The savings and loan crisis had a lot to do with the very bad decision by Congress to relax regulations on those associations, which were in financial trouble as a result of high interest rates. There are obvious parallels to the crisis at Silicon Valley Bank, which also hit a wall because of rising interest rates and was able to take such big risks in part because the Trump administration and Congress had relaxed regulations on midsize banks.

But here’s the thing: The vast bulk of deposits at S.V.B. weren’t insured, because deposit insurance is capped at $250,000. Depositors who had given the bank more than that didn’t fail to do due diligence on the bank’s risky strategy because they thought that the government would bail them out; everyone knows about the F.D.I.C. insurance limit, after all.

They failed to do due diligence because, well, it never occurred to them that bankers who seemed so solid, so sympatico with the whole venture capital ethos, actually had no idea what to do with the money placed in their care.

Now, you could argue that S.V.B.’s depositors felt safe because they somewhat cynically believed that they would be bailed out if things went bad even if they weren’t entitled to any help — which is exactly what just happened. And if you believe that argument, the feds, by making all depositors whole, have confirmed that belief, creating more moral hazard.

The logic of this view is impeccable. And I don’t believe it for a minute, because it gives depositors too much credit.

I don’t believe that S.V.B.’s depositors were making careful, rational calculations about risks and likely policy responses, because I don’t believe that they understood how banking works in the first place. For heaven’s sake, some of S.V.B.’s biggest clients were in crypto. Need we say more?

And just in general, asking investors — not just small investors, who are formally insured, but even businesses with millions or hundreds of millions in the bank — to evaluate the soundness of the banks where they park their funds is expecting too much from people who are, after all, trying to run their own businesses.

Paul Krugman

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