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1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. 2. The government decides that, oops, it

1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. 3. New treasuries yield 4 or 5 times as much in interest as the ones from 1-2 years ago. Why would anyone want to buy those old treasuries near face value now? 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. 5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under. 6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously. SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.

geysersam 4y ago
> 1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. What do you mean by this? No one forced them to invest in bonds and not hedge against raising interest rates.
- ClumsyPilot 4y ago
  The while posts makes out banks to be victims. Supposedly they have no agency. Bank lives matter!
uejfiweun 4y ago
Yeah, it's kind of infuriating, and even more infuriating is the fact that at the first sign of trouble they are gonna turn the printer back on. The alternative is a major recession, which obviously sucks, but sometimes forest fires are necessary to make way for new growth. Without the necessary pain of a recession, our economy is doomed to continue in this bizarre state of zombie companies, asset bubbles, and scams.
gen220 4y ago
Does the government require banks to buy long-term treasuries? [1] Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e. discounting the risk of potential rising interest rates in the future)? It's not a rhetorical question, but a sincere one. [1]: https://en.wikipedia.org/wiki/United_States_Treasury_security https://en.wikipedia.org/wiki/United_States_Treasury_securit... states that Treasuries are sold in all varieties of duration, from 4 week bills to 30 year bonds.
- bombcar 4y ago
  They bought the greediest ones and ignored TIPS. They wanted profit.
- simple-thoughts 4y ago
  Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt. Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day. Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
  - User23 4y ago
    > Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
    - 4y ago
7e 4y ago
1. Why is cash parked at the Fed not an option?
- jkhdigital 4y ago
  The article mentions the real core of the issue, but doesn’t make it clear that it is in fact the core: SLR (a banking regulation). SLR effectively requires banks to raise capital along with deposits. So if you flood the banking system with cash through fiscal policy, they can’t just accept all those deposits and leave them parked in their Fed reserve account. If they could, then the Fed wouldn’t need reverse repo—it could just pay interest on reserves to set a floor on interbank lending rates.
  - 7e 4y ago
    If capital is too risky to raise, why can’t a bank refuse deposits?
    - lmm 4y ago
      That would at the very least be unpopular with their customers, if not outright illegal. What would it look like to be a customer at a bank that did that? Especially for something like SVB - your startup closes its funding round, they wire the money to your bank account, and the bank refuses it?
      - wahern 4y ago
        SVB lobbied for a law that changed a crucial regulatory threshold from $50 billion to $250 billion. From ~2016 to ~2020 their assets jumped from <$50 billion to >$200 billion, with most of that happening from 2020 to 2022. SVB was perfectly capable of restricting the total amount of assets it held. It wasn't a matter of rejecting small deposits; it was a matter of allowing (or rather, soliciting) huge clients to open new accounts to hold hundreds of millions or billions in assets.
    - withinboredom 4y ago
      “What do you mean my paycheck isn’t in my account?” I don’t see that working too well …
tenpies 4y ago
> 1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. It's not just the banks either. In most Western countries, the pension funds are highly incentivised (usually through law) to purchase government debt in some form. This is also part of the fuss on the ESG investment bill that Biden recently vetoed. The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost, and any ESG, DIE, and SDG agendas secondly (or thirdly, or lastly). Why do this? It's financial repression[1]. By channeling private funds into government debt or agenda-driven endeavours, it allows the government and those endeavours to borrow at much cheaper rates than they should be able to. --- [1] https://www.investopedia.com/terms/f/financial-repression.asp https://www.investopedia.com/terms/f/financial-repression.as...
- jquery 4y ago
  > The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost No, the intent was to make sure ESG and other factors could not be analyzed as a risk factor, when they plainly are risk factors, just inconvenient risk factors that oil lobbyists and the like would rather you didn't pay attention to. Biden did the right thing, and ensured pension/fund managers kept their independence.
thedangler 4y ago
You are forgetting all the risky investments short selling and swaps.
- mianos 4y ago
  Funny thing is swaps are sold on the back of bonds, whose holders are prepared to lose when the market interest drops to keep the capital value stable. They are the exact instrument that protects bond holders against the above scenario, over the long term.
75dvtwin 4y ago
@nostromo -- you are exactly correct. The US Fed govnt policies caused inflation, now trying to cool it down through raising interest rates on govn bonds. So investors that were buying commericial bonds, now go and buy govnt bonds. Then, the commercial bonds (for good sound companies), loose values. Then commercial bonds investors loose their investment... So the loose-loose sitation were are looking at: a) continue printing money out of thin air -- raising inflation and indebting the generation of kids who do not even vote yet b) get the current economy go into depression. It seems like the current generation, with their choices of leadership and the habits is responsible -- so ( b ) has to be chosen (to be fair). But since we do not live in the world where accountability is a thing -- ( a ) will be selected.
- quonn 4y ago
  The argument with the kids is really bullshit. I‘ve heard it again and again in different contexts. As if anyone could know how the short term economy will affect the kids. As if the kids would only start living in their 30s and the experience of poverty in childhood would be nothing. As if the economy would be a fixed thing that could be predicted for a few decades in advance.
csomar 4y ago
This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time. Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades. Here is an article I wrote in 2020 that explores that volatility, though from another angle: https://omarabid.com/zero-rates-world https://omarabid.com/zero-rates-world Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up! Here is a quote from that article in 2020: > Maybe, but it's also possible that these high prices are here to stay. I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however. > now finding itself both tightening and loosening fiscal policy simultaneously Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
- jefftk 4y ago
  > Some people are losing their deposits and some are not No one has lost their deposits yet: I can't tell whether you are inaccurately describing the status quo, or making a prediction?
- harry8 4y ago
  > Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday. Big call. Huge. Got some data or similar to back it? Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1] [1] https://www.theguardian.com/business/2021/jan/01/janet-yellen-speaking-fees-us-treasury-secretary https://www.theguardian.com/business/2021/jan/01/janet-yelle...
  - csomar 4y ago
bushbaba 4y ago
The Covid liquidity injections will be known as the worst decision of a generation. PPP loans were greater than student loan forgiveness for all. Greater than the new deal cost. Such a missed opportunity.
- refurb 4y ago
  There were economists warning back in 2008-2010 the dangers of it. Despite the Fed being “independent” they are under enormous pressure from the government. The prediction was that when it was time to stop printing money the Fed wont do it fast enough since the political pressure to keep the economy going will be too high. Pretty much exactly what happened.
  - theowawayfed 4y ago
    Nah. Fed president of that time was stupid enough to continue QE until 2014
- euix 4y ago
  I think without the stimmy checks, loan deferments, liquidity injection, etc the lockdowns could not have been implemented, so many people lost their jobs or couldn't get revenue, the only way to keep them somewhat compliant was a bribe. Could you imagine telling people not to show up for work for months and not sending them any money/compensation? That would be a rebellion. Remember, in the beginning of the pandemic staying home was a lot of fun, especially if you had a corporate job that was now operating out of your PJs, the stock market mania was a real time source of entertainment. I know small business owners who were not retail facing who just working right through the pandemic lockdowns without stop because they couldn't afford to stop operations.
