“If Silicon Valley were a normal place, this past weekend might be remembered as the moment its libertarian instincts gave way to a profound appreciation for the healing power of government.” It didn’t take long, did it?
The words in quotes are those of Washington Post contributor Adam Lashinsky. He believes against all reason that Silicon Valley Bank’s (SVB) troubles have somehow revealed the genius and necessity of government. Not really. Actually not at all. If we’re being realistic, those in the banking industry must most disdain the combined actions of the Fed, Treasury and FDIC to backstop SVB. Think about it.
Failure doesn’t signal disappearance as much as it signals ownership changing hands. Which speaks to the genius of failure as an essential driver of progress. Economies gain crucial strength from periods of weakness precisely because poorly managed physical, financial and human capital changes hands at distressed prices. Silicon Valley itself is a monument to this truth.
It’s not the most prosperous economic locale in the world because all of its businesses succeed; rather it’s the world’s premiere locale for dynamic economic activity precisely because just about every business formed out there fails. Capital never resides long in lousy or mediocre hands for long, which is the point.
Please consider this truth with banking top of mind. How can it help the industry when government is always and everywhere ready to cushion the errors? Before answering this question, readers might ask themselves when Detroit was most prosperous: when carmakers were failing en masse in the 1910s and 1920s, or in the 1970s and beyond when what Lashinsky describes as the “healing power of government” was ever more present in the Motor City? Hopefully the question answers itself.
Failure is what powers prosperity simply because failure is what replaces the bad with the good. To then pretend that banks, for being banks, are somehow immune to the cleansing genius of unfettered freedom to go out of business is to reveal herculean naivete. And it’s also to ignore empirical realities about the declining importance of banks. Indeed, while SVB was the 16th largest U.S. bank, it was the 16th largest bank in an industry that is losing market share by the day.
That banks are rapidly shrinking as sources of credit is a statement of the obvious, or should be. And government looms large. You see, bailouts are never free. Not only does the stasis they engender repel the very human capital necessary for progress, it cannot be stressed enough that governments don’t just write a check to troubled institutions only to walk away; rather governments want their say in how what they’ve “saved” is run. Governments are “conservative” in the business sense, and it shows. Contra Lashinksy’s droolings, “the healing power of government” has been anything but for banking.
Yet the self-proclaimed Valley insider persists. And in persisting, he feeds his angry flock of government apologists the oft-used laugh line about how “the Valley wouldn’t exist without the feds.” Readers have surely heard this one, and it's incredible that even the ignorant could believe something so at odds with reality. The tallest of tall tales says that since individuals inside government created an intensely crude version of the “internet” with no market applications, this means government created the internet. Actually, governments only have resources to deploy insofar as the private sector produces them first. In other words, without private sector ingenuity to tax there would be no government, and there certainly wouldn’t have been ARPANET.
From there, Lashinsky unsurprisingly ignores that technological advance is all about making it possible for individual commercial genius to reach as many people as possible. Translated for those who need it, someone with the business talents of Jeff Bezos in 2123 will be able serve billions more people much better than Bezos’s Amazon in 2023. Considering the previous truth with the internet top of mind, government tinkering with privately produced resources was NOT an essential driver of what became the internet. More realistically, government’s persistent capture of production that has always been privately created logically delayed the internet’s universality, not to mention future advances that will render the internet (remember 2123) primitive by comparison.
Back to SVB, absent the “healing power of government" it's likely already been taken over not by the FDIC, but by a private owner able to make its depositors whole after buying a well-regarded banking brand on the relative cheap. Better yet, the banking industry itself would be better off absent government's "healing" hand for market factors delivering the institution into more capable hands. Oh well, one can dream. But to wake up is to witness the real nightmare of the FDIC robbing the banking sector of its future by shielding it from errors committed in the past.