Sure the banks should have managed risks better and this whole fiasco falls on SVB, but to be fair the Fed is doing a horrible job at setting expectations. Whoever trusted them in the past, got screwed. They are fundamentally a reactive organism that for some unknown reason talks as if they are the ones in charge.
Obviously they are not.
When you're just a small renter, it's fine for when the handyman doesn't show up the apartment keeps flooding. When you're a 200 unit apartment owner, you better have a list of a dozen handymen that you can go down when the first one doesn't show up.
These banks are the equivalent of the apartment owner. They are expected to be able to survive any decision the FED makes short of the FED shutting them down and even in that case they should have known ahead of time and been working on an appeal.
Except for insurance on that sort of bank run.
Really it comes down to irrational VCs starting this bank run, which inevitably led to the destruction of the only bank that really understands tech startups. And now the same folks are making fools of themselves doubting all economic data (public or private, they all agree) that shows that most sectors are doing fantastically, just not tech. They are also backing a presidential candidate that thinks WiFi causes cancer, and has some of the worst anti-science views out there; in addition these same VCs are pretty much solely responsible for the community backlash against tech, the change from appreciation of tech to hate of tech, as they are outliers with their weird political obsessions that don't even match the rest of the industry.
The result of the interest rate hikes was that there were going to be some bank failures, that's the whole point of trying to cool things off. That it happened in tech and not elsewhere is due to a few bad actors that have more economic power than wisdom to wield it well.
The issue is that they ARE important enough to the economy to be considered an "large apartment building owner" (see: de facto bailouts) but were NOT regulated as such. Pardon my continued use of a somewhat tortured analogy.
You and me and everyone else without >$250K in an SVB account should be angry about this. Why? Because the customers of SVB were getting attractive returns on their deposits. So they got exposure to the upside of the bank's risk, but were bailed out of the downside.
By your analogy, that's saying the apartment renters needed to have handymen oncall in case the landlord couldn't manage it!
Furthermore, I still think it is unclear that SVB was a true failure for the decision makers - in the sense that it seems possible that the people making active decisions might have made money. There has been a lack of clarity around who is losing out in this crisis and why ("shareholders" doesn't count - who are they? how much a head?). It seems possible the SVB owners who lost money were either index funds who pass the costs back to small players who were forced out of bonds by the fed, or entities caught up in some web that meant they simultaneously benefited from the bail outs. The people getting bailed out aren't normal depositors.
Not to overly quibble but it really isn’t. If we let the small renter get away with such egregious behavior the bigger renters will take note and do the same
Central Banks' mandate is to control inflation while still ensuring employment is healthy. They can try and model and predict the future as much as they want, and they can tell you what they're thinking at any point in time, but this is fundamentally not something that anyone can do. So the line became "The fed promised us they wouldn't raise rates, but then they did, so my shitty risk management is their fault, not my fault". No, it's your fault, because the Fed's job isn't to make pronouncements and stick to them regardless of reality, it's to keep inflation and employment at healthy levels.
So the Fed did its job. Inflation is being brought under control without a recession or a hit to employment which so far is quite remarkable. If they continue this for another year or two and bring the situation completely under control it'll actually be a historic achievement.
Then the FED shouldn't promise they won't raise rate and instead should just SHUT THE FUCK UP.
It's great that it's doing its job. It's not great that it's ran by downright forked lying tongues.
I am suggesting that the Fed should have not be authoritative on these topics since obviously they have no clue. Only recently they tried to tone it down a little by asserting they are a "data-dependent" and even then, they are still authoritatively making assumptions every week on things they have no clue about.
I think most other banks tried to get interest revenue from something other than going turbo long long-term treasuries? Or just accepted lower profit?
Righfully so. It's econ101. Central Banks modulate the interest rate based on inflation.
Nobody knows how inflation originates or subsides
Presumably if you had something that supported your point you'd share it.
and also a great deal for politicians who are connected with startups,
and a great deal for startups as well (they had the high fixed-rate deposit, without having to carry the risk).
It's just a loss for everyone else who pay taxes.
This is the real moral hazard.
