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The Fed smothers capitalism in an attempt to save it
- Stamper24 4y agoIt all happened so fast , I have been holding Bitcoin for far too long now and just last year I lost over 60 bitcoins to hackers who invaded my wallet . It was this faithful morning I was at work when I received an email from blockchain saying I needed to verify my account again for security purposes which I did thinking that it was the legit blockchain email address that was sending the mail to me , I ended up clicking a file that was attached to the email and that was how it all happened, my PC froze for like 2 minutes and the next thing was me receiving a notification that my Bitcoin has been sent out to another wallet , I was so furious and confused on what to do about this , tried emailing the blockchain support to see if I could by any chance get my bitcoins back but they said that nothing can be done about it , for a sec I almost gave up on it but then it struck me that I could actually use the help of a hacker to trace the Bitcoin back . I reached out to V I R T U A L H A C K N E T @ gmail . Com for their help .. all they needed was the details of my own very wallet and the wallet which the coin was sent out to . In less than a week the funds was traced back to the culprit who had invaded my wallet and it happened they used part of the money already and all I was able to recover was about 40bitcoins out of 60 that was stolen . I’m still happy and grateful regardless . All thanks and appreciation goes out to V I R T U A L H A C K N E T @ gmail dot com for the incredible job they did . They are active both on email and telegram @ VIRTUALHACKNET .
- metadat 4y agohttps://archive.today/YfC1h https://archive.today/YfC1h
- kurthr 4y agoThanks, just posted this, but deleting mine.
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- ivalm 4y agoI think past 100 years have been a pretty good lesson that capitalism works best when there is government to help with collective action. This is what is happening now and how we avoid tragedy of the commons. Laissez faire capitalism is stupid and every historic data point agrees.
- DethNinja 4y agoProblem is how government allocates all the funds. Right now all the winners are chosen by the government. Thus, it is not based on meritocracy but entirely on connections. Also, government and corporations have merged to such an extend that competition with existing players are not even possible. I think a good classification for the current system would be neofeudalism. You are either a noble with connections or a peasant.
- ivalm 4y ago> all the winners are chosen by the government Not true > government and corporations have merged to such an extend that competition with existing players are not even possible. Look at s&p500 cos from 2000 and now, there is a huge amount of displacement (due to competition).
- Forgeties79 4y agoYeah. I like the economist until they make statements like this. Capitalism isn’t a moral good, it isn’t noble. It’s just a system we’ve “created” and we can adjust/mess with it as we see fit. They make it sound like there’s some moral imperative to “stay out of the way of the invisible hand” or whatever when, as you said, historically this has proven pretty destructive.
- jnwatson 4y agoYeah it wasn’t until I heard that the banks weren’t allowed to hedge HTM bonds that I truly appreciated the “make it up as we go along” nature of our monetary system. There could be a bank run on Chase tomorrow and they wouldn’t be able to hold. The only thing keeping everything together is folks not panicking.
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- matt3210 4y agoNASDAQ is up though. It seems it's up every time there is a problem. How does that work?
- jjoonathan 4y agoBecause every time there is a problem the Fed gives them what they want.
- scrlk 4y agoMoney printer go brrr to the tune of $300 billion: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... They've undone half of the quantitative tightening that's been going on in the last year.
- Out_of_Characte 4y agoBecause money and (stock) value is not strictly correlated. A business can lose money but their stock can be up because value depends largely on potential unrealised gain in the future. Then theres the fed making depositors whole again which means any negative sentiment against several banks before the feds involvement will recover. Maybe someone more knowledgeable could weigh in on that last part.
- parineum 4y ago> because value depends largely on potential unrealised gain in the future Exclusively actually. Past performance is only relevant to the price as a predictor of future success.
- tc313 4y agoWell, if we’re being nitpicky, balance sheet items such as a large net cash position (a derivative of past success or failure) are also relevant factors in the value of a company.
