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:
- Congress
- The civil bureaucracy
- The president, primarily for failing to provide proper guidance to the civil bureaucracy, bucking them if necessary
- Corporate management
- 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.
“Why not blame the bankers? Because they were just doing what anyone would have done in their circumstances, based on their incentives. ”
Seriously? Bankers are that stupid? They will do whatever the regulations or regulators allow even if it clearly leads to failure? The incentive to make money on a continuous basis without crashing isn’t enough of an incentive so you need regulators to tell them “All your depositors are invested in tulips and if there is a sudden drop in tulip value you could be in trouble”? Tell me again why the banking sector should make so much money?
Having said all of that, I really do think bank management should get most fo the blame, I think you are sort of correct. The banks will always push to have regulations taken away so that they can do whatever they want. Absent regulations to stop them from doing stupid stuff they will do stupid stuff, and then come running to Congress for money. Then we will always be in the position of letting the banks fail (good) but also letting bank customers also get hurt (not so good). Clearly we need to regulate them even more and ignore their requests to deregulate no matter how much money they offer to bribe Congress.
(One correction. While they value the donations I think what they really covet are the cushy high paying jobs for themselves, family and friends in the finance sector that get passed out as rewards during and after their careers. The donations are pigeon feed in comparison.)
Steve
Exactly. The only actual remedial measure is to limit Congress’s power to regulate banks or back up deposits, i.e. a return to the 19th century. The effect of that was to make people more hesitant about using banks.
My own preference is to prevent banks from getting big. A start would be to end branch banking. That wouldn’t be a return to the 1890s but a return to the 1970s.
I believe events have to play out before we can understand how much more risk SVB took relative to everyone else; and how much blame should be placed on “lax” regulations or their enforcement.
Here’s an analogy to explain why, using one of Warren Buffett’s quotes.
There’s a law against swimming naked; and there’s a police officer on the beach who’s supposed to be policing it. The tide goes out and we find one person naked among the hundreds of swimmers. We place the blame on that one person for ignoring the rules. A reasonable inference is the police officer may have been corrupted by naked swimmer.
On the other hand; if the tide goes out and one sees the whole beach is naked. Then one looks to other places for the causes — like there was a sign on the beach saying one needs to be naked to swim and the police officer was away, invited to speak at a conference.
As it is; SVB failed, but notice two other banks (Silvergate, Signature) that’s failed. And a systemically important bank (Credit Suisse) that has been subject all kinds of rules is looking very wobbly. And given the macro landscape; we are probably closer to the beginning of the decline phase of the credit cycle then the end.
Just remember, the Federal Reserve expanded its balance sheet by 40% / $4 trillion in 2 years — and Congress did trillions in helicopter money. Then the Fed slammed on the brakes with the fastest hiking cycle in 40 years, did QT to the point that M2 is now declining YOY which is unprecedented.
I’m pretty sure SVB wasn’t the only organization that made what seemed quite reasonable decisions in 2020 that looks insane in retrospect.