How to Prevent More Meltdowns like Silicon Valley Bank

The Federal Deposit Insurance Corporation (FDIC) closed the Silicon Valley Bank (SVB) on March 10.  The bank was reopened on March 13 as a bridge bank awaiting sale of its assets.  A joint communiqué released March 12 stated, "After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."

The Motley Fool reported, "SVB received a massive volume of deposits during the 2020–2021 tech boom and invested the proceeds into long-term Treasury bonds while interest rates were low. Now that interest rates are higher, the market value of those Treasuries is substantially lower than SVB paid."

To combat inflation, the Federal Reserve Board (Fed) is raising interest rates.  SVB previously bought bonds at lower interest rates.  This would pose no problem for an investor who collects the modest interest on the bonds he purchased until the bond matures and the Treasury returns the full amount invested.  Unfortunately, SVB was strapped for cash and was forced to sell the low-interest bonds before they matured.  The low-interest bonds were unattractive to current investors.  The bank sold bonds valued at $21 billion for a loss of $1.5 billion.  The bank was unable to raise money from investors to cover the loss and remain viable, so the FDIC closed the bank.

Federal law requires "that the FDIC resolve failed banks by using the method that would be least costly to the deposit insurance fund."  The FDIC guarantees deposits up to $250,000, but the FDIC will keep all depositors at SVB whole, no matter how much money they had deposited in the bank.  The Treasury Department justified this by evoking the systemic risk exception (SRE), which can "be used if complying with the least-cost requirements would have serious adverse effects on economic conditions or financial stability."

Below is a list of some of the depositors who had more than $250,000 at SVB.

Source: Reuters







Sunlight Financial


Acuityads Holdings




Rocket Lab


VIR Biotechnology



President Biden authorized the FDIC to pay tens of billions of dollars to uninsured depositors.  He then had the audacity to say that it won't cost the American people anything.  Are Americans so gullible that they believe that the FDIC can infuse a bank with billions of dollars with money conjured from thin air?

The chairman of the FDIC reported that banks were holding unrealized losses worth "about $620 billion at year end 2022."  The Fed is putting up a "$25 billion backstop" for banks that have similar problems that may result in similar outcomes.  The Fed will loan this money to banks so they don't have to sell bonds at a loss.  The Fed is part of a government that is incapable of solving a problem that requires any strategy other than throwing huge sums of taxpayer dollars at it.

This problem was caused by the government.  In reaction to the 2008 financial crisis, the Fed implemented quantitative easing (Q.E.).  The Fed reduced interest rates to encourage businesses and individuals to borrow money to stimulate the economy.  Interest rates were so low that many investors weren't interested in buying securities, so the Fed bought securities to assure that interest remained low and then made the money available to banks to make low-interest loans.

The Fed was more aggressive during the COVID pandemic.  When federal and state governments locked down the economy, the government determined that it should pay the people it put out of work.  The Fed became so aggressive with Q.E. that the presses that printed money had trouble keeping up.  Money was so easy to obtain from the government that billions were fraudulently delivered to criminals.  Some of this easy money found its way into bank deposits, which were used to purchase securities paying very low interest rates.

To the surprise of the Fed and Janet Yellen, inflation resulted from their policy of free money.  They couldn't believe it.  They said it was transitory and then blamed Putin, Trump, oil executives, greed, and a virus.  While there are many reasons for inflation, the primary reason is quantitative easing and the flood of cash the Fed poured into the economy for a decade.  After waffling for months, the Fed decided that inflation was real and started raising interest rates in an attempt to control the inflation it created.

Markets are self-regulating.  If a business is managed properly and supplies the goods and services its customers demand, it will succeed.  Otherwise, the business will fail.  This is economic Darwinism and how markets regulate themselves.  Markets, including financial markets, don't need federal agencies implementing regulations to fix problems that only cause more problems.

Markets do require regulation and oversight by the government.  This has been true since Adam and Eve took a bite of the apple.  People take advantage of one another during the conduct of business.  The role of government is to monitor and regulate these human frailties.  But the government doesn't have the capacity to monitor and regulate every bad decision a business makes.

A frailty many Americans have is their belief that the government will look out for them.  If something goes wrong, or a banker loses money on a bad investment, the government will fix it.  This frailty is causing problems.  Conservatives believe that the best government is the smallest and least intrusive.  The frailty of leftism is the leftists' belief that government can solve any problem, right any wrong, and regulate any frailty into extinction.  What leftists fail to consider is that, alas, they too are only human.  Their solicitation of perfection by force of government is doomed to fail for the same reason the SVB failed: poor decisions by imperfect people.

Leftists spend too much time protecting their agency and blaming their opponents for the problems their flawed solutions cause.  The Biden administration assails the opposition for not raising taxes so more money can grow an already bloated bureaucracy.  The American people have accepted a bestial government that demands more of them and delivers less.  The beast must be rejected and reformed before the leftist solicitation of perfection causes an unsolvable calamity.

Image: kolyaeg via Pixabay, Pixabay License.

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