Saving banks may be a good thing but one has to consider which eco systems those banks serve. SVB was a cornerstone of the valuation economy, and that's an eco system which shouldn't get a bail out.
Silicon Valley Bank’s failure is not going to cause another 2008-style financial crash, so why did the American government treat Silicon Valley Bank like it did the rest of the banks after Lehman Brothers collapsed? Silicon Valley Bank (SVB) has received generous terms on its collapse. The Biden administration will not save the bank, but it will save all the depositors as well as giving very generous terms for other struggling banks. I think that’s a mistake as Biden doesn’t just save mismanaged banks, but also an unproductive business model.
The start for any discussion surrounding SVB should be the start-up scene around Silicon Valley as it had been the pillar on which SVB was built. As discussed briefly in last week’s blog post, the tech start-up scene was built on valuations. The aim of the game for any founder of a tech firm in the 2010’s was to attract Venture Capital (VC) funding which valued the company for its future potential rather than current performance. During a time when the cost of money was negligible VC firms made their money by trying to pick winners in very early start ups where the business model was to buy a stake in a small company for cheap and make money when the company was listed on public markets at a higher valuation. Most start-ups fail of course, but given how profitable it was to find a winner it was still a viable business model. The core of the business model was valuation; the idea was not to earn money by owning a stable and profitable business, but to own part of a business which other perceived as valuable.
“Innovations” like Bitcoin and WeWork couldn’t have happened without the VC eco system and banks like SVB which supported it. But many Silicon Valley darlings have never been profitable, they have just appeared promising due to extremely fast user growth. Why throw money at loss making technology firms? Because the market likes fast growing tech firms and so those firms often get high valuations despite not making money. In some ways this is like Keynes’ famous beauty contest where an investor needs to think about what the market thinks the market prefers. The hunt for high valuations was extremely profitable for successful VC firms like Andreessen-Horowitz and Sequoia but it is important to note that it wasn’t actually very productive. The idea behind VC was actually a US government programme which helped commercialise the semi-conductor but as it was adopted by the private sector it started producing less and less value for the community as the profit incentive didn’t align with the general interest.
The reason why I find the American government’s response to SVB’s failure so frustrating is how they allow the valuation economy to continue. Capitalism works on creative destruction, but for that formula to work there needs to be a real risk of being destroyed. As mentioned, the valuation economy doesn’t produce anything real. Economies grow by getting more efficient and people’s standards of living increase when they get access to better goods and services for cheaper but the economic model built on valuations is only good for making money, not making things better. If the valuation economy was to be destroyed it would free up people and capital to create new industries and firms which might make production more efficient or life easier. Instead, the Biden administration bails out banks which cater to the valuations business.
Sometimes banks need to be bailed out. But when the losers of a bank failure are largely unproductive and unprofitable tech firms instead of family businesses and individuals I’m not sure how useful bailouts are. As mentioned in last week’s blog post, SVB was mismanaged. There is no reason for a seriously run bank with passable risk management to collapse due to well telegraphed interest rate hikes the way SVB did. By stepping in to help other struggling banks the American government doesn’t just create moral hazard, it also protects the useless valuations industry, and the taxpayer foots the bill.
If you liked this post you can read my last post about the SVB failure here, or the rest of my writings here. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
Cover photo by Matthias Zomer from Pexels, edited by Karl Johansson
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