Promises, promises

Source: EconLog
by Scott Sumner

“After the 2008 banking crisis, the government promised to refrain from bailing out small and mid-sized banks and instead allow FDIC to handle the situation. According to Bloomberg, that promise is also being reneged on: ‘US authorities raced on Sunday to stem jitters about the health of the nation’s financial system, pledging to fully protect all depositors’ money following the collapse of Silicon Valley Bank while also giving any banks squeezed for cash easier terms on short-term loans.’ … This is even worse than only bailing out SVB. It means that other banks will get similar protection. It is tempting to think that bailouts solve the problem, but in fact they just make it worse. The underlying problem is moral hazard, and each bailout makes people behave even more recklessly going forward.” (03/13/23)