SVB and the Hierarchy of Blame

I suppose I should explain my “hierarchy of blame” first. For nearly any given problem I think the blame lies on in more or less descending order of importance:

  1. Congress
  2. The civil bureaucracy
  3. The president, primarily for failing to provide proper guidance to the civil bureaucracy, bucking them if necessary
  4. Corporate management
  5. Human nature

You may wonder where the electorate is in this hierarchy. I’ve lived in Chicago for almost all of my adult life. Maybe it’s different elsewhere but when you have three (or ten) candidates running and they can all be expected to do the same things, I find it hard to blame the electorate. Take the Chicago mayoral election, for example. I realize it’s a sort of cottage industry for Republicans to chortle that Chicagoans are getting what they deserve but there hasn’t been a Republican candidate for mayor in some time. Maybe it’s tough to get elected as anything but a Democrat in Chicago but it’s impossible to get elected if you don’t run.

The grimly entertaining aspect of the whole Silicon Valley Bank debacle is how neatly it fits into that hierarchy. If Silicon Valley Bank had been more closely scrutinized, wouldn’t its exposure have been revealed? Why didn’t they receive more scrutiny? Congress raised the threshold for such scrutiny from $50 billion to $250 billion, presumably responding to the squawks of bankers who complained that they couldn’t make any money if they followed the rules. Why not blame the bankers? Because they were just doing what anyone would have done in their circumstances, based on their incentives. Just as in the financial crisis of 2007-2008 banks, depositors, and even Congress are just responding based on their incentives. We really need to change the incentives. That Congress values political contributions so highly is the root of much evil.

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Twenty Years Later

Twenty years ago today I posted my first post here at The Glittering Eye. Since then I have written 20,246 posts and 18,661 comments.

My posting style and frequency have changed considerably over the years. I rarely write truly long form posts any more. My posts tend to be less poetic than they were once upon a time. I actually write more posts than I used to on a daily basis—typically five per day. Once upon a time I rarely wrote more than three a day.

Twenty years ago solo bloggers were the norm. Now they’re pretty rare although Substack seems to have breathed new life into the solo blog.

On a typical day I get around 200 readers. Nothing in comparison to the big blogs but, honestly, it’s probably not out of line with the number of readers the opinion pages of small newspapers have. At least that’s what I’ve been told by newspapermen.

I haven’t run out of ideas and I intend to keep posting for the foreseeable future.

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Redington Wins

Ryan Redington has won the Iditarod. Fifty-one years ago his grandfather, Joe Redington, dreamed up the idea of the Iditarod, the “last great race on earth”. No Redington has ever won the Iditarod. Until now. At the Anchorage Daily News Zachariah Hughes and Michelle Theriault Boots report:

NOME — Ryan Redington crossed the Iditarod Trail Sled Dog Race finish line in Nome on Tuesday to earn his first victory in the grueling race his grandfather pioneered more than half a century ago.

His team of six dogs, featuring leaders 6-year-old Ghost and 4-year-old Sven, came to a rest on Nome’s Front Street at 12:13 p.m., a couple hours after the sun cracked over the sea ice on the southern horizon.

Redington is the first member of his family to win the Iditarod over the decades they’ve been part of its legacy. “We’ve waited 51 years for this, ladies and gentleman,” emcee Greg Heister of Iditarod Insider told the crowd in Nome, to a roaring cheer.

Redington made the nearly 1,000-mile run in 8 days, 21 hours, 12 minutes and 58 seconds. Hundreds of people lined the race chute in excitement as he jogged beside his sled and up toward the finish line in his lime-green parka ruffed with wolverine fur.

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Might It or Mightn’t It?

There’s something I found perplexing about Alexander Gabuev’s remarks about the “Russia that might have been” in Foreign Affairs:

The current trajectory of Russia’s foreign policy was not predestined, and there were many chances for the Kremlin to do things differently. For much of the last 20 years—even following the illegal annexation of Crimea in 2014—Russia had a historic opening to build a dynamic new place for itself in the international system. When Putin was sworn in as president, in May 2000, Russia was entering a period of greater possibility—both within and beyond its borders—than at any other point in its history. Internally, Russia had survived the collapse of the USSR and the tumultuous 1990s to go from an empire to an influential nation-state in the making. Despite the horrendous wars in Chechnya, Russia was, by the turn of the century, largely stable and at peace. Its planned economy had given way to an adaptable market economy. It was an imperfect but vibrant democracy.

