This is what happens when you have an inoperable Congress: inexplicably bad tax policy and an inadequate Federal Reserve. Other than that, things are going great!
First, let’s review the events of this week since, hopefully, people will still read these rants at other dates. Today (Friday) is Saint Patrick’s Day and so far this week the Treasury Department has bailed out two banks and the industry has bailed out another. This headline alone would likely create concern for most readers, but let me assure you NOTHING happened.
Again we see an example of how unscientific, emotional, and childish the US financial system has become. There is NO FUNDAMENTAL reason, other than the emotions of the depositors, for the collapse of Silicon Valley Bank — NONE.
What actually happened was a rumor started that they were hyper-leveraged and every depositor made a run to remove their uninsured deposits. THAT is the only thing that happened. There weren’t any bad loans that came due or defaults beyond the threshold, just an emotional run on a bank. The emotional run was caused by mostly inexperienced Silicon Valley rich kids who went to Wharton, became CPAs, and took over their MIT buddy’s startup.
Keep in mind that the ONLY people who were ever at risk were people or organizations that had deposits in a single bank or account that exceeded $250,000. No actual American-working humans were ever at risk.
Keep in mind that this was not a “woke” bank or some sort of BLM banking operation. It was the bank of choice for far more republicans and libertarians than socialists or Marxists. These are very, very rich people having a very, very, bad day. The government, which they all decry as the death of freedom, rescued them with FIDC money and some back up dough the Treasury collects from banks and investment firms (they say “no taxpayer money,” but in my humble opinion, money paid to the government by companies is taxpayer money).
Keep in mind that the Fed has been raising interest rates precipitously as their ONLY hedge against inflation. That makes them a mostly meaningless institution at this point. They are carrying a knife to a gunfight. We pushed around 6 TRILLION dollars up to the top of our economy during the first two years of the pandemic via Quantitative Easing or QE (yes, during a Republican administration). Also, we had just given the richest Americans a massive tax cut of about 4 Trillion Dollars. So we pushed 10 TRILLION DOLLARS to the top of the economy and now we sit around and wonder why raising interest rates doesn’t stop inflation. Here’s a hint: the richest Americans aren’t using credit cards to buy washing machines — they pay cash.
So the Fed’s moves are meaningless, as is evident in the results. But they have accomplished one thing: they caused a run on a bank! The Treasury issues bonds that are tied to the Fed’s interest rates and they’ve gotten very pricy lately. Banks buy these bonds because these bonds — if Congress raises the debt ceiling — are the most secure investments in the world. But since the interest rate went up so far so fast, SVB had to sell billions of dollars of these bonds at a loss. Thanks, Fed.
Keep in mind that the FDIC is the Federal Deposit Insurance Corporation, an allegedly independent government agency. I’ve attached a link or two below that explains them. They seem to be stuck in the classic government dilemma. They need to offer insurance for higher amounts to companies and individuals who can afford such coverage. But alas; they are so hyper-regulated as to be limited in their usefulness. Why is the limit $250K? They changed it in 2008 and they were using the financial crisis as cover to increase the overall amount. But why doesn’t the FDIC just cover the first chunk and then let depositors pay for coverage beyond that amount? I suppose we chalk that one up to the fact that it’s the government. Statistically, the only citizens who have over $250K in one account are the one half of the 1%ers. Which means in a country of 332 million people this only applies to about 16 million very, very, rich people. Since SVB had over 60,000 clients we have to look more at small businesses than humans being the recipients of the rescue.
Overall, we have a financial system so tied up in its own self dealing that the once powerful “free markets” are as gerrymandered as the congressional districts. The will of the buyer can no longer reach the top of the companies so the needs and wants of the free market are left to a small cadre of entrepreneurs around the country trying to solve our current and upcoming problems. These are small startups operating with VC money that do the heavy lifting that the free market ensures. These were the primary clients of Silicon Valley Bank. So we may be saving a very important part of the system — only time will tell.
In a nutshell, the combination of an inexplicable tax policy that only rewards back-and-forth transfers of wealth at the top of our economy, toothless bank regulations written by the banks, and 535 members of Congress whose entire life, future, and security are bought and paid for by the banks they are supposed to regulate renders our country vulnerable to the types of antics we’ve seen this week in banking. But worry not, it only really affects people with over $250K in a single account. I don’t know about you, but I’m safe for now.
(I was going to post the Heritage Foundation response, but it was so full of fiction and opinion that I couldn’t include it.)
https://www.investopedia.com/terms/f/fdic.asp
(This is really an ad, but the history is accurate.)