“We have learned over the last few days that many small and mid-sized banks in this country are Zombies,” writes Arnold Kling, a senior scholar at the Mercatus Center at George Mason University and former economist for the Federal Reserve system and Freddie Mac.
Following the run on Silicon Valley Bank, former U.S. Treasury Secretary Larry Summers urged the federal government to guarantee the money of all the bank’s depositors and warned that “now is not the time for lectures about moral hazard.” But Kling insists that “past crises,” such as the savings and loan collapse of the 1980s, “were bungled by authorities who were blind to the moral hazard problem.”
And Lyn Alden, founder of Lyn Alden Investment Strategies, says “banks are basically highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them.” She argues that the Federal Reserve makes it nearly impossible for banks to hold the bulk of their customers’ deposits in cash because “regulators want banks to be reasonably safe, but not ‘too safe.’ They want all banks to be leveraged bond funds to a certain degree, and won’t allow safer ones to exist.”
Join Reason‘s Zach Weissmueller this Thursday at 1 p.m. E.T. for a discussion about the federal government’s decision to guarantee all deposits at the failed Silicon Valley Bank with Alden and Kling. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.
Photo credit: Shen Hong / Xinhua News Agency/Newscom