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- JumpinJack_Cash 4y agoI always think of the Fed as the doctor who overprescribes antibiotics or the fire brigade whicb won’t let even a spark go bu in the forest without flooding the whole zone in order to prevent a fire. Sometimes you have to take it in the chin like a man and spend 5 or 6 days with tonsillitis and congestion. The following week will be amazing because you are back to normal and appreciate all that you took for granted. Food, drinks, even mundane things such as breathing normally Same thing with fires, sometimes the soil needs a violent fire to clean weeds and old trees and disseminate nutrients down the soil We know these concepts at the micro-level, it’s about time we learn them at the societal level. People are longing for the end of the boom-bust cycle. If anything we need them to be more violent and in line with what Nature does with the 4 seasons
- voisin 4y agoWe, as a society, do not reward leaders who follow this. We are our own worst enemy, like petulant children we demand our candies even as our teeth rot out of our heads. There is a quote: bad times make strong men, strong men make good times, good times make weak men, weak men make bad times. We are firmly in the weak men period.
- Jerrrry 4y ago>There is a quote: bad times make strong men, strong men make good times, good times make weak men, weak men make bad times. careful, that phrase and kind of talk will have you labeled a misogynist incel that hates women. Anything that recognizes the need for (strong) men in society is inherently bad. We will soon reap the reward of that cowardice.
- lukas099 4y agoI mean yeah, surely women play a role in the world too. Unless by "men" we mean "people", in which case why not just say that?
- voisin 4y agoI take “strong men” in the quote to be men willing to take the harder but correct path - not kicking the can down the road the way our “leaders” all seem to do now.
- frgtpsswrdlame 4y agoI think the article misses the real dilemma. Think about all the firms who do payroll through Rippling, should those employees and firms suffer because of something they essentially knew nothing about? We want to avoid moral hazard but we also want to avoid firms going bust for no reason. I think the issue is that big economic players (in this case some billionaires and VCs) point to all the small players that will by wiped out and it feels a bit like a hostage scenario. And in that hostage scenario we're basically always going to choose to socialize the risk. IMO the problem comes when we make decisions to socialize risk without socializing reward. When the two are tied together we eliminate the hostage feeling, now big players know there is a big cost to being saved by the government.
- falcolas 4y ago> those employees suffer because of something they essentially knew nothing about Just like the tens of thousands of layoffs before and since? Employees at those companies were really at no more risk than employees at even the most profitable of companies (a’la Google).
- twblalock 4y agoThe rewards are socialized, because the small players would not have existed in the first place if not for the big players. All these small companies that were impacted by SVB only existed in the first place because VCs invested in them. The same story plays out in many other industries. The losses aren't really socialized either -- not this time, and not in 2008. In 2008 the government made money on the bailouts, effectively getting an investment return on taxpayer money. So far in the rescue of SVB no taxpayer money has been spent either.
- jjoonathan 4y agoNope. QE is a fig leaf over a money printer. The Fed is the bagholder of last resort. They haven't made money in any real sense until they sell those assets (or roll them off) and they never will because every time they try the market throws a shitfit and they go back to printing. https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL
- legosexmagic 4y agois there realy no way to get "bank run insurance" from somewhere other than a central bank?
- TaylorAlexander 4y agoI hear Lloyds of London will insure just about anything. If you have $10m and you want to insure it, they can make you a policy.
- HWR_14 4y agoWhat company is big enough to insure a $230 billion payout if just one bank fails, let alone more than one?
- selectodude 4y agoI could see the re-insurance market being able to float it but it would probably work under an excess balance fee >$250,000.
- ivalm 4y agoBut you don’t need to payout $230B, assets didn’t go to 0. You need to payout like $30B, or whatever the difference between assets and liabilities.
- HWR_14 4y agoEven $30B (as a single claim) would be difficult to handle. Again, name a company you would trust to hand over that much money then and not topple over.
- chernevik 4y agoAnyone interested in such a thing would just keep their money in T-bills via a money market fund. Fast access, zero credit risk, but there is the hassle of sweeping/topping up the bank account used for transactions. I understand many banks offer "insured sweep" accounts that do just this but of course this costs them cheap deposits. Go ask the various VCs why they didn't press SVB to make this service available to their portfolio companies.
