Alright folks, let me begin with one word: socialism. That's what Treasury Secretary Janet Yellen was talking about today when she spoke before the American Bankers' Association. Bailouts for everyone. 

No matter who's going to pay for it, because remember, a universally guaranteed insurance plan for all banks and their depositors, or politically targeted banks like Silicon Valley, which was truly in no way a truly systemic problem. That's what socialism is all about. Central planning. The unelected bureaucrats run the country.

Harken back to Steve Forbes' insight, modern socialism through the regulatory state. First Republic Bank shot up 50% today the nano-second after Yellen told the bankers: "Our intervention was necessary to protect the broader U.S. banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion." 

Of course, contrary to President Biden and Ms. Yellen, it is the taxpayers who will pay for these bailouts. Bankers have to pony up their fees to the FDIC and somebody's going to pay for that. Guess who? You! The taxpayer, the customer, the blue-collar worker, the family having trouble making ends meet on groceries and utility bills and their credit card payments and their mortgages. They will pay for the stupidity of others and for these grand dictums of executive authority which I’ll bet are unconstitutional. Where does it say in congressional legislation that bank regulators can just wave a magic wand and universalize all deposit insurance? Where does it say that?

FLASHBACK: TREASURY SEC. YELLEN DIDN’T ‘BELIEVE’ SHE’D SEE ANOTHER FINANCIAL CRISIS IN HER LIFETIME

Now look at the headlines the last 24-48 hours. They tell the story:

"Yellen says U.S. will intervene if needed to protect smaller banks." Another headline, "U.S. Studies Ways to Insure All Bank Deposits If Crisis Grows." Or "Treasury Secretary Yellen says the government could backstop more deposits if necessary to stop contagion." 

All this bailout talk sparked a relief rally among regional bank shares and the overall stock market was up today. In the short-run investors love a bailout, don't they? Somebody's got to pay for this. Joe Biden has already proposed nearly $5 trillion in tax hikes aimed at successful earners, so-called rich people, who already pay nearly half the taxes in this country, and that's just to finance his massive increase in social welfare benefits without work rules with his $7 trillion budget and $20 trillion of higher deficits over the next 10 years. 

The tax man comes in the form of the Treasury and the FDIC and other Biden banking appointees. Throw in Ms. Yellen's protégé, Mary Daly of the San Francisco fed who failed to supervise Silicon Valley bank. 

"Carless supervision sank SVB" wrote economist Larry Lindsey for the Wall Street Journal. "How did California, the FDIC and the Fed all fail to pick up what now seem like obvious red flags?"

Or a New York Times headline -- from a very good piece entitled "Before collapse of Silicon Valley Bank, The Fed spotted big problems." 

How did this all happen? How to get out of this mess? Well, it looks like it sounds like socialism to the rescue – but I’ll say, taxpayers better beware. Caveat emptor. Anybody ever hear of moral hazard? Anyone? Well, here's distinguished NYU business professor William Silber last night on our show: Please take a listen:

"Well, the Hail Mary effect is sort of what a Hail Mary is, which is you only do it when you have what we both call downside protection, when you can't lose because you're already have the game lost. So you take a risk. And anything that has downside protection, you know, and I know promotes risk taking. **LARRY:** And today that sounds a bit like moral hazard kind of thing **SILBER:** It's exactly moral hazard. It's moral hazard."

Well, thank heavens I passed. By the way, Mr. Silber is one of the most distinguished financial economic academics in the country and a man of good common sense. So, moral hazard means you can do any darn thing you want. Throw the "Hail Mary" pass because the government is giving you downside protection and you can't lose. Now, everybody else around you is going to lose because they're going to pay for your mistakes. Including depositors, banks working folks and the whole country.

What happens next? Banks stop making loans, credit contracts and the economy falls into recession. Loan standards have already tightened substantially, almost half of the loans now have been tightened up in terms of their standards. The collapse in bonds that blew up bank capital, well there's a big problem with commercial real estate lurking out there alongside all the Silicon Valley so-called start-ups and other crazy woke ventures. 

Here's what the sensible House Freedom Caucus says about this story. "Americans are done with government bailouts – especially when caused by the government’s own policies. Out-of-control spending in Washington and Federal Reserve interventions have fueled skyrocketing inflation." 

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Right there let me interrupt by saying that was the original sin. Then the Freedom Caucus goes on to criticize mismanaged banking and concludes: "Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules."

Well heck, haven't we talked for two years about Biden's big government socialism? Of course, we have. But golly, now bankers too? Can we find somebody out there who still works hard and plays by the rules? Can we try to at least think about going back and practicing free enterprise capitalism instead of big government bailouts? Just a thought. 

You know me trying to be optimistic, just a thought.

This article is adapted from Larry Kudlow's opening commentary on the March 21, 2023, edition of "Kudlow."