Then, around 2003, Russia got lucky. The U.S. invasion of Iraq coupled with China’s spectacular economic boom led to a sharp increase in global commodity prices. The Kremlin’s coffers were suddenly flooded with revenues from the sale of oil, gas, metals, fertilizers, and other products on the global market. This windfall allowed Russia to quickly repay its foreign debts and nearly double its GDP during Putin’s first two presidential terms. Despite mounting corruption, most ordinary Russians found that their incomes were rising. Compared with their troubled imperial and Soviet past, Russians had never been so prosperous and, simultaneously, so free as in the first decade of the twenty-first century. With these strong economic and political foundations, Russia was well positioned to become a global power between East and West—benefiting from its links to both Europe and Asia, and focused on internal development.

and

When Putin came to power in 1999, the external geopolitical environment was more favorable to Russia than at almost any previous point in the modern era. No neighbor or great power posed a serious threat to Russian security. The collapse of the Soviet Union had not produced territorial disputes between Russia and its neighbors of the sort that would lead to inevitable conflicts. And until the 2014 decision to illegally annex Crimea, Moscow seemed mostly happy with its borders, including with Ukraine. The Cold War was over, and the United States treated Russia as a declining power that no longer constituted a threat to it and its allies. Instead, Washington sought to support Russia in its transition to democracy and a market economy. Foreign investment and technology helped modernize the Russian economy and started to heal the wounds caused by the country’s traumatic adoption of a new economic model in the 1990s. Exports of Russian commodities were enthusiastically purchased by many European nations.

Moscow’s relations with Germany, as well as with other major European countries such as France, Italy, and the United Kingdom, were at a historic peak. In eastern Europe, there was a Soviet legacy of economic ties and personal connections between Moscow and such countries as Poland and the Czech Republic, as well as the newly independent Baltic states. Consecutive waves of NATO and EU enlargement in the 1990s and 2000s made Russia’s neighbors to its west more prosperous and secure, and thus far less fearful of potential Russian revanchism, and opened the way for a dynamic of pragmatic and mutually beneficial engagement, which persisted for much of the 2000s. During these years, Russia and the EU discussed strengthening trade, as well as economic and energy ties. Although the EU did not invite Russia to join the union, it did offer to harmonize trade regulations and remove many of the barriers that limited ties between Moscow and Brussels.

As for its relations with the East, Russia managed to resolve a decades-old territorial dispute with China in 2005, finally putting the relationship with the new superpower on a predictable and productive footing. By then, China was the world’s largest importer of hydrocarbons, providing Russia with a new, enormous, and still expanding market. Meanwhile, with an eye on their own energy security, Japan and South Korea were also interested in helping bring Russia’s vast hydrocarbon resources in Siberia to the market. In turn, by building ties to these two technologically advanced Asian democracies, as well as to China, Russia had an opportunity to tap into the rapidly modernizing potential of the Asia-Pacific region. For the first time in its history, Moscow was able to sell its commodities to both Europe and Asia, diversifying its trade relationships and cultivating new markets as it accessed money and technology from both the West and the East.

Finally, Russia maintained Soviet-era connections to many developing countries in the diverse global South. These ties enabled Russia to keep afloat its Soviet-era industries, particularly its defense sector and civilian nuclear power, by turning contracts with countries like India and Vietnam into sources of revenue that supported domestic manufacturing.

What do I find perplexing? I don’t think you can have it both ways. The admission of Poland, Hungary, and the Czech Republic to NATO in 1999 makes no sense in the context of a Russia that was “a nation with an economy similar to Canada’s, with a permanent seat on the UN Security Council, a large stockpile of nuclear weapons, and geopolitical neutrality”. Quite to the contrary it only makes sense in the context of Eastern European countries in fear of “Russian revanchism”.

Furthermore the rebuffing of Russia offers to join NATO, made by every leader of the post-Soviet Union Russia including Putin does not point to a Russia that would be “geopolitically neutral”. That neutrality only makes sense in the face of a hostile NATO and wouldn’t have been possible in that case. Hence my perplexity.

So which was it? Was Russia irremediably and irrevocably hostile to its neighbors? Or is Mr. Gabuev correct?

