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.

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?

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.

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?

The editors of the Washington Post are worried about the public debt:

The nation has reached a hazardous moment where what it owes, as a percentage of the total size of the economy, is the highest since World War II. If nothing changes, the United States will soon be in an uncharted scenario that weakens its national security, imperils its ability to invest in the future, unfairly burdens generations to come, and will require cuts to critical programs such as Social Security and Medicare. It is not a future anyone wants.

Stabilizing the debt should be a top priority for Mr. Biden and Congress. That starts with setting a clear goal. A reasonable target would be aiming not to have the debt exceed the size of the economy (a 100 percent debt-to-gross-domestic-product ratio). Currently, the debt is 98 percent the size of the economy and on track to hit 118 percent in a decade, largely because of soaring costs from baby boomers retiring and heftier interest payments, according to the nonpartisan Congressional Budget Office. It doesn’t take a PhD in accounting to see the warning sign here: As debt gets bigger than the economy, the interest costs become so onerous that there is little money left for anything else. By 2033, the nation will be spending more on paying creditors than on the entire defense budget.

Their explanation for why the debt has grown so high so fast is to blame it on the Baby Boomers. That those born between 1946 and 1963 would eventually become old has been known for, yes, more than 70 years.

I think a better direction in which to point a finger is at bad assumptions. For quite a while it was assumed that real median wages would always grow. That hasn’t been the case or has only intermittently been the case for 40 years. For decades it has been assumed that spending more invariably produced more economic growth. There is substantial empirical evidence that the larger the overhang of the public debt, the slow is economic growth. It has been assumed that a college education would provide a comfortable living. What is true is that a medical degree, a law degree from a top law school, or engineering degrees in certain specialties do that. Unfortunately, the number of those school slots doesn’t increase as fast as the population does. There are blue collar positions that provide a comfortable living, too, but those have been de-emphasized in favor of college educations. Now we’re boosting the public debt to reduce the private debt incurred by young people in educational debt and will never be able to pay it back. More bad assumptions.

Something else should be considered. Throughout American history it has proven very difficult to raise the effective tax rate much above where it is right now. There is a name for that and I’ve posted on it but it doesn’t come to mind right now. If you don’t want to borrow more (“print money”) and you can’t increase the effective tax rate and you don’t want to reduce benefits paid, you’ve got to look for other areas of the budget to cut. There aren’t many left.

Update

The editors of the Wall Street Journal are unimpressed by President Biden’s plans as well:

The press is reporting that President Biden’s 2024 budget proposal released Thursday would cut the deficit by $3 trillion over 10 years. Way to bury the lead. The plan raises taxes by nearly $4.7 trillion and would increase revenue and spending to unprecedented plateaus as a share of the economy.

The President’s $6.89 trillion proposal is a political document that sets up his re-election campaign. Its spending and tax proposals were rejected in the last Congress under Democratic majorities and have no chance of passing with a GOP House. But the budget shows where Mr. Biden wants to take the country if he wins a second term. Bernie Sanders would be pleased.

concluding:

Even with all the taxes, deficits over the next decade would total $17 trillion, and debt held by the public as a share of GDP would rise to 109.8% in 2033 from 97% last year. Mr. Biden’s budget is a recipe for an economically and militarily (see nearby) weaker America, but at least he’s warning voters of his intentions—unlike in 2020.

With the exception of the corporate income tax, I thought that President Trump’s tax cuts were foolish and whatever growth they produced would not be enough to generate enough taxes to make up for the revenue lost. That has proven correct. I think that when you have an economy that’s growing robustly, you can afford to spend some of the income you’re receiving on things you’d like as well as on what you must. As the economy slows, you don’t.

At this point I think we need to stabilize Medicare and Social Security and start getting more bang for our terabucks in other areas of government. Anything that doesn’t do either of those are wastes of breath.

Perhaps not coincidentally David Brooks’s New York Times column is closely related to the subject of Jon Haidt’s post about which I just posted:

One well-established finding of social science research is that conservatives report being happier than liberals. Over the years, researchers have come up with a bunch of theories to explain this phenomenon.

The first explanation is that conservatives are more likely to take part in the activities that are linked to personal happiness — like being married and actively participating in a religious community. The second explanation is that of course conservatives are happier; they are by definition more satisfied with the established order of things.

The third explanation, related to the second, is that on personality tests liberals tend to score higher on openness to experience but also higher on neuroticism. People who score high on neuroticism are vigilant against potential harms, but they also have to live with a lot of negative emotions — like sadness and anxiety.

He goes on to describe the “maladaptive sadness” from which progressives are suffering:

First, a catastrophizing mentality. For many, America’s problems came to seem endemic: The American dream is a sham, climate change is so unstoppable, systemic racism is eternal. Making catastrophic pronouncements became a way to display that you were woke to the brutalities of American life. The problem, Matthew Yglesias recently wrote on his Substack, is that catastrophizing doesn’t usually help you solve problems. People who provide therapy to depressive people try to break the cycle of catastrophic thinking so they can more calmly locate and deal with the problems they actually have control over.

Second, extreme sensitivity to harm. This was the sense many people had that they were constantly being assaulted by offensive and unsafe speech, the concerns that led to safe spaces, trigger warnings, cancellations, etc. But, as Jill Filipovic argued recently on her own Substack: “I am increasingly convinced that there are tremendously negative long-term consequences, especially to young people, coming from this reliance on the language of harm and accusations that things one finds offensive are ‘deeply problematic’ or even violent. Just about everything researchers understand about resilience and mental well-being suggests that people who feel like they are the chief architects of their own life” are “vastly better off than people whose default position is victimization, hurt and a sense that life simply happens to them.”

