>At the same time, this is yet another example of changing the rules in the middle of the game. Yellen has just broadcast that FDIC insurance is essentially unlimited, as long as you can threaten wider disruption to the economy.
No, there are systemic risk exceptions within the rules. If a bank is large enough, then the systemic risk to the economy as a whole is large enough to warrant this step. "Too big to fail" is typically a derisive comment, but it is not without practical reason. Governments are supposed to act in the best interest of the governed. I hope it is clear to all of us that avoiding the economic disruption of a cascade of bank failures is in our interest.
Smaller bank failures do not pose systemic risk and so they will not be backstopped in the same way. Might seem like unfair treatment, but practical concerns often outweigh the theoretical. By the way, SVB is still a failure and as a company is now gone. Some other entity will take over its assets, debts, and customer services. All senior management has been removed.
>I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
We did. That is why we have the FDIC, the Federal Reserve, and the Treasury department. They did their job and did it quickly and effectively. SVB did not get bailed out, the depositors did.
Is it though? I think there's a proportion of readers who might feel grifted by regulatory capture (eg: unable to get on the housing ladder due to draconian zoning policy) and reasonably feel that some of the moral hazard has to be addressed to stop what has been unstoppable growth to give them a chance to establish financial security. It's a fallacy to see it as zero sum, but a temporary crisis in confidence might produce the only opportunity in a lifetime to create the conditions needed for affordable housing to be available for purchase for folks who can keep their jobs during the crisis. Many feel economically abandoned.
You can't just snap your figures and have the housing market drop by 60% and keep everything else the same.
Those same people are going to lose their jobs and burn through all their savings and be unable to secure loans to buy houses.
Even if you bank at a supposed safe and secure credit union, a systemic crisis will affect them as well. You won't be able to get a loan. There goes your opportunity.
The whole financial and economic system is intertwined and you're part of it, if it blows up and crashes into the rocks, you're going down with the ship as well. Get over your Main Character Syndrome where you think you're going to be the one immune to the catastrophe.
I know many good, hardworking people who secured their position on the housing ladder in the aftermath of the global financial crisis. In conversation, they were bewildered by how much their homes appreciated even by 2018, well before the pandemic bump in valuations.
But is anything being done about it? It is both unequality and bananism at its best. You give money to the "rich" (though this time indirectly), you encourage recklessness and you also change the rules when you see fit.
All of these described above are "disrupting" the economy. And none of them is in our interest.
The really rough part about HN is the low level of knowledge about how governments and politics work. It's ok to judge these outcomes harshly but many commenters here intermingle their judgements with their mental models that seem to have not evolved beyond what they were taught in secondary school.
It's really quite concerning because some of these people have tremendous power. I suppose the only positive is that a number of titans of Silicon Valley are not savvy enough to challenge increasingly assertive governments.
While what you say is true, maybe we shouldn't allow mergers and other avenues to allow these banks (and other verticals) to be too big to fail. We've made that a target for all companies. Just get too big to fail and you get all the upside and none of the downside for free. That is my main complaint. By allowing deposits to be invested without risk, these too big to fail banks are encouraged to chase the highest yield, highest risk re-investments possible. If it works, another yacht for everyone! If it fails, we must be made whole!
I think at least a part of the solution is to increase regulation as banks get larger. Since it is clear that the fate of very large banks is tied in to the the fate of the economy itself, they should be appropriately regulated. In particular, short term asset/deposit ratio requirements should be modified as a bank gets larger. That could reduce the need for the FDIC to step in when depositors get nervous and provide disincentives to getting too large.
I think something like this could make large banks more of an asset for the economy rather than a liability. I wouldn't want to just set a maximum size. If a bank wants to get huge and maintain conservative and safe asset/deposit ratios, good for them.
The problem is that guaranteeing a bank and regulating it's investments still changes the incentives for the bankers. The banker has an incentive make an investment that can presented as "prudent" but which actually has a large up and down side. The banker keeps the upside, the bank's depositors are protected from the downside and the worst the investors face is losing their existing capital.
I would argue no. The issue is that the FDIC has deposit insurance limits already. The depositors are free-rolling on the amount they are getting made whole on above the limit. Then you are just encouraging some new kind of "bank" with limited access to become a customer (e.g. > $50M deposit) and then you can just put all "shareholders" in the role as customers. You are still giving free upside outside the rules that all other depositors are stuck with. Every investment comes with the statement: "Investment contains risk". If the bank wasn't leveraging these deposit as investment cash, there would have been no collapse.
You're right this produces risk but you're wrong about exactly how.
Any bank call pull in deposit and use them as capital. But being a customer also doesn't give one any particular upside - you just get interest on the money you deposit. And if you have a special bank with only large deposits and paying extra high interest, then regulators look at you and quite likely see something not to be protected in the same way.
The way you get risk is basically the way SVB did it. Share holders can lose at most their entire capital but they can get to play with all the money the depositors give them. If they bet on something that pays off big, they get that payoff minus the modest interest they pay depositors and if they lose, they lose at most their capital.
If you can use just a bit of capital to borrow a whole lot of capital, with the only risk to you being your original capital, then you can engage in very risky ventures, getting a huge payoff if you succeed and at worst losing your original capital if you lose.
Come to think of it, that seems a bit like what SVB did. Buying long term bonds when interest rates were likely rise seems like a recipe for disaster - and in fact the logical outcome was this bankruptcy. But there was a chance that interest rates wouldn't have risen, at which point the shareholder get a big payoff, pocket it and go on to the next risky maneuver.
> > Governments are supposed to act in the best interest of the governed
Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
> > They did their job and did it quickly and effectively
Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up? Or a small family owned boat builder in Maine? Nowhere to be found. Their fault? Not being systemically important enough. Whatever the fuck that means.
> Many of the governed see what policymakers and politicians call 'systemic risk' and 'instability' as a not so unwelcome wildcard considering that the wealthy of today are mostly descendants of wealthy land owners from the times of the Crusades.
I'm curious if you have a citation to support that the wealthy in the US are descendants of wealthy land owners from the times of the Crusades at a substantially greater rate than the general population.
> Where are the Fed , D.C. , the FDIC etc. when a gas station goes belly up?
How much of their going belly up was due to Fed policy? Particularly driving and holding interest rates to near zero through market actions then pushing interest rates to nearly 5%?
Read over the history of the US settlement. While they came from the UK and Germany, the vast majority are not descendants of the Normans.
One of the major draws to the US has always been the opportunity to do a little crusading of ones own and find whatever opportunity your courage and lack of scruples allowed you to get away with.
No, there are systemic risk exceptions within the rules. If a bank is large enough, then the systemic risk to the economy as a whole is large enough to warrant this step. "Too big to fail" is typically a derisive comment, but it is not without practical reason. Governments are supposed to act in the best interest of the governed. I hope it is clear to all of us that avoiding the economic disruption of a cascade of bank failures is in our interest.
Smaller bank failures do not pose systemic risk and so they will not be backstopped in the same way. Might seem like unfair treatment, but practical concerns often outweigh the theoretical. By the way, SVB is still a failure and as a company is now gone. Some other entity will take over its assets, debts, and customer services. All senior management has been removed.
>I understand part of this is human nature but I really wish we could plan for these entirely foreseeable events ahead of time so that it's not just cases of "selective justice" with regards to who gets bailed out.
We did. That is why we have the FDIC, the Federal Reserve, and the Treasury department. They did their job and did it quickly and effectively. SVB did not get bailed out, the depositors did.