Three banks have failed in less than a week. U.S. government officials have stepped up to backstop losses, in a bid to prevent further panic. There are genuine concerns about whether that was the right move – effectively bailing out two poorly run institutions facing highly irregular problems and letting the third collapse – as well as the risk that more banks will fail.
So should you take your money out of your bank and keep it safe under the mattress or in bitcoin? The answer is, if you’re anything like me, whatever money you have in a checking account is insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000. So, no, it’s improbable that JPMorgan Chase will rug you.
Still, many are moving their money into crypto, like Tatiana Koffman, who described the move Monday in CoinDesk as an act of protest. Putting aside stablecoins, crypto is volatile, making these assets less than ideal currencies if you want to preserve your wealth. But they offer “root ownership” – meaning no one can make a run for your deposits.
Bitcoin, as many have already said, was born out of an earlier banking crisis. The blockchain’s very first block contained a message about bailouts. It was designed to disintermediate third parties from internet money by making people responsible for their own keys, in contrast to the highly intertwined private banking sector and public sector.
President Joe Biden has said U.S. taxpayers will not foot the bill for the bailout, and that unlike in 2008 the architects of this financial crash will not benefit. There are enough responsible actors here to play the blame game, but if you’re like Tatiana the issue is The System itself.
Senior management of Silicon Valley Bank sold millions of dollars’ worth of shares in the leadup to the crash. That is seemingly the only risk management they performed. In 2015, SVB Chief Executive Greg Becker said institutions like SVB did “not present systemic risks” while testifying before Congress over plans to deregulate banking that were implemented in 2018.
SVB essentially took a bet that interest rates would stay near zero forever. Over the past couple of years, it took in deposits from a tech industry that was booming, in part, due to historically low rates that made venture capital financing worth the risk for many investors. In an effort to juice as much yield as possible from those deposits, SVB put a majority of its money into long-term, fixed-rate interest investments.
The Federal Reserve, as my colleague David Z. Morris wrote, essentially created the foundation for a tech hype cycle through financial engineering to stimulate the economy, and then threw the frying pan into ice water when things got too hot. The recent interest rate rises were not necessarily unpredictable, but the Fed’s inconsistent messaging – saying rate hikes were unthinkable until they weren’t – did not help the situation.
Venture capitalists like Peter Thiel helped accelerate SVB’s outsized growth, and its quickened collapse. Thiel is reportedly a believer in Girardian mimicry, which explains why groups of humans make predictable if irrational decisions and our relentless pursuit of scapegoats. Tech leaders have said SVB grew out of a feedback loop that made it the place for startups to bank.
Also, a similar social dynamic, fueled by chat groups and social media, kicked in on the way down. Some even put sometimes-CoinDesk author Byrne Hobart at the center of things, because he wrote a supposedly well-read blog last month saying SVB was effectively insolvent. And so depositors like Roku, which left some $487 million uninsured at SVB, are not blameless.
Politicians, who like Florida Gov. Ron DeSantis are using the situation to justify their pet causes, once promised us “no more bailouts,” yet wrote the rules that allowed SVB to use a little accounting magic and hide billions in unrealized losses. Some, like former Rep. Barney Frank said Signature Bank, where he is now a board member, was attacked for political reasons because it dealt with crypto.
When Frank was in Congress he co-sponsored the legislation ultimately enacted as the 2010 Dodd-Frank Act, stymied bank failures. Signature had reportedly experienced the worst of its bank run and could have survived without government intervention, Frank said. If moral hazard is the argument that people will engage in riskier behavior if protected from the consequences of their actions, then we need a new term for Frank’s claims.
There were sound arguments for stepping in and preventing a cataclysmic blow to the valuable U.S. tech industry. Taxpayer money isn’t being used (at least not directly), deposits for growing businesses are safe, shareholders and bondholders aren’t being bailed out and even the New York Times is calling for clawbacks of SVB executive’s compensation and stock sales.
And, yes, there are solid arguments in favor of having let Silicon Valley Bank and Signature run their course. Expected losses were almost certainly exaggerated. A sound startup could have raised equity and banked elsewhere, and it would have put the fear of God back into the supposedly capitalistic U.S. economy.
But not bailing SVB and Signature out was never an option. Bank failures today are exceedingly rare and would cause a tremendous amount of panic, such as how the collapse of Silvergate Bank – essentially a free-floating entity detached from the wider economy – led here. And because SVB and Signature rode both the wave of cheap money created by Fed policy up and down, how separate can private and public interests really be?
So, if the U.S. government is officially in the business of bailing out banks, should you keep your money at a bank?
– D.K.
@danielgkuhn
daniel@coindesk.com
