The Economy Could Not Exist Without Government
S E E D E D C O N T E N T
The last several days of news about the collapse of Silicon Valley Bank have been quite familiar for anyone who remembers the financial crisis days. Back in 2008-2010, the Federal Deposit Insurance Corporation was eating up regional banks every few weeks.
It was darkly amusing to see Silicon Valley’s self-anointed masters of capitalism and apostles of libertarianism screaming for no-strings-attached government help after their own bank fell victim to a run sparked by venture capitalists themselves—particularly given that, as my colleague David Dayen writes, SVB itself was a major lobbying force behind the 2018 bank deregulation that allowed it to engage in more risky business. Less amusing were the all-caps tweets from prominent venture capitalists claiming that all regional banks would soon fail, in a clear attempt to spark a broader panic that would camouflage their desired bailout.
Sure enough, SVB depositors at least are going to be made whole. The Treasury Department and FDIC announced on Sunday that they had drawn up a plan to resolve the bank’s problems “in a manner that fully protects all depositors.” As Philip Bump writes at The Washington Post, the Biden administration is desperately trying to avoid the world “bailout” about this action, but while shareholders and executives will get wiped out (which is good), that is a silly deflection.
At bottom, this is an exercise of state power to protect some large financial accounts—the kind of state power that underpins the entire economy. Silicon Valley robber barons begging for help from Uncle Sam when a crisis hits is merely a more glaring than usual display of what is always the case.
Just consider for a moment how businesses operate. Their facilities sit on land whose status as property is created by the state—to “own” land (or anything else) is to say that you have a government document allowing you to call armed government agents, or sue through government courts, should someone trespass on it. That land, of course, was largely stolen from Native Americans and Mexico by the U.S. military, or it was stolen by France or Spain and then bought by the government.
Customers buy products using money wholly created by the government, the value of which is maintained by a government agency with sweeping economic powers. Businesses ship their products over infrastructure either built outright by government (roads and bridges) or elaborately regulated by it (airports). When government fails to oversee that infrastructure, the result is routine disaster, as we recently saw with maintenance-skimping freight rail companies in East Palestine. Corporations themselves are legal entities created by government—granted among other things reduced legal liability. The integrity of the stock market is protected by elaborate regulations.
Silicon Valley in particular was virtually created by government. It was military contracts, particularly for nuclear missiles, that sparked the semiconductor industry. The forerunner to the internet was developed by the Department of Defense. From that day to this, government contracts have been a key source of tech sector income.
Finally, there is a tacit expectation that should the economy run into trouble, the government will be there with a rescue. We saw this with SVB and during the 2008 financial crisis, but also during the pandemic. Without the CARES Act and the other rescue packages, the economy almost certainly would have imploded into a mass unemployment crisis worse than the Great Depression.
Silicon Valley in particular was virtually created by government.
So when tech oligarchs run to Congress, sacks of cash in hand, to lobby for relaxed rules on capital requirements and lighter Federal Reserve oversight for their personal bank, in no sense does this really amount to a diminution of state control over the banking system. In reality, this is a private enclosure of state power—allowing capitalists to run wild making stupid decisions with the implicit guarantee that if they run into trouble, Uncle Sam will catch them, which indeed happened.
Now, as Steve Randy Waldman writes, one can make the case that the Biden administration did the right thing here on the narrow question of SVB. Even though its management made stupid decisions by failing to hedge its interest rate risk, and its depositors idiotically (or corruptly) didn’t get alternative insurance on their large deposits, imposing losses on depositors would likely cause “a run to the banks that are hardest of all to discipline, the ones widely understood to be ‘too-big-to-fail.’”
At any rate, the justification for any rescue of SVB (whether by this method or the normal FDIC resolution process) is that doing so has broader benefits for society. If its depositors were entirely wiped out, that might have terrible knock-on effects throughout the rest of society. In the pre-FDIC age, devastating banking panics spreading from institution to institution were common. It’s good that doesn’t happen anymore.
The problem is that this reasoning is today rarely applied to other uses of state power. When it comes to Biden’s plan to forgive student debt, for example, some of the same venture capitalists begging for handouts were howling about its supposed unfairness. That kind of attitude is so deeply baked into American culture that policymakers have become allergic to clear and direct state action. Instead, they try to hide their tracks—instead of social-democratic welfare programs, we get benefits buried in the tax code so people can pretend they aren’t beneficiaries of government help.
This was true of the SVB bailout too. The Treasury/FDIC statement insists that no taxpayer money will be at risk, because any “losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.” But as Waldman points out, this effectively means “all deposits will become effectively mutually insured by the industry as a whole.” Banks will pay for this, however, by imposing additional costs on their customers—a de facto tax, except one which “deprives the public of any capacity to design the tax, to shape its incidence, and to hold accountable those who provoke the costs the tax must recover.”
