The Fed smothers capitalism in an attempt to save it

There is already talk about rules being changed so that in case of an implosion like SVB, the executives' bonuses could be clawed back over a span of several years. That would be a damn good start, because it would put the C-suite personally on the hook for setting up these cock-ups. It won't be enough.

I hope, and would expect, that FDIC fee structure will also change. The best way to incentivise banks to spread their exposure risks across industry sectors will likely be to charge aggressively progressive fees for increased sector risk. Spread your risk across multiple, mostly uncorrelated sectors? Pay reasonable fees. Concentrate on just one or two? Get charged through the nose, to the point of stunting your profit margins.

Sticks and carrots are not always enough. Sometimes you do need modded, lethal cattle prods.

The fundamental problem is that we had effective 100% insurance at the "too big to fail" banks but not at the others. People just didn't think about that until quite recently, and when they figured it out, they panicked and were going to move all their money into the too big to fail banks unless the government stepped in.

SVB wasn't making those kinds of loans to startups and it wasn't risky loans that blew it up.

The problem is that its model of deposits was startups which would get backed by $5M-$50M all at once and then need to draw that down over time.

The problem comes when VC funding dries up completely and then there's no new deposits to replace everyone burning through their cash.

They did take mortgage debt back in mid-2021, but it was not particularly controversial mortgage debt -- however due to rate increases in mid-2022 it went underwater on a mark-to-market basis. This wouldn't have been a problem if they could hold to maturity, which is what they stated they intended to do (and which they probably did intend to do) but the drawdown in deposits forced them to sell some of these to raise cash and forced them to book those losses.

The weird risk here was really the way the deposits all dried up and the cashflow out of the bank became strongly negative due to economic conditions of the depositors. The whole business model of the bank had a baked-in bank run that would happen. That isn't really a normal kind of risk, though, and not something that is typically regulated or anticipated by anyone. The actions to close down the bank and take it over and insure the depositors seems fine to me.

The moral of the lesson seems to be that bigger banks need to have startup-oriented divisions that will accept this business and absorb those cash flows inside the scope of a much larger bank. You can't have one bank that takes all the deposits of something volatile like VC funded startups. I don't know how you regulate that though other than the Fed explaining to the major banks like JPM that this kind of thing can't happen again so they need to start serving VC companies.

If you're making money in interest, dividends, capital appreciation, market value, etc., that's because your capital is being employed. That's risky and the profit (or loss) should be a function of that risk.

Banking as a pure store of assets feels decoupled from that objective.

I do think SVB depositors being made whole was good, but a hypothetical widespread failure event across dozens of big banks would be catastrophic. There should be easy liquid stores of value that are essentially zero risk for this type of failure, even if you have to pay for them.

Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly.

As long as failing banks fail (stockholders wiped out, assets seized and sold to cover deposits first) there’s no problem with insuring deposits.

I do have a bit of a problem with how broadly bad mortgage backed securities are being bought by the fed to prevent losses from bad investments from failing more banks.

Housing prices are killing our society and there needs to be pressure against the enormous loans nearly every homeowner has.

Hopefully no one will take this as a political endorsement but this is the most exquisite exchange I've seen illustrating your point by Secretary Yellen and Senator Lankford.

https://youtu.be/CX6O--sk48A?t=5430

Based on her response I anticipate we will continue to see the effect you predicted. Yellen was pretty much speechless in the face of presentation that people will start moving their money to banks designated as ones worthy of "systemic risk" designation.

There’s a strong argument to be made that the Fed caused the crash in 08 too. First by keeping rates too low for too long after the dot com crash, then aggressively raising them right up until things started breaking. Sound familiar?

The Fed did a great job after 08 convincing everyone it did a great job managing the crisis, which I think is fair. But there’s also an argument to be made that they played a role in causing the crisis too.

If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 95%, and normal people are banking, this is slightly unstable but most people aren't going to bring down the financial system to slightly reduce their risk of losing 5%. The system has been working like this for 70 years.

The current batch of Silicon valley/new york financial types would stab an orphan in the face with their mother's fine silverware, to avoid losing 5%.

That's not an adequate response to a systemic risk against the entire banking system.

There is a quote: bad times make strong men, strong men make good times, good times make weak men, weak men make bad times.

We are firmly in the weak men period.

Just like the tens of thousands of layoffs before and since? Employees at those companies were really at no more risk than employees at even the most profitable of companies (a’la Google).

Ultimately the VCs that guided their portfolio companies to use SVB and neglect obvious cash management are responsible for the anxiety. I suspect they would have stepped up to fill any gaps, which would have been less serious than claimed; making payroll was never seriously threatened.