albertopv 4y ago
2. is wrong, we had years of central banks money printing without inflation, recovery from Covid19 and the war are the reasons of this high inflation. Actually Fed real error has been raising rates to counter an inflation not caused by monetary policies. SVB put all their investments in one bucket and it has been a very poor decision, really a rookie one
- refurb 4y ago
  Inflation started going up before Covid and the war in Ukraine. Saying “the central bank printed money for years without inflation” as proof it’s not the cause is like saying a gas leak didnt cause the explosion because it’s been leaking for years.
  - albertopv 4y ago
    Maybe you are misinformed: https://en.wikipedia.org/wiki/2021%E2%80%932023_inflation_surge?wprov=sfla1 https://en.wikipedia.org/wiki/2021%E2%80%932023_inflation_su...
    - deleted 4y ago
      [deleted]
    - refurb 4y ago
      Looks at when the trend started. Early 2020.
- NotACop182 4y ago
  Lots point to Covid-19 ppp and spending to be the cause of inflation. When the majority is supply chain and corporate opportunist. Great interview with Jon Stewart ad fed chair here: https://youtu.be/tU3rGFyN5uQ https://youtu.be/tU3rGFyN5uQ
- aaa_aaa 4y ago
  This is false. Just look at amount of money pumped, it is easy to see the skyrocketing line in graphs. It is not the only but the main reason of inflation.
pauljurczak 4y ago
> it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. It printed too much money in 2008 and the following years. It raises rates very quickly now, because each time Fed tried to raise the interest rates or reduce their balance sheet after 2008, the political pressure made them backtrack. This Frontline documentary has a pretty good take on it: https://youtu.be/EpMLAQbSYAw https://youtu.be/EpMLAQbSYAw.
- cudgy 4y ago
  > the political pressure made them backtrack Wasn’t the fed created to some extent to prevent political will from whipsawing the credit markets? How did the politicians force the fed? Isn’t this expected? The fed did it to themselves.
dboreham 4y ago
HTM assets aren't supposed to be sold before maturity. So the problem must be they held too few liquid assets to support deposit outflows. In turn that must either be due to asset mix not being consistent with predicted deposit flows, or actual deposit flows not being as predicted.
vxNsr 4y ago
This is all gonna get brushed under the rug by most journalists because of the political party that supported most of this mess.
- mort96 4y ago
  Huh? This seems like very much a bipartisan thing.
- christophilus 4y ago
  Both parties supported reckless Fed interventions in both 2008/9 and in 2019-23. Remember Trump haranguing Powell? Trump was trying to pressure Powell into keeping the economy running hot. We need a new party. Preferably, one that has some notion of basic economics.
- theowawayfed 4y ago
  All did their best
mo_42 4y ago
> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. Printing money doesn’t cause inflation necessarily. Your thinking is based on Monetarism, which has been debunked a while ago. In essence, it’s not about the amount of money that is created. It's about the amount of goods we try to consume in relation to the amount of goods produced.
- RangerScience 4y ago
  There's a pretty excellent and rather indie board game called "Wealth of Nations". If you squint, it's a bit like what you wish Catan was, after you've played Catan for awhile. Players make resources, then re-invest those resources to expand. There's markets to buy and sell resources, and otherwise money isn't part of the game... until someone makes banks, and starts printing money. At which point everyone watches the prices of everything go up. It's a pretty cool microcosm.
- puzzlingcaptcha 4y ago
  How do you debunk a theory in a field that doesn't allow for a hypothesis to be tested? Economics is just navel-gazing.
  - hanselot 4y ago
    The same way you prebunk things in our modern world. If the information does not fit the narrative, the information must be fake... How else will we ensure the safety of our elections and democracy? Don't you know democracy dies in the dark? Don't you know that this is extremely dangerous for our democracy? Edit: BTW, nothing against what you said, economics seems very similar to the Agile cult to me at this point.
  - mo_42 4y ago
    As in any other scientific field: you put forward a theory and if there is enough evidence that does not fit the theory it’s debunked. In economics, "enough" is hard to assess though. Also, a theory may linger around for a while because it suits the agenda of some people. And I guess many more methodical issues like these.
cudgy 4y ago
Two words … bond ladder. Stagger maturities to meet reasonably expected distributions and interest rate trends. Basic financial management 101.
- brewdad 4y ago
  Until your depositors want 25% of all the deposits your bank holds in less than 24 hours. For all of the missteps SVB made, there isn’t a bank on the planet that can survive that.
  - cudgy 4y ago
    Did you forget? There is a reason that all depositors would want their money in 24 hours … they realized that the bank was mismanaged and overly exposed to the interest rate risk, and they were only insured for $250k.
- SkyMarshal 4y ago
  “reasonably expected” works 99% of the time and then completely implodes 1% of the time. It’s like building a seawall to protect against the next tsunami, and measuring the height of the seawall based on the worst past tsunami. But the worst past tsunami was completely unpredictable prior to it happening, based on all the lesser tsunamis that had come before it. And the future worst tsunami will be by definition worse than the past worst tsunami and similarly unpredictable based on all the lesser past ones.
  - cudgy 4y ago
    Interest rates being near 0% would create the most easily predictable risk of a calamity from investing in long-term bonds. Where else do interest rates go? Going negative is not likely to happen for long. Furthermore, the bond yield was inverted for quite some time (indicating a financial tsunami was on the way) making it even more idiotic to be in long-term treasuries. Also, building walls against physical forces is a terrible analogy for pressing a button to change your bond ladder risk.
tigershark 4y ago
Your view of the story is completely flawed. Your first point is false. There is no regulation that forces banks to buy long term government bonds. There is some regulation that forces them to have a certain percentage of capital tier 1 to safeguard themselves from bank runs, but it was repealed in 2018 by trump for “regional” banks and SVB CEO lobbied strongly for it for years and was ecstatic when it finally happened: https://www.theguardian.com/business/2023/mar/11/silicon-valley-bank-weaken-risk-regulations-svb https://www.theguardian.com/business/2023/mar/11/silicon-val... .
qikInNdOutReply 4y ago
> 6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously. https://en.wikipedia.org/wiki/PID_controller https://en.wikipedia.org/wiki/PID_controller Its time to get this plant swinging.
mrbombastic 4y ago
I buy this outline but honest question, was the massive covid stimulus avoidable? I rode a bicycle around NYC during the early days of covid and it was a ghost town, like not a person on the streets in a city of 8 million. On the weekend I took a ride up state for a hike and virtually every business was closed on the way. It seemed inevitable at that point the economic consequences of this were going to be massive and I am kind of amazed it took this long. It feels easy to say these steps got us in this mess but I am wondering what the alternative was?
- groestl 4y ago
  > I am wondering what the alternative was? When an economy stops producing services and goods, somebody is going to need to reduce their consumption of said goods eventually. The question is just, who that is. Another poster above mentioned three ways a government can balance their budget: spending less, raising more, decreasing real value of debt by inflation. Each of those has a target "audience", which suffers the most when pulling that lever. For inflation (if not combined with compulsory loans), it's the middle class. Pick your poison.
  - makomk 4y ago
    The trouble is that a large chunk of the media has basically lied about this and told people that no, they'd be able to consume just as much as before if it wasn't for the evil profiteering corporations and the mega-rich stealing from them. They've done things like point to the increase in wealth of the super-rich "during the pandemic" to prove that ordinary people have become poorer because the money they deserve was "siphoned off" (never mind the fact that wealth does not represent services and goods that are available to buy and their measurements conveniently start at the bottom of the pandemic-induced drop in share prices) or run breathless headlines about how profits at grocery stores have doubled and this proves profiteering is responsible for price increases when the profit margins of those companies goes from 1% to 2%.
