Posted on 03/14/2023 9:49:57 AM PDT by Heartlander
By now, you’ve likely heard about regulators closing down Silicon Valley Bank (SVB) and now Signature Bank as well.
While I’m not going to go into all the details, the basic story is described well in this article on Seeking Alpha. Essentially, SVB received a large influx of deposits as the Federal Reserve flooded the market with dollars during COVID.
From there, SVB went out and bought government bonds to store that money. But then, the Federal Reserve started enacting policies which moved interest rates up. The problem? As interest rates rose, the bonds SVB purchased in the past declined in value.
Bond prices and the interest rate have an inverse relationship. If interest rates increase, you can earn a higher return on financial assets purchased today. When that happens, bonds issued at a previously lower rate must sell at a discount to compete.
So when rates rose, SVB’s assets (composed largely of old lower-rate government bonds) plummeted in value.
The key question now is, what are we going to do about it?
I have a modest proposal—let them fail.
Allowing banks to fail may sound extreme, but it’s really the most reasonable solution. It’s true there will be some costs if the banks fail. Any time a business fails, other investors tied financially to the company lose.
But here’s the rub—people who invest in bad businesses should lose. SVB’s failure is a reflection of the fact that it was a wealth shredder. It took depositors’ perfectly good cash, and converted it into now severely devalued bonds.
Banks that destroy wealth shouldn’t be allowed to continue to do so indefinitely. And when depositors make a “run” on bad banks, they’re performing a public service.
Kicker: a run on an insolvent bank has the salutary effect of pulling the plug on a wealth-destroying machine. — Lawrence H. White (@lawrencehwhite1) March 11, 2023
At this point, a bank bailout not only would mean the taxpayers will be left holding the bag for bankers’ mistakes—it would mean screwing up incentives in the banking industry even more.
To see the incentive problem, consider an example. Imagine a world where, no matter the circumstances, the government will pay to fix cars after every accident. What do you think this would do to the number of car accidents per year? It would sky-rocket.
If you never need fear paying a price for crashing your car, why drive carefully? There is still some incentive to avoid serious accidents due to injury, but the point is this system lowers the cost of risky behavior, and therefore lowers an individual's incentive to be careful. Economists call this a moral hazard problem.
And this is the primary issue with bank bailouts. If the government sets a precedent that all bank failures will be ameliorated by using taxpayer money, banks will engage in risky behavior which they otherwise would not. Why be cautious with depositors' money if you get a bailout no matter what?
You cannot have a healthy free market when you privatize the profits and socialize the losses. The taxpayer’s wallet, if treated like common property, will be subject to the tragedy of the commons.
Banking, where the rules are made up and the losses don't matter — Brian Albrecht (@BrianCAlbrecht) March 12, 2023
And I don’t just mean that I’m against a formal bailout to save investors. I’m opposed to taxpayer dollars being reallocated to save the bottom line of anyone involved. Some may worry about small depositors, but the FDIC already insures up to $250,000 (regardless of what I or anyone else thinks about that policy), meaning every depositor who has less than that in their account is getting their money back already.
And for the larger depositors? Business deals have risks. We cannot pay people to ignore that fact. If you want to house more than a quarter of a million dollars in any one institution you should be very careful in picking.
If some individual wants to come along and buy SVB or these other failing banks and try to resuscitate them, I invite them to try. Maybe there is a profit opportunity there. But if the choice is between a bailout and letting them fail, the answer is clear to me.
If they can have the profits, they should have the losses as well.
Communism. Government bails out everything and everyone eventually suffers. Taken to its extreme, it leads to mass starvation and deaths or murder.
Will never, ever happen
We are run by (neo) Marxists and central-planners in DC, and we are also engaged in WWIII with Russia (and probably soon, China)
Therefore, something as important as this will NEVER be left to “the market.”
They fail because they are gambling with the shareholders’ money. Betting on “climate change” projects is a bad bet. Why should WE bail them out if they screw up. (They don’t bail me out if I lose my shirt in Atlantic city!)
the depositors money should first be taken from the owners and managers of the bank before a single government dollar is spent to help.
or simply have all banks pay for enough coverage to covers ALL deposits, not just up to $250,000
I would like to see an ETF established that invested in the worst rated ESG companies. I would happily change my asset allocations.
However:
I would agree we should let bad banks fail, but the actions of the Government and the Fed share blame. They changed the game by increasing interest rates to fight inflation. This is a direct fallout of inflation caused by congress and the remedy caused by the Fed.
This is a situation where blame is on the government as well as the bank.
Because that is healthy Capitalism and anything else is evil Leftist machination.
Clearing out the dead wood is smart. It’s like forest management. If you “rescue” the forest too much, when the fire comes (and it will), then the whole world burns.
Bad banks failing is the natural process of the Capitalistic System. It keeps our economy healthy by getting rid of the scum running them. Scum always rises to the surface.
I’d have no problem with a bailout if and only if every employee above 1st level supervisor lined up in front of the public square guillotine.
Cleansing is needed. These were not mistakes made, this was barbarism and they need to pay.
For the squeamish, OK, 40 years hard time.
The author is a moron. Forcing a business customer to take on the risk of a bank failure is a sure way to turn the U.S. into a Third World dump. Nobody will do business except in cash, which means most of the things in our everyday lives that set us apart from Zimbabwe will disappear.
You might as well tell a business owner like me that I’m responsible for ensuring the integrity of every component of the electrical grid between the power generating station and my place of business.
So you are still stuck on stupid today. You are the moron. You don’t know Jack chit about business or economics.Go to DU and hang with the Commies over there.
Yes, there is a reason for the old saw, “Let that be a lesson to you.”
Force? I cannot see where anybody or anything exerted force or advocated force.
https://www.youtube.com/watch?v=pxzlgMauMXk
Clayton Morris: They want to watch the banks burn on purpose.
Redacted
SVB is being allowed to fail. Investors in SVB stock and bonds will get nothing.
Whether cash balances above the $250k FDIC limit should be allowed to vanish like smoke is a different matter.
yeah - like survival of the fittest... another natural process...
Does the author understand that would eliminate the political class's entire reason for existing? :)
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