The collapse of Silicon Valley Bank is the second largest bank failure in American history. It is also likely a nothingburger. This is coming from a goldbug, so the preceding sentence carries even MORE weight than you thought it did!
If you can read it (it’s behind a paywall), this piece from Robert Armstrong of the FT is the best summation of what happened.
Three other observations:
1. This episode is instructive of how state intervention is both good and bad. The good first: the panic is going to end with Silicon Valley Bank. That is because other American banks are well capitalized — and that is because of the Dodd Frank Act. The Act increased capital requirements for regional and major banks. They now hold a variety of assets, from cash and treasury bills to corporate bonds and precious metals. Unlike Silicon Valley Bank, most other banks (from JPM to community banks) should feel little pressure to sell those assets to cover deposit withdrawals. Their retail and small to midsized business depositors are focused on convenience and less sensitive to interest rate fluctuations than Silicon Valley Bank’s high finance VC fund depositors.
2. Now the bad: the reason Silicon Valley bank (and the sector on which it depends) thrived is because of the Fed’s decade-long experiment of suppressing interest rates — which sent investors to ever riskier venues in search of higher yield. Should those funds and businesses received equity investment to begin with? Maybe not. The cleansing fire that the unfairly maligned Andrew Mellon described may sweep through the VC / tech sector in the next few weeks. Few people in “real America” will care, and it is hard to blame them.
3. Finally: concentration in the financial sector, of the kind practiced by Silicon Valley Bank, as the one stop shop for an entire sector in a state, creates systemic risk and is anti-democratic. Fragmentation is not only anti fragile — in that, if there are many small banks, with separate balance sheets that are minimally connected to one another, the failure of one will be contained and not trigger a sector wide disruption. It also gives new businesses the ability to choose between lenders and diffuses capital (and thus political power) throughout the country.
Before you go, read this excerpt from Andrew Jackson’s veto message against the Second Bank of the United States (the Fed of its day), which proves there is truly nothing new under the sun:
“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society--the farmers, mechanics, and laborers--who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.”
Corrections given mobile posting:
ANDREW Mellon (shame on me)
*depends (autocorrect)
*high finance (also autocorrect. Steve Jobs is canceled)