Let's not pretend that a student with $20 in their bank account is paying as much towards FDIC insurance a multinational with a billion dollar account
Did they? It wasn't the comedically low variable rates banks usually pay?
> When federal regulators stepped in to backstop all of Silicon Valley Bank’s deposits, they saved thousands of small tech startups and prevented what could have been a catastrophic blow to a sector that relied heavily on the lender.
Both can be true. Thousands of the "little guys" were saved. Some big names benefitted too. And?
Look, they could have looked up the architectural plans and realized the building was skirting the edge of code. Chose a different building. Someone of them should have known better. Had the resources to do all of that.
But the building had nice amenities at an attractive price. I mean, they should have been sophisticated enough to know that this kind of deal is too good to be true. Rents are high for a reason you know! Why is it up to the public to rescue them?
Let us presume they don't suffer sunk cost fallacy. You have a great company, worth investing $10 million. The company loses $5 million of your cash before they had a chance to spend it. That loss obviously has nothing to do with the company's prospects. What do you do? Obviously, pony up another $5 million and get it going again. And tell them to put their cash in a real bank this time."
https://johnhcochrane.blogspot.com/2023/03/silicon-valley-ba...
They're not in the same position they were before. If you're worth 10 million when you have five million in the bank, you are now worth 5 million without it.
If you sold half your company to get the first 5 million, why would keep working if you have to sell the other half?
So if they had $5M uninsured in SVB they would have received $4.25M and suffered only a 750k loss.
Banks and the government have an agreement where banks operate as if deposits are stable in order to buy long-term assets, while the government insures deposit stability.
These assets primarily comprise of lending to governments, businesses and mortgages. In other words, the banking system essentially acts as a quasi-arm of the government, enabling the welfare state to function both explicitly by buying government debt and implicitly by expanding the monetary supply.
You can prevent the bank runs and massive economic booms/busts by simply prohibiting banks from monetising deposits. We wont do this because it will collapse the nation-state as we know it.
The reality is that we haven't had a free market for banks since the Federal Reserve Act of 1913, so it wasn't a battle between "evil bankers" and "poor poor lidl workers," but rather a game of king-making.
They were literally buying US government bonds based on outlook given by THE government agency which gives OUTLOOKS & sets POLICIES on these matters.
They literally did the you are "supposed" to do and they were called "greedy capitalists" or chumps for not doing sophisticated active player stuff like hedging.
But were they irresponsible? Not really. This is a scenario that's very easy to see the flaws of in hindsight.
It was a huge gamble.
Assuming the world doesn't go to zero, that means a, by definition, very rich entity would get even richer by holding on to these.
Worse, it would have created a race to get your funds out before you couldn't. At which case, it would have certainly screwed up other fundamentals.
Worse still, if you do start auction devaluing of treasury bonds, that will reach so far into the economy that it is hard to really state.
And the very rich entity that once held them but lacked the liquidity to keep them would get a lot poorer. I'm pretty sure that's how capitalism is supposed to work. They're being rewarded for how well they handled risk. If banks, or any other investor/depositor aren't supposed to be rewarded in return for dealing with risks that the government doesn't want to or isn't equipped to take on, what exactly are they being rewarded for?
Government backstops are a license to print money for the people positioned to take advantage of them. Insurance on accounts <$250K is required in order to protect boring deposit banking from runs. If the lack of insurance on accounts >$250K is a bluff, and the state is always going to save them anyway, pricing this in amounts to a direct wealth transfer.
The idea that the degree to which this wealth transfer is necessary should be directly proportional to how wealthy the recipients are (the more to be lost, the more "systemic risk"), is perverse.
The depositors, to be clear, NEVER held the assets under question. They deposited money into the bank that let the bank purchase the assets. At that point, the depositors are not assets of the bank, but liabilities.
Now, the bank's assets dropped in value so that they could not cover their obligations to their depositors. The bank was dissolved accordingly, with their assets sold to another bank. You are wanting to also have their liabilities dissolved, such that the depositors are also somehow punished?
It’s a bit late to be talking about “moral hazard”
https://www.usatoday.com/money/blueprint/personal-finance/go...
