Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (if one ignores the risk-adjustment for potential rising interest rates)?
It's not a rhetorical question, but a sincere one.
[1]: https://en.wikipedia.org/wiki/United_States_Treasury_securit... states that Treasuries are sold in all varieties of duration, from 4 week bills to 30 year bonds.
Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day.
Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
If you buy long-term Treasuries for the high yield with and you hedge the interest risk rate… what you get is the yield of the short-term treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)
Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?
Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent."
SVB was perfectly capable of restricting the total amount of assets it held. It wasn't a matter of rejecting small deposits; it was a matter of allowing (or rather, soliciting) huge clients to open new accounts to hold hundreds of millions or billions in assets.
I don’t see that working too well …
How is that relevant for the choice between buying treasuries and keeping the reserves?
> So if you flood the banking system with cash through fiscal policy, they can’t just accept all those deposits and leave them parked in their Fed reserve account.
Isn’t it just as possible as “just accept all those deposits and buy treasuries with the money” - if not more?
That's the background context. The way it plays out is more technical. See, e.g., Matt Levine's discussion of so-called narrow banking: https://www.bloomberg.com/opinion/articles/2018-09-06/fed-re... Narrow banking is the option you're implying--permitting banks to simply be conduits to park deposits with the Fed.
Really? Doesn’t look like one when it comes to large institutions or large banks. They scream “Capitalism! … for everyone” during the boom times and “Socialism! … for corporations only” when they screw up or times are tough.
Whether they loan, invest, or do something else is their decision.
There is something really fucked up about about the idea that society owes you a risk-free place to put your cash.
We accept other risks in life - some job are dangerous, my health could be gone any moment, I might be unable to pay for trratment. My house is not safe from a calamity.
But as soon as money is not safe, there is a fucking panic.
You don't need to be a bank to make a loan, I can lend money.
Me and you are regulated more than the banks are, because we are not allowed to do things banks do.
Legally the 'bank' means you have a banking licence. That is all.
This licence allows you to create money. This is a huge superpower, but there are terms and conditions attached to make sure it doesn't break the whole economy.
You can create money, you just can't pass that around the monetary framework. That's what the license is really about. It doesn't feel we disagree. What you wrote I totally agree with.
It's not just the banks either. In most Western countries, the pension funds are highly incentivised (usually through law) to purchase government debt in some form.
This is also part of the fuss on the ESG investment bill that Biden recently vetoed. The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost, and any ESG, DIE, and SDG agendas secondly (or thirdly, or lastly).
Why do this? It's financial repression[1]. By channeling private funds into government debt or agenda-driven endeavours, it allows the government and those endeavours to borrow at much cheaper rates than they should be able to.
---
[1] https://www.investopedia.com/terms/f/financial-repression.as...
No, the intent was to make sure ESG and other factors could not be analyzed as a risk factor, when they plainly are risk factors, just inconvenient risk factors that oil lobbyists and the like would rather you didn't pay attention to. Biden did the right thing, and ensured pension/fund managers kept their independence.
Then, the commercial bonds (for good sound companies), loose values. Then commercial bonds investors loose their investment...
So the loose-loose sitation were are looking at:
a) continue printing money out of thin air -- raising inflation and indebting the generation of kids who do not even vote yet
b) get the current economy go into depression.
It seems like the current generation, with their choices of leadership and the habits is responsible -- so ( b ) has to be chosen (to be fair).
But since we do not live in the world where accountability is a thing -- ( a ) will be selected.
Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades.
Here is an article I wrote in 2020 that explores that volatility, though from another angle: https://omarabid.com/zero-rates-world
Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up!
Here is a quote from that article in 2020:
> Maybe, but it's also possible that these high prices are here to stay.
I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however.
> now finding itself both tightening and loosening fiscal policy simultaneously
Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
Big call. Huge. Got some data or similar to back it?
Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1]
[1] https://www.theguardian.com/business/2021/jan/01/janet-yelle...
https://www.youtube.com/watch?v=Bcvl104tyRY
Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own. It's one of the most incredible moments I've witnessed. I'm not sure if there's some hidden agenda being pursued, or if Yellen is just so far removed from the real world that she doesn't understand the consequences of her statement.
I'm not sure why any company or individual would hold >$250k at a non-TBTF bank after this. It borders on financial malpractice.
Even if it some sort of a hidden agenda and [further] centralizing banking is just seen as a convenient stepping stone towards CBDCs or whatever, you'd come up with some passable explanation ahead of time. I mean it's not like the Senator there pulled out some gotcha she couldn't have expected.
Yes we all know the previous President famously kept his family far away from the levers of power.
I mean, if there was ever a time to know the people supporting the current regime are in a cult, look no further.
I’m assuming the point you’re trying to make isn’t actually about nepotism and you’ve simply misunderstood what the word means.
Like, say, John F. Kennedy's brother.
I think about these crises the same way. They had 48h to sort it out and they had to make a decision. The decision has side-effect-like consequences. Should she now lie about this?
So now, why did they only have 48h to make a decision? I don't know. I doubt nobody has thought about this before. But I assume that regulating banks is particularly hard, because of lobby pushback and the banks ability to exploit any loop hole quickly. They are literally organisations that look out for how to make money by exploiting asymmetries. These organisations work against the slow democratic decision making that involves non-aligned actors (who are also often not trained in this particular issue) in the upper and lower houses of parliaments of different countries.
Another question is. Why are small banks treated differently than big banks. I have read somewhere that small banks have less regulatory oversight. Maybe the decision is much more to support heavily regulated banks and not so much those which are for various reasons not as much regulated. Why would the government want to hold the bag that it was not allowed to look into?
