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💣 Blowing up the American tech sector would be bad
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💣 Blowing up the American tech sector would be bad

Washington was right to contain the fallout from the Silicon Valley Bank collapse

James Pethokoukis's avatar
James Pethokoukis
Mar 13, 2023
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💣 Blowing up the American tech sector would be bad
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The downside of Washington fully guaranteeing all those deposits in the failed Silicon Valley Bank (and Signature Bank in New York) is one of moral hazard: The federal government’s moves may encourage more reckless behavior in the future if bankers think Uncle Sam will always race to the rescue. That said, it’s not as if there are no consequences here for the poorly run bank:

Twitter avatar for @jasonfurman
Jason Furman @jasonfurman
P.S. I'm not particularly worried about moral hazard. The CEO, management & Board all losing their jobs. Equity going to zero. Bondholders won't be paid in full. These are all the entities that can effectively monitor, is unrealistic to expect depositors to do much monitoring.
2:54 AM ∙ Mar 13, 2023
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That said, moral hazard is an important factor that should always be among those being carefully considered by policymakers, whether in the middle of an emerging crisis or not. It’s a totally legitimate part of the discussion. Indeed, it would be both worrisome and profoundly strange if moral hazard in the financial system weren’t top of mind just 15 years after the Global Financial Crisis.

But there are other factors also worth considering. Some historical context: In a span of three months at the end of 1879, notes economist Robert Gordon in The Rise and Fall of American Growth a remarkable convergence of human ingenuity gave birth to three inventions that would change our world: wireless transmission, electric light, and the reliable internal combustion engine. They were not alone. In that same decade, two other devices that would revolutionize communication and entertainment emerged: the telephone and the phonograph. These were the seeds of a new industrial era that would transform our civilization beyond anything we had ever imagined.

It’s my hope and my belief that we are now in a similarly inventive and transformative time with key advances in biology, energy, space, and artificial intelligence. And Silicon Valley is the beating heart of that civilizational push forward. Or to put it another way, should I simply discount the potential impact of not making SVB depositors whole? Should I simply dismiss the following as mere whining?

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Consider:

  • "If the government doesn't step in, I think a whole generation of startups will be wiped off the planet," Garry Tan, president and CEO of the startup incubator Y Combinator, said in an interview. ... "Venture capital funding had already been in a contraction mode," Tan said. "So this is really a challenging time for something so devastating to happen." - NPR

  • "The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash." -Bill Ackman

  • "It will certainly have consequences for Silicon Valley and for the economy of the venture sector which has been dynamic, unless the government assures the situation is worked through. ... the consequences really will be quite severe for our innovation system [if SBV account holders can't make payroll]" - Larry Summers

  • “SVB’s 40,000 customers are mostly tech companies—the bank provided services to around half of US startups—but those tech companies are tattooed into the fabric of daily lives across the US and beyond. The power of the West Coast tech industry means that most digital lives are rarely more than a single degree of separation away from a startup banking with SVB.” - Wired

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