My American Madness post four days ago, about a movie depicting a run on a bank in 1932, turned out to be very prophetic, because of the run on Silicon Valley Bank in San Francisco, leading to its collapse yesterday.
A good friend who lived in San Francisco for many years sent this note:
The bank in the Bay Area failing made me nervous. Of course it was a special kind of bank, but the FDIC only bailing out people with less than 250K made me sit up. Knowing that and seeing people who are very worried are two different things.
This was my reply:
Yeah, I’ve been following news of the Silicon Valley Bank failure. Here we are, exactly 90 years after FDR became president during the worst of the Great Depression, and a run on a bank continues to be a very real and existential threat to depositors. Losing the private insurance on my IRA’s, which after the maturity dates will be covered only up to the FDIC limit of a quarter mil, was a concern before, but it’s certainly much more of a concern for me now.
SVB’s failure is being blamed by some pundits on the Fed’s “too rapid and overly aggressive” interest rate increases, but to me that’s political axe-grinding. There had to have been underlying problems caused by bad financial management at the bank. Its very mission, catering to tech startups and tying it into investment banking, made it much more susceptible to failure than a chartered commercial bank should be. A 5% federal funds interest rate being considered excessive is possible only because banks enjoyed a 0% rate, or close to it, for such a long time following the Great Recession.
As I have been saying here and elsewhere for years, the Fed should have started raising rates gradually a long time ago. My issue was primarily with artificially low interest rates putting too much money into Wall Street, but now it’s hitting commercial banking, albeit with close ties to shadow banking.
I met with my (very conservative mutual savings) bank last month to discuss renewing my IRA CD’s. My jaw dropped seeing what they would earn at 4.3%, compared to the 2.5% I’ve been getting for the past five years. It seems likely the rate will go up to 4.5%. I was initially delighted seeing the numbers, but now I’m worried that the bank could possibly run into trouble.
