Earlier this month, little known Silicon Valley Bank – the bank for tech startups and Midwestern identitarians alike – collapsed in spectacular fashion after a good ol’ fashion run on deposits. Within 72 hours, the Fed, Treasury, and FDIC announced that they would make whole all SVB depositors, whether or not their accounts exceeded the $250,000 insurance limit. Beyond revealing that many tech wizards were less financially sophisticated than NBA star Giannis Antetokounmpo, the collapse and subsequent bailout raised fundamental questions about the stability and nature of our banking system. To begin to make sense of all this, we invited six banking experts and friends of the blog to share their initial reactions to the unfolding drama....LPE Project
Christine Desan, Lev Menand, Raúl Carrillo, Rohan Grey, Dan Rohde, Hilary J. Allen
Christine Desan is Leo Gottlieb Professor of Law at Harvard Law School and the co-founder of Harvard’s Program on the Study of Capitalism.
Lev Menand (@LevMenand) is Associate Professor of Law at Columbia Law School.
Raúl Carrillo (@RaulACarrillo) is the Deputy Director of the LPE Project.
Rohan Grey (@rohangrey) is Assistant Professor at Willamette University College of Law and the President of the Modern Money Network.
Dan Rohde (@DanEricRohde) is an S.J.D Candidate at Harvard Law School and co-editor of Just Money.
Hilary J. Allen (@ProfHilaryAllen) is Professor of Law and the Associate Dean for Scholarship at the American University Washington College of Law.
The appropriate place to regulate is on the asset side”
ReplyDeleteYo, they ARE regulating the asset side… and the NPV of the assets is insufficient… hellllooooooo!
When the risk free rate is increased the NPV of all financial ASSETS …. Let me repeat that …. ASSETS… is reduced…
ReplyDeleteThis is the current problem… it doesn’t have ANYTHING to do with liabilities…
Yes. Banking issues emerge on the asset side, but the focus is mistakenly directed onto the liability side. This is why the central bank should obviate concern with the liability side by declaring deposits "money good" by providing unlimited liquidity as required — as Warren proposed.
ReplyDeleteThen the burden for mismanagement of the asset side is where it should be in a capitalistic system, on equity and debt. Including deposits as debt invites runs. This provides no advantage and injects a lot of risk into the system needlessly.
Moreover, the reality is that government cannot step aside for the market to do its magic in relation to the commanding heights of the economy like finance, energy, food, health. and so forth, which are really public utilities and should be treated as such.
For example, to reduce moral hazard the market is supposed to prevail in finance but everyone knows from experience that a government cannot just let the financial system collapse. Under stress, the authorities will step in and socialize losses.
Why not just get in front of that instead of pretending that "the discipline of market" is a principle of capitalism when letting a significant institution go under to set an example risks contagion, as with Lehman and now SVB.
Rather, the regulatory authority should provide discipline through proper regulation of the assets side of finance where the problems arise in order to head off problems before they manifest. But that requires competent regulators and according to Warren, they are in short supply. But that is an issue that can be addressed.
As far as the interest rate risk affecting the asset side that was at the bottom of the SVB debacle goes, the Fed created that by their ill-advised attempt to control inflation with rate setting. should never have happened. That policy should be put to rest for good as a failed policy based on faulty assumptions.
The way to deal with this is to recognize banking based on money creation as a public utility and treat it as such by restructuring the approach to banking, going in the direction of "plain vanilla banking," aka "boring banking."
Alon with that, review the financialization of the economy.
Tom,
ReplyDeleteEVEN IF you let them modify the rate,,, EVEN IF…. they could still figure out how far they could increase the rates before they would bankrupt their own depositories by computing the H.8 system AVERAGE (using composite system duration,etc) and then not exceeding that rate …
These dumb f-cks don’t even do AT LEAST THAT…
“ For example, to reduce moral hazard the market is supposed to….”
ReplyDeleteThe monetarist Fed increasing the risk free rate in unprecedented fashion is not “moral hazard”…
The monetarist Fed increasing reserve assets in unprecedented fashion is not “moral hazard”…
I don’t know where you are getting this…
Matt, the moral hazard that the market is supposed to discipline through loss has absolutely nothing to do with anything but the behavior of market participants. It is assumed that market risk will induce fear of loss as a balance to greed that corrects for excessive risk-taking.
ReplyDeleteHowever, history shows that this is not sufficient so governments add stipulations to correct for this, such as regulation.
A purpose of loss for equity and security holders in bankruptcy is supposed to create a disincentive for excessive risk-taking.
This has nothing to do with central bank monetary policy. There are also ways of addressing moral hazard institutionally. As the chief regulator of banks, central banks do have a responsibility with respect to oversight and regulation of banks. Greenspan blew off the rampant fraud in the mortgage market in the lead up to the GFC as "market froth." Then, as you have pointed out, the Fed compounded the problem by its disastrous policy to address the crisis that could have been averted at least so some degree if he had listened to the FBI warning about what was developing.