“It’s Not a Bailout”: Why Banks and Governments Are Afraid to Use the Term and Why Crypto May Be the Last Safe Haven for Stable Currency

📍Posted by: Merrick Allen. Mar 22, 2023

The term “bailout” has become a dirty word in the aftermath of the 2008 global financial crisis, when governments around the world injected trillions of dollars into failing banks and corporations to prevent a systemic collapse. Many people felt that this was unfair and unjust, as it rewarded reckless and irresponsible behavior at the expense of taxpayers and ordinary citizens.

  • The use of terms such as “resolution” or “liquidation” may be used to describe interventions that are essentially bailouts, and this may lead to skepticism and distrust from the public.
  • The use of cryptocurrencies may be seen as an alternative or hedge against traditional banking systems, particularly in terms of their resistance to inflation and their decentralization.
  • Cryptocurrencies have advantages over fiat currencies in terms of inflation resistance, transparency, immutability, borderlessness, and decentralization.

This was recently demonstrated by the failure of two major banks in the US: Silicon Valley Bank (SVB) and Signature Bank. These banks were heavily exposed to risky loans and investments related to technology startups, cryptocurrencies, and other speculative assets. When these assets lost value due to market volatility and regulatory crackdowns, the banks faced massive losses that threatened their solvency.

To prevent a domino effect that could have triggered bank runs, panic, and contagion across the financial system, US authorities intervened to provide liquidity and support to SVB and Signature Bank. They also announced that they would repay all depositors in full through the Federal Deposit Insurance Corporation (FDIC), regardless of whether their deposits exceeded the $250,000 insurance limit or not.

This move was widely criticized as a bailout by many observers, who argued that it violated the principle of moral hazard: that is, if banks know that they will be rescued by the government in times of trouble, they have no incentive to behave prudently and responsibly. They also claimed that it was unfair to use taxpayer money or funds from other banks (through FDIC premiums) to bail out failed institutions.

However, US authorities insisted that this was not a bailout but rather a “resolution” or a “liquidation”. They argued that unlike in 2008, when banks received direct capital injections from the government with few strings attached, SVB and Signature Bank did not receive any public funds or subsidies. Instead, they were taken over by regulators who removed their senior management, wiped out their shareholders and certain unsecured creditors (such as bondholders), sold off their assets at market prices (including at steep discounts), and used these proceeds to repay depositors.

They also claimed that this intervention was necessary to protect not only depositors but also businesses that relied on SVB and Signature Bank for financing their operations. Many of these businesses were small or medium-sized enterprises (SMEs) in innovative sectors such as biotechnology, artificial intelligence (AI), clean energy, and blockchain technology. Without access to credit from these banks, they could have faced bankruptcy or disruption, which would have harmed the economy and innovation.

Moreover, they argued that this intervention was consistent with international standards and best practices for resolving failing banks. They cited the example of Europe, where since 2016, a new framework called the Bank Recovery and Resolution Directive (BRRD) has been implemented. This framework aims to ensure that failing banks are resolved quickly, efficiently, and with minimal impact on taxpayers. It also introduces a new mechanism called a “bail-in”, thereby banks use their own capital (such as equity and subordinated debt) to absorb losses before resorting to external support.

However, despite these arguments, many people remain skeptical and distrustful of bank bailouts or resolutions. They point out that even if SVB and Signature Bank did not receive direct public funds, they still benefited from indirect subsidies such as access to cheap funding from central banks, implicit guarantees from regulators, and preferential treatment from tax authorities. They also question whether regulators acted swiftly enough to prevent or mitigate these failures before they became too costly or systemic. They wonder whether regulators are sufficiently independent from political interference or capture by powerful interests. And they doubt whether regulators have adequate tools or resources to supervise complex financial institutions effectively.

In this context, some people see cryptocurrencies as an alternative or a hedge against traditional banking systems. Cryptocurrencies are digital assets that operate on decentralized networks using cryptography to secure transactions and records. Unlike fiat currencies issued by central authorities such as governments or central banks, cryptocurrencies are created by algorithms based on predetermined rules such as supply limits or inflation rates. Some of the most popular cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP)) and Cardano (ADA).

Cryptocurrencies offer some advantages over traditional banking systems, such as lower transaction fees, faster settlement times, greater transparency, and resistance to censorship or manipulation.

Fiat currencies are issued and controlled by central banks and governments, which have the power to manipulate their value and supply according to their economic and political agendas. However, this also exposes them to risks of corruption, mismanagement, instability, and loss of trust from the public.

Cryptocurrencies have several advantages over fiat currencies in terms of inflation resistance:

– Cryptocurrencies have a limited or fixed supply that cannot be altered by anyone. For example, Bitcoin has a maximum supply of 21 million coins that will be reached by 2040. This makes it a deflationary asset that increases in value over time as demand grows.

– Cryptocurrencies are transparent and immutable, meaning that their transactions and balances are visible to everyone and cannot be tampered with or reversed. This ensures accountability and trust among users and prevents fraud or manipulation.

– Cryptocurrencies are borderless and global, meaning that they can be used across different countries and regions without restrictions or interference from governments or regulators. This allows users to access alternative markets and opportunities that may not be available with fiat currencies.

– Cryptocurrencies are decentralized and democratic, meaning that they are governed by consensus mechanisms that involve all participants in the network. This prevents any single entity from controlling or influencing the system for their own benefit.

Bitcoin is one of the most popular cryptocurrencies that has been used as a store of value and a hedge against inflation by many people around the world. Bitcoin has shown remarkable resilience and growth despite facing volatility, regulation, competition, and criticism from various quarters.

Bitcoin has also proven to be a safe-haven asset in times of economic turmoil or uncertainty. For example, during the COVID-19 pandemic, many governments resorted to massive stimulus packages and bailouts to support their economies, which resulted in increased money supply and inflation pressure. Bitcoin, on the other hand, maintained its value and even reached new highs as more investors sought refuge in its scarcity, security, and sovereignty.

Cryptocurrencies, especially Bitcoin, provide a safer alternative to fiat currencies during inflation pressure/mass bailouts. They offer users more control, freedom, and protection over their money than traditional systems. They also represent a paradigm shift in how money is created, distributed, and used in society.

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Julio Numbawan
Julio Numbawan
1 year ago

Really good analysis – how do you think the buyout of Credit Suisse will impact with prices?

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