You don’t need to get an economics degree from Princeton to understand economics. In fact, it will likely imbue you with a dangerous level of self-importance and indoctrinate you with dogmatically false concepts (see Princeton grad Jerome Powell who thinks destroying an economy solves inflation).
All you need to do is read my columns and watch my podcast and remember Rob’s Rules. For absolutely no charge I explain easy to remember rules based on the predicable activities of human nature. The foundation of the current “banking crisis” starts with understanding the Rob Is Right Rule of “Other People’s Money” and its “flip side” rule “You Fuc#ed Up, You Trusted Us” brilliantly articulated by Otter to Flounder in Animal House. Since they don’t teach these rules at Princeton, if you are a freshman, go ahead and drop out now, because you will never understand the way the world works without understanding the human elements associated with “property.” Have your parents put your yearly tuition into an investment account that I manage (for a fair and equitable fee of course). Then get a job selling vacuum cleaners door to door for four years. By the time your classmates graduate with their economics degree, you will know much more about economics and the world than they do.
Some banks are in trouble because their costs of borrowing has gone up 2,000 % over 12 months. Banks see their stock value rise when their deposit base grows, so they crave new deposits, but in an era of rising interest rates, not only do banks pay more for the money they lend, but they have to pay more for the deposits they take in. Banks make money by lending money out at rates higher than they pay depositors. Prudent banks manage their risks, by limiting exposure to depositors, having a diverse loan portfolio and maintaining a safe and proper ratio between loans and deposits. None of this is very difficult. Most bankers are incredibly boring people who sleep with the lights on because they are afraid of the dark. They only have missionary style sex, usually at appointed times after an episode of the Big Bang Theory. A big night out for them is taking their wives to pasta night at Olive Garden for the 25% discount. They love to play golf and work in their yards. At a cocktail party they will corner you and bore you to death describing every stroke they took on the links that day or the best place to get a lawnmower serviced. These are exactly the type of people that should be running banks.
Unfortunately, in certain geographical areas, being a banker is synonymous with being a celebrity. This is usually because things have been so good for so long they forget that their primary duty is to maintain that delta between money in and money out and of course to bore you to death with golf and grass mowing stories. And so it was with Silicon Valley Bank. Buy a bunch of fixed rate long term bonds and let the good times roll.
Why did Silicon Valley Bank implode? Other People’s Money! The best steward of property is always the owner of such property. The bankers at SCV were virtue signaling wokesters on steroids. DEI, LGBTQ+, ERG, ESG, blah, blah. It seems every bank officer saw his/her/it/them/they’s role was to proselytize the Gospel of Woke instead of minding the store. Reports are now leaking out about inflated salaries and benefits, not to mention extravagant spending by officers on dinners and entertainment. In essence, all the intemperate spending was Other People’s Money. So to all those who did or should have lost money, remember Otter’s immortal words, “you fu#ked up, you trusted us.”
I don’t have much faith in the ability of regulators to preserve the value of other people’s property, but assuming they have this capability, why didn’t the San Francisco Fed Chairman Mary Daily do a better job regulating SVB? Because she’s a lesbian! Just kidding, well not really. Mary got the job of regulating (making sure banks don’t go broke) because she’s a lesbian. I know lesbians are generally really good softball players, but I didn’t know the lesbian genome contained expert risk management skills too. Huh, who knew?
Mary thinks it is her primary job to let everyone know she’s a lesbian. She spends her time lecturing the world on how cool Black Lives Matter is and the economic benefits of letting domestic terrorists burn down cities. She’s a big proponent of LGBTQ+ rights arguing the need to slap penises on distraught 13-year-old girls who didn’t make the cheerleading team. According to Mary, climate change is an existential threat to the banking system, but the imbalance between bank deposits, actual performing loans and the declining value of banks’ bond portfolios are not a concern. How can she be this obtuse? Because it is not her money!
Speaking of Black Lives Matter, it is a violent, Marxist, terrorist organization. It wants to obliterate the nuclear family and openly advocates for the abolishment of private property. It is responsible for billions of dollars of property damage and many deaths. JP Morgan, Bank of America, Goldman Sachs, Execution and Fifth Third Bank gave over $60 billion to BLM. If some pasty white, long haired freak with satanic tattoos dressed in black ( wearing a face mask of course) knocked on your door and asked you to give $100 to obliterate private property and the nuclear family, I am taking a wild guess that you might not pull out your wallet? Yet if you deposit $ 1 million with your hip, virtue signaling bank, it will use YOUR MONEY to help obliterate private property and the nuclear family. Now, do you see how the rule of Other People’s Money works?
Banks are corporate entities. Their sole job is to make money for their shareholders. Period. I don’t care if the bank is using my money to promote the Gospel of Jesus Christ or to save the lives of little puppies at the SPCA, I am against it. Moreover, are you really going to trust, with your money, the judgment of those who think there are more than two sexes, and that cow flatulence will lead to New York City being underwater by the spring of next year?
If those running any financial entity have personal risks as opposed to collective risks, the entity is much better managed. The rule of Other People’s Money always leads to inefficiencies, perverted incentives and often disaster. Banks promise to make everyone else liquid, yet they maintain the most debt compared to their equity of practically any industry. What would the world be like if there was no deposit insurance? Depositors would take better care of their money. They would police banks instead of relying on rainbow warrior regulators. Bank officers would likely not get paid a dime unless the bank turned a certain amount of profit. Officers would likely be personally liable for a portion of losses. The no deposit insurance vacuum would be filled by the creative genius of the market where property owners protect their property. A better banking system would be the result.
So to all those who will take my advice to sell vacuum cleaners instead of going to Princeton, it is perverse incentives that cause bank failures and these are mostly caused by “Father Knows Best” government intervention, dictates and monolithic rule making which lulls us to sleep thinking Big Daddy has our backs. John Locke stated that the right to property is a natural right, and he understood that inherit in this right is the human inclination to nurture and care for one’s assets which leads to productivity, growth, stability and happiness. No doubt Washington policy wonks will want to put the banking industry on double secret probation, but we will always be Fat, Drunk and Stupid by thinking the solutions rest in Washington, instead of in ourselves.