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Let Them Fail

Peter Jacobsen makes a prudent observation at the blog of the Foundation for Economic Education:

Allowing banks to fail may sound extreme, but it’s really the most reasonable solution. It’s true there will be some costs if the banks fail. Any time a business fails, other investors tied financially to the company lose.

But here’s the rub—people who invest in bad businesses should lose. SVB’s failure is a reflection of the fact that it was a wealth shredder. It took depositors’ perfectly good cash, and converted it into now severely devalued bonds.

Banks that destroy wealth shouldn’t be allowed to continue to do so indefinitely. And when depositors make a “run” on bad banks, they’re performing a public service.

At this point, a bank bailout not only would mean the taxpayers will be left holding the bag for bankers’ mistakes—it would mean screwing up incentives in the banking industry even more.

I suspect it will go unheeded. Here’s another consideration: it’s incoherent on the one hand to complain about income inequality and on the other to bail out financiers when they screw up. If there’s a more perfect example of privatizing profits and socializing losses than that I don’t know what it is.

Bailing out big banks when they screw up is a prima facie case that regulators don’t care about income inequality.

I’m not sure what the Biden Administration’s hypothetical retort to that would be. That they don’t want little people to get hurt? Little people don’t have deposits over $250,000 in banks. And harsh as it might be to say the tech companies that stored tens or hundreds of millions in Silicon Valley Bank don’t actually employ that many people and the median household income in Silicon Valley is $140,000/year. It’s a stretch to call those the “little people”.

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Why Are Millennials So Sick?

This report from Blue Cross/Blue Shield is four years old now. I can only imagine that circumstances have become worse since the outset of the pandemic. Note that it precedes the COVID-19 pandemic.

Short version:

Millennials are seeing their health decline faster than the previous generation as they age. This extends to both physical health conditions, such as hypertension and high cholesterol, and behavioral health conditions, such as major depression and hyperactivity. Without intervention, millennials could feasibly see mortality rates climb up by more than 40% compared to Gen-Xers at the same age.

The question I want to raise in this post is why? I think there are lots of possible reasons including not enough time unsupervised and/or out-of-doors, too much time staring at screens. I can’t help but wonder if medicalization of certain behavioral problems particularly ADHD isn’t a contributing factor. Does having kids take drugs for long periods of time have unforeseen adverse long-term consequences?

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Schrödinger’s Bank

Is it possible for a bank to be systemically important and not systemically important simultaneously? Apparently so, at least if the bank is Silicon Valley Bank. From Vivek Ramaswamy’s op-ed in the Wall Street Journal:

Treasury Secretary Janet Yellen announced Sunday evening that Silicon Valley Bank’s uninsured depositors would gain access to their deposits on Monday. The Federal Deposit Insurance Corp. insures only deposits up to $250,000. The bailout creates incentives for risky behavior, teaching large depositors that they can throw money at risky banks without diversifying or conducting diligence. SVB long lobbied for looser risk limits by arguing that its failure wouldn’t create systemic risk and thus didn’t merit special intervention by the U.S. government. Yet on Sunday, Treasury deemed SVB “systemically important.”

To the extent that failing to make SVB’s uninsured depositors whole would have heightened the risk of a run on other banks, the Federal Reserve should have played its role as lender of last resort. Another option would have been to increase the FDIC coverage limit to a level that would avert a run, shoring up public confidence in other U.S. banks without showing favoritism toward SVB.

Here’s an interesting little tidbit I hadn’t seen elsewhere (the emphasis is mine):

SVB’s situation is different from that of most U.S. banks. Only 11% of its deposits were insured. While the operating accounts of small businesses often exceed the FDIC limit, large banks usually sweep the excess into cash-management programs that buy Treasury bills and other securities. As the nation’s 16th-largest bank, SVB simply chose not to do so. For some reason Roku, the publicly traded maker of streaming devices, had a $487 million balance with the bank.

Here’s another:

SVB also had a concentrated client base of tech startups whose needs for capital were highly sensitive to rising interest rates. Yet SVB itself had the highest concentration of any major bank in mortgage-backed securities, also especially sensitive to that risk factor. This is an egregious oversight specific to SVB. Its investment portfolio was 57% of total assets, more than twice its peer average of 24%.

