A thought on the SVB failure

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In the U.S., Michael Brown, a venture partner at Shield Capital and former head of the Defense Department’s Defense Innovation Unit, told Marcus Weisgerber and Patrick Tucker of Defense One that the collapse of Silicon Valley Bank had the potential to be a big problem for national security, since a number of the affected start-ups were working on projects for the defense sector. “If you want to kind of knock out the seed corn for the next decade or two of innovative tech, much of which we need for the competition with China, [collapsing SVB] would have been a very effective blow. [Chinese President Xi Jinping and Russian President Vladimir Putin] would have been cheering to see so many companies fail.”

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:read::o:

I suspect those startups that the DOD finds promising will not suffer long for lack of funding. DARPA has lots of money.

Here's something to consider.

The real problem behind the SVB collapse is not regulatory neglect or a portfolio that was not diversified. It was twiddlers.

When I took economics back in the 1970s, the assumption was that the macroeconomy was a machine that can be controlled. Twiddle this dial and get that result. Twiddle another and get a different result. Twiddle a little bit and get a modest but knowable result and twiddle it harder to get a more dramatic response.

Problem though, and what no economist will admit, is we don't know really what is going on. Sure, we have theories to explain after the fact what happened but prediction is a lot chancier than we let on in our "science". There are just too many moving pieces and what was important the last time we did something is not so important this time around so we get surprised by a different result. When it comes to macroeconomics, we are all just guessing.

So the Fed decides that we need to twiddle with the money supply to ensure that the economy doesn't go bust during a pandemic and it shovels money out the door. The result of this, anyway, is predictable - interest rates rise and now banks which run on a business model assuming low interest rates are in trouble. Social media produces a new bank run. The government props up banks.

We've seen this movie before - the Savings and Loan crisis back in the 1980s. Same main problem - interest rates being driven up by the Fed.

I've come to the conclusion that Milton Friedman was right. The sole job of the Federal Reserve ought to be predictable, steady, small increases in the money supply to handle the transactional needs of a growing economy. That's all. Let everything else be. We'd soon be finding out that deficit spending is driving up interest rates and the pain of that will lead to calls for a balanced budget. But we don't do that. Politicians love to be able to twiddle the economy. It gets them votes. But in the end, we get things such as Silicon Valley Bank collapses and the public pays a big price for twiddlers.

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Originally Posted by Kevin

We've seen this movie before - the Savings and Loan crisis back in the 1980s. Same main problem - interest rates being driven up by the Fed.

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I like it when our friend pulls open the curtain to look behind it. We all learn from it.

Hunter

For the moment at least, the financial markets are weathering the storm. Key indicators are positive: the volatility index is down, as is gold, with all the market indexes being up for the second day.