OODA loop? https://en.wikipedia.org/wiki/OODA_loop
One would hope that there were some specialists at hand that know parts of the system, laws, implications on the overall economy etc.
There are likely a couple of plans available how to deal with this kind of situation. But likely not for this exact situation. Plans that exist but have not been implemented as policy likely are too rough around the edges or have significant opposition for different reasons.
On top of this, at this level of complexity and abstraction everything is kind of an opinion until tested and proven (but no time for that). Because no one truly understands all details and system connections.
On top of this in government you never know 100% what the motivations behind all these suggestions and plans is. What is factual, and what is politically tainted.
So all of the sudden things turn from certain to probabilistic. The leader has to figure out how to weigh the opinions and how to make a coherent enough decision (remember this is a system, and individually good decisions can be bad when taken together) to be net positive until the structured decision making can catch up.
Hopefully this is what is happening now and a general policy is decided on based on structured analysis. And hopefully it is quick enough to be ready before the next crisis hits.
Central bankers are appointed based on two criteria:
1. A willingness to print money for the government so it can spend more than it raises in taxes.
2. Looking presentable, sounding sophisticated and emitting enough bafflegab that (1) seems scientific instead of ideological.
Thinking deeply about economics and the role of banking/central banks in society is an anti criteria, because if you did think about those things you'd end up concluding that the only fair and stable solution is way less money printing and quite possibly none. That would directly undermine the government that appoints you. Your salary depends on you not understanding your own area of specialism.
I do feel like the defining characteristic of the 2020s is turning out to be people's struggle to accept the horrible truth that government officials/scientists who claim to be experts systematically have no idea what they are doing.
I agree SVB and Signature uninsured deposits shouldn't have been guaranteed, but that's not quite what Yellen said. The $250K guarantee applies to deposits at all insured banks. Having clarified that, Yellen said:
> A bank only gets that treatment [guaranteeing all deposits] if a [super] majority of the FDIC, a super majority of the FED board, and I in consultation with the president determine that the failure to protect uninsured depositors would create a systemic risk and significant economic and and financial consequences ...
From: https://www.cnbc.com/2023/03/16/svb-signature-bank-failures-...
> Treasury Secretary Janet Yellen told senators that government refunds of uninsured deposits will not be extended to every bank that fails, only those that pose systemic risk to the financial system.
The government outsourced this responsibility to the Federal Reserve at the same time that a federal income tax began.
There are 3 main ways to balance a government budget. Spend less, raise more funds through taxes, or make the scale of debt decrease through inflation.
More like government is privatized
And if you save one bank, it restores confidence in the other banks against a bank run. Otherwise I was thinking of removing money in all banks combined.
Instead, why don't you look at how many people have lost uninsured deposits since the FDIC was created in 1933? You'll find its extremely low to nonexistent. Thats because while the FDIC has a 250k insurance limit, it does its absolute best to not use it- Usually by coordinating a bank sale or private-public rescue plan.
He later got charges for corruption and there was a big investment scandal where some people who had done well with him before ended up loosing money later.
So many businesses have become financialized now. In the UK, John Lewis, which is/was an upmarket department store (and also owns Waitrose, a grocery store), is a mutual, owned by it's employees, but is now in the built-to-rent property market. Its literally burning the reputation and diversifying in to all kinds of gimmicks as it dies.
Sainsbury's, one of the biggest supermarket chains in the UK, has been in to lending (credit cards, loans) for decades now.
People used to be able to buy a house and raise a family on one salary. Tell me where exactly the standard of living went up since the 70s.
Sounds nice though.
That family with one salary probably also only had one car. That car needed a tune-up regularly, and was lucky to make it to 100,000 miles.
They had a house, but it was a small house by current standards - maybe 1000 square feet.
They had one landline phone - no cell phones, and certainly no computers.
The breadwinner could retire at 65, but the median age of death was 68. They could afford medical care, but the medical care that was available didn't lengthen their lives to what we expect today.
So that's where it went - bigger houses, more cars, computers and cell phones, and better medical care. But if you're willing to live in a 1000 square foot house, only have one car, no computers or cell phones, and inadequate (by current standards) medical care, you can probably raise a family on one income still today.
I have no idea why those are mentioned. Do we somehow pay for development and manufacturing of those with exorbitant rents and mortgages?
When people talk about standard of living they talk about living, not various forms of entertainment brought on by sheer technological progress.
If you want to mention technology mention things like washing machines, dryers, dishwashers and fridges. Those contribute to standard of living. Not whether people figured out how to do astral projections or whatnot cheaply.
In the 1970s houses were already getting larger, but not to today's. Nearly everyone had one 19 inch color TV, but few two. Only a few weird people had a computer in the house, and it connected to the TV for a monitor, for the rest a computer took up large buildings but many people had a terminal to use it via some time sharing system. Most women had a drivers license, but families only had one car unless the woman worked outside the house (which was most by this time). Cars with advances like electronic ignition cars need much less maintenance, but if your car was about to reach 100,000 miles you gathered your best friends to go for a drive to see it at all zeros: you had to add oil before you left (in a cloud a blue smoke), rebuilding engines was still common, but not something most people did. You had a private phone in your house.
Today most new houses are the size of what would have been considered upper middle class in the 1950s. Today people consider it normal to have a TV in every room. Today everybody has a computer in their home. Most families have a car per driver, and those cars often last 300,000 miles (though many people don't keep them that long). Everybody has a phone/computer in their pocket, few have them in the house at all.
