Paul Krugman: 'I’ve heard four basic kinds of criticism. One is ridiculous. Two are dubious. But the last one has me a bit worried, although I think it’s probably wrong.'
A line of clients outside the entrance to Silicon Valley Bank's headquarters in Santa Clara, Calif., March 13, 2023. The FDIC and other entities will protect most people’s bank and brokerage balances; but it’s as good a time as any for consumers to create other backstops.Last weekend, U.S. policymakers went all-in on bailing out two medium-size banks: Silicon Valley Bank and Signature Bank.
But was it a bad decision? I’ve heard four basic kinds of criticism. One is ridiculous. Two are dubious. But the last one has me a bit worried, although I think it’s probably wrong. On to more serious criticism. There is a reasonable argument, one that I largely agree with, to the effect that the failure of SVB didn’t pose a systemic threat in the way that the failures of financial institutions beginning with Lehman Brothers did in 2008. So why rescue the depositors?
A third criticism is the claim that the feds have now established the principle that all deposits are effectively insured without imposing correspondingly tighter regulation on what banks do with those deposits — creating an incentive for irresponsible risk-taking. But policymakers explicitly didn’t guarantee all deposits everywhere, and at least so far, we’re seeing an outflow of funds from smaller banks to more tightly regulated large banks.
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