Bank Shots

 

I am no economist, and if I offer you financial advice, you’d be wise NOT to take it. Don’t say I didn’t warn you. But like many of you, I’m still trying to get my head around this banking crisis, if that’s what we have here.

After depositors started pulling money out of the Silicon Valley Bank and collapse was imminent, the federal government stepped in to backstop the depositors. Some critics have called this a bailout, while the government insists this was different from 2008, because the bank executives and stockholders this time were not protected. The executives had made some bad investment calls, and stockholders are considered risk-takers, and they lost.

The bank had invested a lot of money in long-term Treasury bonds, which seemed like a safe idea when interest rates were low, but thanks to the Federal Reserve’s raising them to fight inflation, the bonds, purchased at the time they were, have lost much of their value. And SVB catered to the tech industry and startups. As for banks catering to niche industries, though, haven’t banks in agricultural areas had to handle many farm accounts?

I personally hate high interest rates. It’s like having to pay extra for air. There are other causes of inflation besides high prices, spenders willing to pay them, and workers demanding more money. The pandemic and supply chain problems were no help. The Fed has only one tool to control inflation, though. It’s like using a huge sledge hammer to drive a nail, but the nail still has to be driven.

It’s no accident that banks traditionally have occupied imposing buildings, often the tallest in town, with marble floors and ornate fixtures that oozed “stability.” We say things like, “You can take that to the bank!” But it’s not the rock-solid building, or even the money in the vault, that provides stability, it’s depositors’ trust. Potential account-holders may shop around for a friendly bank that doesn’t beat them up with fees, but if an institution calls itself a “bank,” folks don’t usually have to ask, “Is my money safe here?” If trust disappears and everyone wants all their money out at the same time, however, most any bank would collapse.

The finger-pointing festival is in full swing, but the truth is, regulations, or the lack thereof, are only part of the problem. Many in both government and the private sector missed their share of red flags here. I do believe that the system is safe,  but it’s up to the powers-that-be now to keep depositors from going to the mattresses, so to speak.