    - geysersam 4y ago
      Fact remains that wealth inequality has increased enormously over the last decades. This is a big economic issue that deserves journalistic coverage. If you don't want to frame it in terms of "evil" or "profiteering" that's fine. But this issue is important. The expected consequence of inequality is reduced economic output (in terms of utility). It leads to inefficiency. I feel this is a perspective that's not stressed enough.
pibechorro 4y ago
Central, top down control of the economy by political entities is a recepy for graft and disaster. Its a complex emergent system, you pull one string and changes propagate far and deep in unpredictable ways.
mschuster91 4y ago
> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. The cause of the inflation is not a classic spiral, it's profiteering especially on the side of fossil fuel producers and in retail. > 5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under. It's not "a bunch of VCs", it's "GQP-allied Peter Thiel wants to see the world burn just to create additional mess for the Biden gov't and causes a bank run". The SVB crisis only picked up speed when Thiel advised all his startups to pull out their money, thus causing the bank run. > SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis. Without the "excessive" stimulus packages, economies across the Western nations would have been devastated by Covid. It was bad enough with the stimulus packages, I don't even want to imagine how it would have turned out without them.
- censor_me 4y ago
  [dead]
- theowawayfed 4y ago
  Yea. Depositors should never try to take their money out. How dare they ask their money back.
  - mschuster91 4y ago
    It's one thing to take your money out. It's another thing to sound a bullhorn and make everyone rush to take their money out, because that will overwhelm any bank. What Thiel did was beyond irresponsible. He should be criminally tried.
    - slibhb 4y ago
      I don't totally disagree with you that his behavior was irresponsible but under what law would he be tried?
dsomers 4y ago
> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. This is because they fucked up their duration risk handling, no one held a gun to SVBs head and forced them to invest so heavily in long duration bonds. If they bought more short duration bonds none of this would be a problem. Other banks didn’t make this mistake. So why did they do it? Greed, or who knows, maybe it was plain old ignorance/hubris. Still, it was 100% avoidable. SVB fucked up bad and pointing blame at the fed is just not making them accountable. Like fuck, who are these dumb chimps running this place. When I help my parents plan their retirement I looked at 100 years of history of what normal fluctuations are in the bond or stock market. Looking up data like that takes an hour and should make anyone with basic math skills realize rate and the bond fluctuations that follow at 100% bound to happen given enough time. It was just absolute amateur hour at SVB.
- newaccount2023 4y ago
  exactly! even more amateur single investors know better than to bet the farm on ten year notes when rates are exceptionally low SVB wasn't even operating at the level of the typical individual investor!
- unyttigfjelltol 4y ago
  Maybe, but the latest Fed action violates a 40-year downtrend in interest rates, so it was exceptionally improbable from a historical perspective. From 2020 trough to 2022 peak, government interest rates increased almost 1,000%, which means the magnitude also is hard to anticipate or plan for, and the effects extreme from failing to do so. You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend. I don't make excuses for dumb decisions, but... someone said recently when the Fed taps the brakes someone always goes through the windshield. This was a far more extreme scenario than tapping the brakes on a car. More like the moon stopped. We all knew it could theoretically, and what do you know, it just stopped.
  - qwytw 4y ago
watwut 4y ago
> SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis. It is other way round. Majority of issue is on SVB side. Feds are not charged with running SVB nor hedging their risks.
iSnow 4y ago
Well, it points to abysmal risk-management by SVB. The rate rise was announced in late 2021, so banks should have taken some losses and sold the low-yield treasuries and increasingly bought higher yielding ones. It also seems to me SVB used an exemption from Basel III(). Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable, which is why SVG opted out. So they are now in the "find out" phase of fuck around and find out. I really have no sympathy for the way the US banking lobby bribes politics to get exemptions and the cowboy attitude of their "regional banks". Now, everybody is very sorry and promises to improve and once the storm has died down, they will continue to work like that. https://on.ft.com/3ywMURD https://on.ft.com/3ywMURD (google for "Silicon Valley Bank is a very American mess" to sidestep their paywall)
DebtDeflation 4y ago
I'm getting tired of the "those Treasury bonds they bought are completely safe, if they just wait 10+ years until maturity, they will get 100% of their principal back" narrative. There are MANY different types of risk. Credit risk is but one type, and that narrative tries to convince people that it is the ONLY type of risk. In this example, you have both interest rate risk (price of an existing bond moves inversely to interest rates) and maturity risk (long term assets funded by short term liabilities). Risk can be hedged, and it is prudent to do so, but hedging costs money which eats into profit, so in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. I suspect that over the course of the next year we'll see more cracks emerge in the financial system, additional financial institutions fail, and a new narrative that will have to be created.
- AnimalMuppet 4y ago
  > in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. Just as everyone started talking about inflation coming back? Just as it began showing up in the actual data? That's when they deliberately decided to stop hedging? That's insane. "Deserves to lose" is the only non-profane way I know of expressing how incredibly unwise that decision was. And maybe how immoral. They may have made that decision then because everyone could see inflation coming, and therefore the price of hedging the risk went up. If so, they threw away the bank (and the stockholders' money) for one year's increased profit. Madness.
systemvoltage 4y ago
I think the blame squarly lies on 2). Sweden and Florida didn't follow the Science™ and instead followed reason, rationale and logic. The rest of the country was obessesed over lockdowns, especially those on the political left. It was a religion of HN. These are policy failures on all fronts - from monetary to public health.
- quonn 4y ago
  Sweden failed miserably as is now commonly accepted.
  - systemvoltage 4y ago
    Depends on how you define failure. If the goal is set for zero Covid policy then yes, Swedes failed. But so did everyone else in addition to drastic measures such as recommending vax for 3 year olds.
l33tman 4y ago
Instead of explicitly bailing out banks why can't the government in this situation change the rules of the government bonds for the specific bank to let them mature today instead of at the nominal time? Or this is maybe how they do the bailout..
sgjohnson 4y ago
3. this is also why they are required to hold swaps as a hedge.
itsoktocry 4y ago
>The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. They don't require it, it is the safest investment. What do you consider a safer investment? >Oops, they're not so safe after all if you need your money back before maturity, Golly, it's almost like banks are supposed to know how this stuff works. It's funny that you relate "safe" to "never changes price". The bonds were safe and are safe, which is why the "bailout" is an okay deal (ethics aside); the government will pay your money back. >SVB is certainly not blameless here Who on this planet would consider them blameless? They are 95% of the blame of their own situation.
deleted 4y ago
[deleted]
friendzis 4y ago
> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. This is not what safety of investment is, by any stretch of imagination. The yield of investment is nominal returns times weighted probability of that nominal return being lower. Government bonds are near zero risk of not being honored. The risk you talk about is inherent in long assets + short liabilities and has very little to do with issuing body of the bond.
user3939382 4y ago
Let’s talk about the out of control military spending wayyy before the stimulus.
- timcavel 4y ago
  [dead]
bluecalm 4y ago
