Who gets a bailout? In the wake of SVB collapse, some student loan borrowers feel shafted
Economic justice for me, but not for thee?
That's what some advocates who have spent years fighting for student loan debt relief are wondering.
The fate of the Biden administration's student debt relief package is in the hands of the Supreme Court, its decision possibly months away. Meanwhile, after Silicon Valley Bank and Signature Bank – institutions that catered to the tech and cryptocurrency industries – failed this month, the U.S. government took less than a week to decide all their deposits would be protected, no matter how large.
That intervention means those who chose to put more than $250,000 in an account, exceeding the maximum guaranteed by the Federal Deposit Insurance Corporation, will be made whole. But roughly 40 million Americans who could see up to $20,000 in student loan debt reduced under the Biden plan continue to wait and worry about whether they will eventually get a reprieve.
'A huge double standard'?
The situations are not identical, economists and even some advocates say. SVB and Signature failed when depositors flocked to take out their money, worried about the solvency of those institutions. The bank runs could have spurred others and possibly sent the broader banking system into a tailspin.
The individual struggles of student loan borrowers don't produce such a singular jolt to the American economy. But there's pain all the same.
There's the personal loss when student loan bills hinder your ability to create generational wealth or to simply have the peace of mind that comes with financial stability. And in a nation where roughly 70% of gross domestic product comes from the consumption of goods and services, there's a broader, if more incremental, financial impact when you can't buy a home, purchase a car or plan for retirement because of your student loan burden.
While federal officials decided over a weekend to bypass a rule limiting how much money regulators would insure, "we’ve been making calls for student debt cancellation for a decade,'' says Braxton Brewington, spokesperson for the Debt Collective, a union of debtors that wants to see public needs like health care and education become free.
"It is a huge threat to our economy that (more than 40) million Americans are saddled with debt,'' Brewington continued, adding that many borrowers have paid what they initially owed but are mired in paying off interest. "They’re not able to buy homes, to start families, to save for retirement. If we’re talking about systemic risk, it’s a huge double standard.’’
Is a person who borrows to pay for a higher education less worthy of relief than someone who has the means to put over a quarter of a million dollars in an account they know will not be insured? Who is labeled irresponsible and who is deemed deserving?
And how do we determine who is too big to fail and who is too inconsequential to save?
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SVB was second-biggest bank collapse in history
SVB, based in Northern California, went under on March 10 in what was the second-biggest bank collapse in history. New York-based Signature Bank collapsed a few days later. By the end of that week, the Federal Reserve, FDIC and Treasury Department decided the failure of those institutions posed enough of an economic danger that all their deposits would be guaranteed.
Those actions were needed to "protect the broader banking system,'' Treasury Secretary Janet Yellen said in prepared remarks to the American Banking Association. And "similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Jaime Peters, assistant dean of accounting, finance, and economics at Maryville University in St. Louis, agreed the decision by regulators was "absolutely necessary."
Frantic business owners with accounts at other regional banks might have moved their money to larger institutions they considered more stable, like JP Morgan Chase and Citigroup, she said, "and that could result in hundreds of banks going under.''
She doesn't see the debate over giving student loan borrowers relief as at all similar.
“I understand the people who are frustrated,'' she says. "I'm a college professor. The loan forgiveness would be amazing for my students.''
But if regulators had not stepped in after the runs on SVB and Signature, "the contagion would have spread very quickly,'' and people whose employers paid them through accounts in a failing bank could have suffered, she says. "People who expect their paychecks to come through ... that is something worth protection.''
She added that "the important part is this was not a bailout. The government is not putting its own money at risk at this point.''
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Did the government bail out SVB and Signature?
The Biden administration has emphasized that unlike 2008, when the federal government bought the assets of financial institutions as the nation teetered on the brink of the Great Recession, taxpayers are not on the hook for the deposits at SVB and Signature banks.
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Rather, the depositors will be made whole by the Deposit Insurance Fund, which is made up mostly of fees charged to banks. So, there's no actual bailout.
But some economists and lawmakers say that's exactly what it is.
"It definitely is a bailout, and the idea it’s not going to impact taxpayers is technically correct but economically vapid,'' says David Sacco, a practitioner in residence of finance at the University of New Haven's Pompea College of Business.
The bank fees tapped to cover the SVB and Signature deposits will raise those institutions' costs and will affect customers in the form of "higher fees on people's bank accounts, lower interest rates or lower service,'' he says. "They're arguing semantics. ... It's a consumer-funded bailout.''
And while Sacco says he is not in favor of student loan forgiveness, he believes those borrowers have a point when they say they are being treated differently.
"It’s reasonable to say, 'You’re bailing out one group that made bad choices – tech company depositors who happen to be huge donors to the political system – and you’re not bailing out ordinary citizens who made bad decisions,''' he says
Still, there is a key difference, Sacco says.
"Not bailing out student loan holders is not going to cripple the economy the way a bank failure would,'' he says. "The analogy is our economy is an engine (and) the banking system is literally the oil system that makes it work.''
