On the banking crisis, governments should step aside and let the free market fix it

Two famous sayings perfectly frame the struggle to smooth the bumpy road ahead for the U.S. banking system in the wake of the failures of Silicon Valley Bank and other lenders. The first, “We’re from the government and we’re here to help,” is a claim so preposterous that it has become a popular if somewhat clichéd exemplar of a hollow promise.

The second is, “The problem with socialism is that eventually you run out of other people’s money,” Margaret Thatcher’s famous broadside against the financial mess Britain’s Labour government left her when she became prime minister.

Despite howls from many banking industry experts that the U.S. Federal Deposit Insurance Corporation injected moral hazard into the system by agreeing to cover SVB depositors beyond the US$250,000 limit, U.S. Treasury Secretary Janet Yellen has promised even more unmandated giveaways, saying this week that the Biden administration is considering expanding its coverage of uninsured deposits for failed banks.

There are so many things wrong with this sort of regulatory extremism. And it’s discouraging that someone with such sterling credentials as Ms. Yellen, a former chair of the Federal Reserve and the White House Council of Economic Advisers, would be dragged into such quicksand.

First, federal regulators don’t have the authority to make this type of unilateral decision. Such an expansion of coverage would need a joint resolution from Congress.

Second, the broad remedy further rewards bad management and promotes a devil-may-care approach to risk. The investigation into SVB is revealing that its failure was the result of flaws specific to its risk model, not widespread cracks in the banking industry.

Finally, the math of Ms. Yellen’s handout plan simply doesn’t work. Any move to cover a broader universe of uninsured depositors, estimated to cost many trillions of dollars, would quickly exhaust the FDIC’s coffers, which at the end of 2022 sat at about US$128-billion. Where would the other trillions come from?

Cue Mrs. Thatcher: other people’s money. Yes, it is true the banks and credit associations fund the FDIC, not taxpayers. And some proceeds from any asset sales in the current market reckoning may be directed to help.

But if you really believe the Biden administration’s talking point that the average American won’t pay a dime to cover the shortfall, well, there’s a bridge in Brooklyn I’d like to sell you – at a 7-percent mortgage rate.

When the banks are pressed to contribute more, where do you think they’ll get the money? They are not charities, so it’s going to come from someone’s wallet in the form of higher fees and other charges they levy on customers.

The idea that taxpayers won’t feel the pain is simply fantasy. Supporters of this idea are naive or intellectually lazy to think the government is actually here to help – that this is anything other than pickpocketing.

We shouldn’t be surprised. These are the same people who thought the federal government did a good job managing COVID-19. They also believed Mr. Biden’s cancelling of hundreds of billions of dollars in student loan debt would come with few economic consequences. It’s completely plausible that they would buy Ms. Yellen’s fuzzy math.

Amid the nonsense, the banking pros are stepping up in the grand Darwinian tradition of a free market. JPMorgan Chase chief executive Jamie Dimon is spearheading a group to buy First Republic Bank, another wobbly California-based lender. People like Mr. Dimon are better qualified – and driven more by market forces than partisan politics – to sort this issue.

The point is, the regulators need to get out of the way and let the dynamics of the free market take over. Let poorly managed banks die so healthy banks can step in and buy the losers, make new arrangements with depositors and impose the risk management protocols that banks such as SVB, Silvergate and Signature failed to implement.

Regardless of who survives the culling of the herd, the result will be because the free-market system worked, not because of Big Brother.