SVB and Signature Bank Collapse: Let Losers Lose

Winners win. Losers lose.

Such an easy concept to understand, but for some reason, hard to implement in practice.

By now, you've heard that banking regulators have taken control of two major banks-Silicon Valley Bank and Signature Bank. If you haven't, well, you deserve whatever happens to you.

I won't bore you with every little detail, but let me give you the gist of it.

Silicon Valley Bank started lending money to companies that were not doing well. These companies could not repay the loans they received, which caused SVB to lose hundreds of billions of dollars. SVB also loaned money to start-up companies that were not making a profit. Ordinarily, this is not the worst business practice because a few start-ups will eventually produce profits. The problem is when a bank throws money at start-ups AND invests in unsuccessful companies. This means that SVB is taking on a lot of risk by giving these loans, and if the companies don't succeed, then SVB won't get their money back.

Signature Bank suffered a nearly identical fate.

Check out this article from Seeking Alpha and this video from the YouTube channel ClearValue Tax for more in-depth analysis.

America has a history of rewarding bad behavior.

It started during the Panic of 1907. The Knickerbocker Trust Company, a massive New York City bank, invested almost entirely in the stock market. When the market caved and depositors wanted to pull their gold from the bank, KTC folded, causing an economic crisis.

Shortly after, the National Monetary Commission was created in 1908. Led by big bank zealots like Republican Senator Nelson Aldrich and other economists in the J. P. Morgan and Rockefeller orbit, the commission conducted a report blaming small, rural banks for the economic crash. The commission mobilized its big bank propaganda by convincing newspapers to run flattering editorials about the necessity for centralized banking, garnering more public support and pressuring politicians.

After the secret meeting on Jekyll Island in 1910 and the failure of the Aldrich Plan, big bankers were not going to let the opportunity to control the country’s money supply slip through their hands. Democrat President Woodrow Wilson, also friendly with many elitist bankers, signed the Federal Reserve Act of 1913. The Act marketed the Federal Reserve as a standalone entity to ensure the "elasticity" of the American dollar. In reality, the Federal Reserve became another branch of government, using taxpayer dollars to fund its ambitious and self-serving conquests. The Federal Reserve Act was to the Aldrich Plan like ObamaCare was to RomneyCare. They were identical outside of a few nominal changes.

Central banking guarantees the big banks never lose. Since the Woodrow Wilson Administration, the big bank's mistakes have been erased thanks to American taxpayers.

Imagine a scenario where your next-door neighbor, let's call him Jack Assante, starts a business selling mud sandwiches. He takes two slices of bread, goes outside, grabs a handful of dirt, slaps it between the slices, wraps it up, and mails it to his customers.

I'm sure Jack Assante will sell some mud sandwiches. People will buy anything. But his business will not last long. He should have the freedom to start his own business, but others have the sovereignty to not support his mud sandwich venture.

Let's imagine Jack wasted $5000 on his business and the government reimbursed him for all his losses. He is incentivized to dabble in another fruitless and moronic endeavor. The risk/reward ratio is turned on its head.

This is a silly example, I know. The point is there need to be consequences for foolish and reckless decision-making. If not, there will be more of it. It explains why there were more car accidents after implementing safety features like anti-lock brakes. It’s why robberies are on the rise. Politicians are passing pro-crime legislation and the police have become demoralized and afraid to do their job. It partly explains why people have become less healthy the more advanced medicine has become. 

When the government establishes a precedent that it will use taxpayer dollars to fix failed banks, those banks will take on riskier and riskier behavior. So why bother being careful with other people's money when you know you'll get a bailout regardless? This is how neo-liberals and neo-conservatives think. It's easier to spend someone else's money in the name of climate change and social justice than it is their own. It's easier to send someone else's child on the battlefield to fight a forever war than it is their own children.

This is not how a healthy free market is supposed to operate. Let me be clear: I am not a free market die-hard. Part of America's fiscal secularism is fueled by quasi-free-market capitalism. But competitive free markets work in most cases. Thomas Sowell once said, "Competition does a much more effective job than government at protecting consumers." Decentralizing the banks would be a great start to stabilizing the American economy and protecting American consumers. Getting back to the gold standard would be the best way, but let's not get too crazy here. Baby steps.

Lack of competition drives the welfare state. American blacks stopped competing after Lyndon Johnson's Great Society programs were signed into law. A black person gets their welfare money faucet shut off for making too much money in a year. So they stop competing, collect their welfare, and live like a Serf. Many American whites have followed suit.

The issues with centralized banks preceded Biden, Trump, Obama, the Bushes, and Clintons.

In earnest, 1913 was the first time in American history when losers were allowed to win. Fast forward a century and a decade later, losers are running the country.

When big losers lose, we all lose big.