Financial crises are events where the government structures and actions that create and protect the wealth of the oligarch class are made explicit, and hence unpopular. Given that, this is a golden opportunity to take those people down a peg—Democrats in Congress should be drawing up stiff new financial regulations and taxes on the rich—and for Americans as a whole to demand like treatment from the state. If Silicon Valley mental illness factories are entitled to a bailout, then by rights the American people should also get Medicare for All and a full-dress welfare state.
Tags
Who is online
243 visitors
Inconvenient truths.
A bad government, as exemplified by the current Democratic administration, is worse than no government at all. The best government is one that governs least.
As for that recent railroad accident, no evidence has so far been presented that it was caused by a lack of maintenance.
What's inconvenient? Only anarchists want an absence of government.
The government could not exist without the economy.
The federal government collects revenue from individual income taxes, payroll taxes, corporate income taxes, excise taxes and customs duties. The amount is dependent on a successful economy.
You didnt build it yourself, or whatever Obama said, was true. The inconvenience is the widespread denial of this by "conservatives".
Business interests have ALWAYS received favorable treatment by the government, yet those business interests always complain.
So my question is, if governments builds it. Why doesn’t everyone have a successful business like I had?
Could you have had a successful business without the government? I've never heard of one.
Answer my question please and I’ll be happy to answer yours.
This conservative understands and appreciates government. I might be biased since the federal government has paid most of my college costs and my salary for over 50 years now. My wife's salary is paid by our county and state government.
With regards to regulation, it's a question of balance. Regulation requires balancing public benefit with economic costs. Determining that balance point is difficult and can get distorted by politics and overlapping interest. Difficult, but nevertheless necessary in a complex society.
Business interests complain about overlapping regulations at every level of government plus compliance documentation. I recently read an estimate that manufacturers spend an average of $19,600 per employee every year to comply with federal regulations. The total cost of federal regulations is $2 trillion with another trillion imposed by state and local government.
You quoted President Obama, so shall I. In a Wall Street op-ed that he summited he wrote, “Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs.”
Government involvement with business doesnt guarantee that every business will be successful, it guarantees that business interests are given favorable treatment.
Yes, big businesses can more easily afford the legal expertise to both understand the regs as well as how to take advantage of tax complexity. They can also afford to lobby and make political contributions. They have leverage to obtain benefits for locating a business in a state or local region. Small and medium businesses don't have those advantages.
Exactly, the government doesn’t build successful businesses. The people running and working at them do.
This is just a silly conversation. It is most definitely a symbiotic relationship but at minimum, without the people to subsidize it, government doesn’t exist.
Period.
It's not a silly question, government facilitates business , but business does not pay all the taxes, people who earn money do. "the people" do not have lobbying advocates, but banks do.
Wrong.
Government can not exist without people. Who pays for it if their are no people/businesses ? People can and do exist with little to no government if they so desire.
But like I said, this is a silly conversation.
They exist like the Unabomber existed out in the middle of nowhere.
Remember when Democrats were telling us that deficits don't matter? That was only a little more than three years ago. Surely people don't have such short memories.
The argument is being made that the economy wouldn't exist without government. And that argument is correct, to a very large extent. But that argument completely ignores the role of responsible fiscal management by government for maintaining the stability of the economy. Citing all the positive aspects of big government spending won't avoid the consequences of big government deficits.
How does a bank hedge against interest rate risk when the Federal government is responsible for those interest rates? SVB is being chastised for failing to protect itself from Federal fiscal irresponsibility. If Federal notes, bills, and bonds are too risky then how does a bank secure depositor assets? And the value of Federal notes, bills, and bonds have fallen over the past year because the Federal deficits have grown larger than the economy can support. Banks that secured depositor assets with Federal treasuries have been left holding the bag.
Using Biden's student loan forgiveness as an example seems extraordinarily ignorant. The student loan forgiveness is a bailout for lenders. Biden is trying to take loan default off the table. The people that borrowed the money didn't get to keep any of it and those same people with student debt won't see any money if the debt is forgiven. The education system got the borrowed money and the banks will get the money from the bailout. And if Biden forgives the student loans with Federal deficits then the consequences of that irresponsible fiscal management will show up as another SVB that tried to use Federal treasuries to hedge against Federal fiscal irresponsibility.
The Federal government has been robbing Peter to pay Paul by claiming that deficits don't matter. But SVB demonstrates that Federal deficits do matter. SVB is an evil bank because it invested in Federal treasuries to secure depositor assets and maintain liquidity. And SVB failed to protect itself against Federal fiscal irresponsibility.