This article first appeared in The American Prospect. Read the original here.
Economics pundits have predicted the next recession incessantly for the past year and a half (always vaguely in the future), and the Federal Reserve has been happy to play ball. At first, in its inflation fighting, the Fed was vocal about targeting a “soft landing,” but lately hope for such a mild outcome has evaporated as Team Crash The Economy—headlined by Larry Summers—has sought relentlessly to raise unemployment to suppress inflation.
When progressives argued for other policies to fight inflation, such as anti-monopoly work and fighting corporate profiteering, the condemnation was widespread: These ideas were just economically illiterate. The theory that fighting corporate power could also tackle inflation was dismissed as frivolous; Summers called it “science denial.” Immiserating the working class, the argument goes, is the only possible way to fight inflation—a necessary side effect of the drug needed to cure the economy’s current ailment. This was reflected in federal policy. Despite promising anti-monopoly actions and some nice rhetoric from the president, our government’s primary tool for fighting inflation over the last two years has been attacking workers. President Biden even said that the centerpiece of his anti-inflation policy was Fed independence—in other words, that he wouldn’t put pressure on Chair Jerome Powell to keep people employed.
But then a string of banks faced runs, above all Silicon Valley Bank, due to a foreseeable liquidity crunch caused by Powell’s aggressive pace of interest rate hikes. Banks had overinvested in long-term, fixed-rate investments like Treasury bonds, and the hikes caused their value to decline precipitously.
The same people calling for mass firings now moaned that if the federal government didn’t act immediately to fully ensure all depositors, we could face a financial crash. Larry Summers decreed that “this is not the time for moral hazard lectures.” After all, a lack of confidence could spur more bank runs and stock market spirals, thus tanking the entire economy. The Fed jolted into action, coordinating with the Federal Deposit Insurance Corporation (FDIC) and Treasury Department to bail out SVB.
They did so despite a fairly weak legal authority backing them up—fully guaranteeing uninsured deposits is only authorized in instances of “systemic risk,” which our pal Larry says SVB did not represent. That wasn’t just Larry’s view, though; it was an assessment Jerome Powell’s Fed had previously agreed with. And they did it despite the SVB crash causing the same credit tightening that rate hikes are designed to create.
How much contagion risk there was on the fundamentals, and how much was ginned up by major depositors screaming on Twitter, is debatable at this point. But however one feels about the bailout itself, the choice to implement it stands in sharp contrast to policy decisions for the general public over the last several years. The same types of concerns about government intervention and legal justification get brushed aside when capital holders are the ones in peril. It seems economics, politics, and the law are only barriers to action when that action helps Main Street, not Wall Street.
To people like Summers, this wasn’t the right type of crash. They specifically want to destroy labor markets, not capital markets.
The situation is a good illustration of the enormous class bias in American policymaking. Full employment is occasionally tolerated so long as it isn’t associated with so much as a whiff of inflation (even when price increases are largely caused by supply chain issues and Putin’s war). But as soon as corporations and the wealthy run into trouble, elites trip over themselves, discarding both law and precedent, to rescue them.
Consider the Fed’s legal mandate to balance inflation and employment equally. It simply can’t be denied that in its rush to get back to the target inflation rate, which is fairly arbitrary, the Fed is heavily prioritizing stable prices over jobs.
Or consider student loan forgiveness. The legal justification is clear as day, and the authority itself is used regularly. According to the Higher Education Relief Opportunities for Students Act of 2003, the Education Department can forgive student loans as it sees fit in a national emergency. Per the statute, the secretary of education “may waive or modify any statutory or regulatory provision applicable to the student financial assistance programs under title IV of the Act as the Secretary deems necessary in connection with a war or other military operation or national emergency.”
Surely the biggest pandemic in a century qualifies, especially since it was officially declared so by both President Biden and President Trump. But despite a clear, explicit legal authority, student debt forgiveness hangs in the balance as the Supreme Court considers invalidating it based on the so-called “major questions doctrine.” The conservative argument is that student debt cancellation is too big of a decision for the executive branch to make and must be passed by an act of Congress, despite Congress having explicitly delegated this very power.
Naturally, conservative jurists and lawyers appear far less worried about the Fed and FDIC functionally establishing that all bank deposits in the country are now insured, even if they are over the $250,000 legal limit. Such a stance opens the floodgates to a theoretically infinite amount of spending. (The FDIC maintains a $125 billion Deposit Insurance Fund, and has a $100 billion line of credit with the Treasury Department, but also is backed by the “full faith and credit” of the United States, which means printing money in a pinch.) If that’s not a major question, it’s hard to say what is.
Student debt relief also faced immediate pushback from the likes of Summers and the Committee for a Responsible Federal Budget on the grounds that it would drive up inflation. Now, it is rather dubious to think that about $30 billion (how much debt forgiveness is estimated to cost per year) will do very much to boost inflation in a $25 trillion economy, but we also see class bias at work. Summers didn’t blink at the inflationary risk coming from an expenditure big enough to stabilize the 16th-largest American bank, let alone preventing bank runs by offering sweetheart loans and implicitly insuring all deposits. Indeed, a run of bank failures would be quite deflationary!
Similarly, opponents of student debt relief argued it was untenable on the basis of moral hazard and deservedness, claiming any relief should be means-tested. But when venture capitalists and tech bankers blew up their favorite bank, Summers explicitly threw moral hazard concerns out the window.
On the one hand, students have been told for years that earning a college degree is the ticket to a guaranteed good job, and they took out loans to do it. When that promise doesn’t work out, it’s some great moral crisis to forgive even a fraction of that debt. On the other hand, when Roku almost kills itself by having almost half a billion dollars in an uninsured checking account, it’s time for a mulligan.
On the one hand, if any wealthy graduates of elite universities might benefit from debt relief, it’s time to have a furious debate about unfairness. On the other hand, when the crypto firm Circle heedlessly deposits billions in SVB, making them whole is just the price of preventing financial contagion.
Now, I am not necessarily saying that the bailout shouldn’t have happened. No doubt Summers would say that big companies going under poses a greater economic risk than student debt being turned back on. But that is a practical argument, not a moral one. The only moral reason to bail out SVB was because doing so would provide broader benefits to the whole society (by avoiding a financial crisis). The exact same thing is true of student debt relief, a child allowance, Medicare for All, and dozens of other policies that would provide much more tangible benefits. Students and sick people just can’t put a gun to the head of the economy whenever their poor decisions imperil their own businesses.
At bottom, the core reason SVB’s depositors got bailed out had little to do with morals or even financial risk. It happened because they had rich and powerful friends with the ear of the president’s chief of staff. Broke students don’t. The students have to organize and campaign for decades to get something far worse than what they wanted, and for that to hang in the balance at the Supreme Court. The SVB depositors just had to whine on Twitter and make a few calls.
This is not democracy. But it is how power works in the United States.