Silicon Valley Bank Bailout is Instantly Politicized

EVERYTHING IS POLITICIZED IN WASHINGTON, and that surely includes this weekend’s bailout of depositors at the Silicon Valley Bank and Signature Bank of New York. Was it a bailout? Janet Yellen and other officials don’t want to use that word, but it sure looks like a bailout to us, as even uninsured depositors are protected.

KEEPING DEPOSITORS WHOLE was the least-bad solution, but the post-mortem will be rocky. How did the regulators over-look the flashing red signals that SVB was in shaky shape? Were officials seduced by the chummy relationships between the regulators and the San Francisco Fed? There will be lots of congressional hearings to come on that.

MORE IMPORTANTLY, has the Fed accepted a precedent that will allow for similar bailouts in the future? Has this incident essentially eliminated the risk of failure — is there now an implicit understanding that the Fed will always bail out banks and depositors who make reckless decisions (see: cryptocurrencies). Will a universal uninsured deposit guarantee be next?

THE GOOD NEWS is that this collapse was addressed immediately, with — hopefully — minimum contagion. The bad news is that this crisis probably will not dissuade the Fed from more rate hikes. A 50 basis point move later this month seems unlikely, but a quarter-point hike is still on the table (inflation data tomorrow and Wednesday will be crucial).

FOR REPUBLICANS LOOKING FOR AN ISSUE, the optics couldn’t be better — Washington bailing out California zillionaires, tech firms, and venture capitalists while the rest of the country suffers from high inflation. There will be a political price to pay as populists in both parties — from Bernie Sanders to Donald Trump — ask whether bailouts reward bad behavior.

BIDEN WILL ATTEMPT TRIAGE this morning, with an address on the SVB bailout. He’s not having a good stretch, as China brokers a bold deal between Iran and Saudi Arabia that may isolate Israel, and as environmentalists howl over a Biden decision to open up a huge swath of Alaska for oil drilling — a clear sign that the president accepts fossil fuels as part of the solution, not part of the problem.

BIDEN’S POLLS MAY SLUMP AFTER THIS WEEKEND, but the hottest of all Washington hot seats is reserved for Fed Chairman Powell, who was sanguine (and wrong) on inflation two years ago and then took out a rate hike sledgehammer — clobbering credit markets, housing and and banks. Once the dust settles after this latest crisis there may be a focus on Powell’s tenure.

Related: The Collapse of Silicon Valley Bank Rocks Banking Sector: Three Takeaways

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