The Silicon Valley Bank (SVB) has failed, so the government has promised to step in and make depositors whole.

You can blame the bank’s failure on rising interests, bad loans, or some other economic bogeyman, but it was really just a case of a company taking on too much risk.

I would say it was bad decision making, but I’m not sure that is the case. The executives will run off with their millions of dollars that were already pocketed. They had all of the upside with the profit, but they don’t seem to have much of the downside.

The government doesn’t appear to actually be bailing out the bank’s executives, but I doubt they will have to pay back any past money that was made.

The only ones left holding the bag are the shareholders who will see most of the valuation of their stock shares go to zero.

Of course, there is one more group left holding the bag, and that is the general public.

Taxpayers or Dollar Holders

Joe Biden stepped in and assured the country that there was no need to panic and that the government and central bank have everything under control.

I thought Biden was going to order all bank employees to get another jab of mRNA to protect the health of the industry, but maybe that will be next week.

Anyway, Biden said that the taxpayers won’t be on the hook for this bailout. But how is that possible?

The only other possibility is that the Federal Reserve will create money out of thin air to take care of the bank depositors. But I thought the Fed was busy fighting inflation.

Maybe the Fed can take care of this bailout without significantly expanding its balance sheet. The problem is what to do when the next bank fails. How can you fight inflation when you are creating inflation?

So maybe the American taxpayers won’t technically pay for this, but most of those same people hold dollars and buy things in dollars. So their purchasing power will just decline at an even faster pace than before.

Leftist Cronyism?

It is truly hard to say if this bailout would have happened if it had been outside of Silicon Valley or New York City or Washington DC.

If the People’s Bank of Alabama (I have no idea if this exists) had declared insolvency, would the government have bailed out the depositors beyond the FDIC limit?

Maybe the government is really trying to prevent a cascade of banks failing. So much for their regulations and stress tests that came about after the last financial crisis.

But it is rather convenient that the main clientele of the bank were Silicon Valley companies. You wonder how many of these companies had a direct line to the White House.

It’s been reported that over 85% of the deposits were not FDIC insured. Apparently they were beyond the $250,000 limit.

In a sane world, only the FDIC-insured deposits would have been protected. It’s not to say that all of the other money would be gone. It’s just that the company and its assets would be liquidated and only a certain percentage would be paid for the remaining deposits.

Of course, in a really sane world, we wouldn’t have an FDIC and we would have financial institutions that wouldn’t be lured in to taking these ridiculous risks.

Is the FDIC Limit Gone?

A big question that remains is if the FDIC limit is gone. Is the FDIC now insuring all deposits without a limit?

If that is not the case, then this really was a case of pure cronyism. The government and Fed are bailing out this bank because of who the depositors are.

Otherwise, we now have an FDIC that is insuring every individual and company for every dollar, no matter how many millions or billions they have.

The FDIC can only cover a tiny percentage of the total deposits as it is, but the Fed can create any amount of money that it wants. So the Fed is the real backstop. Again, the problem is that the Fed is trying to fight inflation while having to create inflation for bailouts.

The Next Fed Move

The Fed is supposed to hike its target interest rate by 25 or 50 basis points at its next FOMC meeting. The next meeting is scheduled to conclude on March 22.

Apparently the Fed will still hike its rate, but a lot can change in the next week. We see how quickly things can develop.

It seems like everything just floats along despite all of the problems. Then it just all of a sudden changes.

My best guess is that the Fed will hike by 25 basis points at the next meeting, but again, who knows what will happen in the coming days?

I don’t think most people should worry about a bank failure. Most people are covered by the FDIC, and I don’t think the FDIC and the Fed will not cover anyone, because that would truly set off a panic.

The big worry is that the Fed is going to have to ramp up the printing presses (in a digital sense) again. If this happens, then consumer price inflation is not coming down any time soon.

This would also be a signal to the gold market. I think gold is already starting to look a lot better to a lot of people. If nothing else, it adds an element of some relative safety to one’s portfolio.

This is going to be a wild ride. If you are in the stock market, you are highly vulnerable. Even if the Fed ramps up monetary inflation again, it is far from certain that stocks will go up.