Biden’s claim that Silicon Valley bank bailout won’t hurt taxpayers is contrary to fiscal reality: economists

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Biden Administration has insisted that the actions taken by FDIC regulators to protect customers amid the historic implosion of a Silicon Valley bank will be “no cost” to taxpayers, but an economics expert tells Fox Business that’s not the case. Is.

“The idea of ​​rescuing SVB, Signature Bank and others, without cost to taxpayers, doesn’t even pass the smell test,” said EJ Antony, research fellow regional economics with The Heritage Foundation’s Center for Data Analysis.

Antony said, “The government is spending taxpayer dollars. By definition, it is a cost to the taxpayer.”

After the collapse of SVB, the second largest US history, Treasury, the Federal Reserve and the FDIC issued a joint statement adding that “no damages associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

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President Biden talks with Treasury Secretary Janet Yellen during a cabinet meeting the Cabinet Room.

Biden reiterated that statement a day later on Twitter, saying, “With the actions we’ve taken over the past few days to protect depositors from Silicon Valley and Signature Banks, Americans can be confident that our system is safe”. and that “people will have the deposits when they need them – at no cost to the taxpayer.”

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Antony told Fox Business the idea taxpayers are not on the hook for the mitigation effort, which Biden tuesday suggested There isn’t a “bailout” when you look at the mechanics of “how this bailout is working.”

“The FDIC doesn’t have enough money to cover these losses,” Antony explained. “If that were the case, the Federal Reserve wouldn’t have to set an emergency loan fund on Sunday evening to backstop operations. The Fed could simply create money to cover losses at these failed banks, which would cause inflation.” , or the FDIC can do what it did the last financial crisis and just get money from the Treasury, which is a direct cost to taxpayers. Either the American people pay for the hidden tax of inflation or the explicit taxes sent to the Treasury. are on the hook through.”

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Silicon Valley Bank

People queue outside the closed Silicon Valley Bank headquarters on March 10, 2023 Santa Clara, California.

Following the collapse of SVB, federal regulators devised a plan to backstop $175 billion deposits. Federal government officials have waived the $250,000 FDIC limit and plan to release cash from insurance funds paid out by banks.

According to the FDIC, the authorities are in the process of auctioning Silicon Valley Bank has approximately $200 billion assets. Deposit reimbursement that does not come from auction or insurance funds will be taxed by a special assessment, the same tax imposed on large banks in the US.

Antoine said the FDIC would essentially “recoup its losses by increasing the fees it charges all banks,” which still shifts the pain onto taxpayers who are passed on to those insurance and bank fees, meaning There’s the “American people are trapped once again” tab.”

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A sign for the Silicon Valley Bank headquarters Santa Clara, California, March 10, 2023.

“Moreover, banks that lend sensibly and allocate their capital wisely will be levied these high fees, while bailouts are being given to reckless institutions and wealthy depositors,” Antony said. “It is a penalty for prudence and an incentive for bankruptcy.”

According to Antoine, the situation taxpayers are is the result of three “mistakes” made by the federal government.

First, Antoine explained, the federal Reserve “Interest rates should not be manipulated at artificially low levels,” which he says could have prevented this whole situation.

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“After that mistake, the Fed should have raised rates to normal levels quickly, but it didn’t and instead kept rates near zero for a very long time,” Antony said.

The third and most recent mistake, Antoine said, was “bashing out” money depositors who chose not to buy private insurance on their large deposits, “creating a massive moral hazard and setting a mind-bogglingly dangerous precedent.” Went.”

“Once again, the very people who are supposed to protect our banking system have created an incentive for bankruptcy and a penalty for prudence,” Antoine said. “The correct answer to bad financial decisions is always liquidation.”

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Fox Business contacted the White House, which pointed to a previous joint statement that said, “Shareholders and holders of certain unsecured debt will not be protected. Senior management has also been removed. Support for uninsured depositors.” Any loss to the Deposit Insurance Fund shall be recovered by a special assessment on the banks, as required by law.”

The White House stated that the DIF has two sources of funding – insurance premiums on institutions and interest earned on money invested in US government obligations.

“In essence, DIF is being used to support uninsured depositors, and DIF is funded by fees on banks. In addition, losses to DIF will be recovered by fees on banks. Money Charges apply to all banks.

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A Brinks armored truck is parked in front of the closed Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Antoine told Fox Business that “the administration is acting as if DIF has a completely liquid balance sheet, but it doesn’t” and that its holdings are actually medium- and long-term Treasury securities as well as Treasuries. There are notes and bonds, which are “exactly the same debt instruments that SVB had.”

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Antony said, “Basically what has happened is these treasuries have lost money because the SVB had to liquidate them to raise money, they had to sell them, they were selling them at a loss and that The collapse of the bank helped.” “The FDIC is in virtually the exact same position. So now, the FDIC is having to sell some of its holdings at a loss in order to raise money to pay these depositors. So what we’ve done is we’ve just basically socialized.”

Antony said the fees would have to exceed estimates to cover not only payments to uninsured depositors, but also market-to-market losses from selling undervalued assets.

“The idea that banks pay all these fees is ridiculous,” Antoine said. white House “Acting like banks are an unlimited source of capital.

“Those fees are passed entirely onto the customers, who are the American people. What the government has done here is allow the risky profits of these banks to be privatized, while effectively socializing the losses.” “

Antony told Fox Business that the Biden administration is essentially “gaslighting us” and playing a “word game” to avoid connecting with mistakes made during the 2008 bank bailout.

“The moral hazard that the government has created is difficult to eliminate,” Antoine said. “And make no mistake, the taxpayer will pay for that future consequence as well. The sins of the past always catch you up, be they moral or monetary.”

Fox News Digital’s Nicholas Lannum contributed to this report