He complains about SVB’s political contributions:

Either SVB was incompetent or this is a case of moral hazard, taking excessive risk and expecting political favors and bailouts. It turns ot SVB’s real “hedge” was to curry favor with the Biden administration. In 2022 SVB publicly committed $5 billion in “sustainable finance and carbon neutral operations to support a healthier planet.” SVB’s 2022 ESG report lists a litany of “cross-function working groups,” including a “Sustainable Finance Group” that monitors progress against SVB’s Climate Commitment and an “Operational Climate Group” that “monitors implementation of operational greenhouse gas reduction initiatives.” Rather than apply basic risk-management practices, SVB resorted to lobbying for looser risk limits. Taxpayers shouldn’t vindicate SVB’s political hubris.

That’s not quite balanced. According to Open Secrets SVB bankers were equal opportunity favor curriers, donating both to Democrats and Republicans. That’s the way the game is played.

He concludes:

Silicon Valley entrepreneurs want to move fast and break things, but we shouldn’t let them break public trust as a long-shot maneuver for a special bailout. That isn’t how capitalism works.

I would add that SVB’s CEO selling stock days before the bank was closed and paying out bonuses just hours before the bank was closed smells to high heaven.

I’m not the right person to ask about what should be done. I thought that the banking crisis in 2007-2008 was mishandled and said so at the time.

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Oscar Predictions?

Anybody have any predictions about which pictures and which performances will receive Academy Awards this year? I won’t be watching but my wife will.

I think a good deal depends on just how much an Everything Everywhere All At Once night it is. If it’s a EEAAO night, it will win in every category in which it has been nominated except Best Supporting Actress. If it’s not, almost anything could happen.

A big question is will The Fabelmans win anything? It’s probably Judd Hirsh’s last shot, so that’s a possibility. Also the screenplay is something that the Academy frequently goes for. If it’s an EEAAO night, it won’t win anything.

Also, will Brendan Fraser win Best Actor? No black, Hispanic, or Asian actors are nominated so that won’t be a consideration. I’m told that Austin Butler is fantastic as Elvis but he’s awfully young. I suspect that no one who saw Encino Man or George of the Jungle expected Brendan Fraser ever to be nominated for anything. At this point he checks the “body positivity” box. Will that be a consideration?

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Forgetting

As of this writing the big story of today seems to be the closing of the Silicon Valley Bank, 16th largest in the nation. From David Hollerith, Myles Udland and Dan Fitzpatrick at Yahoo Finance:

Regulators closed troubled Silicon Valley Bank after deposit outflows and a failed capital raise plunged the country’s 16th largest bank into crisis, roiling the larger lending industry.

It became the largest bank to fail since Seattle’s Washington Mutual during the height of the 2008 financial crisis and, behind Washington Mutual, the second largest bank failure in U.S. history. It is also the first bank to fail since 2020. Treasury Secretary Janet Yellen acknowledged the industry turmoil Friday, saying there are “a few” banks the department is closely watching.

The observation of the editors of the Wall Street Journal is that the bank “fell victim of a classic banking strategy of borrowing short and lending long”.

I don’t think SVB will be the last substantial bank to fail in the present climate or even the last business and they will all have something in common: they’ve forgotten how to do business in an environment of high inflation and attendant high interest rates. It doesn’t help that all sorts of businesses have forgotten their core business. I don’t know that it’s the case in the instance of SVB but banks don’t understand the banking business any more, insurance companies don’t understand the insurance business, automobile manufacturers, aerospace companies, and on and on have lost touch with the basics of their own businesses.

As a colleague of mine quipped nearly 50 years ago artificial intelligence is what you use when you don’t have natural intelligence.

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How Do We Increase U. S. Microchip Production?

Rather than complaining about the legislation that’s already been enacted, let me, as they say on Jeopardy put it in the form of a question. There is little question that we need to produce more of the microchips we’re consuming domestically. We can’t allow ourselves to be dependent on China. Dependency on Taiwan makes us dependent on China, too. How do we accomplish that objective?

President Biden’s approach is subsidies for major chip manufacturing companies. I suspect that will prove disappointing although I’m sure that Intel, Nvidia, and TI, et alia are grateful for the dough. What else should we do.

Imposing tariffs on imported microchips will do some of what’s necessary. What else should we do?

My own pet proposal is to declare companies that use offshore (other than to Canada or Mexico) sources for the chips used in their products ineligible for government contracts. It wouldn’t need to be done all at once—it could be phased in.

Any other ideas?

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