I don't think there is any basis to say too much money printing caused inflation. There were many countries with even lower rates for many years and no inflation to speak of to the point of it becaming problematic. What caused this wave of inflation was supply taking a hit. Fallout from COVID and then war in Ukraine. It was difficult to get many good which normally were easily available. It's not rocket science either: inflation is about always caused by falling demand. It doesn't matter how much the government prints. When bread is hard to get people will exchange a lot to get a loaf. If anything it seems like overreaction by the feds to raise the rates so much. It's not like them reducing access to capital magically makes goods appear on the shelves.
netcan 4y ago
I disagree with everything but the conclusion. I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that... in this case. I don't think the particular path matters much. People tend to moralize banking, and post failure we tend to hunt for moral culprits. But... the historical fact is that banks fail sometimes, under all possible regulatory and commercial regimes. We have hundreds of years worth of evidence. Banks have failure scenarios. The concept of a bank which takes deposits and invests them while maintaining 0% risk to depositors does not, and has never existed. We need to decide if money in the bank proverbial gold, or is it more like shares in a company? We just can't have both.
- slowturtle 4y ago
  > I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that.. The rate increases were an attempt to combat the inflation caused by the massive increase in money supply during the pandemic due to the government stimulus. There were no new goods or services justifying all the stimulated activity. SVB was drunk on the seemingly permanent zero interest rates (like everyone else) and invested in long term government bonds. Then the unthinkable happens—rate increases for the first time in over a decade, and those investments go boom. This is all about people getting used to cheap money.
- grecy 4y ago
  > I'm dubious that the "Fed's money printer" had much of an effect on inflation In all of modern history around the world when has printing more money not resulted in inflation. Let's look at Zimbabwe and other countries that went nuts printing money.
spaceman_2020 4y ago
From the panicked, rushed lockdowns to the massive money printing, it’s been one bad policy error after another. All the pandemic showed us is how ill-equipped we really are to deal with an actual challenge, from individual people to policymakers. The last 3 years have been so devoid of any basic rationality across the board.
cies 4y ago
All comes down to the "too big to fail" problem. 7. In order to inject "massive liquidity into banks" more money is printed. 8. GOTO 2 but for different years.
nonethewiser 4y ago
> The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. Just to be clear, this is finance 101. Its not a surprise. Having to sell treasuries at this time was the surprise.
pixelmonkey 4y ago
Your analysis is missing this critical piece: duration risk. The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries. In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration). Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this. Some banks were simply greedy, lazy, or both (SVB). It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine. I think the big lesson is that the banking industry isn't nearly as smart and self-regulating as many people think it is. Bank finance departments either chase yield, when they can (2021), or they manufacture it, when they can't (2007-2008).
- evantbyrne 4y ago
  Exactly. I was speaking with my attorney about this the other day because he also advises numerous banks. He explained to me that balancing short and long term investments to handle withdrawals is a basic aspect of modern banking, and SVB should not be viewed as a signal of a more widespread bank collapse.
Spooky23 4y ago
SVB leveraged cozy relationships to attract business than they could handle. They ignored compliance and normal banking risks. They left their C level risk management position open and we’re not transparent about their fiscal health. Rate risk is a key feature to buying any bond, and it’s a risk that is manageable if management isn’t asleep at the switch. Nobody forced SVB to buy long duration bonds. Any investor with a moderate level of expertise understands that, and you’d have to be pretty green to not expect rate increases from the all time lows. Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly.
- polygamous_bat 4y ago
  > Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly. Somehow I feel that blaming the government is much more than a cop-out; it's a calculated position that enables the big players to continue privatizing the wins and socializing the losses. "Of course we are getting a bailout", the narrative goes, "cause it was the big government's fault all along!"
  - Spooky23 4y ago
    Of course. Outside of academia and some law schools, there’s no real conservatives. These guys will cry and whine for bailouts, cash the check and start crying and whining about government meddling.
mromanuk 4y ago
It's possible that they have already reaped the profits and are now saddling the banks with debt, leaving the burden on the people.
Mizoguchi 4y ago
I think SVB case was atypical in the sense that while being the 16th biggest bank in the country their largest accounts were owned by a few VCs that (figuratively) grew up on the same street. So it took just one guy to make a call for the panic to spread in town like a wildfire. It was only 36 hours from that first call to when SVB was gone.
dsfyu404ed 4y ago
The people in step 5 have a huge incentive to make it look like the fed is wrong to raise rate because their monopoly money fueled dumpster fire of an industry only "works" when rates are low. I'm not alleging conspiracy, I don't think these people are competent enough to actually conspire. But the incentive to pull your money out knowing that it makes others more likely to follow and that if the bank keels over the failure mode makes policy you don't like look bad is definitely there.
bradDonniger 4y ago
The worst thing about takes like this is it assumes none of the bankers and government officials communicate. It sets up this nice and tidy semantic bubble that ignores the messy reality of these folks socializing together. Just because the paperwork is in order does not mean these people do not collude and influence each others emotions to empower themselves and just legislate their mess away or get bailed out. Collectivist and socialist in their nature and choices. You and I though? Subject to the whims of the “free market”. Your entire finance system is a joke because your society and culture are a joke. We keep taking marching orders from post-war shellshocked, Cold War paranoids, leaded gas huffers in the Boomers and GenX. 2000, 2008, and again here we go eating their shit. We coddle people who cannot grow a potato for themselves. What are octogenarians and their progeny whose only skill set in life is “inherit dads imaginary money?” going to do if we quit logging in and showing up?
ren_engineer 4y ago
I find it amusing how far away from capitalism the Fed is, it's literally the opposite of a free market. Instead it's a communist style central planning committee made of "the smartest guys in the room" making decisions that impact the entire economy. Why is anybody shocked they made a mess of things?
jasmer 4y ago
I'm sorry but I think you missed something a bit relevant aka 'Global Pandemic' which literally shut down massive swaths of the global economy, and was materially the biggest extant shock to the US economy probaby ever. And I mean ever, except for literally the Civil War, and maybe but not really the Opec crisis. Ok maybe the war of 1812. Historically, we would have just 'let people die' and work through it, but this time we want to react and try to save lives so we shut stuff down, but it's existentially damaging. Hence money printing.
tablespoon 4y ago
I think you're being a bit misleading. It's not some issue related to government bonds specifically, it's about long-term bonds generally. IIRC, SVB went under because it took up a large position in long term mortgage-backed securities not treasuries. If it had instead invested in short-term treasuries, it would have been fine. Government debt is the safest, and if you buy any other kind of debt, you'll want to be paid a premium for the extra risk you're taking. If interest rates are going up, you don't want all your money in long-term bonds.
slt2021 4y ago
>>because it's considered the safest investment you are wrong right at the first step. there is credit risk (risk of default) and for this risk, treasuries are still considered safest. then, there is duration risk (risk of interest rates increasing) - and this risk has always been there. Bankers know about these risks, it is just they were greedy and decided to go for the highest yielding MBS, instead of short-term securities. => and obviously banks suffered consequences. for bankers this is Banking 101 One can argue that what is going on right now is market forces punishing the most greedy bankers (SVB, Debit suisse, etc)
Cyberthal 4y ago
It's almost like the government shouldn't be trusted with a monopoly on money.

