Over the weekend, the United States suffered the second-largest bank failure in history. The consensus view is that Silicon Valley Bank made a huge mistake by borrowing short term and then parking money in long-term bonds. When interest rates rose, assets lost value, and SVB was put in a perilous position.
Joe Biden promises there will be a “full accounting” of the situation and that everyone will be held “accountable.” But that would mean the president taking responsibility for the reckless governance that helped create the environment that made this possible. The Fed wouldn’t have been compelled to aggressively raise interest rates if Biden had acted more like a responsible statesman rather than a cynical partisan.
It’s infuriating reading fluff pieces like Politico’s “How Biden saved Silicon Valley startups: Inside the 72 hours that transformed U.S. banking,” when it was the president and his party, against all common sense and evidence, that helped create the conditions that led to the crisis.
Let’s recall that virtually the entire left-wing political infrastructure — media, politicians, and expert class — was activated to dismiss the concerns of those who warned that inflation was a threat. The reason was obvious: Democrats wanted to cram through as many long-term spending proposals as possible while they held both houses. That had to be done in two years’ time. And it had to be done with the support of Joe Manchin, a senator who would occasionally feign concern about spending.
In 2021, Biden signed the $2 trillion so-called American Rescue Plan, indiscriminately sending checks to millions even as Covid lockdowns were winding down. This, after issuing a number of presidential edicts limiting affordable fossil fuels (with some Republican help, Democrats would later pass a $715 billion green “infrastructure” bill). The Fed, meanwhile, kept rates at zero, pumping an already hot post-lockdown with billions. Inflation began spiking.
That’s when the word “transitory” began making an appearance. The president argued in the summer of 2021 that “there’s nobody suggesting there’s unchecked inflation on the way — no serious economist.” White House Press Secretary Jen Psaki claimed that “no economist,” serious or otherwise, was projecting higher inflation due to more government spending. (And the politicization of economic departments is a disaster, but that’s another story.) Treasury Secretary Janet Yellen promised there was “small risk” of inflation, but that it would be “manageable.”
When prices started creeping up, Biden’s then-chief of staff Ron Klain called inflation a “high-class problem” before Democrats inevitably pivoted to blaming corporate greed and arguing that conglomerates had suddenly conspired, after 40 years of keeping prices relatively in check, to screw over consumers. Piece after piece dismissed the “weird” and hawkish ideas of people who were warning that spending would spur inflation.
Rather than slowing down, Biden argued we should pass another $5 trillion in spending to alleviate price spikes: “If your primary concern is about inflation, you should be even more enthusiastic about this plan. We can’t afford not to make these investments.” Then, Democrats simply renamed the Build Back Better spending bill the “Inflation Reduction Act” — though the new iteration had as much to do with inflation as the Patriot Act had to do with patriotism. It was just another long-desired leftist wish list and some tax hikes. Among the “investments” in the bill was another $369 billion dumped into green boondoggles, a slush fund for Democrats and donors, the kind of market distortion that fueled SVB.
Americans were soon dealing with 40-year high inflation. The Fed was forced to raise interest rates because retarding economic growth is the prescription. In the ’80s, years of persistent inflation were only shaken off when Paul Volcker raised rates to 20 percent — and the country experienced a deep recession. The 30-year fixed rate mortgage hit 18.63 percent in 1981. You think houses are unaffordable now?
This week we learned that inflation rose 6 percent in February from a year earlier, versus a 6.4 percent gain in January. It is the slowest pace since September of 2021 and still near 40-year highs. The administration is preposterously trying to spin this as good news. But what’s next? The best way to stem inflation is to slow the economy. Now the Fed has to think twice about easing growth because it might lead to widespread bank runs. We’re left with few good options.
Democrats and other populists are going to blame greed and deregulation. Never let a crisis go to waste. CNN’s Manu Raju is already prowling the hallways of Congress setting this narrative by asking senators like Manchin if they regret voting for the 2018 Dodd-Frank “roll back” — which has nothing to do with the SVB run — rather than asking him if he regrets voting for trillions in new spending in an overcharged economy. Media hackery can have serious consequences.
It is true SVB and Signature Bank — another failed bank — were heavy investors in crypto, green energy, tech start-ups, and IPOs with unrealized profits. Comfort with risk is a vital part of the American finance system. It separates us from other nations as top innovators and entrepreneurs. But is it really “risk” if certain types of investors can never lose? If SVB’s 40,000 accounts aren’t made whole, will it lead to contagion? And if big banks come in and white knight regional ones, aren’t we only making too-big-to-fail bigger, and injecting even more moral hazard into our system?
Those are complex questions. But one of the biggest reasons we find ourselves here is clear: a lack of basic governing competence.