Maxine Waters, Mitt Romney, President Biden, Treasury Secretary Janet Yellen, and most other Washington politicians agree on one thing: Silicon Valley Bank (SVB) executives should lose their jobs and equity holders should lose everything, but SVB depositors should get made whole.
“Failing to intervene and make sure depositors get all their money back will hurt normal people and destabilize the entire U.S. banking system,” they say. Not only that, but they’re assuring us this definitely isn’t a bailout! Even many on the nationalist right echoed these talking points.
Except they are wrong. At best, they don’t understand the banking system, banking regulations, and the incentives being created here. At worst, they are — as is certainly the case for Democrats like Eric Swalwell — arguing solely for the interests of large and wealthy investment firms that had money at SVB without regard for the interests of normal working Americans.
To understand why, we need to examine what happened with SVB in the run-up to the crisis.
Silicon Valley Bank’s Collapse
SVB has had tremendous growth over the last 10 years as the Federal Reserve’s easy money programs flooded the tech industry with cheap capital.
Banks are tasked with managing assets and liabilities. Liabilities include deposits and debt, and assets include government securities and loans. SVB’s business revolved around serving Silicon Valley’s startups and the wealthy investment funds buying and selling these startups. That meant taking in an explosion of deposits from these investment funds as cheap money from the Fed flooded in
