The Biden administration has insisted that FDIC regulators’ actions to protect customers amid the historic Silicon Valley bank implosion will be “free” to taxpayers, but an economist tells Fox Business that’s not the case.
“The mere idea of bailouting SVB, Signature Bank and others without charging taxpayers doesn’t even pass the smell test,” said EJ Antoni, research associate in regional economics at the Heritage Foundation’s Center for Data Analysis.
“The government spends tax money. By definition, that costs the taxpayer,” Antoni said.
After the collapse of the SVB, the second largest in US history, the Treasury Department, the Federal Reserve and the FDIC released a joint statement that “no losses related to the dissolution of Silicon Valley Bank will be borne by the taxpayer.”
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Biden reiterated that statement a day later on Twitter, saying, “The actions we’ve taken over the past few days to protect Silicon Valley and signature bank depositors give Americans confidence that our system is secure.” and that “people’s deposits will be there when they need them – at no cost to the taxpayer.”
Antoni told Fox Business that taxpayers are not on the hook for the mitigation effort Biden is impacting Tuesday recommended is not a “bailout” is wrong when you look at “the mechanism of how this bailout works”.
“The FDIC doesn’t have enough money to cover these losses,” Antoni explained. “If that were the case, the Federal Reserve would not have had to set up an emergency loan fund on a Sunday night to stop the operation. The Fed can just create the money to cover the losses at these failed banks, which will lead to inflation, or the FDIC can do what they did in the last financial crisis and just get the money from the Treasury which places a direct burden on taxpayers. Either the American people are on the hook with the hidden inflation tax or with explicit taxes sent to the Treasury Department. “
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After the SVB collapsed, federal regulators developed a plan to freeze $175 billion in deposits. Federal government officials have waived the FDIC’s $250,000 threshold and plan to release cash from insurance funds deposited by banks.
According to the FDIC, they are officers in the auction process Silicon Valley Bank assets worth nearly $200 billion. Deposit refunds that don’t come from the auction or insurance fund are backed by special assessments, a tax imposed on larger US banks
Antoni said the FDIC will essentially “recoup its losses by increasing the fees it charges all banks,” still shifting the pain to taxpayers, to whom those insurance and banking fees are passed, meaning that the “American people are stuck with the tab again.”
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“Furthermore, the banks that have lent wisely and allocated their capital wisely will be the ones hitting these higher fees, while the reckless institutions and wealthy depositors are the ones who will be bailed out,” Antoni said. “This is a precautionary measure and an incentive for bankruptcy.”
The situation taxpayers are in is due to three “mistakes” by the federal government, according to Antoni.
First, Antoni explained that federal reserve “shouldn’t have manipulated interest rates to artificially low levels,” which he says should have prevented this whole situation.
“After that mistake, the Fed should have raised rates quickly to normal levels, but they didn’t and instead kept rates at zero for far too long,” Antoni said.
The third and most recent mistake, Antoni said, was to “bail out” wealth investors who chose not to take out private insurance for their large deposits, “thereby setting a massive moral hazard and an incredibly dangerous precedent for the future.”
“Once again, the very people who are supposed to protect our banking system created an incentive for bankruptcy and a penalty for being cautious,” Antoni said. “The right answer to bad financial decisions is always liquidation.”
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Fox Business reached out to the White House, which pointed to the previous joint statement, which said: “Shareholders and certain holders of unsecured debt will not be protected. The senior management was also removed. Any losses to the Deposit Insurance Fund, which supports uninsured depositors, will be recovered through a statutory special filing with banks.”
The White House added that the DIF has two sources of funding – insurance premiums for institutions and interest income from money invested in US Treasury bonds.
“In short, the DIF is used to support uninsured depositors and the DIF is funded through fees from banks. In addition, losses of the DIF are offset by bank fees. The money comes exclusively from bank fees.”
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Antoni told Fox Business that management “acts as if DIF has a purely liquid balance sheet, but that is not the case” and its holdings are actually medium- and long-term government bonds, as well as Treasury bills and bonds, which it is “exactly the same debt instrument that SVB had.”
“Basically this happened because these treasuries were losing money as SVB had to liquidate them to raise money, they had to sell them, they sold them at a loss and that contributed to the collapse of the bank easier,” said Antoni. “The FDIC is literally in the exact same position. Now the FDIC must sell some of its holdings at a loss to raise the money to pay out those depositors. So what we did was just basically socialize the losses.”
Antoni said fees need to rise more than expected to cover not only payments to uninsured depositors but also market-to-market losses from sales of depreciated assets.
“The idea of banks paying all these fees is (ridiculous),” Antoni said, adding that the White House behaves “as if banks were an unlimited source of capital.
“These fees are fully passed on to the customers, which are the American people. What the government has done here is that these banks’ risky profit-taking remains privatized while the losses are effectively socialized.”
Antoni told Fox Business that the Biden administration is essentially “pressuring” us and playing “puns” to avoid being associated with the mistakes made during the 2008 bank bailout.
“It’s difficult to exaggerate the moral hazard that the government has just created,” Antoni said. “And make no mistake, the taxpayer will pay for these future consequences as well. The sins of the past always catch up with you, be they moral or financial.”
Fox News Digital’s Nikolas Lanum contributed to this report
Source : finance.yahoo.com