3/13/23

Busted bank

Busted bank

SVP, done in by a cliché. [Source: "Broken Piggy Bank" by Images_of_Money is licensed under CC BY 2.0.]

This is what makes me a fan of Arnold Kling: clear, succinct descriptions.

He is an intellectually curious economist, with deep theoretical knowledge about economics. His daily newsletter surveys the ideas landscape, searching for what he rates as good ones to pass along. His criteria are about intellectual curiosity and honesty rather than tribal loyalty or ideological rigidity. Which is not to say he doesn’t have any biases. He is a conservative-leaning libertarian, and says so.

His take on the Silicon Valley Bank bust exemplifies his succinct style. A snippet:

When interest rates go up, the value of a portfolio of fixed-rate bonds or mortgages goes down. Roughly speaking, if the bank paid $100 to buy a long-term bond with an interest rate of 2-1/2%, and now the interest rate on a comparable bond is 5%, the bank’s bond is worth about $50.

The regulators should make you [as a bank] mark down the value of your assets to their current market value and force you to shore up your capital. They should make you stop paying dividends and executive bonuses, for one thing. You should not be allowed to make any more risky loans, because of the moral hazard: if the risk pays off, you return to profitability; if it goes badly, then the taxpayers take a bigger hit via the deposit insurance fund. You have an incentive to take desperate gambles.

Read the whole thing—it doesn’t take but a minute. He makes a case against the government’s banking regulators allowing banks to fake the value of their assets. But he goes on to describe the way banks and government support one another in lousy behavior: banks in faking the values of assets on their books; governments in borrowing as if there will never be a day when the bills come due.

You can agree or disagree, but his description for how the system works as opposed to its ideal is easy to understand.