As America's economic turmoil continues to spread fear among consumers and depositors, U.S. Rep. Thomas Massie (R-KY) took to Twitter to explain how the clumsy hand of government — specifically the Federal Reserve — enabled both the "malfeasance" and "failure" of Silicon Valley Bank.
First, Massie explained the Fed's role as "Santa Claus" by setting and keeping interest rates "artificially low" for years. That spurred economic growth and "nudged" those with cash to spend into venture capital which in turn necessitated an institution like Silicon Valley Bank.
Let’s review the Federal Reserve Bank’s many roles, & how each of them enabled the SVB failure/malfeasance:
— Thomas Massie (@RepThomasMassie) March 12, 2023
(1) Santa Claus.
By keeping interest rates artificially low, FED stimulated the economy, & nudged those with capital into the VC space creating demand for a bank like SVB.
Second, the Kentucky Republican outlined the Fed's "arsonist" behavior demonstrated by its actions that "created $5 trillion out of thin air" for Congress to spend...that did not, in fact, exist.
(2) Arsonist.
— Thomas Massie (@RepThomasMassie) March 12, 2023
FED created $5 trillion out of thin air so Congress could inject this money into the economy. There weren’t 5 trillion dollars to borrow during COVID, and certainly not at the low rates imposed by FED. Inflation was off to the races thanks to dilution.
Third, the Fed then changed hats from "arsonist" to "firefighter," and "came to the rescue to fight inflation by rapidly increasing interest rates" to their highest level since the 2008 financial crisis. Consequently, venture capital startup deposits to Silicon Valley Bank slowed down while the now-failed bank's assets lost value.
(3) Firefighter.
— Thomas Massie (@RepThomasMassie) March 12, 2023
After setting the blaze, FED came to the rescue to fight inflation by rapidly increasing interest rates. As a result, net VC startup deposits into SVB slowed, while assets held by SVB (long-term low-interest government debt) became less valuable.
Fourth, the Fed is now likely to act as a "trauma doctor," Massie explained, which will see the Fed put its "Santa" hat back on again with the same consequences.
(4) Trauma Doctor.
— Thomas Massie (@RepThomasMassie) March 12, 2023
Will the FED play a role in bailing out SVB depositors and other banks? Possibly by lowering rates, buying their holdings at above value, or creating more money for bailouts. None of these are free. But the FED becomes Santa Claus again and inflation rages on.
This equation, Massie argued, is why Americans "would be better off if the Federal Reserve Bank...did not exist to socialize the risks of insiders while distorting our economy, destroying jobs, and devaluing our currency."
We, the American people, would be better off if the Federal Reserve Bank, an instrument of the very wealthy and connected, did not exist to socialize the risks of insiders while distorting our economy, destroying jobs, and devaluing our currency.
— Thomas Massie (@RepThomasMassie) March 12, 2023