On his blog yesterday, Richard sets out crisp assessment of the bank’s failure. This he follows with eight take away points.
So, what are the lessons?
The first, and most obvious is that these bankers clearly had no clue as to what they were doing. Yet again the so-called ‘masters of the universe’ have got things wrong.
Second, regulation failed. The risks in this bank were obviously incorrectly appraised by them, and it was allowed to continue trading when there was obviously too much risk implicit in an apparently well funded balance sheet.
Third, the bank had insufficient capital for the risks it took. If there had been sufficient capital it would not now be bust.
Fourth, as ever, this bank presumed the state would cover its risk. As ever that has proved to be correct. The mockery of privately owned banks continues when what they actually do is extract value for private gain safe in the knowledge that governments will not let them fail.
Fifth, the fallout from the over-inflation of interest rates by the Fed is clear. These are being artificially manipulated upward when there is no need for that, most especially when there is no US wages spiral. Artificial risk is being created instead by over deflating asset prices too quickly for markets to handle. This crisis was created by the Fed. 1 2
Sixth, this bank was used by the well off and the companies they own. There is always an excuse for bailing them out. None is found for anyone else. Wealth flows upwards, as ever.
Seventh, cash deposits served no economic purpose here: most of what this bank did added no economic value. Despite that it will secure an expensive bail out. At some time we will realise that savings do not equate to investment, and the models we have for saving make no economic sense, as this failure proves. But we are not there yet.
Eighth, this is market failure because this bank could not even manage cash, the most basic task asked of it. It was said to be really good at tech. Based on this are we really expected to believe that?
* * *
- Richard, like all modern monetary theorists – and for that matter mainstream Keynesians – has argued consistently that hiking up interest rates is a terrible response to inflationary pressures currently as misattributed as they are overstated. SVB, which had bought bonds to cover interest payments to depositors, was laid low by the inverse relation between interest rates and bond values.
- For a more comprehensive appraisal of the Fed’s role in the SVB crisis – and why it goes way beyond one medium sized bank – see Michael Hudson’s March 13 piece, Why the Banking System is Breaking Up.