No doubt most readers saw the news that Silicon Valley Bank, a top-20 bank, went into receivership on Friday. There’s more news: Signature Bank, a smaller regional bank, has joined it. And worse yet?
In an extraordinary action to restore confidence in America’s banking system, the Biden administration on Sunday guaranteed that customers of the failed Silicon Valley Bank will have access to all their money starting Monday. [CNN/Business]
The little information present on the Signature Bank collapse is in the above article.
So why is this little Christmas gift to Silicon and, yes, Signature bad news? Because this is a misuse of a system that depends on the intelligent use of its parts – not foolhardy use. Much like the foolish mistake of the Clinton Administration in rescuing Long Term Capital Management, and thus encouraging other hedge funds to grow huge and shoot for the moon, this misstep by the Biden Administration essentially insulates customers from the consequences of their own mistakes.
The system functions on the feedback loop of action -> consequence -> learn -> next action. By breaking this critical sequence, we do not learn, we do not grow – we become infantilized.
Yes, yes, I recognize that the Administration is trying to avoid a run on all the banks. Is it worth it? I guess we’ll never really know.
But I fear the consequences of this action may outweigh the immediate punishment of letting dumb people be in charge.
Not done yet, though. All that said, it’s legitimate to speculate that we may be asking too much of the people in charge. After all, 1-2 million years of evolution for surviving on the savanna and other places doesn’t prepare anyone, simple depositor or CFO of Apple, to pick out the right bank for a bank account.
But the fix has to be right in order to avoid unforeseen consequences, and I frankly haven’t the expertise to understand even this:
US taxpayers will not be on the hook for either facility, the regulators said.
So who will be? Maybe other banks?
And how carefully have regulators prepared for these situations?