geysersam 4y ago

> 1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. What do you mean by this? No one forced them to invest in bonds and not hedge against raising interest rates.

ClumsyPilot 4y ago
The while posts makes out banks to be victims. Supposedly they have no agency. Bank lives matter!

uejfiweun 4y ago

Yeah, it's kind of infuriating, and even more infuriating is the fact that at the first sign of trouble they are gonna turn the printer back on. The alternative is a major recession, which obviously sucks, but sometimes forest fires are necessary to make way for new growth. Without the necessary pain of a recession, our economy is doomed to continue in this bizarre state of zombie companies, asset bubbles, and scams.

gen220 4y ago

Does the government require banks to buy long-term treasuries? [1] Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e. discounting the risk of potential rising interest rates in the future)? It's not a rhetorical question, but a sincere one. [1]: https://en.wikipedia.org/wiki/United_States_Treasury_security https://en.wikipedia.org/wiki/United_States_Treasury_securit... states that Treasuries are sold in all varieties of duration, from 4 week bills to 30 year bonds.

bombcar 4y ago
They bought the greediest ones and ignored TIPS. They wanted profit.
simple-thoughts 4y ago
Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt. Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day. Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
- User23 4y ago
  > Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
  - 4y ago

7e 4y ago

1. Why is cash parked at the Fed not an option?

jkhdigital 4y ago
The article mentions the real core of the issue, but doesn’t make it clear that it is in fact the core: SLR (a banking regulation). SLR effectively requires banks to raise capital along with deposits. So if you flood the banking system with cash through fiscal policy, they can’t just accept all those deposits and leave them parked in their Fed reserve account. If they could, then the Fed wouldn’t need reverse repo—it could just pay interest on reserves to set a floor on interbank lending rates.
- 7e 4y ago
  If capital is too risky to raise, why can’t a bank refuse deposits?
  - lmm 4y ago
    That would at the very least be unpopular with their customers, if not outright illegal. What would it look like to be a customer at a bank that did that? Especially for something like SVB - your startup closes its funding round, they wire the money to your bank account, and the bank refuses it?
    - wahern 4y ago
      SVB lobbied for a law that changed a crucial regulatory threshold from $50 billion to $250 billion. From ~2016 to ~2020 their assets jumped from <$50 billion to >$200 billion, with most of that happening from 2020 to 2022. SVB was perfectly capable of restricting the total amount of assets it held. It wasn't a matter of rejecting small deposits; it was a matter of allowing (or rather, soliciting) huge clients to open new accounts to hold hundreds of millions or billions in assets.
  - withinboredom 4y ago
    “What do you mean my paycheck isn’t in my account?” I don’t see that working too well …

tenpies 4y ago

> 1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. It's not just the banks either. In most Western countries, the pension funds are highly incentivised (usually through law) to purchase government debt in some form. This is also part of the fuss on the ESG investment bill that Biden recently vetoed. The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost, and any ESG, DIE, and SDG agendas secondly (or thirdly, or lastly). Why do this? It's financial repression[1]. By channeling private funds into government debt or agenda-driven endeavours, it allows the government and those endeavours to borrow at much cheaper rates than they should be able to. --- [1] https://www.investopedia.com/terms/f/financial-repression.asp https://www.investopedia.com/terms/f/financial-repression.as...

jquery 4y ago
> The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost No, the intent was to make sure ESG and other factors could not be analyzed as a risk factor, when they plainly are risk factors, just inconvenient risk factors that oil lobbyists and the like would rather you didn't pay attention to. Biden did the right thing, and ensured pension/fund managers kept their independence.

thedangler 4y ago

You are forgetting all the risky investments short selling and swaps.

mianos 4y ago
Funny thing is swaps are sold on the back of bonds, whose holders are prepared to lose when the market interest drops to keep the capital value stable. They are the exact instrument that protects bond holders against the above scenario, over the long term.

75dvtwin 4y ago

@nostromo -- you are exactly correct. The US Fed govnt policies caused inflation, now trying to cool it down through raising interest rates on govn bonds. So investors that were buying commericial bonds, now go and buy govnt bonds. Then, the commercial bonds (for good sound companies), loose values. Then commercial bonds investors loose their investment... So the loose-loose sitation were are looking at: a) continue printing money out of thin air -- raising inflation and indebting the generation of kids who do not even vote yet b) get the current economy go into depression. It seems like the current generation, with their choices of leadership and the habits is responsible -- so ( b ) has to be chosen (to be fair). But since we do not live in the world where accountability is a thing -- ( a ) will be selected.

quonn 4y ago
The argument with the kids is really bullshit. I‘ve heard it again and again in different contexts. As if anyone could know how the short term economy will affect the kids. As if the kids would only start living in their 30s and the experience of poverty in childhood would be nothing. As if the economy would be a fixed thing that could be predicted for a few decades in advance.

csomar 4y ago

This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time. Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades. Here is an article I wrote in 2020 that explores that volatility, though from another angle: https://omarabid.com/zero-rates-world https://omarabid.com/zero-rates-world Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up! Here is a quote from that article in 2020: > Maybe, but it's also possible that these high prices are here to stay. I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however. > now finding itself both tightening and loosening fiscal policy simultaneously Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.

jefftk 4y ago
> Some people are losing their deposits and some are not No one has lost their deposits yet: I can't tell whether you are inaccurately describing the status quo, or making a prediction?
harry8 4y ago
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday. Big call. Huge. Got some data or similar to back it? Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1] [1] https://www.theguardian.com/business/2021/jan/01/janet-yellen-speaking-fees-us-treasury-secretary https://www.theguardian.com/business/2021/jan/01/janet-yelle...
- csomar 4y ago

bushbaba 4y ago

The Covid liquidity injections will be known as the worst decision of a generation. PPP loans were greater than student loan forgiveness for all. Greater than the new deal cost. Such a missed opportunity.

refurb 4y ago
There were economists warning back in 2008-2010 the dangers of it. Despite the Fed being “independent” they are under enormous pressure from the government. The prediction was that when it was time to stop printing money the Fed wont do it fast enough since the political pressure to keep the economy going will be too high. Pretty much exactly what happened.
- theowawayfed 4y ago
  Nah. Fed president of that time was stupid enough to continue QE until 2014
euix 4y ago
I think without the stimmy checks, loan deferments, liquidity injection, etc the lockdowns could not have been implemented, so many people lost their jobs or couldn't get revenue, the only way to keep them somewhat compliant was a bribe. Could you imagine telling people not to show up for work for months and not sending them any money/compensation? That would be a rebellion. Remember, in the beginning of the pandemic staying home was a lot of fun, especially if you had a corporate job that was now operating out of your PJs, the stock market mania was a real time source of entertainment. I know small business owners who were not retail facing who just working right through the pandemic lockdowns without stop because they couldn't afford to stop operations.

