I wanted to comment Jeffrey Snider’s observations at RealClearMarkets to your attention. It’s accurate as usual and somewhat less opaque than usual. Here’s the kernel:

The latest instance of this modern version of a bank run, the one which took down Silicon Valley Bank and Signature is largely of the same “substance.” Virtual cash was drained from both for various reasons, but it did not disappear into public hands. Rather, it migrated to others in the system as more book entries.

Therefore, the failures of SVB and Signature are uninteresting and pretty much irrelevant. The more important question is the same one about arbitrage; how there wasn’t any to help either of them. What must be inhibiting wholesale redistribution from those who have benefited from this migration, and was it specific to these two banks?

While we have no way of knowing for sure, it’s not as if we don’t have useful clues. Money market prices such as eurodollar futures give us a systemic sense of arbitrage potential, more so the risks dealers might be perceiving when considering them. And it is here where trading over the past week has been both illuminating and frightening.

Single-day moves in eurodollar futures contracts were historic. The price for the September 2023, for example, gained nearly 45 bps last Friday, March 10, in the wake of SVB’s seizure. That was almost the same as the March 2009 contract had been moved on September 15, 2008, the day Lehman Brothers’ insolvency was made public.

But then on Monday, March 13, a buying panic in these hedging instruments became so intense, the same September 2023 added an unthinkable 101 bps! In a single day, more than double Lehman. After a relatively small reverse on Tuesday, massive buying stuck again on Wednesday with the contract rising another 35 bps.

What do these moves tell us about perceptions of systemic risk? Bill Dudley, then the Federal Reserve System’s Open Market Manager, spilled the secret on August 7, 2007:

“MR. DUDLEY. That said, the Eurodollar market is a very deep market, and if one thought that the Fed was not going to do what the market priced in, there certainly would be the ability of people to take the other side of the bet…In the short run, that kind of thing certainly goes on. If I can’t sell the bad asset that I hold, then I will buy something that will perform well if the bad asset deteriorates.”

He goes on to say that whatever we want to call what’s happening is far from over. That’s what the markets are telling us.

I want to make one additional point. If the Biden Administration really, truly wants to underwrite the uninsured deposits of Silicon Valley Bank, there should be a special tax levy (call it a fee) placed on banks for doing so. Anything else is horrifically regressive. Allow me to explain.

If any governmental entity or the Federal Reserve, a public-private hybrid, underwrites SVB’s depositors by issuing credit (“printing money”), it will increase inflation. That will fall most heavily on the poorest people. We’ll be taxing the poor to pay the rich. Robin Hood in reverse.

And that doesn’t even get into the insanity of underwriting the uninsured deposits of foreign companies. I honestly have no idea why we’re doing that.

I wanted to call Vivek Ramaswamy’s Newsweek op-ed to your attention. After making some of the observations I’ve made here he continues:

Silicon Valley’s dirty little secret? Venture investors could easily infuse fresh equity capital to make up for any balance-sheet losses. Yes, that involves painful equity dilution for founders and VCs, which means the CEOs and other VCs don’t make as much money when the company becomes wildly successful. And yes, capitalism includes accountability for poor financial decisions. But that’s how these losses should be recuperated, not at the taxpayer’s expense.

Moreover, many of those founders and venture-backed companies even received private benefits—such as non-dilutive venture debt—from Silicon Valley Bank itself, as an implicit condition for depositing their money with SVB. Ordinary Americans would have never enjoyed the upside of those special arrangements.

But facts be damned: Their gambit worked.

Behold this pure display of cronyism. The tech companies that petitioned President Biden to protect their assets are now changing the rules after the fact to help a select few who are favored by political actors.

It’s wildly unfair. But it’s worse than that, too: By selectively changing the rules after the fact for SVB, the U.S. government is now incentivizing greater risk-taking by corporations in the future, teaching large depositors at smaller banks that they can simply throw money at risky banks without diversifying or conducting diligence, just like many tech startups did here.

My key point is that I think that the public good, bank management, shareholder scrutiny, and depositor scrutiny should all be aligned. Right now they aren’t. I also think that laws should be enforced without carveouts, exceptions, or special cases. Such things inevitably repeat inevitably become political footballs.

An interesting discussion continues in comments in my posts about Silicon Valley Bank, see here and here. In my ongoing research I’ve found some food for thought. This article by Peter Santilli in the Wall Street Journal reports the size of some deposits in the bank:

You don’t get a lot of those to the pound.

