Responding to a Reader Question: What the Silicon Valley Bank Collapse Says About Money, and Capitalism.
It's not good, folks.
Hey folks! This question was sent to me by JoeWrote reader Daniel Herndon . It’s a great question, and one I think many people are asking in the wake of the collapse of SVB. If you have a question, feel free to email me (joemayall@gmail.com) or DM me on Twitter.
Also, I’m going to start a discussion thread tomorrow about Bernie Sanders’ new book (You don’t have to have read it to participate), so keep an eye out!
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Thank you, and enjoy! - Joe
Hey Joe,
The recent crash of Silicon Valley Bank has given me some paranoia about the banking industry. I'm not sure who or what I can trust. Not to be too suspicious, but every time I pass an ATM, I feel like it's looking at me like I'm a piece of meat (I'm not just a wallet in expensive jeans! My eyes are up here!). I'm not sure if we should let the government take over the banking industry all the way yet, but it's probably time for a close look at why we bank the way we do. Something tells me you'd have an opinion on this (and as a subscriber, I feel pretty confident you're that something).
What do you think the SVB downfall tells us about how we do money today?
Daniel Herndon (writer of The Lorem Ipsum)
This is a great question! Like anything pertaining to the financial industry, the details of the Silicon Valley Bank (SVB) collapse are exhaustive and intricate, so I’m going to start by establishing some key facts:
SVB was heavily invested in U.S. Government bonds, the value of which is inversely correlated with interest rates set by the Federal Reserve (“The Fed”). When the Fed raised interest rates, the value of SVB’s bonds fell. The bank announced its losses, which prompted its biggest depositors, a group of Silicon Valley billionaires who all shared a group chat, to get spooked and withdraw their funds. This caused a bank run and the eventual collapse.
In 2018, Congress passed the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” which raised the threshold of “banks requiring enhanced oversight and regulation” from $50 billion in assets to $250 billion. At the time of its collapse, SVB had $200 billion in assets. Had this threshold not been raised by the 2018 Congress, SVB would have been under stronger regulations, severely decreasing the chances of its collapse.
The FDIC insures depositors up to $250,000. Many of SVB’s customers had more than $250,000 invested. Even though they were above the limit, the FDIC has invoked a “systemic risk exception” to ensure these big-money depositors got their money back.
With these key facts established, here are the 4 top-level takeaways I see from the SVB collapse.
1. We Don’t Learn Our Lessons
The reason SVB’s failure is such a cataclysmic disaster is thanks to the 2018 deregulation. The 2010 Dodd-Frank Act was passed specifically to avoid situations such as this by regulating high-asset banks, as defined as those with assets over $50 billion. But just a decade after the Great Recession, American politicians stripped away the protections enacted after 2008, opening the door to this catastrophe.
We got punched in the mouth in 2008, took steps to make sure it didn’t happen again in 2010, and then decided to forget everything we learned in 2018.
And this isn’t the first time we’ve made similar mistakes. The Glass-Steagall Act, passed during the fallout of the Great Depression, raised a wall between commercial from investment banking. The theory here is that if commercial and investment banks are separate, one can fail without taking the other with it. But if they are conjoined, they both go down. Unfortunately, the Glass-Steagall Act was repealed in 1999. While its repeal wasn’t a direct cause of the 2008 Great Recession, the fact it allowed banks to be bigger undeniably made things worse.
Which leads me to my second point…
2. Capitalism and “The Market” Are Not Natural.
This is a tune I’ve been singing for some time, and it looks like the SVB episode is my encore.
After the fall of the Soviet Union, people claimed history had “ended” and the debate between Capitalism and Socialism had been settled. To many, there was no longer any argument against the supremacy of American-style Capitalism.
Though many westerners previously held this belief, the USSR’s disunion gave the false impression of surety. Since then, pro-Capitalist pontificators talk about “the market” with utmost confidence. To them, Capitalism is a universal, undeniable truth. To suggest alternatives or iterations is like saying you want to change the Earth’s orbit.
But as this episode shows, it is not.
Capitalism is not natural. It is not self-sustaining. It is not inevitable.
It is a very specific economic structure, devised, assembled, and protected by certain people. And like all things man-made, it can break. And when it does break (which it will), we find ourselves at a loss and unprepared, like the unsinkable Titanic without enough lifeboats.
3. Capitalism is Not Fair.
Along with the surety of Capitalist prosperity, pro-Capitalists preach Capitalism like it is a game, open to any-and-all players. And if anyone can play, anyone can win! That means even a lowly, minimum wage worker can be a billionaire one day! Better not support stronger business regulation, or it will hamper your potential to reach the tippy-top of society.
If you haven’t learned by now, the SVB collapse shows that this theory is horseshit.
The run on SVB was set off by 15 or so billionaires in a group chat. One of them texted the others to pull their money out, and they did. You can bet all you’ve got that this wasn’t the first time this chat was used to manipulate the economic system in their favor. Undoubtedly, it was the home to casual insider trading (“I hear bad things are happening at Meta!”) and the sharing of contact info for powerful politicians and regulators.
Additionally, those who deposited over the FDIC-insured limit of $250,000 in SVB will be getting their money back thanks to the “systemic risk” exception. The $250k limit is supposed to incentivize depositors to move their money around, which raises the question of why so many of SVB’s depositors did not. (It’s starting to look like SVB was giving kickbacks to these heavy depositors, but that’s another discussion.)
Regardless of if they were getting special favors or not, it’s important to call out what happened here. These companies are going to get back all their money from the government because they are “systemically important” to the U.S. economy. If you were to have $500,000 in your local bank in hopes of starting your own business, and that bank went under, you would not get your money back because you’re not “systemically important.”
When money is lost, the rich get a government bailout, while everyone else gets lectured on needing to “budget better.”
4. Money is Fake.
It’s a cliche, but it’s true.
The reason the run on SVB led to its collapse is that the bank didn’t have the cash on hand to give to its depositors. When they showed up wanting to withdraw, the bank responded, “We don’t have it.”
This happened because Capitalist banks operate on the fractional reserve system. When someone deposits money in their account, the bank lends that money and charges interest. So, if you deposit $100 in your account, the bank will lend $10 to me. Now I have $10, but your account still says “$100.”
Viola! $10 was just created out of thin air, which can be used for investments and starting a business. This create-money-out-of-thin-air approach is the backbone of the Capitalist economy.
Problems arise when you go to take out your $100, but the cash isn’t there. There’s $100 on your statement, but the bank has been lending your $100 to other people. When everyone goes to take out their money, this is called a bank run. The bank doesn’t have the cash to give to depositors, and it collapses.
“Money is fake” is often chided as an oversimplification. But it’s the truth. And as it’s true, it raises the question: “Why are people living on the street because they don’t have enough of this artificially created asset?”
Once you begin asking that question, you begin to question the entire Capitalist structure.
I’d like to thank Daniel again for the question. If you have a question you’d like me to answer, shoot me an email (joemayall@gmail.com) or drop me a DM on Twitter.
What do you think the SVB collapse says about our society’s economic system and monetary design? Does this collapse concern you? Why or why not? Share your thoughts in the comments.
Helpful insights! Love that you respond to reader questions
Feel free to share any takeaways you think I missed!