There are a lot more things I could point out that have advanced. If you were willing to live like 1950 or 1970 you could get by on a lot less money.
Maybe we could measure living standards by looking at mental health statistics? Percent of population on prescription mind-altering drugs?
Do bigger houses, leading to greater social isolation, actually represent an increase in living standards? I get that bigger house == bigger house, but maybe the metric is flawed.
Housing is a weird examples, since that's actually been getting worse, due to housing construction largely being banned.
Increased (and arguably unneccessary) complexity that hides simple truths. For example, SBF and his colleagues were committing fraud.
Whether this added complexity is intentional is left as question for the reader. Regardless, obfuscation has its benefits.
Arguably same critique can be applied to software.
I feel bad for your friend, however. He was not systemic enough.
You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all.
Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist.
The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hit it as hard as you can knowing it won't last and it's free money.
SVB shouldn’t need to hedge the interest rate increasing by .5 or 1%, but they definitely should have hedge the risk of it jumping 4% and more.
It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.
1) Buy loads of long term debt and some swaps.
2) Buy less long term debt than that and t-bills.
These two options are exactly equivalent from a financial perspective. Same risk, same reward, quite similar costs.
If instead you've bought loads of long term debt and not hedged, why did you do that? This is the nub of the thing. Why? Because you couldn't make it pay otherwise with the given market conditions? So you took a punt on inflation and the official rate staying low? Could you have done that differently? Should you have? What were the implications for your business if you didn't take a massive bet on interest rates?
Swaps are entirely beside the point here. Swaps here are just "hey let's not actually make the bet we just went out of our way to make." It's likely going to cost you a little more than not exposing yourself to that risk in the first place. It's like betting on both teams in the superbowl. The house takes a cut.
"Should have hedged with swaps" misses: "why did they have an exposure of that size at all?" Recklessness? Idiocy? Should they be prosecuted for extreme negligence? Were they between a rock and a hard place and took a fairly desperate measure? (Which I'm also not excusing either fwiw).
No no no, that's not how financial markets work. It's the stuff that happens after dinner over drinks that makes the difference
I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that knows better than the markets. Actually 'vision' was used jokingly when someone accidentally made a profit by not hedging and ending up on the right side of the market.
Bankers know this. In this case, SVB could have hedged their risk with interest rate swaps, for instance. But for those they would have to pay a premium. Why? Because the market believed there was a real chance the rates would go up. If at SVB they really planned on zero rates to stay for a decade or more, they have simply been gambling.
Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset
On a Treasury or guaranteed bond, there is no credit risk.
On a Treasury there is no prepayment risk.
Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk.
0 risk = 0 or near 0 premium.
e.g. there’s no point in doing the trade if you hedge.
Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.
SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.
Obviously not.
I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).
Treasury bills may be cash equivalents. They present (almost) no interest risk.
Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).
A bank would indeed be crazy to hold onto fixed rate 30-year loans with interest rates at near zero.
The naïveté was thinking the deposit base wouldn’t shrink (after growing 3x in as many years)
I would suggest a read of https://en.wikipedia.org/wiki/Credit_Suisse#Controversies and consider that each time that happened they lost money and trust.
At this point, they have neither.
For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank.
That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.
I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages.
I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.
Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.
The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it)
I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade?
Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.
I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time.
Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.
Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".
1. Many people trading on the stock market are professional traders who do it as a full time job, and they have access to information and tools that you don't. So unless you expend similar amount of time in studying the markets, it's highly unlikely you'd beat them.
2. Even the best traders generally beat the market by a couple percent on average. So in order to compensate for time cost of equivalent to a full time job on studying the markets, the fund you're investing needs to be: (your salary / x%) -- Let's say you expect 100k salary, and somehow you can beat the market by 5% if you put in the time, then you need a fund of 100k/0.05 = 2000k for the enterprise to "break even" so to speak.
3. Most people don't have 2 million to invest. And even if they do, they don't want to spend 40+ hours a week studying the stock market. So, since trading is basically a zero sum game, most people who invest small amounts of money perform worse than the market.
This doesn't even go into the tricky details of determining whether your performance is due to skill or luck (or lack thereof). The 5% is subtle enough, but not having any degree of certainty at all makes reviewing your decisions and trying to improve your trading skills even harder.
That said, there's probably more than a couple people besides the big names who can pull this off. It's just that even if you consistently beat the market, it takes a long time for people (including yourself?) to notice, because the effects are so subtle at first. In a sense Warren Buffet owes his fame not only to his skill but also to his age, and his willingness to engage in the activity even when he has all the money in the world. I suspect most other people find other interesting things to do once they earn a hundred million or so since it's more money than they ever need...
https://www.nytimes.com/2022/12/02/business/stock-market-ind...
You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.
"The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium.
Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out.
Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond.
Too much of even a good thing, still poisons the system.
Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers.
So either their peers were smarter or the big unfolding is yet to happen.
https://www.bloomberg.com/news/videos/2021-05-20/innovation-...
If humans could predict the future, we wouldn't have gambling.
And the domestic angle isn’t even the worst. Breton-Woods put America in a sort of custodianship which they have betrayed. Raising and lowering rates to promote your domestic economy without even considering the global impact is fucked up if you promised the world that your currency can serve as a trusted foundation.
World order is still fluctuating all as a result of these betrayals.
How do people get this backwards?
The US didn't say, "use our currency as the global reserve currency!" Countries chose and continue to choose to use the USD for global commerce. No one is forcing them, the USD really is valuable.