And here are some interesting observations by Laura He from CNNBusines:

Hong Kong
CNN—The collapse of Silicon Valley Bank (SVB), which courted Chinese start-ups, has caused widespread concern in China, where a string of founders and companies rushed to appease investors by saying their exposure was insignificant or nonexistent.

What are we talking about?

BeiGene, one of China’s largest cancer-focused drug companies, said Monday it had more than $175 million uninsured cash deposits at SVB, which represents approximately 3.9% of its cash, cash equivalents and short-term investments.

“The company does not expect the recent developments with SVB to significantly impact its operations,” it said.

Zai Lab, a pharmaceutical firm, announced that its cash deposits at SVB were “immaterial” at about $23 million.

The closure of SVB “will not have an impact” on the company’s ability to meet its operating expenses and capital expenditure requirements, including payroll, it said.

Other companies that publicly assured investors included Andon Health, Sirnaomics, Everest Medicines, Broncus Medical, Jacobio Pharmaceuticals, Brii Biosciences, CStone Pharmaceuticals, Genor Biopharma and CANbridge Pharmaceuticals.

Mobile ad tech firm Mobvista and wealth management firm Noah Holdings said their cash holdings at SVB were “minimal” or “immaterial.”

So here’s my question. Should the federal government underwrite the uninsured deposits of foreign companies, particularly when the companies themselves are declaring those deposits “immaterial” or unlikely to “significantly impact” their operations and why? I also wonder how many of these companies are state-owned or de facto state-owned.

Note that these are uninsured deposits which means that the deposits aren’t covered by the FDIC and the FDIC service charges haven’t applied to them.

Update

My reading of the statutes empowering the Federal Deposit Insurance Corporation suggest that the FDIC is specifically prohibited from covering deposits above the $250,000 limit in the absence of an act of Congress. Perhaps someone better informed than I can comment on this.

Tyler Nottberg’s Washington Post op-ed on the recent decision by the 4th Circuit Court of Appeals that ruled that “gruyere” was a generic term for a type of cheese pushed a number of buttons on things interesting to me. Among them are cheese, Americans making bad assumptions, Europeans making bad assumptions, and our system of common law. Here’s his main complaint:

The judges affirmed a district court ruling that the “gruyere” label cannot be trademarked. Americans have voted with our wallets in favor of generic cheese by purchasing more ersatz domestic “gruyere” than we buy of the authentic Swiss stuff.

Having experienced the region, the people and the product in its native setting, Brooks and I believe the 4th Circuit has used runny logic. This is a loss of something important — perhaps not as bad as Velveeta claiming to be cheese; more like a cover band claiming to be the Rolling Stones. Perhaps I feel so strongly because I lead a business that has been in my family for more than 125 years. A brand to me is more than a word or logo on shrink-wrap; it is the passion, sweat and culture of people who give their best to burnish it from generation to generation. Those who seek the real Gruyère will find it not by its label but by the love on that Swiss mountainside. It’s worth the trip.

Why is cheese interesting to me? First of all, I like cheese. My mom once observed that members of our family could probably live happily on a diet consisting only of bread, cheese, and apples. I think we come by it honestly. My Swiss ancestors were milk brokers and had been for, probably, most of the last millennium. What do milk brokers do with the milk they don’t sell? I suspect they use it to make cheese.

What bad assumption is Mr. Nottberg, an American, making? Like most Americans he is apparently unaware that there is no robust international system of civil law. European laws mean next to nothing in the United States. What bad assumptions are the Europeans making? They didn’t adopt their “protected designation of origin” regime until 1992. If they think that at that late date that Americans will change every name of every thing that uses a place name to conform to their new laws, they don’t know us very well.

What things have place names?

Cheddar cheese
Stilton
Swiss cheese
Gruyere
Camembert
Brie
Champagne
Port
Parmesan
Asiago
Hamburgers
Frankfurters

That’s just off the top of my head and that’s just a bare beginning. I could probably come up with hundreds more.

What relevance does all of that have to our system of common law? Under the common law you can’t copyright terms that are in common usage. That makes sense. Otherwise you’d have people trying to copyright everything forever. By and large European countries have a civil code system of law. A law could be enacted allowing a company to copyright “fire” or “wheel” and the courts would happily enforce it.