- chernevik 4y agoUnmentioned are the regulatory implications of 100% deposit insurance. A regulator liable for ALL the deposits becomes responsible for ALL the assets. Regulators are generally conservative, and loans to new companies with strange ideas and no track record don't look so good to them. SVB's underwriting of startups depended on regulatory freedom to take risks not entirely understood by regulators, with corresponding risk that those loans might fail. Some career bureaucrat will not look kindly on a bunch of loans to the likes of nextbigthing.com. That underwriting didn't kill SVB. But restrictions on it are likely to follow -- the bureaucrats lack the judgment and knowledge to approve anything without a proven track record. The SVB depositor bailout may have spared startups some anxiety and complication (the bulk of their cash was never at risk), but it may very well prevent the replacement of SVB. The startup community will likely regret its weekend of panic and special pleading. (There is also the problem of politicization of credit allocation, which we saw in 2008 when mortgages to low-income and subprime borrowers contributed to (I don't say caused) the housing bubble that brought down the whole mortgage market. But this will be of less interest/concern to the tech startup community.)
- throwawaysleep 4y agoWas SVB actually lending money to companies with no revenue? Isn't that where VCs should be?
- chernevik 4y agoI'm sure they weren't lending to zero revenue companies but there are lots of new small companies with some revenue and capital that need some momentary liquidity: credit lines, bridge loans to next equity funding, etc. And loans/services to people with stakes in such companies. Need a loan to fund exercise of options in a private company that's doing well? SVB might do something like that, Citibank not so much. A knowledgeable bank can safely make such loans but no regulator will.
- colechristensen 4y agoThere are already banks that provide products to sweep your large valued accounts into as many banks as necessary to keep your entire balance insured. Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly. As long as failing banks fail (stockholders wiped out, assets seized and sold to cover deposits first) there’s no problem with insuring deposits. I do have a bit of a problem with how broadly bad mortgage backed securities are being bought by the fed to prevent losses from bad investments from failing more banks. Housing prices are killing our society and there needs to be pressure against the enormous loans nearly every homeowner has.
- _skel 4y agoBanking has been a quasi-government-operated industry for over 100 years, since the creation of the Fed in 1913, the creation of the FDIC in 1933, and the increased regulation since 2008. In 2008 the Fed created a two-layer banking system: banks that were "too big to fail" whose deposits are effectively insured for infinite amounts, and all other banks whose deposits are insured for $250k. Nobody realized this until a few weeks ago, and without the government's scramble to respond everyone would have moved their deposits to the big banks, killing all the others. People finally realized this because of duration risk on long-term investments. Who caused that duration risk to actually manifest as a real problem? The Fed! The same people who are supposed to run the banking system in a stable way have contributed to the instability of the banking system by keeping rates low for so long, overreacting to Covid, assuming inflation was "transitory", and then raising rates very quickly trying to squash the inflation they caused. That's not capitalism. We haven't had capitalism in banking for a century. People have an impression that banking is a private industry and the government comes in to bail it out, when really the government was involved the entire time. Aside from the crash in 2008, where the Fed really did help, a number of the major recessions in the past century have either been caused by or made worse by the Fed, including the Great Depression by Bernanke's own admission. Banking regulations certainly need to be changed because of what happened last week, but the way the Fed is run should definitely also be changed.
- nostromo 4y ago> Aside from the crash in 2008 There’s a strong argument to be made that the Fed caused the crash in 08 too. First by keeping rates too low for too long after the dot com crash, then aggressively raising them right up until things started breaking. Sound familiar? The Fed did a great job after 08 convincing everyone it did a great job managing the crisis, which I think is fair. But there’s also an argument to be made that they played a role in causing the crisis too.
- notch898a 4y ago> Nobody realized this until a few weeks ago, and without the government's scramble to respond everyone would have moved their deposits to the big banks, killing all the others. Hopefully no one will take this as a political endorsement but this is the most exquisite exchange I've seen illustrating your point by Secretary Yellen and Senator Lankford. https://youtu.be/CX6O--sk48A?t=5430 https://youtu.be/CX6O--sk48A?t=5430 Based on her response I anticipate we will continue to see the effect you predicted. Yellen was pretty much speechless in the face of presentation that people will start moving their money to banks designated as ones worthy of "systemic risk" designation.
- passwordoops 4y agoThey're not smothering capitalism. They are doubling down on the corporate welfare, cronyism and centralization that's been on full throttle since 2008. That bailout and the acceptance of "too big to fail" banks was when they smothered capitalism
- dv_dt 4y agoThe very structure of the Fed since it's inception has been as a organization that serves banks. To some extent, it used to at least try to keep the industry from eating its own seed, but the lack of attention to that outcome really traces back to the 1970's and rise of neoliberal economic philosophy. https://mattstoller.substack.com/p/fire-the-fed https://mattstoller.substack.com/p/fire-the-fed
- Devasta 4y agoAre those with capital served by the governments propping up the banks? Then it is capitalism.