>World order is still fluctuating all as a result of these betrayals.
So raising rates is a betrayal, but allowing inflation to eat away at savings of those with USD holdings is not betrayal?
You might argue that to keep printing this country needs to invest into aircraft carriers to keep everybody else in line and well behaved. But it's still a very profitable arrangement as the recent history of USA shows.
This is an honest question, that may be naive. But, what are institutions formed, founded, and ran inside of the US, overseeing the US government and policy, supposed to do instead of considering what is best for their own country?
Are you arguing that, because the world chose the US dollar as its de-facto global currency, that the US is obligated to consider the entire world first, instead of its own citizens?
The very basic thing you learn when studying banking is durations and how your primary job is balancing that for your debts and assets.
Bankers also have various tools to short circuit any issues, inclusing raising rates on deposits, getting wholesale funding, matching various duration bonds, etc.
Also, while historical data is not an indicator of future data, the average long term interest rates in the US have always been higher than what it was in the past decade.
Yes, hindsight might be 2020, and this applies to even my comments. But we literally are paying these bankers exorbitant sums to know these and do better than the average Joe
The key being, SVB, etc are symptoms. And while we should certain chat about it the focus should be on The Fed. Again. Just like it played a key role circa 2007/2008.
Given The Fed's mandate, how is it once again missing the mark? And where has Congress been? They're mandated with overseeing The Fed, yes?
Yet we're led to believe this is a banking problem? With little of no legitimate dicussion of foundational problems?
=^\
Until when? Until there were only billionaires left and all the poors died off? This is delusional thinking and it was the same thoughts the banks and the Fed had which is really why we are in this situation.
It is also why I left Economics behind.
This would not have been an issue if the Fed raised rates gradually over years and kept the bonds more or less even because of time value. But they panicked and very possibly because they have been politicized. They should have started raising rates in 2021 but with the election and the Fed seat up for appointment they sat on their hands.
There’s blame to spread around but there’s a reason 100s of banks are in this situation right now. They were all following the Feds regulations and guidance. And now they’re holding all these lousy bonds and the deposits that back them want to be moved into high interest accounts now. Whoops.
Had they guided for this then banks would have went shorter term.
[1] Normally. Sometimes the Fed does something like Operation Twist or QE or something, where they intervene in the markets of other rates. But that is not the normal way this works.
Understatement of the year. It's based entirely on what they think the Fed will do in the future.
Of course I could still be right. These higher interest rates could be a blip.
No one has lost their deposits yet: I can't tell whether you are inaccurately describing the status quo, or making a prediction?
The government controls interest rates, therefore the fact remains: it has in-fact been the feds fault all along. When you lower the cost of money (interest rates) so, so low, you send a signal to the market that says, "Hey, everyone -- invest, invest, invest!". That signal makes it look as if a lot of things are a good investment, thereby causing malinvestments all over the economy that eventually go bust.
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
When the government sets up a borrowing program and immediately shells out 300+ billion to banks, and when they bailout the 16th largest bank in the US to the tune of 100+ billion, Janet is certainly picking winners and losers, but at that scale, I think an argument could be made that fiscal policy is loosening, just like it was loosening when Bush and Obama handed out their bailouts.
Politicians are addicted to cheap money.
Rates were far too low for far too long. Why was the Fed still aggressively expanding their balance sheet into 2022 when inflation was obviously happening?
This is a problem created by monetary theory academics with access to too powerful of tools. If you have it, you're going to use it.
Imagine if we gave generals the same kind of unrestricted access to weapons and allowed them to wage war at will with no oversight. That is the Fed.
Such a missed opportunity.
Despite the Fed being “independent” they are under enormous pressure from the government.
The prediction was that when it was time to stop printing money the Fed wont do it fast enough since the political pressure to keep the economy going will be too high.
Pretty much exactly what happened.
I know small business owners who were not retail facing who just working right through the pandemic lockdowns without stop because they couldn't afford to stop operations.
Actually Fed real error has been raising rates to counter an inflation not caused by monetary policies.
SVB put all their investments in one bucket and it has been a very poor decision, really a rookie one
Saying “the central bank printed money for years without inflation” as proof it’s not the cause is like saying a gas leak didnt cause the explosion because it’s been leaking for years.
https://en.wikipedia.org/wiki/2021%E2%80%932023_inflation_su...
In more recent times, even more rapidly accelerating inflation began in July 2020, shortly following the $2.2 trillion CARES act from late March 2020. The "transitory inflation" narrative would begin in early 2021. The war in Ukraine began in February 2022, and doesn't even register as a visible data point in terms of rate change.
You have it backwards. Ending Bretton Woods didn't cause inflation. Inflation caused the end of Bretton Woods. If you zoom into the period before 1971, you still see plenty of inflation. If the government wants to stop its deficit that forces it to "print money", it needs to stop its deficit. Forcing the government to give a fixed quantity of a shiny yellow metal in exchange for a green piece of paper isn't going to help with that. All that does is ensure that the government will instantly give up all of its shiny yellow metals.
25 years to double.
CPI in 1980 = 84
18 years to double
CPI in 1999 = 168
19 years to double
24 years later is still hasn't doubled again. It's hardly a runaway freight train compared to pre 1971 is it?
