I don't understand why bailing out DEPOSITORS is a big deal:
* when I put money in a bank, I am just depositing it, I am not "investing". If I wanted to invest (take risk for a chance of profit) I would buy bonds or shares etc. I expect the money to be safe and accessible.
* the "product" being sold by SVB is a bank account. It's low interest (if any at all) and comes with a bunch of charges (so most people will not even break even). If they were offering a 10% interest current account, that might be different. But until then no one has been compensated for the risk of losing their "capital".
If I leave clothes with a dry cleaner or tools at a storage unit, those are mine. I am not "investing" my clothes in the dry cleaner. The same should apply for standard, low interest, current accounts for individuals and businesses.
Maybe in the 1950s, people only used accounts for saving, and they were expecting a return and it was the main way for people to invest. At the same time people/businesses did most of their business in cash (literal folding notes etc). But the opposite is true now. People and Businesses need a risk free account to make a receive payments. They're not looking to be "on risk".
The risky behavior was enabled by de-regulation starting from Clinton. (Most de-regulation related systemic flaws today can be traced back to his admin)
"Tech bros" support this de-regulation. Any regulation is govt. overreach. "We know how to handle our shit" attitude all over the place.
Yet when the downside of the risk comes, it is govt. money that bails them out.
Regarding your last line. How much of your stuff (something that is fungible, like money) needs to be actually be in the unit while the storage company can loan out the rest is the question. There can be more of the stuff in circulation than there are resources. As long as not everyone is asking for their stuff back, the storage company can keep juggling balls in the air.
>The risky behavior was enabled by de-regulation starting from Clinton. (Most de-regulation related systemic flaws today can be traced back to his admin)
>"Tech bros" support this de-regulation. Any regulation is govt. overreach. "We know how to handle our shit" attitude all over the place.
Surely this doesn't apply to all SVB depositors? Or do you think the entire SVB deposit base was card carrying "tech bro" members? Or suppose 80% are, what of the remaining 20%? Should they get ruined because they dared to associate with "tech bros" and/or didn't do financial risk modeling properly? Or maybe the government should make the bailout conditional on whether you were a "tech bro" or advocated for deregulation?
It is something of an aside but, I find it very amusing that the risky behaviour people are up in arms about in this case is "buying long dated US treasuries".
I think no one really disagrees about whether people who knowingly take risks should be bailed out - they shouldn't.
To me, the deeper question is who actually knowingly took the risks and should people/businesses have an opportunity NOT to take such risks but to still access basic banking services?
I have zero objection to shareholders, bond holders and even senior management getting nothing in these cases. They absolutely should not. And the second government has to step in, that should be the case.
I am just not convinced that depositors count as having knowingly taken risk. It does not seem to me that the average depositor (including businesses or individuals with more than 250k in cash) ARE or SHOULD BE knowingly taking risks just by depositing their cash.
Perhaps I am wrong, maybe that should be the case and bank accounts should continue to be a "risky" product? But if so, then I think we should offer (either via private banks or direct from the FED etc) a risk free product that lets you do the things we rely on from bank accounts (store, send and receive cash).
It is an accident of history otherwise that the only way to access those services is to invest in a private firm. If I proposed that we should ban cash transfers and if people wanted to move money electrically, they should buy shares, send the shares, then have the recipient sell the shares, people would think I was crazy. But this is the same system really if depositors are really to be treated as "investors". I should not have to invest in a bank to transfer money anymore than I have to invest in a moving company to transfer a package.
It's another aside but... The system in Scotland a few hundred years back was that each bank would issue it's own currency. Then the value of a "pound" from one bank would fluctuate compared to others depending on how stable that bank was considered to be. So even the bundle of bank notes under your bed could become worthless overnight. Personally I think that sounds crazy, and a sound, transferable deposit system sounds like the same sort of boring obvious infrastructure we should really have...
You have a big misunderstanding just like the David Sacks and the rest who feel depositors are wholly innocent.
Most everyone involved in finance knows that banks treat 'depositors' as creditors. Banks view deposits as a liability. Anything over $250k is uninsured. There are multiple ways to insure deposits over $250k. These are simple concepts.
To say that you shouldn't know how to manage your own money is like saying you shouldn't know the traffic rules when you're driving. Where you decide to keep your money is your own choice. Everyone participating in the economy takes risks. It doesn't matter where money are assets are kept...there is always risk.
In terms of depositors, they neglected counterparty risk. In terms of SVB, they poorly managed interest rate risk.
Oh, no, you mis understand me: I know what the rule is. I just think it is arbitrary and stupid and was a hack when it came in decades ago before most people actually used banks.
Why does someone with 250,001USD in an account deserve what they get but someone with 249,999USD here and 100bn elsewhere get bailed out? Why is the only way to transfer cash to take counterparty risk? Why are the amounts for businesses and individuals the same (250k is huge for an individual but tiny for a business!?)? Especially since it is individuals that will miss their salaries when their employer finds they're bankrupt, and is that also their own fault for not assessing counterparty risk?
We could avoid all these contradictions by just having "basic function" accounts that let people/companies use banking services that pay no interest and have no risk (fully insured). Then separately offer "investment" accounts for people that want them (with no insurance). If I want to use a hospital or an insurance company, I just use it and pay accordingly. Why is are banking services the only thing where to access the service I have to become an investor in the provider!?
Bailout SVB, or don't. I don't know if people deserve it or not. I make no moral judgement. I just think this whole system makes no sense, is unfair/arbitrary and is not effective. It should be changed irrespective of what we do in this one case...
Edit: I should have been clearer in my original comment. I didn't mention the 250k limit because to me at least it doesn't matter. I can see being an investor (risk AND reward) or not (no reward but no risk) at any amount...
I understand most of your questions may be rhetorical, but I'll try to clarify some aspects.
The FDIC insurance coverage limit is an arbitrary number. It was enacted during the era of the Great Depression to protect the common people's money from bank failures. The limit was raised from $100k to $250k during the GFC. It was always meant as a deposit insurance to protect the common person...not the wealthy. To offer full insurance to all bank deposits would cost $18-20 trillion. This has never been the normal and is just not feasible.
You always have counterparty risk when you have someone else hold your money. Even if the fed starts CBDCs (central bank digital currencies) and gives everyone a fully 'insured' bank account, the fed is still your counterparty. These risks should always be managed.
You can avoid counterparty risk by holding your own money. You can transact in cash if you want to avoid banks. You would have to take care of your own security and safekeeping which makes it unfeasible in large amounts.
To think that companies or VCs would not be advised of standard corporate finance practices seem like a huge failure.
One of the axioms in finance I've run across is that you can never eliminate risk. You can only move it around.
* when I put money in a bank, I am just depositing it, I am not "investing". If I wanted to invest (take risk for a chance of profit) I would buy bonds or shares etc. I expect the money to be safe and accessible.
* the "product" being sold by SVB is a bank account. It's low interest (if any at all) and comes with a bunch of charges (so most people will not even break even). If they were offering a 10% interest current account, that might be different. But until then no one has been compensated for the risk of losing their "capital".
If I leave clothes with a dry cleaner or tools at a storage unit, those are mine. I am not "investing" my clothes in the dry cleaner. The same should apply for standard, low interest, current accounts for individuals and businesses.
Maybe in the 1950s, people only used accounts for saving, and they were expecting a return and it was the main way for people to invest. At the same time people/businesses did most of their business in cash (literal folding notes etc). But the opposite is true now. People and Businesses need a risk free account to make a receive payments. They're not looking to be "on risk".