Banking My Crisis For Later

Incisive thoughts on Silicon Valley Bank and how we manage our monetary institutions. This post includes guest excepts contributed by Joe Mayall.

Banking My Crisis For Later

I'm no therapist, but as an internet user and relatively fast Googler, you can consider me your source for your next mental health crisis if, at any point, you found your mind needs calming. With any luck, the comments section will be filled with mental health requests to keep my Ask The Lorem Ipsum column busy for weeks.

I cover a number of specialties with my patients, often being classified as a generalist, but my most skilled/googled areas include "how do I really become good at my job?" my advice? Try giving a shit? Or another common one is, "How do I avoid taking criticism personally?" to which I say, try not giving a shit?

Obviously, I should disclose that there are some side effects to my advice. Much like many pharmacological treatments, sometimes what cures one disease can cause the other, but I'm dedicated to helping you where I can while ensuring my job security as a writer/advisor to people asking any and all questions.

Listen, mental health is physical health. This has been confirmed when scientists discovered that the mind is part of the body (as it is housed in the brain, an organ most people have, with the exception of a few extremist politicians and some Kardashians due to its hereditary nature).

As for me, I think we should all get therapy, not just from snappy writers who pretend to know everything, but from a real, trained therapist. I have spent my fair share of time with a therapist, but ever the efficiency hound, I like to consolidate my crises to address several in one single visit. That's why I'm banking crises, like SVB after a bank run, so that my next therapy session can cover a lot of ground and set me up for the next tour of sweeping things under the rug.

But my most recent issue needed to be addressed as a one-off. A banked crisis about banking crises. More specifically, what happens to my money when I hand it to Misters Morgan or Fargo? Is it "safe," And why does every bank look at me like I'm a piece of meat wrapped in wallet leather?

Should we rethink the banking industry?

The banks say all will be okay. "Trust us," they say. "leave your money here." But I want a second opinion.

Since money, like life is fleeting, and both move fast, I can't wait on the banking sector to succeed or fail because I have bottles of bourbon to buy and retirements to save up for. So to ease my tender heart, I reached out to another opinion manufacturer to answer my fiat questions and ease my mid-bank crisis.

Regular readers know I value an honest look at issues, not blinded by society's ideologies and cultural pressures. You also know I value people who share views I don't hold, and others who stretch the way I think.

So I reached out to fellow writer Joe Mayall, the Proletariat Socialist of Substack Abbey. That's not his real surname/title. He actually goes by JoeWrote, but I wanted to make sure he sounded regal and humble at the same time because sometimes people consider certain words to be dirty words, and Joe has used some of those words.

Joe's words are not truly dirty, but they may be a stray from the popular narrative. Regardless, they are well thought out and, like mine, found on the internet, so I'm sharing a portion of our conversation about the banking industry right here and encouraging you to take a look.

I started with this question:

Hey Joe,

The recent crash of Silicon Valley Bank has given me some paranoia about the banking industry. I'm not sure who or what I can trust. Not to be too suspicious, but every time I pass an ATM, I feel like it's looking at me like I'm a piece of meat (I'm not just a wallet in expensive jeans! My eyes are up here!). I'm not sure if we should let the government take over the banking industry all the way yet, but it's probably time for a close look at why we bank the way we do. Something tells me you'd have an opinion on this (and as a subscriber, I feel pretty confident you're that something).

What do you think the SVB downfall tells us about how we do money today?

I'll include Joe's response, and below this post, a chance for you to comment and share yours because your opinion is important to me as well. Joe's post is heavily edited to draw out some highlights. You can read his whole response here on his website, and I suggest you subscribe to get more from Joe.

Here's Joe's response:

This is a great question!

Editors note: I pride myself in producing good questions so this is one point, early in his post where I completely agree with him. Back to Joe.

Like anything pertaining to the financial industry, the details of the Silicon Valley Bank (SVB) collapse are exhaustive and intricate, so I’m going to start by establishing some key facts:

SVB was heavily invested in U.S. Government bonds, the value of which is inversely correlated with interest rates set by the Federal Reserve (“The Fed”). When the Fed raised interest rates, the value of SVB’s bonds fell. The bank announced its losses, which prompted its biggest depositors, a group of Silicon Valley billionaires who all shared a group chat, to get spooked and withdraw their funds. This caused a bank run and the eventual collapse.