- adventured 4y agoWhich people? The people with opportunity capital that are now frequently denied the ability to rationally utilize their capital to acquire discounted assets from other irresponsible actors? Those responsible actors with capital - biding their time forever - are being routinely punished in this corrupted system of constant government intervention and bailouts. Bankrupt GM would not have vanished, its pieces would have been acquired at a steep discount. Pandemic mega airlines would not have all vanished without government bailouts, some of them would have been acquired for cheap (and essentially all of their assets would have been acquired one way or another). Buffett's Berkshire Hathaway for example, is typically extraordinarily responsible with its capital and most often maintains enormous reserves, ready to strike when the opportunity presents. The post great recession era has been a nightmare for him in terms of deploying capital, because the Fed was performing a decade plus long handout program to investors, making their assets artificially more expensive to fake prosperity. Buffett, one of the ultimate capital actors, is very heavily handicapped in these scenarios, insofar as he's unwilling to act as recklessly as the rampant speculators that commonly blanket Fed bubble markets (whether housing bubbles, dotcom bubble, or the couple of more recent bubbles such as in crypto). So no, not all with capital are served by this environment of Fed & US Government fraud. Many would do far better without it, picking up cheap assets for pennies on the dollar when other irresponsible parties take insane risks and implode.
- haberman 4y agoIf the shareholders were wiped out (as I understand they were), then the moral hazard seems limited, no? The main remaining moral hazard would be that customers would be incentivized to choose banks that offered higher rates as a result of taking on unsustainable risk. But this moral hazard is checked by investors who are directly incentivized to remain solvent and liquid, because otherwise they will lose everything. This leaves me with two questions: 1. Did investors of the bank literally lose everything? Or did they get bought out by the government at pennies on the dollar? If indeed this was a liquidity crisis, rather than a solvency crisis, it seems like the shares would still be worth something. Did the shareholders have to agree to give up their ownership, and were they compensated for that? 2. Why didn't the 2008 bailouts follow this model? The way this bank failure was handled makes much more sense to me than the 2008 model. It seems right to me that shareholders should lose everything if the institution fails. Why did shareholders get to keep their companies in 2008?
- Xeoncross 4y agoBecause other, national/international banks like JPM, WFC, & BAC have a much closer uh... relationship with congress.
- twblalock 4y agoAt the moment SVB stock is worthless and SVB does not legally even exist anymore. The government didn't buy the shares. Every shareholder got wiped out, unless something changes.
- maxerickson 4y agoThe assets are rolled into the new bank, to back the deposits. FDIC probably won't pay in very much in the end. https://www.fdic.gov/news/press-releases/2023/pr23019.html https://www.fdic.gov/news/press-releases/2023/pr23019.html Several banks were wiped out in 2008. Other banks exchanged large amounts of equity for government funds. Establishing systemic stability by injecting large amounts of government money was seen as better than letting the entire mortgage system collapse (which is what likely would have happened if all the banks holding mortgage backed securities were left to unwind). The shareholders didn't get off scot free, the government ended up their major partner and sold the assets for more than they had injected into the system (which doesn't necessarily represent a profit).
- nemo44x 4y agoEvery bank is insolvent today and people are just starting to realize this. They all were loaded with tons of liquidity that they couldn’t loan (due to demand) so they had to do something and they all bought “safe” assets in the form of treasuries, etc. The Fed continued to guide on low interest until they suddenly decided to raise rates non-stop. All those deposit accounts paid 0% interest. Not there’s 4%+ interest available and everyone is pulling their money to put into those, or other things. The banks can’t actually do this much longer. If you mark to market the bonds these banks are carrying you can see they are insolvent. As more people realize and pull out this and/or move money to higher interest accounts, they are doomed. How is this fixed? Hope everyone chills? No it will only get worse. I sure it all? That will cause trillions in inflation overnight. Let all the banks collapse? That will spell anarchy and depositors will lose a lot. Quickly lower interest rates? Inflation continues and accelerates. We are in grave danger right now.
