Why banks are failing
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The Silicon Valley Bank collapsed this past Friday, on March 10. As the second-largest bank failure in U.S. history, it quickly made headline news all across this nation. Very soon after, on Sunday, March 12, the Signature Bank out of New York also failed, as the third-largest bank failure.
The Silicon Valley Bank was a premiere bank for startup businesses, especially tech startups. Before it failed, the Silicon Valley Bank had more than $200 billion in assets and was the fourteenth largest lender in the U.S. “Forbes” listed SVB as one of America’s Best Banks for 2023, and Jim Cramer (the former hedge fund manager and host of “Mad Money” on CNBC) had advised people to buy stock in SVB just a matter of days before the collapse. If you were going to start up a new tech company, SVB was probably where you’d bank.
Thanks to a boom in startups from 2020 to 2022, paired with artificially low Federal Reserve interest rates and lots of free “stimulus” money being thrown around by the government, SVB’s deposits went from $60 billion in 2019 to nearly $200 billion in 2022.
SVB needed a “safe” place to invest all of this money that was coming in, so they invested $80 billion worth into mortgage-backed securities, which had a yield of 1.5%. With startups booming and federal rates at or near 0%, a 1.5% return was a pretty good deal at that time. What SVB unknowingly did is called malinvestment, and this can happen when the fed decides to hand out money like it is candy.
As we all have personally experienced whenever the feds start handing out money, as with prior bailouts and stimulus checks, inflation follows. Inflation happens because there was no value tied to the dollars the government whipped up to hand out; that money may as well be counterfeit money. Whenever we get more new dollars dumped into the economy, without a corresponding increase in assets or services to compete for those dollars, people have more money in their pocket to compete against the same limited supply of goods. With more dollars available to compete for the same limited supply of goods, the goods will increase in price to compete for those extra dollars.
In reality, whenever a good requires more dollars to acquire it; not because it is rarer, but because there are more dollars available; it is because the dollars have a reduced buying power, making them worth less than they were before.
This is what the government prefers to call “inflation” of costs, rather than a “deflation” of the value of their money, but they are in actuality one and the same. This is a con that the fed has been playing for many decades now. Those who get the money first are able to make purchases before the economy can react to the increases in supply.
This makes the rich richer, while those of us further down the financial food chain are left having to use more and more of our depleted-value dollars to purchase fewer and fewer inflated-priced goods. Thanks to the stimmy checks, inflation recently went through the roof. In an attempt to cool off rampant lending, the fed chose to start raising their rates. Suddenly, the 1.5% rate was no longer a good return, and with each increase of the feds rate, the SVB lost billions.
As both inflation and federal rates increased, the economy started to cool down. The startups then began to make less money and correspondingly began to deposit less and less money. To try to free up some of their assets, SVB announced that they would sell some of their stocks, at a loss. After hearing of this, investors began to panic, and SVB’s shares fell by nearly 70%.
With the sale of shares failing miserably, SVB had to resort to offering to sell their entire bank. At this point, major venture capitalists and financial pundits publicly advised everyone to get their money out of SVB. This then sparked a run on the bank, which led to it being shut down.
That was on a Friday, and everyone was hoping over that weekend that this problem was contained and specific to just the one bank. Then on Sunday, Signature Bank had to shut down, as well.
Signature Bank catered primarily to large businesses in big cities, thus the reason that Signature collapsed was for different reasons, but those reasons were because of the same original cause. Signature had decided to invest heavily into cryptocurrency as a side gig. But crypto was also a malinvestment, because it was not immune to the effects of the fed dumping unbacked currency into the economy and then later raising their interest rates.
With more people having more money in their pockets to spend, many invested into crypto, causing values to skyrocket. But as explained above, it was less that crypto was worth more, and more that the U.S. dollar was worth less. As the fed began to increase their rates, crypto, like the mortgage-backed securities that SVB had invested into, could not hold up to the pressure and began to collapse. Since the FDIC only insures the first $250,000 in an account, many of those big businesses started pulling their money out, causing Signature to implode.
In order to try to stop more banks from following, the government announced that it was backing the full deposits of anyone with money deposited in SVB or Signature and that executives and investors would get nothing. This is in effect a bailout for people who used the bank, but not for the people who owned them.
Despite the claims by politicians that the promise to cover losses will come from FDIC and other set-aside funds, because the FDIC and those other funds enjoy implicit guarantees of taxpayer backing, they are in the end being paid for by “We the Taxpayers.”
There’s only one problem: That doesn’t stop what caused these banks to fail. The economy is still steadily heading into a recession, and inflation is still going up. If the fed lowers rates to try to save the banks, inflation will go even higher, and that would make things even worse. But no matter what the federal government does, banks are still currently hemorrhaging money by the billions with the increased rates.
The second and third largest bank failures in U.S. history aren’t an isolated incident, so don’t be surprised to see more failures in the coming days and weeks. These endless boom/bust cycles will continue as long as government controls money and hands it out to its buddies at our expense, instead of leaving banking to a free market, as was intended by our founding fathers that warned against having a central bank.
“We the People” must demand that our representatives in Congress end the fed, end corporate welfare, and get our government out of banking!