1952 - 26
1972 - 41 (+58%)
1992 - 138 (+430%)
2012 - 227 (+773%)
2023 - 300 (+1053%) in 11 years
Now imagine we kept at the same relative rate of change from 1952:
1952 - 26
1972 - 41 (+58%)
1992 - 65 (+150%)
2012 - 103 (+294%)
2023 - 132 (+407%)
Your dollars being worth ~2.5x less than they would have been otherwise is huge, and largely explains nearly every graph from https://wtfhappenedin1971.com/ . This also ignores the fact that CPI does not accurately reflect change in costs of things like education, healthcare, and housing which have all inflated in cost far beyond the rate of nominal CPI. And all having the same common denominator of dramatic increases in government $ involvement, which has largely been enabled by the end of Bretton Woods.
I'd also add here that another child comment is completely correct. Inflation had already been increasing at an unacceptable rate prior to 1971, largely due to reckless spending. And that was a major reason we withdrew from Bretton Woods. But it was completely myopic. Instead of solving the problem, we simply gave ourselves room to make it even worse, which we promptly proceeded to do - much much worse. So now instead of solving a relatively small problem in 1971, we strapped a bandaid on it and gave a later generation an exponentially larger problem to solve. The point of this is that the delta from 1952-1972 is already far higher than it "should" have been. The "to the moon" rates from there are simply completely unsustainable.
When all you have is a hammer...
It printed too much money in 2008 and the following years. It raises rates very quickly now, because each time Fed tried to raise the interest rates or reduce their balance sheet after 2008, the political pressure made them backtrack. This Frontline documentary has a pretty good take on it: https://youtu.be/EpMLAQbSYAw.
Wasn’t the fed created to some extent to prevent political will from whipsawing the credit markets? How did the politicians force the fed? Isn’t this expected? The fed did it to themselves.
We need a new party. Preferably, one that has some notion of basic economics.
Printing money doesn’t cause inflation necessarily. Your thinking is based on Monetarism, which has been debunked a while ago.
In essence, it’s not about the amount of money that is created. It's about the amount of goods we try to consume in relation to the amount of goods produced.
Players make resources, then re-invest those resources to expand. There's markets to buy and sell resources, and otherwise money isn't part of the game... until someone makes banks, and starts printing money. At which point everyone watches the prices of everything go up.
It's a pretty cool microcosm.
If the information does not fit the narrative, the information must be fake...
How else will we ensure the safety of our elections and democracy? Don't you know democracy dies in the dark? Don't you know that this is extremely dangerous for our democracy?
Edit: BTW, nothing against what you said, economics seems very similar to the Agile cult to me at this point.
In economics, "enough" is hard to assess though. Also, a theory may linger around for a while because it suits the agenda of some people. And I guess many more methodical issues like these.
As you wrote, it was the hickups in the actual economy which caused the price hike, and with all that "money" available it was also clear that this inflation wouldn't go down anytime soon as so called "experts" were talking about initially. In fact, it is a wonderful dumping ground for all this junk in the stock market, although by now it is more of a trickle in relation to the amounts piled up there ...
If you look at real estate prices vs CPI since MMT really began, real estate grew much faster than CPI, in some cities over twice as fast. That is a direct result of all the excess money that wasn't needed for productive endeavours finding a "safe" place to be parked. Similarly having bonds yield below even the cooked inflation number forces safe traditional investors like pension funds to chase stock market returns which was a large contributor to the gigantic bubble that is now popping.
Redefining inflation to mean consumer price increase was a very sneaky move to be sure. A hundred years ago your statement would have been read as "inflation doesn't cause inflation" since it meant any expansion of the money supply.
Since 1950's, population has doubled and GDP is up 10x.
What should money supply be for it to cause zero inflation? 1x? 2x? 10x?
Meanwhile under the monetary alchemists and "stabilizing" regime of central banks real wages have stagnated, crises still occur every 10 years and the entire system is so fragile that one major event could collapse the whole house of cards.
Prices definitely lowered, but the difference being that while there was also supplier upheaval as artisan/bespoke producers were replaced by mass production - the industrialists were enormously and sustainably profitable and could in turn employ those displaced from the failed producers.
Aggregate demand arguably increased with the move of labour from rural agriculture to urban manufacturing.
A deflationary cycle annihilates demand by definition and fixed costs then eat producers alive - leading to wealth destruction, unemployment, debt writeoffs and credit tightening. Which in turn leads to more demand annihilation.
The ill-defined nature of inflation is an extremely important and often overlooked fact.
Another interesting problem with the concept of inflation:
Thirty years ago, what would've been the "consumer price" of a modern smartphone? Millions, easily.
Same goes for many other technologies that have fallen in price rapidly. (Big screen TVs, speakers, computers, anything with a screen, a CPU or a wireless communication chip really.)
Is this deflation?
Sure, but how many of them were there? Zero. Volume has to be accounted for.
Having a 2% inflation target would in practice mean having a target for median living cost increase.
Seems like a post hoc ergo proctor hoc fallacy. There are plenty of safe investments that could also be productive, that doesn't say anything about why real estate specifically.
It's pretty strange how, when all the money was being printed, it wasn't that hard to find a plethora of economists warning that it would cause inflation (due to Monetarism principles) and then, now that inflation is rampant, that's not seen as evidence to the theory. Furthermore, change the interest rates to curb inflation is exactly in-line with that theory because higher interest rates cause people to take their inflated currency out of circulation and into savings.
So as the supply chain continues to improve, prices should come down?
Inflation is too much money, chasing too few goods. It's the push/pull between money supply and goods in the market that drives inflation. Money can't be talked about in a vacuum.
That's very often the case.
One more easy things in economics to understand is that your second sentence is only true if demand is assumed to be constant.
For all of the missteps SVB made, there isn’t a bank on the planet that can survive that.