albertopv 4y ago

2. is wrong, we had years of central banks money printing without inflation, recovery from Covid19 and the war are the reasons of this high inflation. Actually Fed real error has been raising rates to counter an inflation not caused by monetary policies. SVB put all their investments in one bucket and it has been a very poor decision, really a rookie one

refurb 4y ago
Inflation started going up before Covid and the war in Ukraine. Saying “the central bank printed money for years without inflation” as proof it’s not the cause is like saying a gas leak didnt cause the explosion because it’s been leaking for years.
- albertopv 4y ago
  Maybe you are misinformed: https://en.wikipedia.org/wiki/2021%E2%80%932023_inflation_surge?wprov=sfla1 https://en.wikipedia.org/wiki/2021%E2%80%932023_inflation_su...
  - deleted 4y ago
    [deleted]
  - refurb 4y ago
    Looks at when the trend started. Early 2020.
NotACop182 4y ago
Lots point to Covid-19 ppp and spending to be the cause of inflation. When the majority is supply chain and corporate opportunist. Great interview with Jon Stewart ad fed chair here: https://youtu.be/tU3rGFyN5uQ https://youtu.be/tU3rGFyN5uQ
aaa_aaa 4y ago
This is false. Just look at amount of money pumped, it is easy to see the skyrocketing line in graphs. It is not the only but the main reason of inflation.

pauljurczak 4y ago

> it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. It printed too much money in 2008 and the following years. It raises rates very quickly now, because each time Fed tried to raise the interest rates or reduce their balance sheet after 2008, the political pressure made them backtrack. This Frontline documentary has a pretty good take on it: https://youtu.be/EpMLAQbSYAw https://youtu.be/EpMLAQbSYAw.

cudgy 4y ago
> the political pressure made them backtrack Wasn’t the fed created to some extent to prevent political will from whipsawing the credit markets? How did the politicians force the fed? Isn’t this expected? The fed did it to themselves.

dboreham 4y ago

HTM assets aren't supposed to be sold before maturity. So the problem must be they held too few liquid assets to support deposit outflows. In turn that must either be due to asset mix not being consistent with predicted deposit flows, or actual deposit flows not being as predicted.

vxNsr 4y ago

This is all gonna get brushed under the rug by most journalists because of the political party that supported most of this mess.

mort96 4y ago
Huh? This seems like very much a bipartisan thing.
christophilus 4y ago
Both parties supported reckless Fed interventions in both 2008/9 and in 2019-23. Remember Trump haranguing Powell? Trump was trying to pressure Powell into keeping the economy running hot. We need a new party. Preferably, one that has some notion of basic economics.
theowawayfed 4y ago
All did their best

mo_42 4y ago

> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. Printing money doesn’t cause inflation necessarily. Your thinking is based on Monetarism, which has been debunked a while ago. In essence, it’s not about the amount of money that is created. It's about the amount of goods we try to consume in relation to the amount of goods produced.

RangerScience 4y ago
There's a pretty excellent and rather indie board game called "Wealth of Nations". If you squint, it's a bit like what you wish Catan was, after you've played Catan for awhile. Players make resources, then re-invest those resources to expand. There's markets to buy and sell resources, and otherwise money isn't part of the game... until someone makes banks, and starts printing money. At which point everyone watches the prices of everything go up. It's a pretty cool microcosm.
puzzlingcaptcha 4y ago
How do you debunk a theory in a field that doesn't allow for a hypothesis to be tested? Economics is just navel-gazing.
- hanselot 4y ago
  The same way you prebunk things in our modern world. If the information does not fit the narrative, the information must be fake... How else will we ensure the safety of our elections and democracy? Don't you know democracy dies in the dark? Don't you know that this is extremely dangerous for our democracy? Edit: BTW, nothing against what you said, economics seems very similar to the Agile cult to me at this point.
- mo_42 4y ago
  As in any other scientific field: you put forward a theory and if there is enough evidence that does not fit the theory it’s debunked. In economics, "enough" is hard to assess though. Also, a theory may linger around for a while because it suits the agenda of some people. And I guess many more methodical issues like these.

cudgy 4y ago

Two words … bond ladder. Stagger maturities to meet reasonably expected distributions and interest rate trends. Basic financial management 101.

brewdad 4y ago
Until your depositors want 25% of all the deposits your bank holds in less than 24 hours. For all of the missteps SVB made, there isn’t a bank on the planet that can survive that.
- cudgy 4y ago
  Did you forget? There is a reason that all depositors would want their money in 24 hours … they realized that the bank was mismanaged and overly exposed to the interest rate risk, and they were only insured for $250k.
SkyMarshal 4y ago
“reasonably expected” works 99% of the time and then completely implodes 1% of the time. It’s like building a seawall to protect against the next tsunami, and measuring the height of the seawall based on the worst past tsunami. But the worst past tsunami was completely unpredictable prior to it happening, based on all the lesser tsunamis that had come before it. And the future worst tsunami will be by definition worse than the past worst tsunami and similarly unpredictable based on all the lesser past ones.
- cudgy 4y ago
  Interest rates being near 0% would create the most easily predictable risk of a calamity from investing in long-term bonds. Where else do interest rates go? Going negative is not likely to happen for long. Furthermore, the bond yield was inverted for quite some time (indicating a financial tsunami was on the way) making it even more idiotic to be in long-term treasuries. Also, building walls against physical forces is a terrible analogy for pressing a button to change your bond ladder risk.

tigershark 4y ago

Your view of the story is completely flawed. Your first point is false. There is no regulation that forces banks to buy long term government bonds. There is some regulation that forces them to have a certain percentage of capital tier 1 to safeguard themselves from bank runs, but it was repealed in 2018 by trump for “regional” banks and SVB CEO lobbied strongly for it for years and was ecstatic when it finally happened: https://www.theguardian.com/business/2023/mar/11/silicon-valley-bank-weaken-risk-regulations-svb https://www.theguardian.com/business/2023/mar/11/silicon-val... .

qikInNdOutReply 4y ago

> 6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously. https://en.wikipedia.org/wiki/PID_controller https://en.wikipedia.org/wiki/PID_controller Its time to get this plant swinging.

mrbombastic 4y ago

I buy this outline but honest question, was the massive covid stimulus avoidable? I rode a bicycle around NYC during the early days of covid and it was a ghost town, like not a person on the streets in a city of 8 million. On the weekend I took a ride up state for a hike and virtually every business was closed on the way. It seemed inevitable at that point the economic consequences of this were going to be massive and I am kind of amazed it took this long. It feels easy to say these steps got us in this mess but I am wondering what the alternative was?

groestl 4y ago
> I am wondering what the alternative was? When an economy stops producing services and goods, somebody is going to need to reduce their consumption of said goods eventually. The question is just, who that is. Another poster above mentioned three ways a government can balance their budget: spending less, raising more, decreasing real value of debt by inflation. Each of those has a target "audience", which suffers the most when pulling that lever. For inflation (if not combined with compulsory loans), it's the middle class. Pick your poison.
- makomk 4y ago
  The trouble is that a large chunk of the media has basically lied about this and told people that no, they'd be able to consume just as much as before if it wasn't for the evil profiteering corporations and the mega-rich stealing from them. They've done things like point to the increase in wealth of the super-rich "during the pandemic" to prove that ordinary people have become poorer because the money they deserve was "siphoned off" (never mind the fact that wealth does not represent services and goods that are available to buy and their measurements conveniently start at the bottom of the pandemic-induced drop in share prices) or run breathless headlines about how profits at grocery stores have doubled and this proves profiteering is responsible for price increases when the profit margins of those companies goes from 1% to 2%.
  - geysersam 4y ago
    Fact remains that wealth inequality has increased enormously over the last decades. This is a big economic issue that deserves journalistic coverage. If you don't want to frame it in terms of "evil" or "profiteering" that's fine. But this issue is important. The expected consequence of inequality is reduced economic output (in terms of utility). It leads to inefficiency. I feel this is a perspective that's not stressed enough.