Though it's true millions of people may never "achieve the economic success" they otherwise might have without student loan debt, Sacco says, "that’s not going to throw our economy into a depression."
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Wealthy investors take to Twitter to save SVB depositors
In the wake of the SVB and Signature Bank collapses, First Republic Bank also ran into trouble. It has gotten $30 billion in deposits from JPMorgan and other large banks to keep it afloat.
Federal regulators have also announced a lending facility that would allow regional banks to borrow money over the next year to handle withdrawals by uninsured depositors with the goal of preventing more bank runs.
Debt relief advocates have noted the chorus of wealthy investors and prominent officials who took to social media and television to call for SVB depositors to be made whole.
"The tragedy of SVB is that it's not the wealthy taking the hit,'' Mark Cuban, owner of the Dallas Mavericks, tweeted on March 11. "It's the thousands of companies who borrowed from SVB and were required to keep their cash in SVB. Those entrepreneurs and their employees and vendors are feeling the pain. And they are who the Fed should protect"
... and the millionaires in SVB, where only up to $250k of the millions they had will be insured. SVB only had 2.7% of their transactions in Q4 22 under $250k.
— InvestorX (@DailyInvestorX) March 11, 2023
After SVB's collapse, former Treasury Secretary Larry Summers said on Bloomberg TV that "what is absolutely imperative is that, however this gets resolved, depositors be paid back and paid back in full.''
But Summers has been far less enthusiastic about student loan forgiveness, tweeting that it could accelerate inflation and strip resources from people who are more in need.
Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.
— Lawrence H. Summers (@LHSummers) August 22, 2022
"We saw a lot of folks who seemed hypocritical in terms of saving one part of the economy and not the other,'' says Natalia Abrams, president of the Student Debt Crisis Center.
Itay Goldstein, who is the Joel S. Ehrenkranz Family Professor as well as professor of finance and economics at Wharton, believes federal bank regulators "acted a little too quickly'' in regard to SVB and Signature, adding that the government's actions could lead banks and large depositors to take more risks in the future knowing they'll likely be rescued if they get in trouble.
Instead, he says, federal officials might have taken more time to explore options like getting another bank to take over those troubled institutions or made the decision to guarantee some uninsured deposits, but not all.
"I certainly would not dismiss the possibility that there was a strong political pressure, public pressure from social media, from different lobbying groups that pushed for it,'' he says of federal officials' swift actions.
Cody Hounanian, the Student Debt Crisis Center's executive director, says the student debt quandary also warrants bold action.
“The speed in responding to this is the thing that is particularly frustrating,'' he says of the SVB and Signature failures. "This issue of student debt is equal in scale. $1.2 trillion (in debt) is a massive problem. ... We'd like to see policymakers respond with similar urgency.''
Medical and housing debt not so easily forgiven
Some economists and lawmakers say other financial burdens like health care and housing have also not received the same type of emergency response, despite the toll those debts take on many Americans.
"In America, if you're a wealthy vulture capitalist with over $250,000 in uninsured deposits at a loosely regulated bank, the federal government will guarantee that your money is safe in a weekend,'' tweeted Sen. Bernie Sanders, I-Vt. "If you have no health insurance and get cancer, you're on your own. Unacceptable.''
In America, if you're a wealthy vulture capitalist with over $250,000 in uninsured deposits at a loosely regulated bank the federal government will guarantee that your money is safe in a weekend. If you have no health insurance and get cancer, you're on your own. Unacceptable.
— Bernie Sanders (@SenSanders) March 15, 2023
Andre Perry, a senior fellow at Brookings-Metro and professor of practice of economics at Washington University, also sees parallels to the housing crash of 2008 that occurred on the heels of lenders giving mortgages with high interest rates to borrowers who couldn't afford them.
"They felt that pain, many having to lose their homes,'' says Perry, author of "Know Your Price: Valuing Black Lives and Property in America's Black Cities." "Yet there weren’t many corporate executives that had to feel the pain. There were limited arrests, limited punishments overall.''
It's similar to the student debt relief debate, he says. "If you frame an issue in ways that ignore how people are dealing with economic crisis, you’re always going to favor some corporations and high-wealth people who already have an advantage in using their wealth to shape policy.’’
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Banking failure is under review
Fed Chairman Jerome Powell has said there will be a review of what caused the recent banking collapses.
"The question we were asking ourselves over that first week was, 'How did this happen?'" Powell said to reporters.
Previously, the Justice Department began a preliminary inquiry into why SVB failed, a person familiar with the matter has said, and the Securities and Exchange Commission was also looking into the bank's collapse, according to The Wall Street Journal, which was first to report those two inquiries.
But some questions will probably not be on the agenda, like who exactly is deemed too big to fail, whose voices matter, and why.
Those questions may not come up. But they should.
This article originally appeared on USA TODAY: Silicon Valley Bank v student loans: Double standard in who's helped?