U.S. capitalism is ‘breaking down before our eyes’: prominent hedge fund manager

The rescue package that aims to protect uninsured depositors from the blowback Silicon Valley Bank’s historic collapse shows that American capitalism is “breaking down before our eyes,” a prominent hedge fund manager told The Financial Times.

The Treasury Department, Federal Reserve and FDIC on Sunday jointly announced that SVB depositors would be made whole along with additional measures that aim to protect that financial institution from future bank runs. The agencies said taxpayer money will not be used in the rescue.

“The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” Citadel hedge fund founder and CEO Ken Griffin told The Financial Times.

“There’s been a loss of financial discipline with the government bailing out depositors in full.”

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Griffin said the move risks incentivizing risky behavior, a term economists call “moral hazard.”

“It would have been a great lesson in moral hazard,” he said. “Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential,” Griffin said.

“We’re at full employment, credit losses have been minimal, and bank balance sheets are at their strongest ever. We can address the issue of moral hazard from a position of strength.”

Griffin’s comments follow a statement from former Treasury Secretary Larry Summers, who on Sunday urged measures that are “necessary to restore confidence.”

“Acting decisively and rapidly is both the cheapest for taxpayers and the best for the economy. Failure to act strongly enough would be a Lehman-like error,” Summers tweeted.

“This is not the time for moral hazard lectures or for lesson administering or for alarm about the political consequences of ‘bailouts.’”