Authored by Roy Sebag via GoldMoney.com,
On July 11, 2008, news broke out that California based IndyMac Bank suddenly failed and was to be shut down by banking regulators. Within minutes, thousands of bank depositors swarmed their local branches. A jarring video covering the event can still be viewed online. In it, a puzzled CBS news reporter approaches people queueing in the streets and asks them why they have showed up en masse to withdraw their funds from the bank.
The reporter approaches Lisa Hester Lerner, a female depositor who rushed to the scene after having discovered that everything above the insured limit in her online bank account had disappeared. She had this to say: “I think it’s mass hysteria. I think this is similar to what happened in the Great Depression. And I think that everyone wants their money, and they want to touch it and hold it and see it.”
Nearly fifteen years after the 2008 financial crisis, retail bank depositors have been plunged into a renewed sense of fear as bank runs abound from Silicon Valley to Manhattan to Zurich. Last week, Silicon Valley Bank, Silvergate and Signature Bank New York failed. The US Treasury, FDIC, and the Federal Reserve were forced to step in by providing an “emergency rescue” package that will guarantee as much as $400 billion of uninsured deposits. Over the weekend, the Swiss government forced a merger of Credit Suisse with UBS by changing the country’s laws in an effort to halt a bank run on the 166-year-old institution.
These privileged bailouts, which were not offered to those unfortunate IndyMac depositors in 2008, have rightfully evoked a conversation about moral hazard which is eerily reminiscent to the Occupy Wall Street movement years ago. While the financial conditions which led to the recent bank runs are in some ways very different to the conditions underlying the start of the 2008 financial crisis, many in the public square today feel that much of the underlying anxiety, anger, and confusion from that defining period of a generation has never really disappeared.
Nassim Taleb, the author of the bestselling book The Black Swan is one of those people. According to Taleb, the 2008-9 bailouts were a “blatant case of corporate socialism and a reward to an industry whose managers are stopped out by taxpayers”.
Taleb continued: “Remember that bailouts come with printed money, which effectively deflate the wages of the middle class.”
It was not surprising then to see Taleb criticize the recent bailouts with similar perspicuity. Last week he blamed venture capitalists for taking inordinate risk by banking with Silicon Valley Bank, causing a bank run when they noticed the institution was on the brink of insolvency, and then begging the government for bailouts when they realized they would be unable to withdraw their uninsured deposits in time. “They are all libertarians until they are hit by higher interest rates,” he concluded.
In an opinion piece for the Wall Street Journal, Vivek Ramaswamy, the entrepreneur turned US 2024 Presidential Candidate, similarly blasted the recent bailouts. He argued that the issues at the banks were a “simple case of bad risk management”, and that they were, at best, a case of incompetence, or at worst, a case of moral hazard where bank executives took on excessive risks with the knowledge that a bailout would materialize in the case of failure. According to Ramaswamy, Silicon Valley Bank’s “real hedge was to curry favour with the Biden administration.”
On the other side of the debate were three notable voices: David Sacks and Gary Tan, both venture capitalists based in Silicon Valley, and Bill Ackman, the New York based hedge fund manager. Over the weekend of March 10, 2023, these three flooded social media with hysterical warnings about the risks to society and the need for the government to step in before markets opened on Monday. Some commentators have observed how these sensational appeals for government action placed a great deal of political pressure on the Secretary of the Treasury Janet Yellen and the Chairman of the Federal Reserve William Powell to take radical action, which of course, they did. Tan, went so far as arguing that this was “an extinction level event” that demanded an urgent solution.
In David Sacks’ own words: “The only reason people are being stubborn about this point is because Silicon Valley Bank has the name Silicon Valley in it. If this was a farmers’ bank and it was 40,000 farms, small business farms that were on the hook, everybody would understand. The arguments being made would be: we can’t let 40,000 farms go out of business. They didn’t do anything wrong. They just trusted when they put their money in a bank that it was safe.”
Bill Ackman, echoing Sacks, said that the government did not “bailout” Silicon Valley Bank because, unlike in the 2008 financial crisis, the government did not inject taxpayer money into the banks.
To his mind, the government “did the right thing for the country.”