But before then they were happy to let some useful idiots clamor for a depositor bailout that would absolve them of that responsibility.

The losses aren't really socialized either -- not this time, and not in 2008. In 2008 the government made money on the bailouts, effectively getting an investment return on taxpayer money. So far in the rescue of SVB no taxpayer money has been spent either.

They've undone half of the quantitative tightening that's been going on in the last year.

The lucky ones, they've staked out places for themselves next to the heat vent, surrounded by broken glass and fences made of twisted rebar. Other squatters shiver way over in the corner by the windows. They regularly lose toes to frostbite.

When the squatters really start dying -- mothers wake up to find their babies have turned into frozen meat in the middle of the night -- then "JPow" gives in a little and cranks up the thermostat. The temperature in that far corner of the warehouse might even get above freezing.

But for the heat-lords who've got the good turf, man, it's like a day in the tropics. Shorts, flip-flops, Hawaiian shirts, margaritas. Party on!

Which is why, of course, it's always good news that plebs are starting to die of hypothermia. Because it means "JPow" has to keep 'em warm, and party time continues.

This little parable is, of course, a description of the Cantillon Effect.

NASDAQ is particularly sensitive to interest rates. People say it's because Tech is more future-looking, and when rates are high you want profits now. Or maybe it's sensitive just because that's what everyone believes. Either way, when rates go down, NASDAQ goes up.

It's weird that people celebrate news that the car is slow, because that means the driver is going to hit the gas. But that's how it be.

The markets have been high on ZIRP and QE for a decade now, and so when interest rates/inflation increase, the Fed takes action, reducing the price of assets.

Good news (more jobs!) means that the Fed will increase rates more (bad news!).

Hilariously enough, the actions of the government(s) to bail out various banks are regarded as bad news by the markets which mean good news for asset prices.

Yes, it's entirely insane. Welcome to modern capitalism, I suppose.

Do you have any sources/data for this? I saw something for BofA that indicated a $110b mark to market unrealized loss, but they have roughly $200b in equity so that wouldn't make them insolvent. I don't know if that $110b included everything or just a subset of their hold-to-maturity assets and would love to see more complete data for all big the banks if you have a nicely consolidated source for it?

Banks were only technically solvent before all of this, it isn't a big deal if they are now only technically solvent.

https://www.fdic.gov/news/press-releases/2023/pr23019.html

Several banks were wiped out in 2008. Other banks exchanged large amounts of equity for government funds. Establishing systemic stability by injecting large amounts of government money was seen as better than letting the entire mortgage system collapse (which is what likely would have happened if all the banks holding mortgage backed securities were left to unwind). The shareholders didn't get off scot free, the government ended up their major partner and sold the assets for more than they had injected into the system (which doesn't necessarily represent a profit).

https://mattstoller.substack.com/p/fire-the-fed

I understand many banks offer "insured sweep" accounts that do just this but of course this costs them cheap deposits. Go ask the various VCs why they didn't press SVB to make this service available to their portfolio companies.

Uber rich don't need to do this, because they lever up until they are too big to fail.

The people with opportunity capital that are now frequently denied the ability to rationally utilize their capital to acquire discounted assets from other irresponsible actors? Those responsible actors with capital - biding their time forever - are being routinely punished in this corrupted system of constant government intervention and bailouts.

Bankrupt GM would not have vanished, its pieces would have been acquired at a steep discount. Pandemic mega airlines would not have all vanished without government bailouts, some of them would have been acquired for cheap (and essentially all of their assets would have been acquired one way or another).

Buffett's Berkshire Hathaway for example, is typically extraordinarily responsible with its capital and most often maintains enormous reserves, ready to strike when the opportunity presents. The post great recession era has been a nightmare for him in terms of deploying capital, because the Fed was performing a decade plus long handout program to investors, making their assets artificially more expensive to fake prosperity. Buffett, one of the ultimate capital actors, is very heavily handicapped in these scenarios, insofar as he's unwilling to act as recklessly as the rampant speculators that commonly blanket Fed bubble markets (whether housing bubbles, dotcom bubble, or the couple of more recent bubbles such as in crypto).

So no, not all with capital are served by this environment of Fed & US Government fraud. Many would do far better without it, picking up cheap assets for pennies on the dollar when other irresponsible parties take insane risks and implode.

Right now all the winners are chosen by the government. Thus, it is not based on meritocracy but entirely on connections.

Also, government and corporations have merged to such an extend that competition with existing players are not even possible.

I think a good classification for the current system would be neofeudalism. You are either a noble with connections or a peasant.

And that includes all the adjustments to how they calculate CPI they like to include almost every recession to make it look less bad.