I'm not saying that the system is perfect - far from it. But the whole banking system operates on the principle that the bank can invest their deposits (i.e. make loans) to earn interest and make a profit. If too many people (near 100% in SVB's case) withdraw their deposits at once, the bank will not have the liquidity to give them their money back until they liquidate their investments - hence the "run on the bank". What's the alternative? No banks? That means no mortgages, car loans, etc. - money in mattress time. The purpose of the Fed is to backstop a "run on banks" to keep the system functioning which is precisely what they did. And no, crypto is not an answer. Crypto is an example of no "lender of last resort" which is why it's so volatile. Imagine if the value of the dollar fluctuated by 10% or more per day - not good.
i can’t help but feel a sense of anticipation that all of your writing over the past few years has been training ground for intimately covering what’s unfolding right now in the economy, banking and tech (no pressure).
I’ve been on an info binge for the past week, and your writing stands out with a few others, that you’ve mostly linked!
… tldr; the banking crisis root cause is flawed data modeling. the entities represented in the system (for the purpose of both administration and legislation) do not accurately reflect reality.
… which, after my last 13 years of work in tech, does not shock me, but does leave me feeling deeply unsettled.
If you continued to analyze/cover this space, i’d pay to subscribe.
" People and companies losing their deposits wasn’t fair. Startups who banked at SVB didn’t do anything wrong, unethical, or even (we all thought) risky; all they did was open a checking account. It wasn’t their fault; they were victims of mismanagement and an economic shock; they deserve to be made whole. "
If you deposit more than 250k in a bank, losing money over 250k is *at least* partially on you.
If I'm a founder and I just got a 50 million dollar round, I'd be very careful about where that money goes because 49.75M of that is exposed. This is not opaque. As the founder I have a duty to protect that money. No one should assume that putting money in any bank is a riskless exercise. Sounds like the founder/VC/SVB bankers were all a little too cozy.
I thought this one was special since startups create jobs and the government has to protect those jobs, so that's why FDIC saved them. If a startup succeed and become the next Google, then it's gonna create more jobs and boost the US economy which is what the government would want, so that's why they get special benefits.
I'm watching how this shifts into a political narrative later this year, the 2024 Presidential race develops.
Like it or not, the two biggest sources of VC money are pension funds and endowments tied to universities and health systems - things that are ostensibly "socially good" for the poor and middle class, that help retirement, access to higher ed, and healthcare access.
Populists on both sides (Warren, Sanders on left; some MAGA remnants on right) have incredible leverage in calling out what fuels all of this.
I'm pretty sure most tech employees don't know that the fancy dinners, cushy office spaces, pet insurance they have is all essentially funded by retirement funds from people who make a lot less than they do - essentially a large, massive scale wealth transfer.
I tend to comment when I'm disagreeable about something, but I wouldn't come here week after week if I didn't appreciate your thinking and writing. I also hope Mode didn't suffer any adverse effects from SVB.
I don't think the question is about fairness at all. Is the Fed raising interest rates "fair"? Without a trusted entity (the U.S. Treasury in this case) providing liquidity, there can be no commerce. We would be back to bartering. We have a very recent example of applying the "moral hazard" rule in the case of Lehman Brothers in 2008. I don't think people realize just how close we came to complete collapse as a result (there's a great Frontline about this that's a must see). SVB made a bonehead move of funding low yield, long term investments with increasingly costly, short term deposits. Lehman demonstrated even more malfeasance and greed. Contrary to what people think, backstopping SVB didn't "bail out" SVB - they're history. Rather, bailing out SVB bailed out everyone in the U.S. (and beyond) who need to buy things to live.
I'm not saying that the system is perfect - far from it. But the whole banking system operates on the principle that the bank can invest their deposits (i.e. make loans) to earn interest and make a profit. If too many people (near 100% in SVB's case) withdraw their deposits at once, the bank will not have the liquidity to give them their money back until they liquidate their investments - hence the "run on the bank". What's the alternative? No banks? That means no mortgages, car loans, etc. - money in mattress time. The purpose of the Fed is to backstop a "run on banks" to keep the system functioning which is precisely what they did. And no, crypto is not an answer. Crypto is an example of no "lender of last resort" which is why it's so volatile. Imagine if the value of the dollar fluctuated by 10% or more per day - not good.
i can’t help but feel a sense of anticipation that all of your writing over the past few years has been training ground for intimately covering what’s unfolding right now in the economy, banking and tech (no pressure).
I’ve been on an info binge for the past week, and your writing stands out with a few others, that you’ve mostly linked!
Here’s my favorite (i saw you reference patrick so maybe you saw) https://www.bitsaboutmoney.com/archive/banking-in-very-uncertain-times/
… tldr; the banking crisis root cause is flawed data modeling. the entities represented in the system (for the purpose of both administration and legislation) do not accurately reflect reality.
… which, after my last 13 years of work in tech, does not shock me, but does leave me feeling deeply unsettled.
If you continued to analyze/cover this space, i’d pay to subscribe.
Preach it!!🙌🏽
" People and companies losing their deposits wasn’t fair. Startups who banked at SVB didn’t do anything wrong, unethical, or even (we all thought) risky; all they did was open a checking account. It wasn’t their fault; they were victims of mismanagement and an economic shock; they deserve to be made whole. "
If you deposit more than 250k in a bank, losing money over 250k is *at least* partially on you.
If I'm a founder and I just got a 50 million dollar round, I'd be very careful about where that money goes because 49.75M of that is exposed. This is not opaque. As the founder I have a duty to protect that money. No one should assume that putting money in any bank is a riskless exercise. Sounds like the founder/VC/SVB bankers were all a little too cozy.
I thought this one was special since startups create jobs and the government has to protect those jobs, so that's why FDIC saved them. If a startup succeed and become the next Google, then it's gonna create more jobs and boost the US economy which is what the government would want, so that's why they get special benefits.
I'm watching how this shifts into a political narrative later this year, the 2024 Presidential race develops.
Like it or not, the two biggest sources of VC money are pension funds and endowments tied to universities and health systems - things that are ostensibly "socially good" for the poor and middle class, that help retirement, access to higher ed, and healthcare access.
Populists on both sides (Warren, Sanders on left; some MAGA remnants on right) have incredible leverage in calling out what fuels all of this.
I'm pretty sure most tech employees don't know that the fancy dinners, cushy office spaces, pet insurance they have is all essentially funded by retirement funds from people who make a lot less than they do - essentially a large, massive scale wealth transfer.
Will be interesting to see how this plays out!
Here for the comments
BTW, Benn -
I tend to comment when I'm disagreeable about something, but I wouldn't come here week after week if I didn't appreciate your thinking and writing. I also hope Mode didn't suffer any adverse effects from SVB.
I don't think the question is about fairness at all. Is the Fed raising interest rates "fair"? Without a trusted entity (the U.S. Treasury in this case) providing liquidity, there can be no commerce. We would be back to bartering. We have a very recent example of applying the "moral hazard" rule in the case of Lehman Brothers in 2008. I don't think people realize just how close we came to complete collapse as a result (there's a great Frontline about this that's a must see). SVB made a bonehead move of funding low yield, long term investments with increasingly costly, short term deposits. Lehman demonstrated even more malfeasance and greed. Contrary to what people think, backstopping SVB didn't "bail out" SVB - they're history. Rather, bailing out SVB bailed out everyone in the U.S. (and beyond) who need to buy things to live.