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Last Friday, in the largest bank failure since 2008, Silicon Valley Bank failed.
Banks fail all the time. But unless it’s a big or highly-connected bank, most of us don’t pay much attention. That’s because at the average bank, about half of all accounts are F.D.I.C.-insured. That means, if a typical bank fails, the F.D.I.C. will step in and pay every depositor back up to $250,000.
But Silicon Valley Bank was not a typical bank. It seems that only around a single digit percentage of accounts were under $250,000. And the people who banked at Silicon Valley Bank are among the most powerful in the world. Nearly half of venture finance-backed tech and life-science companies had money in there. When these people start shouting, those in power listen.
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And so the Federal Reserve and the Treasury Department and the F.D.I.C. stepped in forcefully. They retroactively insured all the accounts, and created an emergency system to backstop other struggling banks, too. But that doesn’t mean this is over. Bank runs are narrative phenomena. Rising interest rates are revealing a financial system that had only planned for low interest rates — in perpetuity. And if, in practice, we’re going to make whole any depositor at any bank no matter how much money is in the account, shouldn’t we make that into actual policy, and charge banks for the privilege of full social insurance?
Noah Smith is an economist, a former columnist at Bloomberg, and the author of the fantastic Substack Noahpinion, and he’s done some of the clearest writing and coverage of this mess. We talk about the above, as well as what the crypto boosters — many of whom were begging for a bailout here — got wrong about trust and finance, the problem the Fed now faces raising rates to fight inflation, whether this was a “bailout,” how a bank can be “narratively important” no matter its size, and much more.
You can listen to our whole conversation by following “The Ezra Klein Show” on Apple, Spotify, Google or wherever you get your podcasts. View a list of book recommendations from our guests here.
(A full transcript of the episode will be available midday on the Times website.)
“The Ezra Klein Show” is produced by Emefa Agawu, Annie Galvin, Jeff Geld, Rogé Karma and Kristin Lin. Fact-checking by Michelle Harris, Mary Marge Locker and Kate Sinclair. Mixing by Sonia Herrero and Efim Shapiro. Original music by Isaac Jones. Audience strategy by Shannon Busta. The executive producer of New York Times Opinion Audio is Annie-Rose Strasser. Special thanks to Pat McCusker and Kristina Samulewski.
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