It’s like building a seawall to protect against the next tsunami, and measuring the height of the seawall based on the worst past tsunami. But the worst past tsunami was completely unpredictable prior to it happening, based on all the lesser tsunamis that had come before it. And the future worst tsunami will be by definition worse than the past worst tsunami and similarly unpredictable based on all the lesser past ones.
Furthermore, the bond yield was inverted for quite some time (indicating a financial tsunami was on the way) making it even more idiotic to be in long-term treasuries.
Also, building walls against physical forces is a terrible analogy for pressing a button to change your bond ladder risk.
https://en.wikipedia.org/wiki/PID_controller
Its time to get this plant swinging.
When an economy stops producing services and goods, somebody is going to need to reduce their consumption of said goods eventually. The question is just, who that is. Another poster above mentioned three ways a government can balance their budget: spending less, raising more, decreasing real value of debt by inflation. Each of those has a target "audience", which suffers the most when pulling that lever.
For inflation (if not combined with compulsory loans), it's the middle class.
Pick your poison.
If you don't want to frame it in terms of "evil" or "profiteering" that's fine.
But this issue is important. The expected consequence of inequality is reduced economic output (in terms of utility). It leads to inefficiency. I feel this is a perspective that's not stressed enough.
For example: Bill Gates comes along with Microsoft, and sells Windows to businesses worldwide, who all benefit. Why is GDP not growing? And even if it magically doesn't grow, how has that made me poorer?
Did GDP grow during the pandemic? Did dozens of Bill Gates's spawn?
How did you even get the idea that Bill gates has increaeed inequality? Thousands of people were able to get a well paid job or start a business, inequality probably decreased on average.
But when there is wealth inequality this assumption breaks down. A person with large wealth can offer higher prices for less utility compared to a less wealthy individual.
This biases markets to satisfy wealthy individuals, overall reducing total utility production.
A slightly better seat on an airplane is 10x the price of economy seats. Without those seats, economy seats would cost much more each.
A slightly better car spec is 2x the price of the base model. Without the better spec model, the base model would cost much more.
Additionally, just the development of new technology is often for the wealthy first, as it's prohibitively expensive, and then as manufacturing techniques work out the tech filters to a large group of people. E.g. Tesla cars; computers; pretty much everything, really.
That's a perfect example of when inequality biases a market to produce suboptimal outcomes.
Why?
Because if people wouldn't be able to afford an airplane ticket in perfect market conditions, then that is the optimal allocation of resources.
If they can afford that in current market conditions that's a less optimal resource allocation.
In other words, the resources spent to subsidize air travel (in your example) could have been more efficiently spent elsewhere.
Sorry, you've lost me. How do you define perfect market conditions?
It requires a bunch of idealizing conditions that never holds in practice. But it's still useful to study what effects deviations from perfect competition has on efficiency.
Think about it like this: subsidies lets you buy something you don't actually want, that's inefficient.
For subsidies to make sense, they need to compensate some other deviation from perfect competition. For example, it can make sense to subsidize green energy because fossile fuels has external costs not accounted for by the market.
But the fact that a rich individual is willing to pay your air ticket is not a good reason to subsidize something.
An intuitive example: A rich guy enters a bar and yells "free ice cream for everyone!". That's nice. But if the same cash were distributed among the guests, some would've gotten beers and some wine. But when faced with the choice "pay for beer or get free ice cream" everyone choose ice cream despite there being a better allocation of resources.
> People choosing free ice cream over expensive beer doesn't strike me as inefficient.
But it is!
With the total available resources we have two options:
All get beer. Or all get ice cream.
Total utility (value/happiness/whatever) is maximized when everyone gets beer.
When resources are unevenly distributed, ice cream is subsidized, and all get ice cream.
When resources are evenly distributed everyone can make the choice themselves, and they get beer.
Clearly "resources evenly distributed" had the better outcome.
The point is not that redistribution is a good idea. The point is that wealth inequality makes the economy less efficient, and that it is something we should take into consideration.
Redistributing wealth might also make the economy less efficient, that's an argument that can be made.
From where I stand, it seems the inefficiency caused by wealth inequality is too rarely discussed relative to its harmful impact.
The problems caused by redistribution/taxes etc. are otoh extremely often raised.
But I do think your argument of efficiency is not persuasive, as the definition of utility relies on people making choices they never regret, or that don't harm their total lifetime utility.
E.g. some people might want to take that money and save it, and if you come back to the situation in a year's time they now have more money than the people that bought beer. Now there's wealth inequality and they can buy something the others can't. Viewing the original situation in microcosm makes buying beer the "efficient" thing to do, but it also makes the second scenario less "efficient".
Not a lie at all, corporate profits are the largest driving factor behind inflation over the past couple of years:
https://www.epi.org/blog/corporate-profits-have-contributed-...
Corporations raising prices is a response to inflation, not the cause of it.
When the levy breaks and the town floods, don't blame the river for being a river. Blame the engineers that built the levy.
Sorry, that's wrong. Corporations are taking advantage of the perception of supply chain disruptions to excuse price gouging. Supply chain shortages led to a 1-2% bump in inflation pushing it to 3-4%. Corporations then bumped prices 3-4% which raised inflation even more, pushing it to 7-9%.
If corporations were raising prices in response to increases in costs, their profits would remain flat or only slightly increase. That's not what the data shows.
Easily said now, however.
There'd be no practical way to shield the vulnerable or the carers and beyond that if it's left to run rampant in the wider population eventually the medical system is overwhelmed and collapses.
