Instability in our financial system has led to several bank failures this year. There are several factors leading to the collapse of these banks. Rather than letting these failures run their natural course, the government has stepped in (as usual) and guarantee the depositors get their money back. Let’s see how does the socialization of the banking system affects you?
Background
Your deposit is considered your asset, but simultaneously it’s the banks liability.
The bank does not place your money in a safe, ready to hand it back to you at a moments notice. They reinvest your money by loaning it out to someone else.
They collect interest on those loans, pay you a much smaller amount on your deposit, and pocket the difference. This is positive financial arbitrage.
When you deposit your money at the bank, you are taking on counter party risk. If they don’t do a good job with your money, they may not be able to give it back to you when you ask for it.
Latest Banks Failures
Silicon Valley Bank, Santa Clara, CA, the 16th largest bank in the U.S. with $209B in assets went bust on March 10, 2023.
Signature Bank, New York, NY with $110.4B in assets went bust on March 12, 2023.
First Republic Bank, San Francisco, CA with $229.1B in assets went bust on May 1, 2023.
Those are the failures at the time of this post, but click here for the latest.
The SVB Case Study
Silicon Valley Bank (SVB) may be the first in the latest wave of bank failures, but it certainly isn’t the only one facing the systemic problems which led to it’s demise.
When a pin pops a balloon, it’s often the pin that get’s the blame, but it’s rarely the pins fault.
Silicon Valley Bank (SVB) had over $200B in assets, but when the depositors asked for the money back, they did not have the liquidity to meet the withdrawal requests. It was a run on the bank.
They had to sell the long term bonds they made at low interest rates at a loss, because interest rates are higher now. Bond prices are inversely proportional to the interest rate, which is the yield.
They took a huge loss on the sale of these assets, and could not meet the demand, thus going insolvent.
Long story short, the government stepped in and took over the bank, promising to “make whole” all the depositors, over and above even the $250K insurance limit, while looking for a buyer for the bank.
The FED will loan money to the failing banks, but when other banks in the same situation need help, the saga will continue.
How this affects you
The FDIC claims no taxpayer burden will be felt here. But how could that possibly be true? The plumbing of the financial system is complex and fundamentally fragile.
If the FED will simply backstop and “solve” any and every flaw in the monetary system, why have the FDIC at all? Why require sound money? They will maintain control of the currency and create more of it whenever they want.
What does this mean for you and me? We are witnessing yet again the socialization of the monetary system. That ultimately devalues your dollar and takes away your freedom.
How so?
Keep your eye out for the calls for Central Bank Digital Currency (CBDC). If the banks are so fragile, they will say the centralization of the monetary system is the solution.
However, that comes at a cost. When they control the system, they control you.
History never repeats itself, but it does rhyme.
What can you do?
Don’t be afraid of bank failures. Take control of your assets today. Own real things, things that retain their value, produce income, and that you control. Learn to manage your counter party risk.
Listen to 11: When The Bank Fails and 12: History Of The FDIC for a deep dive on the situation.
Finally, be encouraged. Do not worry.
Therefore do not be anxious about tomorrow, for tomorrow will be anxious for itself. Sufficient for the day is its own trouble.
Matthew 6:34 (ESV)
