Socialism for the Rich, Rugged Free Enterprise for the Poor (part 55)
On bank bailouts and SNAP benefits
Dear Tobias,
I can hardly imagine what last weekend was like for you. Even from your post in Singapore, you must have had a front-row seat to the near-collapse of the American financial system, which was saved by the Federal Reserve’s 11th-hour promise to guarantee all deposits at a few tottering banks. It sounds like a near thing. The announcement came Sunday night, mere hours before the start of trading in Asia. Maybe you kept cool through it all. I would have been smoking two cigarettes at once.
In truth, though, I have also had a front-row seat to a recent disaster, albeit one moving much more slowly. This March, after several delays, the “emergency allotment” benefits for the Supplemental Nutrition Assistance Program (SNAP) finally ended. These allotments provided every SNAP recipient with “an additional $95 [per month] or the maximum [SNAP] amount for their household size–whichever was greater.”
The whole thing reminded me of a line from Martin Luther King, Jr., spoken at a 1968 minister’s conference in Miami: “In this country we have socialism for the rich and rugged free enterprise for the poor. That’s the problem.”
Fifty five years later, he’s still right. An investigation of bailouts and expiring benefits can tell us a lot, I think, about our society, about what (and who) we value, and about its deep designs.
Socialism for the Rich
Others can and surely will give a more technical explanation for what went wrong at Silicon Valley Bank (SVB) last Friday. But the basic outlines seem clear enough. Tell me if I have this right:
At heart it was a good old-fashioned bank run. In order to entice depositors, especially tech companies, SVB had been offering attractive rates on its accounts and then covering those expensive promises by buying lots of bonds. So far so good. But because the Federal Reserve has been raising interest rates aggressively, the relative value of those bonds, purchased at the lower interest rates, went way down. Reuters reported that the SVB bond portfolio “was yielding it an average 1.79%, far below the current 10-year Treasury yield of around 3.9%.”
Not a disaster on its own. Except. Due to the uncertainty in the tech sector right now, a few of SVB’s depositors started to ask for their money. In order to honor these requests, the bank had to sell some assets at a loss, which reduced the value of their total assets even further, so it started to look like the bank couldn’t cover its deposits, and then everyone wanted their money. The run was on.
All of SVB’s deposits were insured by the FDIC up to $250,000, but any deposits above a quarter million would have been wiped out. Apparently 90-97% of SVB’s deposits were uninsured. Many of the big deposits belonged to tech companies and venture capitalists. Despite their reputations as brilliant innovators and iconoclastic free-thinkers, they turned out to be shockingly prone to herd behavior, to say nothing of how poorly they monitored their bank. As one observer put it, “this was more of a case of ‘bank-run by idiots’ rather than a ‘bank run by idiots.’”
I wouldn’t give the bank’s executives too much credit, though. They were to a great extent the author of their own difficulties. SVB’s CEO had previously lobbied congress to relax regulations on banks like his so that he and his colleagues could come up with new financial products for their customers. Congressional Republicans, the Trump administration, and more than a dozen Democrats granted him his wish. The previous regulations might well have prevented his bank’s collapse. But no. Now the fearless innovator wanted a handout.
When I imagined him and all of his tech billionaire depositors losing their shirts I gave a rueful laugh, as if the Lord Jehovah had smite-ed mine enemies.
That’s not what ultimately happened, though. The Federal Reserve stepped in to cover all the deposits, even though the bank hadn’t paid for anything like that level of insurance. Maybe it was for the best. On Sunday another bank, Signature Bank, closed too. As you pointed out to me while events were unfolding: the US banking system has no way to stop a digital run. If the Federal Reserve couldn’t restore trust in the system as a whole, would other banks start falling one after another? Would it be as bad as 2008? Or worse?
Even if the bailout was necessary, it was undeniably socialism for the rich. If the banks had remained profitable, their gains would have been mostly private; now, the public was assuming all the risk.
I got the distinct sense that these people, these venture capitalists and other super-rich depositors, were not the kind of people who were supposed to pay for their mistake, or for the unintended consequences of their actions. Patrick Henry, the GOP chair of the House Committee on Financial Services appeared on CNBC in a fluorescent green bowtie and told us all, “There is a large amount of personal responsibility that Americans should take. But in a moment like this…”
Then there was Larry Summers. On Sunday night the former head of the Federal Reserve and president of Harvard University was sputtering that this was no time for a lecture on moral hazards–the hazard in this case being that big depositors would learn that they don’t need to buy insurance or do due diligence with their bank or otherwise reduce their risks because someone else, the rest of us, will always bail them out. We needed to help these people, no matter what the cost.
The cost appears to be $175 billion, for SVB alone.
The same Larry Summers has been telling anyone who will listen that the Federal Reserve must keep pushing up interest rates until it gets not only a recession, but also an unemployment rate of 6%. That would mean millions more out of work. Millions scrambling to make ends meet and fighting for whatever job they can get, no matter how low-paying, dangerous, or demeaning. So you see, economic pain is for the wage-earners, the little people. Not important people. Not venture capitalists!