The position advanced by Sacks and Tan is patently false. As Roger Lowenstein pointed out last week in his own opinion piece for the NY Times: “In the rescue of Silicon Valley Bank on Friday and of Signature Bank in New York two days later, the FDIC overtly ignored the cap and rescued all depositors, irrespective of size. This is a breathtaking leap.” In response to Ackman’s line of thinking, Lowenstein had this to say:
“Federal officials have seized on a technicality to claim that it is not a bailout…. However, in the sense that banking customers are a pretty big group, the ‘public’ will be affected. Once you take risk out of a part of a bank’s operations, it is hard to let market principles govern the rest… the bailout does nothing to address the condition that fostered financial instability: inflation. It may even exacerbate it.”
While the discourse is certainly polarized, with those firmly in the bailout camp and others firmly opposed, it seems that both sides are swiftly focusing on surface level talking points. The conversation, it seems, is being positioned in the financial media and from the institutional class in the following way: The recent bank runs have been caused by price declines from mostly safe assets. Therefore, monetary authorities need to focus on low contagion risk, decisive banking facilities to limit systemic damage, and the need to improve the health of bank balance sheets.
The party lines will tow their diagnoses and purported cures. But isn’t there a bigger problem?
Peering deeper into the cultural tension and anxiety, what feels different for many of the Occupy generation, and what you likely won’t hear in much of the financial media, is not that this was another unexpected bank crisis and bailout, but that an entire, mostly unvoiced group of people find both the bank failure and the bailout entirely predictable. But they feel they have no alternative in the matter, or even a voice. This is just the way the system is.
These are people like Lisa Hester Lerner who just want to touch, hold, and see their money. This desire for a tangible solution reflects the real tension that many of us feel to be at the heart of things: that our abstract financial system is out of balance. And out of balance with what? With nature itself.
The ideal relationship between humans and nature is obvious enough. We work with the land, forage for food, till the soil, produce crops, and after the laborious harvest season, we enjoy the fruits of the land, and conserve the surplus for the winter months. Unexpected calamities may occur – a drought, a rough season, a case of blight or disease – but, sure enough, with care and patience, the cycle reassumes its course, and we reap what we sow in time.
Most of us today don’t work with nature anymore. We go to offices, sit at desks, take home paychecks, feed our families and pay the bills, and hopefully come away with something at the end of the month to put away into the family nest egg. Yet the basic principle still stands: it is entirely natural for us to store away a portion of the harvest into “savings” and conserve it for the colder seasons.
But the human institution today is no longer harmonious with the natural economy. The money in the paycheck is not as real as the food we harvest and eat. This is because our modern society has been collectively systematized into the abstract. Your savings is no longer grain in a storehouse, nor is it silver in a purse or gold in a vault – it’s a number on the screen of a bank’s website. Refresh the page and it may be gone.
This isn’t populist anger. It is plain enough that the abstract system is already out of balance with the natural economy. It speaks an entirely different language. Instead of a physical reward, earners are given a nominal sum – and you better hope that sum isn’t capped at a wage while the government’s pool of printed money drowns its real purchasing power. Instead of savings that are concrete and ready-to-hand for the future, savers are forced to put away their time and labour into the black hole of risk otherwise known as a bank.
Throughout history, great civilizations collapse when human institutions mistake themselves to be unaccountable to any objective standard of measure and reward, or when they think themselves to float above the tides of nature. To believe that we are exempt from this universal law is either a sign of great imprudence or perilous maleficence.
In my book, The Natural Order of Money, I argue that there are two economies: the real economy and the service economy. The role of money is to balance the relationship between these two sectors in relation to our shared environment of the natural world. My conclusion is that only natural money can achieve this function.
A bank run can and will take place even if natural money is used, but there is a great distinction in the possible actions available to the government. A modern bank run predicated on fiat money, as we have seen by the recent bailouts, no longer provides a “check” on the system. Rather, it consolidates the system into smaller but more powerful central banking institutions. While central banks swiftly print new money to provide liquidity to the banks facing runs, this digital money is just as swiftly withdrawn from the failing bank into a larger, systemically important bank, or instead into a government bond. In other words, the bailouts reinforce the system itself by socializing the failure and privatizing the gains.
With natural money, a bank run has to be respected, it cannot be papered over by devaluing the purchasing power of society’s savers. This in turn would allow the government and central banks to actually complete the task they set out for themselves last year, which was supposed to be to fight inflation, not print more currency.
When central banks are compelled by social media trending hashtags and evanescent hysteria to bailout failed banks, they fail in their primary duty to society as the privileged administrators of money as a social contract. The result of this folly is another deferral of the inevitable re-balancing of our abstract economies with the natural world.