The Biden administration has insisted that the measures taken by FDIC regulators to protect customers amid Silicon Valley Bank’s historic implosion will be “free” to taxpayers, but an economics expert tells Fox Business that this not the case.
“The mere idea of bailing out SVB, Signature Bank and others, without costing taxpayers, doesn’t even pass the smell test,” said EJ Antoni, research fellow in regional economics at The Heritage Foundation’s Center for Data Analysis.
“The government spends tax money. By definition, it costs the taxpayer,” Antoni said.
After the collapse of SVB, the second largest in US history, the Treasury, the Federal Reserve and the FDIC released a joint statement saying that “no losses related to the Silicon Valley Bank resolution will be borne by the taxpayer.”
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Biden reiterated that statement on Twitter a day later, saying, “We’ve been taking steps in recent days to protect depositors from Silicon Valley and Signature Banks. Americans can rest assured that our system is safe” and that “people’s deposits will be there.” are”. when they need them – at no cost to the taxpayer.”
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Antoni told Fox Business the idea that taxpayers are not on the hook for the mitigation efforts, which Biden has proposed Tuesday is not a “rescue operation” is incorrect if you “look at how this rescue operation works”.
“The FDIC doesn’t have enough money to cover these losses,” Antoni explained. “If it were, the Federal Reserve would not have had to set up an emergency lending fund on Sunday night to stop the operation. The Fed can simply create the money to cover the losses at these failing banks, which will cause inflation, or the FDIC can do whatever they did in the last financial crisis and simply get the money from the Treasury, which is a direct cost to the taxpayer. Either the American people are hooked by the hidden inflation tax or explicit taxes sent to the Treasury.”
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After the collapse of SVB, federal regulators devised a plan to backstop $175 billion in deposits. Federal government officials have waived the $250,000 FDIC threshold and plan to release cash from the insurance funds paid by banks.
According to the FDIC, civil servants are during the auction nearly $200 billion in Silicon Valley Bank assets. Deposit fee that does not come from the auction or insurance fund is supported by special assessments, a tax levied on larger banks in the US.
Antoni said that the FDIC will essentially “recoup its losses by increasing the fees it charges to all banks,” which still shifts the pain to taxpayers who are passed on those insurance and banking costs, meaning “it American people are once again stuck with the tab.”
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“In addition, the banks that have lent wisely and allocated their capital wisely are the ones from whom these higher fees will be levied, while the reckless institutions and wealthy savers are the ones who will be bailed out,” Antoni said. “This is a punishment for prudence and an incentive for insolvency.”
The situation the taxpayer finds himself in is, according to Antoni, the result of three “mistakes” by the federal government.
First, Antoni explained, the Federal Reserve should not have “manipulated interest rates artificially low,” which he said would have prevented this whole situation.
“After that mistake, the Fed should have raised interest rates quickly to normal levels, but it didn’t and instead kept rates at zero for far too long,” Antoni said.
The third and most recent mistake, Antoni said, was “rescuing” wealth depositors who chose not to take out private insurance for their large deposits, “creating tremendous moral hazard and a mind-bogglingly dangerous precedent for the future.”
“Again, the very people who are supposed to protect our banking system have created an incentive for insolvency and a penalty for prudence,” Antoni said. “The right answer to bad financial decisions is always liquidation.”
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Fox Business contacted the White House, which referred to the previous joint statement which said: “Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund supporting uninsured depositors will be recovered by a special assessment against banks, as required by law.”
The White House added that the DIF has two sources of money: insurance premiums on institutions and interest earned on funds invested in US government bonds.
“Basically, the DIF is used to support uninsured savers, and the DIF is funded through bank fees. In addition, losses to the DIF will be recovered through bank fees. The money will all come from bank fees.”
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Antoni told Fox Business that the “administration is pretending that the DIF has a purely liquid balance sheet, but that’s not the case” and that its holdings are, in fact, medium- and long-term Treasury bills, along with Treasury bills and bonds, which are the “exactly the same thing.” debt certificate that SVB had.”
“What actually happened is that these treasuries lost money because the SVB had to liquidate them to raise money, they had to sell them, they sold them at a loss and that helped facilitate the collapse of the bank,” said Antoni . “FDIC is literally in the exact same position. So now FDIC will have to sell some of their holdings at a loss to raise the money to pay off these depositors. So what we’ve done is we just basically socialized the to lose.”
Antoni said fees will have to rise more than expected to cover not only payments to uninsured savers, but also to cover market-to-market losses from the sale of devalued assets.
“The idea of banks paying all these fees is (laughable),” Antoni said, adding that the White House “acts as if banks are an unlimited source of capital.
“That cost is fully passed on to customers, the American people. What the government has done here is allow the risky profit-taking of these banks to remain privatized, while effectively socializing the losses.”
Antoni told Fox Business that the Biden administration is essentially “cheating on us” and playing “word games” to avoid being associated with the mistakes made during the bank’s 2008 bailout.
“It’s hard to overstate the moral hazard the government has just created,” Antoni said. “And make no mistake, the taxpayer will also pay for those future consequences. The sins of the past always catch up with you, whether they be moral or monetary.”
Nikolas Lanum of Fox News Digital contributed to this report