There Is No Free Lunch No Matter How Many Times Banks And Politicians Try To Convince You There Is. | (3.13.23)
"It's fine to celebrate success, but it is more important to heed the lessons of failure." ― Bill Gates
We absolutely should not be bailing out investors, banks, bankers, business owners, or depositors. The capital and resources needed to cover multi-billion-dollar bank insolvencies do not come out of thin air and ultimately result in financial punishment for the everyday American. This comes in the form of a reduced standard of living for those who did not make a financial mistake / risk-mismanagement in favor of the survival of institutions that have mismanaged balance sheet assets and consumed more than they could produce.
Let me be very clear. I am sorry for the individuals and businesses that have been negatively impacted by the apparent insolvency of both Silicon Valley Bank (SVB) and Signature bank. It is an awful situation that I wish was not the reality for you. In a perfect world, you should be able to deposit your capital into heavily regulated financial institutions and maintain full faith that those assets will be appropriately managed so that they will be available to you when you choose to withdraw them. However, we do not live in a perfect world. We live in a world where banks can (and will) leverage your assets for profit and you as the depositor are assuming the capital management decisions/risk of the financial institution you choose to bank with. This is with one key exception...
In an effort to protect individuals and businesses from “the unlikely event of a bank failure,” the Federal Deposit Insurance Corporation (FDIC) insures each depositor of an FDIC-insured bank for up to $250,000 for each account ownership category. This is the safety net, right there. If you are an individual who holds more than $250,000 in a single account, you are assuming the “unsecured” risk of each dollar above that limit. Does this mean that an individual with $2,000,000 in assets would need to maintain accounts with 8 institutions in order to guarantee that their full balance is FDIC insured? Yes. 100%. Yes. That is exactly what it means. Now… I am a logical and reasonable person…. Do I believe it is realistic for every single individual and institution to actively manage that many accounts? Not to mention those whose balances far exceed something like $2,000,000? No. I don’t. However, they are absolutely on the hook for assuming the risk associated with not doing so. Do you want a guarantee? Make sure your assets are FDIC insured…
Here’s the problem though, our institutions are set up with a set of rules that they are not being forced to operate within. Given that Silicon Valley Bank (SVB) was declared a systematic risk to the financial system, the FDIC has now guaranteed that all SVB depositors will be made whole. Yes, including those whose deposits exceed the $250,000 limit. At the same time, Signature Bank which also held a significant number of uninsured deposits was closed down by the New York Department of Financial Services (DFS) and all of its depositors will also be made whole — including those with balances that exceed $250,000. This brings us to the burning question at hand, where does the money to make these depositors whole come from?
As of the time of writing this, the Federal Reserve plans to leverage the Bank Term Funding Program (BTFP) in order to make this additional funding available to banks by offering loans of up to one year to depository institutions (banks) that pledged any collateral assets eligible for open-market operations. Further, the collateral being used for the loans will be valued at par as opposed to the true fair market value. Yes, this means that banks currently carrying large unrealized losses will be able to borrow from the BTFP against those assets as if they had not lost any value. Meanwhile, the Department of Treasury declared that it will be providing $25 billion from the Exchange Stabilization Fund as a backstop to the BTFP. Yes, that means that the Fed’s money printer is likely to be fired back up and we can expect this to directly lead to increased inflation.
We now face a reality where the Fed is simultaneously printing money in order to bail out financial institutions that mismanaged their balance sheets assets (leading to increased rates of inflation) at the same time that it is implementing hawkish monetary policy by aggressively hiking rates in an effort to slow the economy (in order to fight inflation). It is this response and this exact mentality that is leading to the continued gap between the rich and the poor in America. Without a doubt, there are everyday depositors of SVB and Signature Bank who would be crushed if the banks were actually allowed to fail and I do feel bad for them. Genuinely. However, when they receive special treatment in the form of financial protection it is being done at the expense of all other regular everyday Americans who will now see their basic living expenses increase by a significant margin again next year or watch their wages stay stagnate (if not negative due to inflation outpacing their raises). Not to mention, those who have already lost their jobs and the countless others who will in the coming months/year due to the need for even further hawkish monetary policy / economic slowdown since we are now turning the money printer back on.
The cost of saving these financial institutions is being passed on to all of us who have no involvement with the situation whatsoever as bankers and politicians continue to pretend that there are no consequences for their actions. This is the peak of selfishness. These institutions and as well as the high-net-worth depositors (both individuals and institutions alike) are forcing poorer people to pay for their mistakes. Ironically, it is also one of the least capitalist responses that one could call for. As somebody who is an avid proponent of the free market economy, I believe that you have every right to enjoy the fruits of your labor and there does not need to be a limit on your success. Did you make excellent financial decisions? Started a successful company? or even inherited wealth from a past generation that did those things for you? That is excellent for you. It is yours (not mine) and certainly not the government’s to steal and mismanage on your behalf. HOWEVER, the counter-example is also true. If you (or your business) have significant wealth and decide to park it in an uninsured depository account it is NOT my, my family, my friends, my peers, my clients, my business’s, or even the U.S. government’s job to save you from yourself. We need to get to a place where people and institutions are held accountable for their actions financially. It is the only path forward. Remember, there is no free lunch. Wishing it wasn’t true does not make it so.
P.S. Anybody who attempts to claim that the failure of these banks is “due to crypto” has no idea what they are talking about (at best) or has ulterior motives (at worst) and is not somebody that shouldn’t be taken seriously.