- HWR_14 4y agoThe Fed already announced their solution. They are making loans available to those banks based on the acquisition cost, not mark-to-market value, of those treasuries.
- nemo44x 4y agoThis will result in hyperinflation. Hence why Yellen did not commit to the vast majority of banks. Did you not see that?
- photochemsyn 4y agoSort of amazing that someone could write an article referencing bank panics, the Great Depression, and the role the Federal Reserve without even mentioning what constraints that the pre 1999-Glass-Steagall would have placed on a bank like SVB. Would those in the know classify SVB as primarily a commercial bank, handling the deposits primarily of businesses (they don't seem to have been in the car-loan and home-loan sector, but I have no idea), and loaning to other businesses, or as an investment bank, with a large portfolio of stocks and bonds? Did SVB have a trading division like Goldman or JPMorgan does, i.e. SVB Capital? What's the SVB Group structure all about? Glass-Steagall seems to be getting a lot of attention as a possible contributing factor in this story in other venues: https://www.newsweek.com/bring-back-glass-steagall-opinion-1787966 https://www.newsweek.com/bring-back-glass-steagall-opinion-1... https://www.nytimes.com/2023/03/15/opinion/silicon-valley-bank-rescue-glass-steagall-act.html https://www.nytimes.com/2023/03/15/opinion/silicon-valley-ba... https://www.huffpost.com/entry/yellen-glass-steagall_n_64136877e4b0bc5cb64f3ecb https://www.huffpost.com/entry/yellen-glass-steagall_n_64136...
- wpietri 4y agoThe Economist covers the topic of banks pretty much every week. Individual articles are mostly written to be short and approachable; depth comes through multiple articles over time.
- Waterluvian 4y agoWhen this happens to a bank, the FDIC should step in, make the bank liquid again (perhaps by trading the bonds and other investment products for cash), evenly pay out every customer with whatever there is, pay up to $250,000 per customer for the shortfall, if there is any. If there was no shortfall, pay out to investors/debtors. Then shut the bank down. I think a lot of people perceive the bank as having zero assets and the FDIC is covering 100% of the deposits. Some $200B or whatnot. But most of what people deposited didn’t just vanish.
- twblalock 4y agoWhat you described is what happens during a normal bank failure. That happens fairly regularly to small local banks and it's not normally even newsworthy. That's not an adequate response to a systemic risk against the entire banking system.
- Waterluvian 4y agoGood to know. And fair enough. I won’t pretend to understand just how much risk there was to the entire system. But obviously the officials felt it was immense.
- QuadmasterXLII 4y agoThe challenge is what to pay to the people who pulled out all their assets hours before the bank failed. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 50%, this is wildly unstable and we see constant bank runs, as was common in the early 20th century. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 95%, and normal people are banking, this is slightly unstable but most people aren't going to bring down the financial system to slightly reduce their risk of losing 5%. The system has been working like this for 70 years. The current batch of Silicon valley/new york financial types would stab an orphan in the face with their mother's fine silverware, to avoid losing 5%.
- wpietri 4y agoYeah, during the panic over SVB, I saw lots of argument that people with millions of dollars in cash shouldn't have to worry their pretty heads over managing that money. Lots. And I think that's true in the same sort of abstract way I shouldn't have to worry about how what I'm eating affects my health. All desserts, no vegetables, right? But back here in the real world, arguing for eternal and unlimited taxpayer bailouts implies eternal and unlimited interference from the people paying for the bailouts. Capitalism is about risk and reward. It's about a cycle of gambles and consequences, good and bad, that helps society discover what works and what doesn't. If you take away the consequences, it's not capitalism anymore. Maybe you end up with socialism for the rich, maybe you end up with gray, bureaucrat-run playpens. But either way you lose the engine-for-progress part of capitalism, which I see as the heart of it. I was talking with my retired aunt yesterday and she asked about the reaction here in tech-land to the SVB bank run. When I explained to her that there were people with millions or tens of millions in cash in one bank, she was gobsmacked. She is just getting by, and even she keeps accounts with two separate companies. In her words, "You never know!" The question she had that I couldn't answer: "How do people think history doesn't apply to them?"
- BigCryo 4y agoI am encouraged by how many people are now becoming aware of the influence of central banks on our lives.. I think the central bankers also know this, that we know now.. I think that makes them nervous