In the last few days, the federal government has embarked on a disastrous path as regards banking and finance. Their actions guarantee a worsening of the problem whether in the near term or down the line. These “emergency” actions have effectively created a moral hazard that could wreck the entire sector and the whole economy over time. In short, the government just guaranteed 100 percent of deposits in major banks, amounting to nearly $10 trillion in bailout guarantees.

There is no living thinker who believes that this is a good idea. Why would they do it? From every account we have so far concerning the chaotic couple of days at the White House, they did it because they didn’t know what else to do. They fear that allowing Silicon Valley Bank (SVB) to fail would lead to contagion. There is zero evidence that this is true.

SVB failed for specific reasons related to its bond portfolio. Egged on by federal regulators who pushed government bonds over the exotic financial instruments that created such trouble in 2008, this bank went all in on fixed-rate bonds. Its entire portfolio became devalued when rates rose after the Fed changed its policies. Instead of taking a haircut, like many major banks did, this bank did nothing.


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