pibechorro 4y ago

Central, top down control of the economy by political entities is a recepy for graft and disaster. Its a complex emergent system, you pull one string and changes propagate far and deep in unpredictable ways.

mschuster91 4y ago

> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly. The cause of the inflation is not a classic spiral, it's profiteering especially on the side of fossil fuel producers and in retail. > 5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under. It's not "a bunch of VCs", it's "GQP-allied Peter Thiel wants to see the world burn just to create additional mess for the Biden gov't and causes a bank run". The SVB crisis only picked up speed when Thiel advised all his startups to pull out their money, thus causing the bank run. > SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis. Without the "excessive" stimulus packages, economies across the Western nations would have been devastated by Covid. It was bad enough with the stimulus packages, I don't even want to imagine how it would have turned out without them.

censor_me 4y ago
[dead]
theowawayfed 4y ago
Yea. Depositors should never try to take their money out. How dare they ask their money back.
- mschuster91 4y ago
  It's one thing to take your money out. It's another thing to sound a bullhorn and make everyone rush to take their money out, because that will overwhelm any bank. What Thiel did was beyond irresponsible. He should be criminally tried.
  - slibhb 4y ago
    I don't totally disagree with you that his behavior was irresponsible but under what law would he be tried?

dsomers 4y ago

> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. This is because they fucked up their duration risk handling, no one held a gun to SVBs head and forced them to invest so heavily in long duration bonds. If they bought more short duration bonds none of this would be a problem. Other banks didn’t make this mistake. So why did they do it? Greed, or who knows, maybe it was plain old ignorance/hubris. Still, it was 100% avoidable. SVB fucked up bad and pointing blame at the fed is just not making them accountable. Like fuck, who are these dumb chimps running this place. When I help my parents plan their retirement I looked at 100 years of history of what normal fluctuations are in the bond or stock market. Looking up data like that takes an hour and should make anyone with basic math skills realize rate and the bond fluctuations that follow at 100% bound to happen given enough time. It was just absolute amateur hour at SVB.

newaccount2023 4y ago
exactly! even more amateur single investors know better than to bet the farm on ten year notes when rates are exceptionally low SVB wasn't even operating at the level of the typical individual investor!
unyttigfjelltol 4y ago
Maybe, but the latest Fed action violates a 40-year downtrend in interest rates, so it was exceptionally improbable from a historical perspective. From 2020 trough to 2022 peak, government interest rates increased almost 1,000%, which means the magnitude also is hard to anticipate or plan for, and the effects extreme from failing to do so. You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend. I don't make excuses for dumb decisions, but... someone said recently when the Fed taps the brakes someone always goes through the windshield. This was a far more extreme scenario than tapping the brakes on a car. More like the moon stopped. We all knew it could theoretically, and what do you know, it just stopped.
- qwytw 4y ago

watwut 4y ago

> SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis. It is other way round. Majority of issue is on SVB side. Feds are not charged with running SVB nor hedging their risks.

iSnow 4y ago

Well, it points to abysmal risk-management by SVB. The rate rise was announced in late 2021, so banks should have taken some losses and sold the low-yield treasuries and increasingly bought higher yielding ones. It also seems to me SVB used an exemption from Basel III(). Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable, which is why SVG opted out. So they are now in the "find out" phase of fuck around and find out. I really have no sympathy for the way the US banking lobby bribes politics to get exemptions and the cowboy attitude of their "regional banks". Now, everybody is very sorry and promises to improve and once the storm has died down, they will continue to work like that. https://on.ft.com/3ywMURD https://on.ft.com/3ywMURD (google for "Silicon Valley Bank is a very American mess" to sidestep their paywall)

DebtDeflation 4y ago

I'm getting tired of the "those Treasury bonds they bought are completely safe, if they just wait 10+ years until maturity, they will get 100% of their principal back" narrative. There are MANY different types of risk. Credit risk is but one type, and that narrative tries to convince people that it is the ONLY type of risk. In this example, you have both interest rate risk (price of an existing bond moves inversely to interest rates) and maturity risk (long term assets funded by short term liabilities). Risk can be hedged, and it is prudent to do so, but hedging costs money which eats into profit, so in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. I suspect that over the course of the next year we'll see more cracks emerge in the financial system, additional financial institutions fail, and a new narrative that will have to be created.

AnimalMuppet 4y ago
> in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. Just as everyone started talking about inflation coming back? Just as it began showing up in the actual data? That's when they deliberately decided to stop hedging? That's insane. "Deserves to lose" is the only non-profane way I know of expressing how incredibly unwise that decision was. And maybe how immoral. They may have made that decision then because everyone could see inflation coming, and therefore the price of hedging the risk went up. If so, they threw away the bank (and the stockholders' money) for one year's increased profit. Madness.

systemvoltage 4y ago

I think the blame squarly lies on 2). Sweden and Florida didn't follow the Science™ and instead followed reason, rationale and logic. The rest of the country was obessesed over lockdowns, especially those on the political left. It was a religion of HN. These are policy failures on all fronts - from monetary to public health.

quonn 4y ago
Sweden failed miserably as is now commonly accepted.
- systemvoltage 4y ago
  Depends on how you define failure. If the goal is set for zero Covid policy then yes, Swedes failed. But so did everyone else in addition to drastic measures such as recommending vax for 3 year olds.

l33tman 4y ago

Instead of explicitly bailing out banks why can't the government in this situation change the rules of the government bonds for the specific bank to let them mature today instead of at the nominal time? Or this is maybe how they do the bailout..

sgjohnson 4y ago

3. this is also why they are required to hold swaps as a hedge.

itsoktocry 4y ago

>The government requires banks buy their debt and hold it as reserves because it's considered the safest investment. They don't require it, it is the safest investment. What do you consider a safer investment? >Oops, they're not so safe after all if you need your money back before maturity, Golly, it's almost like banks are supposed to know how this stuff works. It's funny that you relate "safe" to "never changes price". The bonds were safe and are safe, which is why the "bailout" is an okay deal (ethics aside); the government will pay your money back. >SVB is certainly not blameless here Who on this planet would consider them blameless? They are 95% of the blame of their own situation.

deleted 4y ago

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friendzis 4y ago

> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. This is not what safety of investment is, by any stretch of imagination. The yield of investment is nominal returns times weighted probability of that nominal return being lower. Government bonds are near zero risk of not being honored. The risk you talk about is inherent in long assets + short liabilities and has very little to do with issuing body of the bond.

user3939382 4y ago

Let’s talk about the out of control military spending wayyy before the stimulus.

timcavel 4y ago
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bluecalm 4y ago

