New York (Trends Wide) — “Bailout” became a curse word in American politics after the 2008 global financial crisis, fueling a backlash among people who felt the risks and potential consequences of capitalism did not apply to big corporations or the wealthy.
Now, the recent collapse of two large banks, Silicon Valley Bank and Signature Bank—and federal intervention to support the banks’ uninsured depositors—have put the “r” word back at the center of political debates and economy of the country.
While the back-and-forth over whether this intervention was a bailout can be attributed to semantics, it raises key questions about the structure of the financial system and who the government protects in times of crisis, and who it leaves out.
Gerald Epstein, a progressive economist at the University of Massachusetts Amherst and co-director of the university’s Political Economy Research Institute, says: “Part of what’s happening is because of the belief that the system is rigged against the little ones. That’s why there’s so much debate. People think, ‘Here we go again.'”
Bailout is a popular, non-technical term, and there is no universal definition of what it means, Epstein said. A bailout is generally seen as compensating for losses where there has been reckless, irresponsible or nefarious behavior, he added.
However, the term continues to carry social and political weight. This was partly due to the 2008 crisis, when the federal government poured in taxpayer money to bail out banks that engaged in risky lending practices. Most of the executives who watched the crash faced little to no repercussions.
The politics of bailouts
The bailout policy returned in response to the collapse of Silicon Valley and the firms.
Over the weekend, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) proceeded to fully refund uninsured depositors — removing the $250,000 limit on depositors. insured deposits—from Silicon Valley and Signature through the FDIC’s insurance fund, which is financed by taxes on bank deposits.
The agencies took these measures to try to avoid bank failures and help companies that deposited amounts in Silicon Valley and Signature to continue paying payroll and financing their operations. They said shareholders of the two banks and some unsecured debtors would not be protected and top managers would be ousted.
The Federal Reserve also said it would create a new mechanism — the Bank Term Financing Program — to offer eligible banks loans of up to one year against US Treasury bonds and other assets at their original value. . This measure, consisting essentially of granting loans to banks at a discount, was designed to prevent any financial contagion from spreading to other banks, unlike what happened in 2008.
President Joe Biden and US government officials tried to distinguish between the steps they are taking to protect depositors and stabilize the financial system and a response similar to that of 2008.
“The taxpayers will not suffer a loss. Let me repeat it: no loss will be borne by the taxpayers,” Biden said in a speech Monday. “The management of these banks will be laid off. If the bank is taken over by the FDIC, the people who run the bank should no longer work there.”
But Republicans have been quick to try to link Biden to previous taxpayer-funded bailouts.
“Joe Biden is pretending this isn’t a bailout. It is,” said Nikki Haley, the former governor of South Carolina and a 2024 Republican presidential candidate.
UMass Amherst’s Epstein doesn’t think small depositors and businesses that depended on banks for basic services were being bailed out. But it is not yet clear if there were venture capital funds or other depositors that engaged in imprudent practices. If those depositors are compensated, that would constitute a bailout, he said.
“It is not convenient to bail out people for their bad behavior and create moral hazard,” he said.
He also said the bailout debate distracts from bigger questions: what caused this and how we can prevent it from happening again.
Amiyatosh Purnanandam, a University of Michigan finance professor who studies bank bailouts, views these actions as bailouts because the government — the lender of last resort — stepped in and gave depositors something they couldn’t get on the market.
In addition, taxpayers could be affected in the future in the form of fees or other costs as banks replenish the FDIC’s deposit insurance fund, he warned.
To restore public confidence in accountability, Purnanandam said regulators and lawmakers could try to impose more costs on executives who may have engaged in the reckless behavior that triggered this latest crisis: “Do we get the bonuses back? Can they work in the financial sector in the future?
Trends Wide’s Matt Egan and Phil Mattingly contributed to this article.
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New York (Trends Wide) — “Bailout” became a curse word in American politics after the 2008 global financial crisis, fueling a backlash among people who felt the risks and potential consequences of capitalism did not apply to big corporations or the wealthy.
Now, the recent collapse of two large banks, Silicon Valley Bank and Signature Bank—and federal intervention to support the banks’ uninsured depositors—have put the “r” word back at the center of political debates and economy of the country.
While the back-and-forth over whether this intervention was a bailout can be attributed to semantics, it raises key questions about the structure of the financial system and who the government protects in times of crisis, and who it leaves out.
Gerald Epstein, a progressive economist at the University of Massachusetts Amherst and co-director of the university’s Political Economy Research Institute, says: “Part of what’s happening is because of the belief that the system is rigged against the little ones. That’s why there’s so much debate. People think, ‘Here we go again.'”
Bailout is a popular, non-technical term, and there is no universal definition of what it means, Epstein said. A bailout is generally seen as compensating for losses where there has been reckless, irresponsible or nefarious behavior, he added.
However, the term continues to carry social and political weight. This was partly due to the 2008 crisis, when the federal government poured in taxpayer money to bail out banks that engaged in risky lending practices. Most of the executives who watched the crash faced little to no repercussions.
The politics of bailouts
The bailout policy returned in response to the collapse of Silicon Valley and the firms.
Over the weekend, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) proceeded to fully refund uninsured depositors — removing the $250,000 limit on depositors. insured deposits—from Silicon Valley and Signature through the FDIC’s insurance fund, which is financed by taxes on bank deposits.
The agencies took these measures to try to avoid bank failures and help companies that deposited amounts in Silicon Valley and Signature to continue paying payroll and financing their operations. They said shareholders of the two banks and some unsecured debtors would not be protected and top managers would be ousted.
The Federal Reserve also said it would create a new mechanism — the Bank Term Financing Program — to offer eligible banks loans of up to one year against US Treasury bonds and other assets at their original value. . This measure, consisting essentially of granting loans to banks at a discount, was designed to prevent any financial contagion from spreading to other banks, unlike what happened in 2008.
President Joe Biden and US government officials tried to distinguish between the steps they are taking to protect depositors and stabilize the financial system and a response similar to that of 2008.
“The taxpayers will not suffer a loss. Let me repeat it: no loss will be borne by the taxpayers,” Biden said in a speech Monday. “The management of these banks will be laid off. If the bank is taken over by the FDIC, the people who run the bank should no longer work there.”
But Republicans have been quick to try to link Biden to previous taxpayer-funded bailouts.
“Joe Biden is pretending this isn’t a bailout. It is,” said Nikki Haley, the former governor of South Carolina and a 2024 Republican presidential candidate.
UMass Amherst’s Epstein doesn’t think small depositors and businesses that depended on banks for basic services were being bailed out. But it is not yet clear if there were venture capital funds or other depositors that engaged in imprudent practices. If those depositors are compensated, that would constitute a bailout, he said.
“It is not convenient to bail out people for their bad behavior and create moral hazard,” he said.
He also said the bailout debate distracts from bigger questions: what caused this and how we can prevent it from happening again.
Amiyatosh Purnanandam, a University of Michigan finance professor who studies bank bailouts, views these actions as bailouts because the government — the lender of last resort — stepped in and gave depositors something they couldn’t get on the market.
In addition, taxpayers could be affected in the future in the form of fees or other costs as banks replenish the FDIC’s deposit insurance fund, he warned.
To restore public confidence in accountability, Purnanandam said regulators and lawmakers could try to impose more costs on executives who may have engaged in the reckless behavior that triggered this latest crisis: “Do we get the bonuses back? Can they work in the financial sector in the future?
Trends Wide’s Matt Egan and Phil Mattingly contributed to this article.
