Biden’s claim that Silicon Valley Bank bailout wouldn’t cost taxpayers contradicts fiscal reality: economist

Biden administration insisted that the actions of FDIC regulators taken to protect clients during the historic collapse of Silicon Valley Bank would be “free” for taxpayers, but an economics expert told Fox Business that was not the case.

“The very idea of ​​bailing out SVB, Signature Bank and others without hurting taxpayers doesn’t even pass the smell test,” said E.J. Anthony, a regional economics fellow at the Heritage Foundation’s Data Analysis Center.

“The government is spending taxpayer dollars. By definition, it costs taxpayers,” Anthony said.

After the collapse of the SVB, the second largest in US history, the Treasury, the Federal Reserve and the FDIC issued a joint statement stating that “the taxpayer does not bear any losses associated with the reorganization of Silicon Valley Bank.”

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Biden echoed the claim a day later on Twitter, stating “the actions we’ve taken over the past few days to protect Silicon Valley and branded bank depositors, Americans can rest assured that our system is safe” and that “people’s deposits will there”. when they need them, free of charge to the taxpayer.”

Anthony told Fox Business that taxpayers are not interested in mitigation efforts that Biden proposed Tuesday is not a “salvation”, false if “look at the mechanics of how this salvation works”.

“The FDIC does not have enough funds to cover these losses,” Anthony explained. “If that were the case, the Federal Reserve would not have had to set up an emergency loan fund on Sunday night to support the operation. The FDIC can do what they did during the last financial crisis and just get money from the treasury, which is a direct cost to taxpayers. Either the American people are hooked by a hidden tax on inflation, or by explicit taxes, sent to the Treasury. “

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Following the collapse of the SVB, federal regulators put in place a $175 billion deposit support plan. Federal government officials have waived the FDIC’s $250,000 threshold and plan to free up cash from insurance funds paid by banks.

According to the FDIC, officials during the auction nearly $200 billion of Silicon Valley bank assets. The refund of the deposit, which does not come from the auction or the insurance fund, will be backed by special contributions, a tax levied on large banks in the US.

Anthony said that the FDIC would essentially “recoup its losses by increasing the fees it charges all banks,” which still puts the pain on the taxpayers who get these insurance and banking fees, which means that ” The American people are stuck in the tab again.”

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“In addition, banks that lend prudently and wisely allocate their capital will be charged with these higher fees, while reckless institutions and wealthy savers are bailed out,” Anthony said. “It’s a punishment for prudence and an incentive for insolvency.”

According to Anthony, the situation in which taxpayers find themselves is the result of three “mistakes” made by the federal government.

First, Anthony explained, the Federal Reserve should not have “manipulated interest rates to artificially low levels,” which he said would have prevented this whole situation.

“After this mistake, the Fed should have raised rates quickly to normal levels, but they didn’t and instead kept rates at zero for too long,” Anthony said.

The third and most recent mistake, according to Anthony, was “helping out” savers who chose not to buy private insurance on their large deposits, “thereby setting a huge moral hazard and a mind-bogglingly dangerous precedent for the future.”

“Once again, the very people who are supposed to guard our banking system have created an incentive for insolvency and a punishment for caution,” Anthony 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 a previous joint statement that said, “Shareholders and certain holders of unsecured debt will not be protected. Senior management was also removed from office. be recovered by conducting a special assessment of banks, as required by law.

The White House added that DIF has two sources of funds – insurance premiums for institutions and interest received from funds invested in US government bonds.

“In short, DIF is used to support uninsured depositors, and DIF is funded by fees from banks. In addition, DIF losses will be reimbursed through fees from banks. All the money comes from bank fees.”

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Anthony told Fox Business that “the administration is acting like DIF has a purely liquid balance sheet, but it doesn’t,” and his holdings are actually medium to long-term Treasury securities along with Treasury bills and bonds, which is ” exactly the same debt instrument that SVB had.”

“Basically, it happened because these treasuries lost money because SVB had to liquidate them to raise funds, they had to sell them, they sold them at a loss, and this contributed to the collapse of the bank,” Anthony said. “The FDIC is literally in the same position. So now the FDIC will have to sell some of its assets at a loss in order to raise money to pay out these contributors. So what we did was just basically socialize the losses.”

Anthony said fees would need to rise more than expected to cover not only payouts to uninsured depositors but also market losses from the sale of worthless assets.

“The idea that banks pay all these fees is (ridiculous),” Anthony said, adding that White House is to “act as if banks are an unlimited source of capital.

“These charges are completely passed on to the clients, who are the American people. What the government has done here is to allow the risky profit making of these banks to remain privatized, effectively socializing the losses.”

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Anthony told Fox Business that the Biden administration is essentially “manipulating us” and playing “word games” to avoid being associated with the mistakes made during the 2008 bank bailout.

“It’s hard to overestimate the moral hazard that the government has just created,” Anthony said. “And make no mistake, the taxpayer will pay for these future consequences as well. The sins of the past always overtake you, whether they are moral or monetary.

Nicholas Lanum of Fox News Digital contributed to this report.