I don't think there is any basis to say too much money printing caused inflation. There were many countries with even lower rates for many years and no inflation to speak of to the point of it becaming problematic. What caused this wave of inflation was supply taking a hit. Fallout from COVID and then war in Ukraine. It was difficult to get many good which normally were easily available. It's not rocket science either: inflation is about always caused by falling demand. It doesn't matter how much the government prints. When bread is hard to get people will exchange a lot to get a loaf. If anything it seems like overreaction by the feds to raise the rates so much. It's not like them reducing access to capital magically makes goods appear on the shelves.

netcan 4y ago

I disagree with everything but the conclusion. I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that... in this case. I don't think the particular path matters much. People tend to moralize banking, and post failure we tend to hunt for moral culprits. But... the historical fact is that banks fail sometimes, under all possible regulatory and commercial regimes. We have hundreds of years worth of evidence. Banks have failure scenarios. The concept of a bank which takes deposits and invests them while maintaining 0% risk to depositors does not, and has never existed. We need to decide if money in the bank proverbial gold, or is it more like shares in a company? We just can't have both.

slowturtle 4y ago
> I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that.. The rate increases were an attempt to combat the inflation caused by the massive increase in money supply during the pandemic due to the government stimulus. There were no new goods or services justifying all the stimulated activity. SVB was drunk on the seemingly permanent zero interest rates (like everyone else) and invested in long term government bonds. Then the unthinkable happens—rate increases for the first time in over a decade, and those investments go boom. This is all about people getting used to cheap money.
grecy 4y ago
> I'm dubious that the "Fed's money printer" had much of an effect on inflation In all of modern history around the world when has printing more money not resulted in inflation. Let's look at Zimbabwe and other countries that went nuts printing money.

spaceman_2020 4y ago

From the panicked, rushed lockdowns to the massive money printing, it’s been one bad policy error after another. All the pandemic showed us is how ill-equipped we really are to deal with an actual challenge, from individual people to policymakers. The last 3 years have been so devoid of any basic rationality across the board.

cies 4y ago

All comes down to the "too big to fail" problem. 7. In order to inject "massive liquidity into banks" more money is printed. 8. GOTO 2 but for different years.

nonethewiser 4y ago

> The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away. Just to be clear, this is finance 101. Its not a surprise. Having to sell treasuries at this time was the surprise.

pixelmonkey 4y ago

Your analysis is missing this critical piece: duration risk. The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries. In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration). Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this. Some banks were simply greedy, lazy, or both (SVB). It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine. I think the big lesson is that the banking industry isn't nearly as smart and self-regulating as many people think it is. Bank finance departments either chase yield, when they can (2021), or they manufacture it, when they can't (2007-2008).

evantbyrne 4y ago
Exactly. I was speaking with my attorney about this the other day because he also advises numerous banks. He explained to me that balancing short and long term investments to handle withdrawals is a basic aspect of modern banking, and SVB should not be viewed as a signal of a more widespread bank collapse.

Spooky23 4y ago

SVB leveraged cozy relationships to attract business than they could handle. They ignored compliance and normal banking risks. They left their C level risk management position open and we’re not transparent about their fiscal health. Rate risk is a key feature to buying any bond, and it’s a risk that is manageable if management isn’t asleep at the switch. Nobody forced SVB to buy long duration bonds. Any investor with a moderate level of expertise understands that, and you’d have to be pretty green to not expect rate increases from the all time lows. Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly.

polygamous_bat 4y ago
> Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly. Somehow I feel that blaming the government is much more than a cop-out; it's a calculated position that enables the big players to continue privatizing the wins and socializing the losses. "Of course we are getting a bailout", the narrative goes, "cause it was the big government's fault all along!"
- Spooky23 4y ago
  Of course. Outside of academia and some law schools, there’s no real conservatives. These guys will cry and whine for bailouts, cash the check and start crying and whining about government meddling.

mromanuk 4y ago

It's possible that they have already reaped the profits and are now saddling the banks with debt, leaving the burden on the people.

Mizoguchi 4y ago

I think SVB case was atypical in the sense that while being the 16th biggest bank in the country their largest accounts were owned by a few VCs that (figuratively) grew up on the same street. So it took just one guy to make a call for the panic to spread in town like a wildfire. It was only 36 hours from that first call to when SVB was gone.

dsfyu404ed 4y ago

The people in step 5 have a huge incentive to make it look like the fed is wrong to raise rate because their monopoly money fueled dumpster fire of an industry only "works" when rates are low. I'm not alleging conspiracy, I don't think these people are competent enough to actually conspire. But the incentive to pull your money out knowing that it makes others more likely to follow and that if the bank keels over the failure mode makes policy you don't like look bad is definitely there.

bradDonniger 4y ago

The worst thing about takes like this is it assumes none of the bankers and government officials communicate. It sets up this nice and tidy semantic bubble that ignores the messy reality of these folks socializing together. Just because the paperwork is in order does not mean these people do not collude and influence each others emotions to empower themselves and just legislate their mess away or get bailed out. Collectivist and socialist in their nature and choices. You and I though? Subject to the whims of the “free market”. Your entire finance system is a joke because your society and culture are a joke. We keep taking marching orders from post-war shellshocked, Cold War paranoids, leaded gas huffers in the Boomers and GenX. 2000, 2008, and again here we go eating their shit. We coddle people who cannot grow a potato for themselves. What are octogenarians and their progeny whose only skill set in life is “inherit dads imaginary money?” going to do if we quit logging in and showing up?

ren_engineer 4y ago

I find it amusing how far away from capitalism the Fed is, it's literally the opposite of a free market. Instead it's a communist style central planning committee made of "the smartest guys in the room" making decisions that impact the entire economy. Why is anybody shocked they made a mess of things?

jasmer 4y ago

I'm sorry but I think you missed something a bit relevant aka 'Global Pandemic' which literally shut down massive swaths of the global economy, and was materially the biggest extant shock to the US economy probaby ever. And I mean ever, except for literally the Civil War, and maybe but not really the Opec crisis. Ok maybe the war of 1812. Historically, we would have just 'let people die' and work through it, but this time we want to react and try to save lives so we shut stuff down, but it's existentially damaging. Hence money printing.

tablespoon 4y ago

I think you're being a bit misleading. It's not some issue related to government bonds specifically, it's about long-term bonds generally. IIRC, SVB went under because it took up a large position in long term mortgage-backed securities not treasuries. If it had instead invested in short-term treasuries, it would have been fine. Government debt is the safest, and if you buy any other kind of debt, you'll want to be paid a premium for the extra risk you're taking. If interest rates are going up, you don't want all your money in long-term bonds.

slt2021 4y ago

>>because it's considered the safest investment you are wrong right at the first step. there is credit risk (risk of default) and for this risk, treasuries are still considered safest. then, there is duration risk (risk of interest rates increasing) - and this risk has always been there. Bankers know about these risks, it is just they were greedy and decided to go for the highest yielding MBS, instead of short-term securities. => and obviously banks suffered consequences. for bankers this is Banking 101 One can argue that what is going on right now is market forces punishing the most greedy bankers (SVB, Debit suisse, etc)

Cyberthal 4y ago

It's almost like the government shouldn't be trusted with a monopoly on money.