The shielding system was an official policy in the UK
https://www.local.gov.uk/sites/default/files/documents/SHIEL...
> left to run rampant in the wider population eventually the medical system is overwhelmed and collapses.
The risk of hospitalisation was low around the 30s and younger.
Yeah, it still didn't and doesn't work though. Carers will have families, they'll have children in school, they'll potentially have more than one job. You can't shield the "carers" so you can't shield the vulnerable outside of a wider scale lockdown. Lockdown was the only thing that stopped case numbers going up till the vaccine came along.
> The risk of hospitalisation was low around the 30s and younger.
The average age in the UK is 40. So pretty much half the population would need to completely isolate from the other half while the younger half lived their lives as normal.
yeah, not going to happen.
[0] https://www.economist.com/graphic-detail/2021/03/13/our-covi...
Really? The graphs I have seen show cases declining even before lockdowns were imposed.
> The average age in the UK is 40. So pretty much half the population would need to completely isolate from the other half while the younger half lived their lives as normal.
The advice would have been the same, work from homes where possible. There was already the concept of "bubbles".
Likely because people were voluntarily locking down.
Unless you deal with schools, there are no "bubbles" or not ones that really work. Do you send teachers into schools who are in the vulnerable group? Or do you close the schools? If you close the schools you may as well do a full lockdown because so many people will have to be at home to look after their children.
The idea you can lockdown half the population by age just doesn't work because society doesn't separate itself out neatly by age.
What is QE? How can financial stimulus limit the physical consequences of businesses closing?
QE can only redistribute wealth. This is an axiom. If we are lucky/played our cards well, this redistribution results in a more efficient economy overall. For example, because it alleviates overly risk adverse behavior by market actors.
However, QE also reduces market efficiency by polluting the price signal. For example, by increasing wealth inequality.
I feel this is a common misunderstanding. QE is treated like some magic wand to improve economic measures such as stock market valuations and profits.
When the fed/gov uses tools like quantitative easing it should be obligatory for journalists to ask: "Why do you think this redistribution of wealth results in net positive impact on the economy?".
The cause of the inflation is not a classic spiral, it's profiteering especially on the side of fossil fuel producers and in retail.
> 5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under.
It's not "a bunch of VCs", it's "GQP-allied Peter Thiel wants to see the world burn just to create additional mess for the Biden gov't and causes a bank run".
> SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.
Without the "excessive" stimulus packages, economies across the Western nations would have been devastated by Covid. It was bad enough with the stimulus packages, I don't even want to imagine how it would have turned out without them.
What Thiel did was beyond irresponsible. He should be criminally tried.
This is because they fucked up their duration risk handling, no one held a gun to SVBs head and forced them to invest so heavily in long duration bonds. If they bought more short duration bonds none of this would be a problem. Other banks didn’t make this mistake. So why did they do it? Greed, or who knows, maybe it was plain old ignorance/hubris. Still, it was 100% avoidable. SVB fucked up bad and pointing blame at the fed is just not making them accountable.
Like fuck, who are these dumb chimps running this place. When I help my parents plan their retirement I looked at 100 years of history of what normal fluctuations are in the bond or stock market. Looking up data like that takes an hour and should make anyone with basic math skills realize rate and the bond fluctuations that follow at 100% bound to happen given enough time. It was just absolute amateur hour at SVB.
I don't make excuses for dumb decisions, but... someone said recently when the Fed taps the brakes someone always goes through the windshield. This was a far more extreme scenario than tapping the brakes on a car. More like the moon stopped. We all knew it could theoretically, and what do you know, it just stopped.
imo this is very flawed thinking, a once in a 40 year event is almost 100% likely to happen in an average persons life — maybe twice. I think when it comes to either your life savings or gigantic amounts of money like banks manage it’s irresponsible to not consider economic cycles that even only happen once per 100 years because of how likely it is to happen once is your life and be absolutely devastating.
I stand by my statement, this is 100% on SVBs amateur hour monkey level thinking.
Well 0.1 -> 1.0 is a 900% increase, want to 1.0 -> 4.0 is "just" 300% so I'm not sure if this is a very good way to measures increases in interest rates...
> regression of interest rates from whenever to now, draw a line that's never violated until
Given the data (https://www.macrotrends.net/2015/fed-funds-rate-historical-c...) I would expected such line to be nearly useless due to a very low R2 (too lazy to actually calculate it...)
But yeah, even back in last March the bond markets were not expecting that the rates will be above 2.75% in 12 months.
In 2020 and 2021, we already had tons of talk of upcoming inflation due to the stimulus pacjages. I myself took some precautions, and I am really not at all savvy.
The management team of a major bank would certainly be aware of the risk of inflation given the massive uptick in money supply and that the fed would be forced to raise interests as soon as the inflation manifests.
I think incompetence is an easier explanation. Years of ZIRP bubbled incompetent or lazy people to the top.
It seems a pretty basic assumption that someone at SVB did a WHAT IF analysis to game out different scenarios if interest rates started rising. This is not rocket science.
>You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend
Well, if your bank is relying on analysis like this, it deserved to fail.
Here's how easy this situation was:
"Historically, would 5% interest rates be seen as crazy? What happens to our balance sheet if we see those rates?"
its no big deal to make a little bet based on that, but SVB seems to have bet the farm
had they even diversified their duration they would have been fine
SVB wasn't even operating at the level of the typical individual investor!
It is other way round. Majority of issue is on SVB side. Feds are not charged with running SVB nor hedging their risks.
What do you mean by this?
No one forced them to invest in bonds and not hedge against raising interest rates.