Rugged Free Enterprise for the Poor
Well, Larry needn’t worry. The poor are hurting.
From my post as a grant manager at a basic needs nonprofit, I have seen financial protections for the poor disappear one by one. During the early days of the pandemic, the Biden administration dramatically expanded the social safety net. It wasn’t only the stimulus checks and generous unemployment insurance. There were other programs, too:
The expanded child tax credit sent families an extra $250-300 for each child. It lifted 3.7 million children out of poverty.
All school children were getting their breakfasts and lunches for free. The USDA’s data showed that the number of “food insecure” children–their bloodless euphemism for hungry–fell to an all-time low.
Children who had previously received free or reduced lunches also received automatic enrollment in SNAP, with a card that showed up in their parents’ mailbox. Now their families had money for their dinners and weekend meals, too.
“Emergency allotments” made SNAP benefits more generous. All recipients either received the maximum benefit for their family size or, if they were already receiving the maximum, another $95 a month.
As a result of all the new policies, “poverty fell by the largest amount in five decades.” The total number of Americans in poverty fell by 12 million, a total which included 5.6 million children.
Even so, one can imagine the objections. First, cost. Yet how did the costs compare to the Silicon Valley bailout? Keeping school breakfasts and lunches free would have cost $11 billion; the extra SNAP benefits cost $2.7 billion in February; and making the child tax-credit permanent would have cost around $160 billion a year. I admit that the nearly universal child tax-credit was probably unsustainable, but a version aimed at only low-income families, plus the SNAP emergency allotment and school lunches, might have kept poverty at a 50-year low. It would have cost way less than the bailout.
As for the economic benefits of the expanded benefits, I suspect they would have been salutary. The public would have easily recouped their cost in the long run, as perhaps nothing is as important to the economic future of a nation than healthy and thriving children. It’s hard for children to thrive in poor households, which means supporting their parents, even parents who we are inclined to blame for their poor situations.
And speaking of deserving: what about the moral fiber of the poor? In 2021 Republican Senator Roger Marshall fumed that companies in Kansas were having trouble attracting employees because unemployment insurance was “paying [people] more to stay at home than to go to work.” In reality, states that ended pandemic unemployment benefits early saw only a modest rise in employment, relative to states that kept the benefits going. The five states with the lowest unemployment levels had all retained some, or all, of the benefits.
Still, Marshall’s complaint probably resonated with many. He was parroting an idea that we have heard again and again: government largesse creates dependency and lethargy. Donald Trump’s Council of Economic Advisors supported work requirements for welfare programs, on the theory that welfare alone led to a “decline in self-sufficiency”; and Bill Clinton ended welfare as we know it, saying that benefits with no strings attached had created “a cycle of dependency that has existed for millions of our fellow citizens, exiling them from the world of work.” Democrats or Republicans, they are all agreed. Social services rob the poor of their chance to become rugged individualists and compete in the arena of free enterprise. If the poor dears do not want to fight in the coliseum, then they must be pushed. And the gates slammed shut behind them.
The clearest expression of this idea I have ever read comes from Joseph Townsend, an 18th-century clergyman and early liberal economist. In his A Dissertation on the Poor Laws, By a Well-Wisher of Mankind he wrote: “The poor know little of the motives which stimulate the higher ranks to action–pride, honor, and ambition. In general it is only hunger which can spur and goad them on to labor.”
He would certainly disapprove of my non-profit’s network of food shelves, though it might console him to know that we are seeing 25% more shoppers this year than last. The poor are feeling his spurs.
Coda: Where Do We Go From Here?
I cannot be the only one who notices the incredible difference between how we as a nation treat the rich and poor. The poor must always take personal responsibility, compete and fight for everything they have, and their condition is always the fault of their own sloth or stupidity. When some large group of rich Americans suddenly faces ruin, then their mistakes (ie, trusting all of their money to an incompetent bank) are suddenly beside the point and they need our help.
Another point of contrast. American social service programs are almost all means-tested. For every new dollar a SNAP recipient earns, her benefits fall by an equal amount, even if she is receiving a social security cost-of-living adjustment, which is not technically increasing her purchasing power. There is a tight cap on how much money anyone can receive. For the rich depositors at SVB, there is no limit to how much of their losses we, as the public, are expected to cover.
There are two possible reasons why this might be so. The first is the moral reason. We have been led to believe for so long that the rich are brilliant and righteous, even when some of them take every opportunity to convince us otherwise, that we are willing to give them the benefit of the doubt. The poor, we are told, are morally and intellectually deficient. If they can demonstrate fitness in the arena of the free market, we might reconsider them, on a case-by-case basis. Otherwise, though, they deserve their fate.
The other explanation is worse. What if the venture capitalists in San Francisco, just like investment bankers in New York in 2008, really are that essential to our economic system? The global economic system, through design or accident, may now depend on them not losing money. Perhaps capital accumulation and concentration has gone so far now that not only individual banks but also whole classes of people are too big to fail.
To which I could only say, with Dr. King, yes, that’s the problem.