President Biden has made a promise that taxpayers will not be held responsible for bailing out banks that have recently collapsed. However, critics have contested this statement, as the federal government has intervened by taking over and backing up these banks, thereby allowing depositors to access their funds, even if the banks are insolvent. This situation has raised concerns among economists who point out that the deposit insurance fund does not have enough liquidity to cover depositors, as evidenced by the need for the Federal Reserve to announce an emergency lending fund to meet the demand for liquidity.
Silicon Valley Bank (SVB) collapsed last week due to capital issues and a bank run. The bank's insolvency worsened when Signature Bank was closed by regulators on Sunday, leading to fears of economic fallout. The Federal Reserve Board of Governors pledged to ensure that depositors affected by SVB's collapse have access to their funds this week, with no cost to be borne by taxpayers. However, critics argue that taxpayers may ultimately bear the cost of this bailout if the Federal Deposit Insurance Corporation (FDIC) runs out of cash.
Economists explain that the FDIC can increase its insurance premiums charged to banks, but these fees are passed on to customers. Alternatively, the Treasury can give money to the FDIC, which ultimately makes taxpayers responsible for the expense. Lastly, the Fed can finance the expense by printing money, which may lead to inflation, effectively creating a hidden tax.
The situation surrounding the collapse of SVB has drawn comparisons to the 2008 financial crisis and the subsequent bank bailouts. During that crisis, taxpayers spent hundreds of billions of dollars to bail out banks and stimulate the economy during the recession primarily caused by those banks. With SVB being the largest financial institution to collapse since that crisis, there are concerns about the potential economic fallout if more banks collapse in the future.
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