Bank lives matter!
It also seems to me SVB used an exemption from Basel III(). Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable, which is why SVG opted out.
So they are now in the "find out" phase of fuck around and find out. I really have no sympathy for the way the US banking lobby bribes politics to get exemptions and the cowboy attitude of their "regional banks". Now, everybody is very sorry and promises to improve and once the storm has died down, they will continue to work like that.
https://on.ft.com/3ywMURD (google for "Silicon Valley Bank is a very American mess" to sidestep their paywall)
Just as everyone started talking about inflation coming back? Just as it began showing up in the actual data? That's when they deliberately decided to stop hedging? That's insane. "Deserves to lose" is the only non-profane way I know of expressing how incredibly unwise that decision was.
And maybe how immoral. They may have made that decision then because everyone could see inflation coming, and therefore the price of hedging the risk went up. If so, they threw away the bank (and the stockholders' money) for one year's increased profit. Madness.
These are policy failures on all fronts - from monetary to public health.
They don't require it, it is the safest investment. What do you consider a safer investment?
>Oops, they're not so safe after all if you need your money back before maturity,
Golly, it's almost like banks are supposed to know how this stuff works.
It's funny that you relate "safe" to "never changes price". The bonds were safe and are safe, which is why the "bailout" is an okay deal (ethics aside); the government will pay your money back.
>SVB is certainly not blameless here
Who on this planet would consider them blameless? They are 95% of the blame of their own situation.
This is not what safety of investment is, by any stretch of imagination. The yield of investment is nominal returns times weighted probability of that nominal return being lower. Government bonds are near zero risk of not being honored.
The risk you talk about is inherent in long assets + short liabilities and has very little to do with issuing body of the bond.
What caused this wave of inflation was supply taking a hit. Fallout from COVID and then war in Ukraine. It was difficult to get many good which normally were easily available. It's not rocket science either: inflation is about always caused by falling demand. It doesn't matter how much the government prints. When bread is hard to get people will exchange a lot to get a loaf.
If anything it seems like overreaction by the feds to raise the rates so much. It's not like them reducing access to capital magically makes goods appear on the shelves.
I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that... in this case.
I don't think the particular path matters much. People tend to moralize banking, and post failure we tend to hunt for moral culprits. But... the historical fact is that banks fail sometimes, under all possible regulatory and commercial regimes. We have hundreds of years worth of evidence.
Banks have failure scenarios. The concept of a bank which takes deposits and invests them while maintaining 0% risk to depositors does not, and has never existed. We need to decide if money in the bank proverbial gold, or is it more like shares in a company? We just can't have both.
The rate increases were an attempt to combat the inflation caused by the massive increase in money supply during the pandemic due to the government stimulus. There were no new goods or services justifying all the stimulated activity. SVB was drunk on the seemingly permanent zero interest rates (like everyone else) and invested in long term government bonds. Then the unthinkable happens—rate increases for the first time in over a decade, and those investments go boom. This is all about people getting used to cheap money.
In all of modern history around the world when has printing more money not resulted in inflation. Let's look at Zimbabwe and other countries that went nuts printing money.
All the pandemic showed us is how ill-equipped we really are to deal with an actual challenge, from individual people to policymakers.
The last 3 years have been so devoid of any basic rationality across the board.
7. In order to inject "massive liquidity into banks" more money is printed.
8. GOTO 2 but for different years.
Just to be clear, this is finance 101. Its not a surprise.
Having to sell treasuries at this time was the surprise.
The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries.
In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration).
Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this.
Some banks were simply greedy, lazy, or both (SVB).
It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine.
I think the big lesson is that bankers aren't nearly as smart and self-regulating as many people think they are. They either chase yield, when they can (2021), or they manufacture it when they can't (2008).
Rate risk is a key feature to buying any bond, and it’s a risk that is manageable if management isn’t asleep at the switch. Nobody forced SVB to buy long duration bonds. Any investor with a moderate level of expertise understands that, and you’d have to be pretty green to not expect rate increases from the all time lows.
Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly.
Somehow I feel that blaming the government is much more than a cop-out; it's a calculated position that enables the big players to continue privatizing the wins and socializing the losses. "Of course we are getting a bailout", the narrative goes, "cause it was the big government's fault all along!"
I'm not alleging conspiracy, I don't think these people are competent enough to actually conspire. But the incentive to pull your money out knowing that it makes others more likely to follow and that if the bank keels over the failure mode makes policy you don't like look bad is definitely there.
Historically, we would have just 'let people die' and work through it, but this time we want to react and try to save lives so we shut stuff down, but it's existentially damaging.
Hence money printing.
Government debt is the safest, and if you buy any other kind of debt, you'll want to be paid a premium for the extra risk you're taking. If interest rates are going up, you don't want all your money in long-term bonds.
you are wrong right at the first step.
there is credit risk (risk of default) and for this risk, treasuries are still considered safest.
then, there is duration risk (risk of interest rates increasing) - and this risk has always been there.
Bankers know about these risks, it is just they were greedy and decided to go for the highest yielding MBS, instead of short-term securities. => and obviously banks suffered consequences.
for bankers this is Banking 101
One can argue that what is going on right now is market forces punishing the most greedy bankers (SVB, Debit suisse, etc)
2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly.
3. New treasuries yield 4 or 5 times as much in interest as the ones from 1-2 years ago. Why would anyone want to buy those old treasuries near face value now?
4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away.
5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under.
6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously.
SVB is certainly not blameless here, but the Fed's money printer and the Government wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.