The editors of the Washington Post have proposed a plan for salvaging Social Security:

A plausible plan would involve these elements: broadening the base upon which the 12.4 percent payroll tax is levied — currently 84 percent of all earnings — to the 90 percent that prevailed in 1982, at the time of the Reagan reforms; gradually indexing up the age, currently 67, at which people may retire at full benefits, to take account of longer retirements due to rising life expectancy; and shoring up the program’s distributional equity, via tweaking benefit formulas to trim how much high-income households get and increases for the most vulnerable. The latter category would include a minimum benefit equal to 125 percent of the official poverty line as well as a “bump up” in payments to the very aged. And all new state and local employees should be required to pay Social Security tax — and receive the benefits — though existing opt-outs for the small minority of state and local government workers who chose not to participate in Social Security should not be altered.

This package, illustrated in the accompanying table, would not quite eliminate the trust fund’s projected shortfall. It would close 87 percent of it, however, according to projections provided by the Committee for a Responsible Federal Budget. That’s good progress, given the tough politics of the issue and the uncertainties surrounding long-range forecasts.

Closing the rest of the 75-year gap would require one more major step: changing the formula by which Social Security adjusts benefits for inflation, to an arguably more accurate measure — known in wonkspeak as the “chained CPI.” The resulting benefit reduction relative to current policy would be real but manageable for most households, including less-affluent ones, if Congress adopted protections for them such as those we suggested. Yet the “chained CPI,” which a Democratic president, Barack Obama, supported as recently as 2013, can indeed be attacked as a cut to Social Security and has thus far proved politically impossible.

I actually approve of that plan—it’s not dissimilar to what I’ve suggested around here. However, we should acknowledge that it presents certain political problems beyond the one raised by tying benefit increases to chained CPI, the most important of which is that it violates one of President Biden’s most frequently-repeated pledges, not to increase taxes on people earning less than $400,000/year. Assuming that President Biden intends to run again, breaking that pledge may prove increasingly hazardous to him as 2024 approaches.

I’m still trying to figure out what point Peter Feaver, Christopher Gelpi, and Jason Reifler were making in their piece in Foreign Affairs, “The Strange Case of Iraq Syndrome”. They begin by contrasting the “Vietnam Syndrome” that afflicted U. S. policymakers following the conclusion of the Vietnam War:

After the Vietnam War, a generation of U.S. leaders developed what became known as “Vietnam syndrome”—a pathological belief that public support for the use of force was too fleeting, and the U.S. military’s power too uncertain, for foreign military operations to be advisable.

with something they’re terming “Iraq Syndrome”:

Iraq syndrome holds that Americans are casualty-phobic: they will support a military operation only if the cost in American lives is minimal. As a consequence, U.S. policymakers who wish to use force must fight as bloodlessly as possible and be quick to abandon their commitments if the adversary proves able to fight back and kill U.S. soldiers. The politically expedient position, in a world afflicted by Iraq syndrome, is a quasi-isolationist one, since the public is not willing to underwrite the costs of lasting international commitments.

“Quasi-isolationist” is a slander. There’s another term for it that’s already in the common parlance: noninterventionist. Are they embracing its opposite and encouraging Americans leaders to do so? There’s a term for that, too: imperialist.

I almost stopped reading when I encountered their definition of the goals of the U. S. invasion of Iraq:

Compared with the United States’ outright defeat in Afghanistan, the result of the U.S. campaign in Iraq looks like a modest success. It still might be possible to achieve some of the goals of the war—an Iraq that can govern and defend itself and that is an ally in the war against terrorists—albeit at a tragically high price.

a piece of historical revisionism if I’ve ever seen one. Here’s what President Bush said on March 19, 2003:

THE PRESIDENT: My fellow citizens, at this hour, American and coalition forces are in the early stages of military operations to disarm Iraq, to free its people and to defend the world from grave danger.

So, did the United States achieve its objectives in Iraq or fail to do so? There were no weapons of mass destruction in Iraq to speak of, the “grave danger” to which President Bush alluded. Under Saddam Hussein Iraq was not a liberal democracy. It remains not a liberal democracy. Iraq’s disarmament was fleeting and largely took the form of removing Sunni officers from the Iraqi military.

Is Iraq our “ally in the war against terrorists”? I would say that we have taken the side of Shi’ite terrorists against Sunni terrorists, embroiling ourselves in a sectarian conflict that’s been going on for more than a millennium. In 2002 Sunni terrorists may have been our greater concern. Now Shi’ite terrorists are an equal if not greater concern.

I was opposed to our invasion of Iraq for reasons that have actually come to fruition, one of the few to take that position publicly although there’s no lack of people claiming to have held that view all along. I would say, contra the authors that we lost the Iraq War, too.

