Fires are always burning. Always. Even the naively referenced “great moderation” (1985-2007) was defined by a number of major market corrections and crashes (24% on October 19, 1987 alone), currency debacles, business failures, not to mention wars and terrorist attacks that invariably spook the commercial sector.
What rates stress is that the fires are a sign of progress. Capitalism is the personification of messy, at which point it shouldn’t surprise any serious reader that in the most dynamically capitalist country on earth there would be routine scenarios that elicit fear in the marketplace. The fear personifies progress precisely because it signals the migration of precious resources into the hands of better stewards.
The persistence of commercial fires in the U.S. is something to keep in mind with Silicon Valley Bank (SVB) top of mind. The bigger concern would be if the lineup of businesses never changed due to extreme tranquility. Without ascribing “bad” or “mediocre” to SVB, economies gain strength from periods of weakness as the bad and mediocre are replaced by the good and great.
This is why it’s important to dismiss the popular commentary about how what’s happening with SVB signals the bitter fruits of a “credit mania” born of “easy money” care of the Federal Reserve. The latter to a high degree sums up what is, and what has long been the argument of the Wall Street Journal’s editorial page. Which is too bad. The analysis ignores the simple truth that no one borrows money as much as they borrow access to the goods, services and labor that money can be exchanged for. Translated, soaring credit is a logical consequence of soaring production.
As for “easy money” care of the Fed, to believe this simplistic narrative is to believe that the Fed, and the Fed alone, can overturn an ironclad law of economics about price controls always and everywhere resulting in scarcity. The Fed narrative also presumes money to be incredibly dumb; so dumb that those with title to it would blithely ignore the genius of compound returns so long as the slow-witted at the Fed are decreeing credit “easy” or “costless." It’s a long way of saying that the Fed didn’t do this despite the desire among some to tie the central bank to seemingly every fire.
Some will of course point to the Fed raising rates, and that the hikes had a negative impact on Treasuries that SVB owned and owns. This analysis presumes that every time the Fed hikes banks fail, or experience a run on deposits. No on both counts.
No doubt SVB’s assets were compromised by Fed rate increases, but the fact that its assets were and are safe and liquid hardly indicts SVB. Andy Kessler has pointed out that the Fed had loudly telegraphed its rate increases thus the question of why SVB didn’t move into shorter Treasuries over 5 and 10-years, but that’s easy to say in retrospect.
To see why, just consider all the endless speculation about what the Fed will or will not do. This doesn’t take place because the Fed’s future machinations are a sure thing, but because they’re not. If SVB had moved into 3-month Treasuries the latter would in retrospect have been a good move, but hardly a sure thing. Had the Fed ceased its rate fiddling, such a move would look foolish at present. In other words, it’s hard to indict SVB for having made longer-dated Treasuries easily the biggest category of assets on its books.
It all speaks to what’s not true about SVB: it did not nor does it have a liquidity problem. See its Treasury holdings. And it wasn’t taking major risks as the “easy money” and “searching for yield” crowd continues to assert. SVB was doing the opposite of risky.
Some have happened on “duration mismatch” as the source of SVB’s problems. Except that the latter is as old as banking is. Almost by definition banks are going to “rent money” at short-term rates in order to buy or lend long. Banks are not warehouses for cash as the “duration mismatch” crowd wants them to be. Though if there’s demand for warehouses, the markets will meet those needs as they always do.
My RealClear colleague Joseph Calhoun has written about the drawdowns at SVB. Located in the heart of – yes - Silicon Valley, a not insubstantial portion of the cash SVB holds constitutes the funds of VC-backed businesses that routinely fail. Add to this that VCs have tightened the reins on those businesses, thus intensifying the drawdown of cash from SVB. Still, Calhoun reasons calmly that this alone wouldn’t fell a bank, at which point it rates stressing yet again that SVB had its cash in highly liquid assets.
Calhoun points to Peter Thiel essentially yelling “Fire” last week, and there lies a big question: why did he? Why in consideration of how conservatively SVB had once again allocated the funds in its care? The answer to this question will seemingly unlock greater truths?
What about bailouts to stanch “contagion” or the FDIC stepping in as it did? Ok, but why? Especially if SVB faces failure, any financial institution or business more broadly could own an impressive franchise on the relative cheap, and would be compensated for making depositors whole by the latter. So while endless questions remain, it’s worth stressing that failure defines capitalistic progress such that government shouldn’t play a role in what would ably solved by market actors if government would just get out of the way.