Third, a culture of denunciation. When people feel emotionally unsafe, they’re going to lash out — often in over the top, vitriolic terms. That contributes to the fierce volleys of cancellation and denunciation we’ve seen over the past few years. For example, Damon Linker recently wrote a piece for Times Opinion arguing that Ron DeSantis is bad, but not as terrible as Trump. The furies descended on him online. The gist was that it is shameful to merely say DeSantis is bad — you need to say he is a fascist, pure evil! If you aren’t speaking in the language of maximalist exorcism, you’re betraying the cause.

This rhetorical style is also self-destructive. When maximalist denunciation is the go-to device, then nobody knows who’s going to be denounced next. Everybody finds himself living in a climate of fear, and every emotionally healthy person is writing and talking from a defensive crouch.

I think there’s more going on, something inherent. Progressives are dissatisfied with the status quo by definition. Now couple that with radicalization which, as noted in my prior post, encourages a feeling of helplessness. How can such helpless dissatisfaction be anything but unhappy?

Note that “radicalization” doesn’t apply only to progressives. Our present politics is dominated by left wing radicals on one side and right wing radicals on the other with most ordinary people who are just trying to live their lives as best they can stuck in befuddlement.

The topic of Jon Haidt’s post is summarized here:

All of Gen Z got more anxious and depressed after 2012. But Lukianoff’s reverse CBT hypothesis is the best explanation I have found for Why the mental health of liberal girls sank first and fastest.

This graph illustrates the point:

What happened in 2012?

After examining the evidence, including the fact that the same trends happened at the same time in Britain, Canada, and Australia, Goldberg concluded that “Technology, not politics, was what changed in all these countries around 2012. That was the year that Facebook bought Instagram and the word “selfie” entered the popular lexicon.”

This passage explains the “reverse CBT hypothesis”:

Greg is prone to depression, and after hospitalization for a serious episode in 2007, Greg learned CBT (Cognitive Behavioral Therapy). In CBT you learn to recognize when your ruminations and automatic thinking patterns exemplify one or more of about a dozen “cognitive distortions,” such as catastrophizing, black-and-white thinking, fortune telling, or emotional reasoning. Thinking in these ways causes depression, as well as being a symptom of depression. Breaking out of these painful distortions is a cure for depression.

What Greg saw in 2013 were students justifying the suppression of speech and the punishment of dissent using the exact distortions that Greg had learned to free himself from. Students were saying that an unorthodox speaker on campus would cause severe harm to vulnerable students (catastrophizing); they were using their emotions as proof that a text should be removed from a syllabus (emotional reasoning). Greg hypothesized that if colleges supported the use of these cognitive distortions, rather than teaching students skills of critical thinking (which is basically what CBT is), then this could cause students to become depressed. Greg feared that colleges were performing reverse CBT.

I wanted to remark on this passage, describing the notion of “locus of control”:

As first laid out by Julian Rotter in the 1950s, this is a malleable personality trait referring to the fact that some people have an internal locus of control—they feel as if they have the power to choose a course of action and make it happen, while other people have an external locus of control—they have little sense of agency and they believe that strong forces or agents outside of themselves will determine what happens to them. Sixty years of research show that people with an internal locus of control are happier and achieve more. People with an external locus of control are more passive and more likely to become depressed.

Radicalization—any sort of radicalization—promotes the development of an external locus of control. The radicalized tend to attribute every setback to whatever it is they’re radicalized with respect to. If you’re radicalized with respect to race, you are predisposed to attribute every setback to race; if you’re radicalized with respect to gender, you’re predisposed to attribute every setback to gender; if you’re radicalized with respect to sexual preference, you’re predisposed to attribute every setback to sexual preference; and so on.

One will always encounter hardships and setbacks in life. When there are lots of miserable radicalized people around and they are driven to make other people as miserable as they are themselves, you get, well, where we are right now.

I’ve seen a number of opinion pieces in various different forms about education and healthcare and there’s one point they miss. When you increase the willingness to pay without increasing the supply, the price will go up. That’s not just axiomatic it’s tautological—saying the same thing in a different way.

The effect of reducing out-of-pocket in healthcare is to increase willingness to pay. The same is true of subsidized (or free) loans for education.

The graph above shows the steady rise in Medicare spending per beneficiary since the program started in 1966. But that doesn’t reflect constant dollars! (I hear someone say) Here:

Not quite up to the present but it gives you the general idea. I think it tells a story.

The cost per beneficiary has grown faster than inflation over the period of the last 55 years with only a few exceptions and those exceptions are significant. Note the period between 1997 and 2000. What happened?

Congress, alarmed at the growth of Medicare spending, imposed something called “Sustainable Growth Rate” (SGR). Here’s a description from Brookings:

Under the SGR formula, if overall physician costs exceed target expenditures, this triggers an across-the-board reduction in payments. The target is based on spending growth in the economy – that’s where the “sustainable” part of the name comes from – but is not tied to quality or access to care. This year, if Congress does not act by March 31, then payments to Medicare physicians would be reduced by 21.2 percent.

What happened to upset that?

However, since 2002, Congress has stepped in with short-term legislation (often referred to as the “doc fix”) to avert the payment reduction. These patches have kept increases in physician payments below inflation over time, and have also resulted in a huge divergence between the actual level of Medicare physician-related spending and the target in the SGR formula. Consequently, the budgetary cost of permanently fixing the SGR now runs over a hundred billion dollars. For years it has been clear that both the SGR and physician payment system urgently need attention.

In other words what reduced Medicare spending was reduce the compensation rates and what increased it again was allowing the compensation rates to increase.

One last point. The annual increase in spending per beneficiary is just under 6% and has been for some time. Private insurance is about the same. When Medicare was first put in place in 1965, healthcare represented about 5% of U. S. GDP. Now it’s 18%. That means that healthcare contributes a full percentage point to inflation every year.