In 2018, Congress passed the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” which raised the threshold of “banks requiring enhanced oversight and regulation” from $50 billion in assets to $250 billion. At the time of its collapse, SVB had $200 billion in assets. Had this threshold not been raised by the 2018 Congress, SVB would have been under stronger regulations, severely decreasing the chances of its collapse.

With these key facts established, here are the 4 top-level takeaways I see from the SVB collapse.

We Don’t Learn Our Lessons

The reason SVB’s failure is such a cataclysmic disaster is thanks to the 2018 deregulation. The 2010 Dodd-Frank Act was passed specifically to avoid situations such as this by regulating high-asset banks, as defined as those with assets over $50 billion. But just a decade after the Great Recession, American politicians stripped away the protections enacted after 2008, opening the door to this catastrophe.

We got punched in the mouth in 2008, took steps to make sure it didn’t happen again in 2010, and then decided to forget everything we learned in 2018.

And this isn’t the first time we’ve made similar mistakes. The Glass-Steagall Act, passed during the fallout of the Great Depression, raised a wall between commercial from investment banking. The theory here is that if commercial and investment banks are separate, one can fail without taking the other with it. But if they are conjoined, they both go down. Unfortunately, the Glass-Steagall Act was repealed in 1999. While its repeal wasn’t a direct cause of the 2008 Great Recession, the fact it allowed banks to be bigger undeniably made things worse.

Which leads me to my second point…

Capitalism and “The Market” Are Not Natural.

This is a tune I’ve been singing for some time, and it looks like the SVB episode is my encore.

After the fall of the Soviet Union, people claimed history had “ended” and the debate between Capitalism and Socialism had been settled. To many, there was no longer any argument against the supremacy of American-style Capitalism.

But as this episode shows, it is not. Capitalism is not natural. It is not self-sustaining. It is not inevitable.

It is a very specific economic structure, devised, assembled, and protected by certain people. And like all things man-made, it can break. And when it does break (which it will), we find ourselves at a loss and unprepared, like the unsinkable Titanic without enough lifeboats.

Capitalism is Not Fair.

Along with the surety of Capitalist prosperity, pro-Capitalists preach Capitalism like it is a game, open to any-and-all players. And if anyone can play, anyone can win! That means even a lowly, minimum wage worker can be a billionaire one day! Better not support stronger business regulation, or it will hamper your potential to reach the tippy-top of society.

If you haven’t learned by now, the SVB collapse shows that this theory is horseshit.

The run on SVB was set off by 15 or so billionaires in a group chat. One of them texted the others to pull their money out, and they did. You can bet all you’ve got that this wasn’t the first time this chat was used to manipulate the economic system in their favor. Undoubtedly, it was the home to casual insider trading (“I hear bad things are happening at Meta!”) and the sharing of contact info for powerful politicians and regulators.

When money is lost, the rich get a government bailout while everyone else gets lectured on needing to “budget better.”

Money is Fake.

It’s a cliche, but it’s true.

The reason the run on SVB led to its collapse is that the bank didn’t have the cash on hand to give to its depositors. When they showed up wanting to withdraw, the bank responded, “We don’t have it.”

This happened because Capitalist banks operate on the fractional reserve system. When someone deposits money in their account, the bank lends that money and charges interest. So, if you deposit $100 in your account, the bank will lend $10 to me. Now I have $10, but your account still says “$100.”

Viola! $10 was just created out of thin air, which can be used for investments and starting a business. This create-money-out-of-thin-air approach is the backbone of the Capitalist economy.

“Money is fake” is often chided as an oversimplification. But it’s the truth. And as it’s true, it raises the question: “Why are people living on the street because they don’t have enough of this artificially created asset?”

Once you begin asking that question, you begin to question the entire Capitalist structure.

JoeWrote explores and explains Leftist politics. Even if you don't consider yourself a Lefty, you'll appreciate JoeWrote for its simplicity, clarity, and commitment to human-first principles. Find his writing here.