This appears to be their thesis:

Iraq syndrome holds that Americans are casualty-phobic: they will support a military operation only if the cost in American lives is minimal. As a consequence, U.S. policymakers who wish to use force must fight as bloodlessly as possible and be quick to abandon their commitments if the adversary proves able to fight back and kill U.S. soldiers. The politically expedient position, in a world afflicted by Iraq syndrome, is a quasi-isolationist one, since the public is not willing to underwrite the costs of lasting international commitments.

But as prevalent as it is among politicians, Iraq syndrome does not appear to be as widespread among the broader public. American voters are not nearly as allergic to military force as their leaders think. In fact, the public will continue to adequately support a military mission even as its costs mount, provided that the war seems winnable. That means policymakers do not need to abandon a national security commitment as soon as the costs start to mount, provided that the leaders are pursuing a strategy that will lead to success. Leaders should pay more attention to prospects for good outcomes rather than try for cost-free commitments, an impossible standard that the public does not demand and that only hobbles the United States in a dangerous world.

I would say that there remains little evidence that Americans are particularly interested in foreign policy. I think that we “support the troops” but not necessarily the objectives for which the troops have been engaged. Deploying our military more frequently is not the logical implication of that. Deploying our military more prudently is.

I’ve been mulling this over for some time but haven’t found any post in which working it in was appropriate. The problems that people are complaining about these days: crime, inflation, income inequality, immigration, politics, homicides, war, and so on and so on are all downstream from the culture. What comprises the culture? History, sexual mores and practices, gender roles, family structure, and language just to name a few of its aspects.

There is copious evidence that culture has an impact on all of the problems in the list. There is very little evidence that culture has zero influence on them. Just to cite one example every country in which English is the primary first language is a liberal democracy. Among countries in which Spanish is the primary first language how many are robust liberal democracies are there? Uruguay maybe? Possibly a couple of others. That’s an obvious difference. We’re not entirely sure why there’s a difference but that there’s a difference is indisputable. BTW, what I’m describing is called the “weak Sapir-Whorf hypothesis” if you’re interested in the subject.

Here’s something else to mull over. Traditionally, in the United States the family structure known as the “absolute nuclear family” has dominated. The short description is two biological parents plus children. An enormous number of things depend on it: our form of government, jobs, education, and so on.

The absolute nuclear family has been under considerable stress for the last 50 years. My own view is that, like it or not, the absolute nuclear family is disappearing, there’s little that can be done about it, and that has implications. The America that DeTocqueville described is disappearing along with it. What will replace is we don’t know but whatever that may be at this point it certainly doesn’t look pretty.

As just one example of the change I’m talking about in the black community the majority of households are single parent headed by women. We don’t know how that influences crime, attitudes towards education, employment, and so on but it would be incredible if it had no effect whatever.

William Galston devotes his Wall Street Journal column to explaining how Silicon Valley Bank avoided oversight. Here’s the meat of it:

On one level, this is a saga of bad management. As deposits soared, SVB’s executives had invested in long-term assets without hedging adequately against interest-rate risks. And the firm lacked a diversified portfolio of depositors, most of whom came from the venture-capital sector. As the sector came under increasing pressure, its members tried to withdraw their funds simultaneously, and the bank couldn’t meet its obligations.

But there is a story behind this saga. After the financial collapse in 2008 and the ensuing Great Recession, Congress passed the Dodd-Frank Act of 2010 to regulate the banking practices that had nearly plunged the world into a second global depression. Among other measures, Dodd-Frank imposed new reporting requirements on banks, toughened standards for capital adequacy, and restrained banks’ ability to use deposits for speculative investment. Banks with assets above $50 billion were deemed “systemically important” and subjected to especially strict scrutiny.

These standards brought greater stability to the sector, but also higher expenses and lower profits. Bank leaders weren’t pleased and soon began lobbying to mitigate the legislation’s impact on their operations. SVB’s CEO Greg Becker was an early objector who argued that subjecting his midsize bank to the full range of Dodd-Frank requirements “would stifle our ability to provide credit to our clients.”

and I want to endorse his conclusion:

Not all regulations are “burdensome.” Some are essential to prevent bad things from happening, as in this case. Congress and the Fed should rethink their decision to exempt key parts of the financial system from the discipline of oversight.

As I’ve said above, I think the primary culprit here is Congress. They listened to whose money was talking the loudest but that’s not what they’re elected to do and they don’t have to do it. There’s a clear conflict between their personal interests and the public interest. Their primary concern should be the public interest. The primary concern of bankers should be their banks. As long as they believe that Congress will cover their bad bets, they’ll keep making them. Not to do so would be remiss.