The Fed’s near-zero interest rate experiment was destined to have unintended consequences. Backstopping SVB’s collapse is just the first one

Good morning.

Well, that was fast. The U.S. government yesterday effectively eliminated the cap on Federal Deposit Insurance, telling depositors at Silicon Valley Bank and at another failed bank—Signature—that they will get all their money back and can access it today. Any shortfalls at the banks will be covered by the FDIC, which raises money through fees on banks.

The move ends the immediate crisis; there’s no reason for depositors to pull their money from banks if the government is guaranteeing it. But the long-term implications remain to be seen. During the financial crisis, regulators made clear they would backstop all “systemically important” institutions, and significantly increased regulations on those large institutions as a result. Yesterday’s action extends that guarantee to big depositors at smaller banks. (Shareholders at SVB and Signature won’t be made whole.) If anyone thinks that won’t be accompanied by stepped up regulation on those banks, they are misreading history.

It was inevitable that the Fed’s decade-long experiment with near-zero interest rates would have serious unintended consequences. Count this as one of the first of those—a historic reframing of depression-era deposit insurance. We’ll let politicians and regulators argue over whether to call it a bailout, but it is a big change.

And another thing to watch: The Fed has made clear its determination to keep raising interest rates until it gets inflation under control. But fear of a financial crisis is the one thing that could shake that determination.

Other news below.

Alan Murray

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