Intervention in free markets, or protecting investors? Considering the moral choice

13th March 2023

The last-minute rescue of SVB raised in some economists minds important “moral” questions, both about free markets and also the responsibility of government and regulators to look after savers – the challenge being made by those who object to the rescue steps being taken, is that by bailing out banks like SVB it is distorting market forces rather than simply letting the free market take its course.  Their view would be to leave others to address its consequences, and that there is no moral imperative for governments to step in to support the private sector.

However, this does not address the wider question around the fact that ultimately those with small businesses, and entrepreneurs on whom the economy relies, are dependent on the moral requirements of a fair market system, to become engaged with banks like SVB in the first place.

The view of some of those who adhere to a pure free market approach, and laud economists like Milton Friedman, is that the markets should be left to regulate themselves and in broad terms that the risks that investors and entrepreneurs take is part of what makes markets work.  In Friedman’s own words: ‘The Social Responsibility of Business Is to Increase Its Profits’.  The net effect being to benefit society, create jobs and create benefits through its ongoing engagement.

While for some libertarians the ideas behind Friedman’s approach and others like him, sound appealing, in fact, they forget that small businesses, and growing companies rely on larger businesses and regulators, to create a market they can trust and which can help them grow.

The moral question is really how do we create a fair system on which small businesses can flourish and develop their own businesses, without having to worry about the security of those banks and other services which enable their growth.

Many lenders and shareholders in SVB have lost money from speculating on its growth – but those who banked on its security and deposited their funds with it, are for the most part now protected as a result of government intervention.  This has protected jobs, secured markets and continued to enable small and growing businesses to trust that the system will to some extent look after them and enable them to focus on what they know best, innovation, risk and creativity.

Putting all moral arguments to one side about the free market economics, these recent steps at least for the moment seem very much like the right thing to do.

Some 89% of around $200 billion in deposits held by SVB at the end of 2022 was uninsured, according to the FDIC.

Regulators have now removed that risk.

But in doing so “they took another step towards demonstrating that they are unwilling to allow free markets to sort themselves out,” said Toronto-based independent proprietary trader Kevin Muir.