4 ms·

There's no moral hazard if we pay out depositors and let the bank fail. The big "problem" in 2008 was that the bailed out banks were made whole with equity inje

There's no moral hazard if we pay out depositors and let the bank fail. The big "problem" in 2008 was that the bailed out banks were made whole with equity injections and then continued to grow. (Although the government did quite well on those investments). SVB is dead. Shareholders are getting zero. The losses are not being socialized. But because we don't want a bank run on every regional bank, let's make depositors whole.

lotsofpulp 4y ago
Why even bother with the fiction and payroll of the FDIC and a $250k limit and FDIC insurance premiums if there is always an implicit taxpayer bailout? Obviously that insurance costs something, and the moral hazard is that both bank owners and depositors of banks with lax standards get to financially benefit from lower costs due to all federal taxpayers subsidizing their risk. Anytime taxpayers give money, they are tilting the incentives such that the risk of the loss being bailed out is now going to be underpriced, because it will be assumed a bailout is coming. If the goal is to have no depositor in the US ever lose any money, then the government should just give everyone an account they can transfer money into and out of. It will earn no interest, and no bank owners will profit from the taxpayers’ subsidy.
- junofan 4y ago
  The FDIC does this as a matter of course with LSAs though.
  - lotsofpulp 4y ago
    What is an LSA? Legal service agreement? I am not sure how it applies.
    - zerocrates 4y ago
      Loss-sharing (or "shared loss") agreement.
tome 4y ago
The moral hazard is that if depositors know they'll always be made whole then they'll keep their deposits in riskier institutions and therefore executives who are taking on undue risk will win at the expense of the insurance provider. (I think this is probably what lotsofpulp was saying in a different way.)
unity1001 4y ago
The general public doesnt care about the shareholders. For the public, a bailout is a bailout. By lending money to that bank, depositors took a risk and participated in the bank's business. It was NOT a state bank. It did not pay any taxes, fees, or anything else to the public's treasury more than the $250k per account insurance. If it did, you would be right - everything could have been rescued to the order of that insurance. But there is no such insurance over $250k. > make depositors whole It seems that the big money people affected by this chose this nonsensical, archaic term to use in place of 'bailout' so that people wont react. It really doesnt work and it looks way, way nonsensical.

lotsofpulp 4y ago

Why even bother with the fiction and payroll of the FDIC and a $250k limit and FDIC insurance premiums if there is always an implicit taxpayer bailout? Obviously that insurance costs something, and the moral hazard is that both bank owners and depositors of banks with lax standards get to financially benefit from lower costs due to all federal taxpayers subsidizing their risk. Anytime taxpayers give money, they are tilting the incentives such that the risk of the loss being bailed out is now going to be underpriced, because it will be assumed a bailout is coming. If the goal is to have no depositor in the US ever lose any money, then the government should just give everyone an account they can transfer money into and out of. It will earn no interest, and no bank owners will profit from the taxpayers’ subsidy.

junofan 4y ago
The FDIC does this as a matter of course with LSAs though.
- lotsofpulp 4y ago
  What is an LSA? Legal service agreement? I am not sure how it applies.
  - zerocrates 4y ago
    Loss-sharing (or "shared loss") agreement.

tome 4y ago

The moral hazard is that if depositors know they'll always be made whole then they'll keep their deposits in riskier institutions and therefore executives who are taking on undue risk will win at the expense of the insurance provider. (I think this is probably what lotsofpulp was saying in a different way.)

unity1001 4y ago

The general public doesnt care about the shareholders. For the public, a bailout is a bailout. By lending money to that bank, depositors took a risk and participated in the bank's business. It was NOT a state bank. It did not pay any taxes, fees, or anything else to the public's treasury more than the $250k per account insurance. If it did, you would be right - everything could have been rescued to the order of that insurance. But there is no such insurance over $250k. > make depositors whole It seems that the big money people affected by this chose this nonsensical, archaic term to use in place of 'bailout' so that people wont react. It really doesnt work and it looks way, way nonsensical.