In response to Covid, our political leaders mandated restrictions resulting in a partial economic shutdown. Then gave trillions of dollars to those who were not working, and to companies that were not producing.
Inflation is the mechanism by which we all are paying for this act of generosity.
Those issued dollars had to go somewhere, with many being deposited at Silicon Valley Bank (SVB), which ended up with far more dollars they needed to back new loans. All they had to do was invest this excess wealth wisely. Instead, they chased a single percentage of yield at the expense of liquidity. Did they not consider that trillions of excess dollars would be inflationary, would result in higher interest rates?
That was mistake #1.
What about the regulators? The bank of banks, the fail-safe mechanism endowed with the responsibility of ensuring the stability of our inherently unstable fractional reserve banking system. Tasked to preserve the faith in our financial system, in our dollar, and in our economy. According to the Federal Reserve’s website, this is what the Federal Reserve Bank of San Francisco (Fed S.F.) was supposed to be doing:
“…The Federal Reserve and other regulators have long supervised individual banks and other critical financial institutions to make sure they are operated in a “prudent” and “safe and sound” manner and are not taking excessive risks...”
Given that the Fed’s were not insuring that SVB was operating in a “safe and sound” manner, what exactly were they doing? This section of the Fed S.F. webpage sheds some light.
“We are the San Francisco Fed, public servants with a congressionally mandated mission to promote a healthy and sustainable economy and support the nation’s financial and payment systems.”
Interesting. First and foremost, they apparently are mandated to promote a healthy and sustainable economy. I am not sure what this means, but perhaps it explains their obsession with climate and woke issues. Secondary is what the rest of us believe they ought to be focused on, our nation’s financial system. They failed miserably in this role, and that was mistake #2.
The third mistake was for the VC’s to encourage the entrepreneurs to deposit all of their funding eggs in one banking basket. Was this in any way the fault of these young, risk-taking CEOs? Do we blame the CEO’s for this destabilizing consolidation? In addition to raising funds and developing products, they are expected to periodically review the regulatory filings of their bank? Really? Isn’t this the job of the Federal Reserve? If not, then exactly what is the role of the 1,800 employees of the Fed S.F.?
There was never a chance of an SVB bailout. Once the bank run was over, so was SVB. The shareholders lost their equity, and the SVB leadership lost their positions. It is yet to be seen if any corrective changes will be made at the Fed S.F.
The vast majority of the SVB depositors are smart, resourceful, and hard-working entrepreneurs, doggedly pursuing the American dream. They are not millionaires, and often are not drawing a salary. They hail from all over the country, not just Silicon Valley. They generally had more than $250K in the bank because that is what is required for a tech product-developing business.
Their work will contribute to the essential products of tomorrow, raising the standard of living for all of us. While there are many critical workers in our society worthy of our admiration, what truly sets our society apart from much of the rest of the world is this unique culture of entrepreneurism. They are a primary reason why our standard of living remains so much higher than most of the world.
We need to recognize that this preventable event was based on the trifecta failure of SVB leadership, the Fed S.F., and the VC’s. Not at fault were the entrepreneurs themselves, and yet, many believe they are to be burned at the stake in the name of capitalism, or despicable partisan politics. Without access to their funds, their choices included bankruptcy, or in desperation, back to the VC’s for more funding, more loss of control.
We spent trillions on the Covid shutdown, does it not make sense to spend a few billion to save this amazing culture?
Perhaps the greatest problem is our banking system, inefficient and obsolete, slow to adapt. Unless knowingly invested for a return, wealth should never be at risk.
Eric Johnson is a Rancho Santa Fe based active angel investor, and the author of “What the Hell is an Economy?”