American Economics Thread
- Thread starter Bernard
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So you expect every single business to spend dozens of man hours to audit their bank's records or jump from bank to bank every month(in pursuit of a the next bank they feel would be "safer")?
It might seem irresponsible, but theres a wide gap between knee-jerk populist outrage vs what's pragmatically necessary for a functional banking system that's at the center of a major economy.
I expect people to bank with more established institutions in the future, yes. I also expect for more people to be more suspicious of smaller banks. This might have a natural effect on smaller banks to be more innovative in how they provide value to potential customers.
I agree. This is part of why the 2008 financial bailouts were tolerated. I am still salty about literally nobody going to jail for widespread fraud, but I'm happy to make that trade-off if the alternative is an economic calamity that makes the Great Depression look tame. But this isn't really the case here. The accounts in SVB were big (according to media), the bank is relatively small, and the upside of saving the depositors seems minimal when weighed against the message it sends.
To be clear, I'm not implying that I think people should all lose their money and the executives jailed. I just think the natural process here would be relatively simple. The bank failure would mean that whatever assets the bank had would be liquidated, and whatever money could be raised would be used to recoup portions of the depositors' money.
Instead, the media frenzy caught the White House attention, and we now have a national intervention to refund every single cent. Fine, that's not a bad thing I suppose, but what about the next time a bank collapses? What about banks who are already playing it relatively loose with their leverage? What about the people and executives who make policy decision? If I was getting paid a 7 figure salary and I knew that Uncle Sam would probably refund my investors anyway, even if I massively screw up, it certainly would make it a lot easier for me, morally, to make riskier decisions.
I just do not like the precedent this sets. Bailouts are for extraordinary circumstances. This does not look like an extraordinary event.
Washington Mutual, Countrywide, Bear Sterns, China's Evergrande group, et al were all "more established institutions" until they're not.
If small banks = risky, then during the next crisis people will complain that big banks have gotten too big or too anticompetiive or some other kneejerk populist sentiment. There's no one solution that does't have it's faults.
I wouldn't call the upsides of reasserting confidence in the banking system, preventing a spiraling liquidity and bank run cycle and a financial crisis with global implications "minimal"
"Everyone’s talking about SVB like they’re now banking experts, but they can’t even explain in coherent sentences why SVB collapsed" - anonymous
Most people think the process should be "simple", but it's far from that if they don't have an in-depth understanding of how banks and central banks work. The stipulation of liquidating a bank's assets is stating the obvious and a process that's already begun when bank goes into receivership.
Also, to say "recoup" implies a loss, but in the case of a classical bank, excluding outstanding loans, there's really not much of a "loss" since those "whatever assets" are either cash or cash equivalents in the form of treasuries. You don't lose money on treasuries when hold them to maturity, but that was the source of the crisis since SVB's customers needed money "now" and not 6 months down the line when the treasury matures.
I'm not saying small banks are inherently more risky. Furthermore, the scale of WaMu, BearStearns, and Evergrande's collapse is precisely the sort of event that would make a bailout more palatable. Even in those cases, I have issues with the lack of accountability. What I am saying, is that we shouldn't continue to set a precedent that any financial mistake will get a government handout.
I haven't seen any strong evidence that the SVB collapse was a start of any major panic spiral. And if the argument is about mob psychology and behavioral economics, the government could've just as well announced that they wouldn't bail out precisely because the financial system is strong. There are going to be hundreds of skeptics either way.
Okay, well I'm not going to claim that something is simple or not simple or whatever. My argument is that the government should've let nature run its course, so to speak. I don't see strong evidence that rescuing the depositors was necessary, or that it prevented a run on the banks. The latest "explanation" from government policy makers is that the FDIC is simply using its insurance fund.
Okay, well what if next time the FDIC didn't have enough funds to cover the depositors? What then? Are the taxpayers going to foot the bill? Leaving alone the taxpayer, what is even the point of capping the FDIC at $250,000 if the FDIC will always try to make depositors whole? The policy is pointless in that case.
Anyway, I find this whole episode pointless. I find the government's interference to do more harm than good and it leaves me with more questions than answers.
I'll put a simple term what's happening with SVB that I could gather.
SVB has asset about $170 bil, they spent about $80 bil buying US government debt as investment. Now, here is the catch, before Feds up the interests, US treasury debt pays about 0.5% interest, very low return on investment, but it's a stable and secure investment.
Once the interest rate went up, SVB invested in the government debt at interest rate about 1.6~1.7%. They thought that's a decent return compare to before. However, Feds keep upping the interest rate, now the government debt is paying 4 ~ 5% interests.
Now, the problem is SVB has almost half of their asset tied to 10 year government bonds that pays 1.6% interest, and the current buyers get 4 ~ 5% return on purchasing government bonds. So, now you see the problem, the bonds still have a few year before mature. And they cannot sell those bonds at cost either, no one will buy them at face value and getting such low return. In order to get liquid asset to cover customers, they sold $ 20 billion government bond at $1.8 billion loses. Once this new got out, a bank run and stock free fall happened. And the rest is in the news currently.
A lots of small regional banks has either similar investments or has a lot of their asset tied in the real estate market ( first republic bank ), when market and economy is at a down turn, they have no liquid assets to cover their customers' needs unless they are willing to sell at a lose.
So the conclusion drawn base on those is that US government / Feds are screwing those smaller banks sideways with no mercy with high interest rates. Without higher interest rates, inflation is out of control. So they are kind fk'd either way
Inflation and interest rate are two sides of the same coin. Its about printing money but really this is all related to diminishing EROEI...
Fundamentally this is not about money, but about net energy flows...
Bailing out banks to try and keep the system going for a little while longer is like opening your refrigerator door to cool down your face locally once your house central AC broke down but at the expense of injecting even more heat waste into your home in totality.
As I said the inflation number never truly reflected the increase in housing. That's why unless labor and housing costs go back down inflation would not be tamed. The Fed was worried about resurgence of inflation but the banking crisis might tie their hands.
The consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier, according to Bureau of Labor Statistics data out Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure.
The overall CPI climbed 0.4% in February — over 70% of which was due to shelter — and 6% from a year earlier. The median estimates in a Bloomberg survey of economists called for a 0.4% monthly advance in the overall and core CPI measures.
More pain in the tech sector, Google, FB and many high tech firms continue their layoffs. I don't think the banking crisis is over. There is just too much money flowing around that any major movement can cause a meltdown in certain sectors and banks.
The consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier, according to Bureau of Labor Statistics data out Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure.
The overall CPI climbed 0.4% in February — over 70% of which was due to shelter — and 6% from a year earlier. The median estimates in a Bloomberg survey of economists called for a 0.4% monthly advance in the overall and core CPI measures.
More pain in the tech sector, Google, FB and many high tech firms continue their layoffs. I don't think the banking crisis is over. There is just too much money flowing around that any major movement can cause a meltdown in certain sectors and banks.