That’s what you take from the collapse of Silicon Valley Bank? My impression is that the bank was managed by idiots who didn’t know how to manage risk.
Sure, that’s one way to look at it. But then you have to say that Moody’s is full of idiots, because they gave the bank an ‘A’ rating. And you’d have to say that the Fed’s ‘transient inflation’ was idiotic, because if you believed it you’d have to say that SVB didn’t do anything wrong. If inflation had stayed where promised by our leaders, they could have liquidated their bonds without losing all that money, and they’d be fine. They screwed up: they trusted the Fed.
You can also argue that the bank was stupid to have their capital in a 10-year instrument while making 1-4 year loans. Lots of people have said that since the crash, and here as well. And it’s true. But I don’t recall anyone saying that before the crash. In hindsight it’s obvious, but it doesn’t seem to have been that obvious before,
The problem is that regulators and regulations try to protect us from the last crash happening again, but the way complex systems crash can be very different each time. It used to be that stocks and bonds moved in opposite directions all the time. It used to be that bonds and treasuries were considered to be the safest investments. We were worried about the new derivatives, such as Mortgage Backed Securities, because that’s what bit us last time.
No one saw this structural inflation coming except for classical economists, and no one listens to them anymore because they tend to say things people don’t want to hear and don’t have handy quick fixes for complex problems that align with people’s political desires.
It also ignores the fact that SVB was only the first. Signature Bank has failed, Credit Suisse had to be bailed out last week by UBS, First Republic had to be bailed out as well.
There is now 31 trillion in government debt and about 29 trillion in private debt in the banking system. That’s not going away any time soon. The government debt is mostly in short and medium term instruments. The fed is sitting on 8 trillion in government bonds that are declining in value, and over 2 trillion more in mortgage securities in a declining market. Other central banks around the world are in the same shape. They are broke, printing money to keep government operations going, and trying to juggle inflation and interest rates while their citizens clamor for more spending.
Something had to break. The banks are just the start. We aren’t getting out of this mess for some time. Likely a decade or more. The Biden administration wants to add another 17 trillion to the debt over the next 10 years. That’s in addition to huge tax raises. Those deficits are inflationary. If the U.S. spends 1.7 trillion per year in printed money, get ready for more inflation, higher interest rates, and low growth.
I mean regulations will never be perfect but in an insured market there is no alternative to the insurer regulating what they will insure. The only alternative would be no insurance.
Nonsense. Nobody at the Fed claims any certainty in their macroeconomic forecasts, and managing risk does not mean “trusting” anyone’s macroeconomic forecast. Banks are not in the business of guessing a macroeconomic future that Nobel Prize-winning economists notoriously get wrong all the time. Managing risk in banking means that you hedge adequately so that you don’t blow up whatever happens. You should never be so heavily exposed that this can happen.
There are some innovative options. For example, banks could be allowed to lend up to the FDIC limit, but for huge accounts one option would be fee for service, in which the banks basically act as a vault and transaction manager. A multimillion dollar account might pay thousands per year. A huge account, maybe tens or hundreds of thousands per year.
Think of it like the mangement fee in a mutual. Storing your money costs you a couple of percent per year. Otherwise you have to buy insurance.
Banks could still retain the option to offer unsecured large accounts, but with the explicit understanding that they are not backstopped and will not be made whole in a bank failure. Very large firms might choose to risk a certain percentage of their capital that way in return for a positive return on the money and no fees.
The problem is that if you suddenly restrict lending capital like that, the money supply will crater. Good for inflation, but bad when we are already heading towards a recession. But that’s just another sign of the trap we are in. Finding soft landings is getting increasingly difficult.