Of Banks and Bailouts
by Ben Seevers
How should we respond to the Silicon Valley Bank failure? Are we doomed to repeat this same story for eternity until the monetary system breaks down?
The monetary chickens released during the COVID panic are coming home to roost. Rampant monetary inflation, easy money, in large part led to the price inflation plaguing us in recent times, but it also leads to another pernicious phenomenon: fractional reserve banking. Inevitably, banks partaking in the feast of easy money are placed on the chopping block. The Silicon Valley Bank (SVB) failure is among the first of a potential string of bank failures. Signature Bank also failed, marking another massive bank failure.
For an extended discussion of what credit expansion does to an economy go here. In this case, the low reserve ratio requirement and masses of deposits made amidst the tech boom (SVB’s deposits nearly doubled with the tech boom) allowed the SVB for the time being to invest a lot of deposited funds. They mainly chose to invest in long term treasury bonds.
The problem came when the era of easy money came to an end and the Fed began to raise interest rates. This caused the value of long term treasury bonds to collapse, leading to the SVB being unable satisfy the demands of depositors for redeem obligations. The SVB could not cover all of their obligations with the present value of their assets, leading to the bank’s insolvency.
Usually depositors need not fret, but in this case more than 85% of their deposits were not insured. Uh oh. If the depositors did not come to get their money the SVB could have wormed their way out of it, but fate would have it another way. The depositors caught wind of the situation and rightly demanded their money, which the SVB did not have.
The depositors should be in trouble; however, thanks to the Federal Reserve’s new “Bank Term Funding Program,” those who held deposits in excess of the FDIC’s guaranteed amount of $250,000 will get a bailout. So much for Biden saying there would be no bailout. Expect this to simply create more inflation, moral hazard, and further business cycles.
The heart of the problem
The real question is how should we respond to this? What the bureaucrats did is immaterial. They are merely trying to escape the scrutiny of the public, and they are setting a bad precedent in doing so. What should have happened?
We should have let the irresponsible depositors lose their money, but instead the Federal Reserve is bailing them out at the expense of the public. By giving the SVB depositors a pass we are sending a signal to future big-time depositors that we have their back. That is not the kind of message we want to send.
We should desire to promote virtuous dispositions such as caution and frugality, not recklessness and prodigality. The latter two features are exactly what government interventions promote.
If we are to create a system which fosters virtue and restores economic order, we must cease the artificial credit expansion by the Federal Reserve, restore respect in the contract made by the depositor by restoring a 100% reserve system in which banks actually have to hold your money if you deposit it, and end government laws regulating the production and use of competing currencies.
The example of the SVB is a tale as old as time. We have experienced this time and time again. The integrity of an institution is threatened, and people want their money and the banks don’t have it. The Crash of 1929 and the bank failures of 2008 should remind us of this. It has happened too many times for us to care about particulars at this point. The problem is the Federal Reserve and their monopoly on money. They foist an artificial currency upon us that is backed by nothing which banks are not obliged to hold on to for you. This is the problem, and it must end.
There are no doubt some conservatives who desire partial solutions such as abiding by rules, such as inflation targeting, but targeting a specific rate of inflation will just result in the same pains, price inflation, business cycles, and moral hazard. It is no doubt preferable to abide by a rule, but it does not solve the issue of busts and bank runs that rears its ugly head every 10-12 years.
The SVB failure is indicative of a great flaw in our economy. This issue must be solved through a dramatic change in the way we conduct monetary policy, or else we are doomed to repeat this same story for eternity until the monetary system breaks down.
Benjamin Seevers is a senior at Grove City college studying economics. On campus, Ben is a teaching assistant and the president of the Grove City College Libertarians and the economics honorary. He is currently serving his hometown of North Apollo as an elected councilman. He also has experience in banking and public policy research. Upon graduation Ben hopes to attend graduate school for economics and pursue a career in academia and education.