Medicare for All in the United States, I’ve got some great news: The government just created it on Sunday!
Yes, this is Medicare for All Bank Deposits, rather than Medicare for All People. But if we think this through, we’ll see that both these things are great ideas and make sense for the same reasons — and there’s no reason that if we have one, we can’t have the other.
First of all, it’s important to understand what happened yesterday. Banks are intrinsically vulnerable to runs. They accept deposits from regular people and businesses, which is good, so we don’t have to keep sacks full of cash in our closet and pay armed men to guard them.
The problem is that we want to be able to come get our money out of the bank at any time. However, banks don’t keep sacks of all our cash in their vaults waiting for us. They loan deposits out and make other investments with them, leaving just a fraction of their deposits available to be withdrawn at any time. In the past, in the U.S., this meant that if rumors got going that a bank was insolvent, it didn’t actually matter whether or not the bank was healthy or not. Everyone would show up and try to get their money out first, creating a self-fulfilling prophecy: The very fact that people were scared a bank was insolvent could make it insolvent. (In fact, Silicon Valley Bank, whose failure led to Sunday’s swift government action, may have been accidentally destroyed by its own clients telling each other scary stories in a group chat.)
As a company called American Deposit Management cheerily informs us on its website, “The history of bank failures in the U.S. begins just over 40 years after the Declaration of Independence was signed.” From then until the Great Depression, America saw constant, catastrophic bank panics that destroyed individual fortunes and the economy overall.
Until the beginning of Franklin D. Roosevelt’s presidency, Wall Street had been able to fend off most democratic oversight. Partly, they did this by overtly arguing that the government would stifle crucial financial innovations and partly by covertly engaging in every form of corruption imaginable. But by 1933, there was enough popular anger at a recent cascade of bank runs and failures to overwhelm the industry’s power. The government was forced to do something about it, and part of the something was the creation of Federal Deposit Insurance Corporation.
One of the main things the FDIC has done ever since is insure deposits, mostly savings and checking accounts, up to a certain limit. Originally, the limit was the equivalent of about $50,000 today. The idea was that this would cover most Americans, and people with more money were big boys and girls able to take care of themselves. It was last raised in 2008 to $250,000. Crucially, the funding for the insurance comes from an assessment on the banks themselves.
But the insurance created a new problem: With deposits insured by the government, depositors would naturally be tempted to place their money with banks making risky investments that promised high returns, knowing that if the bank lost their money, the government would step in and make them whole. Roosevelt was concerned about this at the time, telling reporters off the record, “We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.” The only solution was what banks hated most: regulation, government oversight of what they were doing with their depositors’ money.
This was the basic background to what happened last week, when Silicon Valley Bank, or SVB, previously the 16th-largest bank in America and the favorite bank of the valley’s venture capitalists, experienced a bank run. This was alarming to many of its largest depositors, given that they apparently have the financial sophistication of a chicken. For instance, Roku revealed in a filing with the Securities and Exchange Commission that it was holding “approximately $487 million” at SVB. This suggests that $486,750,000 of Roku’s money was uninsured — and as the filing said, “the Company does not know to what extent the Company will be able to recover its cash on deposit at SVB.”
It is not, in fact, impossible for corporations to manage their money safely. Indeed, some do it every day. But apparently, it can be a challenge for chickens, which have brains the size of two shelled peanuts.
The mass financial incompetence by SVB’s depositors set off shrieking and caterwauling from the valley’s venture capitalists and angel investors that could be heard on Neptune:
YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW — THAT IS THE PROPER REACTION TO A BANK RUN & CONTAGION @POTUS & @SecYellen MUST GET ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO $10M OR THIS WILL SPIRAL INTO CHAOS— @jason (@Jason) March 12, 2023
On the one hand, this is hilarious. Silicon Valley’s libertarianism is apparently based on one clear, firm principle: It’s illegal for them and their friends to lose money.
But on the other hand, the financial system is so complex that literally no one on Earth can say for sure how it will behave under stress. Again, remember that banks can experience runs not because they’re insolvent, but because people come to believe they are or just that other people will believe that they are, perhaps because someone prominent is SCREAMING AT THEM IN ALL CAPS TO PANIC.
And society at large has a genuine interest in preventing bank runs. So the Treasury Department, the Federal Reserve, and the FDIC jointly announced on Sunday that the government would guarantee all deposits at SVB (and another big bank called Signature), no matter the size. In other words, it turns out Roku will be getting back all of its $487 million.
This might be the right call overall. But then again, it’s gratingly unfair. SVB’s big depositors are suddenly getting financial backing from the government — i.e., everyone else in America.
Most importantly, the entire financial system now understands that, if push comes to shove, the government will guarantee all deposits of any amount. The $250,000 limit turns out to be no limit at all.
The Treasury Department doesn’t want to admit this, of course, but they also can’t deny it. So when Washington Post reporter Jeff Stein asked about it yesterday, a Treasury official responded, “Well, you see, mmfrrffm rmmm blrf.”
But whatever cloud of words is emitted by the government, depositors will be incentivized to put their money in banks taking wild swings, knowing that if there’s an upside, they’ll pocket some of it, while if things go wrong, the government will step in.
Now that this Rubicon has been crossed, there’s only one rational path forward: If the government is going to guarantee all bank deposits, then much of the banking industry is parasitical and should be euthanized.
The logic here is largely the same as with health care, where logic likewise inexorably points to universal insurance funded and supervised by the government.
Individuals have a strong interest in both their health costs and their basic banking deposits being covered by insurance. The conservative perspective is that everyone should buy private insurance based on a constant, never-ending series of Monte Carlo simulations about what your individual future holds.
But this is impossible for human beings. The future is unknowable. You may live your entire life with few health care costs, or you might suddenly face $1 million in costs next year. Your bank might putter along indefinitely, or it might explode tomorrow.
Likewise, society has a powerful interest in everyone being covered by these kinds of insurance. In the case of SVB, we don’t want the depositors to go without insurance but then be able to blackmail everyone else into bailing them out because we’re scared their miscalculations will infect the rest of the system. Analogously, we don’t want people, especially powerful ones, to avoid health insurance and then demand we pay for their treatment if they get a dangerous infectious disease.
In both cases, universal insurance is also necessary for more subtle reasons. Everyone knows that both the U.S. health insurance system and the banking system are unbearably unjust. If they’re not dealt with in an equitable way, the anger Americans rightfully feel about both will continue to be harvested by reactionary politicians.
The clear answer for health care is Medicare for All. With banking, it may plausibly be something like Banking for All — i.e., the Federal Reserve giving every person and corporation an account that no bank run could ever take away. In both cases, the solution is simple and obvious, with the only obstacle being the extraordinary power of wealthy corporations that serve no purpose whatsoever.