A554. “For This, They Had Themselves to Thank. They Put Their Money in the Bank.”

Insurance against adverse events that you can't prevent is effective in safeguarding your wealth only if you're motivated and able to behave prudently in avoiding or mitigating remaining risks.  Despite the dreadful non-financial consequences of having your home flooded or your savings jeopardized, the feeling of "I'm insured" can make you feel empowered to pursue your immediate convenience or perceived advantage--and take avoidable risks because "I'm insured." 

This is referred to as moral hazard associated with insurance.  For instance, suppose you've got a new tech company that just received a $100 million investment.  Or, on a smaller scale, you're processing your bi-weekly payroll.  So, you put the money in the bank, to be disbursed later as you direct. 

In fact, you're probably safe if you choose one of the biggest banks, a "systemically-important" one.  When one of these huge banks, such as Citi, become insolvent or illiquid, they are bailed out by the Government and kept operating.  There is no insurance involved.  Less important banks, the ones that are "not systemically important," are sold if possible or if not they are closed with loss to uninsured deposits. 

Surely you know that deposits are insured by the FDIC only up to $250,000.  But, "banks don't fail."  Or at least, they haven't done so lately.  That would be like getting struck by lightning!  You're influenced by the existence of the insurance, even though you know it won't protect you.  "The FDIC and other regulators wouldn't let a big bank fail!  Too expensive for them!" 

But it does fail.  That has happened repeatedly from the start of the FDIC, established in 1933, until now.  And up to now, the policy of the FDIC (and other Government agencies) has been not to pay holders of uninsured deposits in these banks.  If the failed bank is sold, they might get some of their money relatively quickly.  Otherwise it could take months or years to liquidate.

Anyone who is financially literate knows that instead of bank deposits, you can hold larger amounts in safer ways, such as Treasury Bills, or even a money-market fund.  If you started a tech company and you don't know that, you deserve to fail and your investors deserve to lose their money. 

However, some very prominent policymakers, economists and politicians said in March, 2023, that it doesn't matter what's deserved by the people directly involved in this.  According to them, it would just be too horrible for the US economy and its tech prospects to let that happen this time.  They advocate paying off the uninsured deposits in Silicon Valley Bank on Monday morning, or very soon after that.  That's not a good idea.  It would encourage irresponsibility, expand moral hazard.

What we now have is an argument that Silicon Valley Bank, roughly #16 in the US, really is systemically important, though it was not rated or treated as such.  It is important only to the special interests involved--venture capital, new tech!  So, these people claim it's important to the nation that they be protected against loss.  Baloney.