Is any bank small enough to fail anymore?

In a blink of an eye, it was over. For a minute there, it seemed like the collapse of Silicon Valley Bank was going to consume us. Now, just a few weeks later, we have moved on. According to Google Trends, however significant the 2023 bank crisis seemed to be in the moment, that moment has passed. 

The specter of the 2008 global financial crisis was hard to ignore when federal regulators closed down Silicon Valley Bank on March 10th. Indeed, the 2023 bank crisis had many elements of the 2008 crisis. The shutters of fear rippling through financial markets. The failure of a highly visible institution and rumors about which might be next. The debates over the urgency of federal intervention to stanch the risks of contagion spreading across the financial system balanced against the outrage at the prospect of bailing out fat cats. Then, after the fat cats are bailed out and the dust settles, the political retribution against those who did what needed to be done.

In 2008, that sequence of events took several years to play out, while this time around, it was all over in a matter of days, except for the political retribution. Early in the week of March 6th, we heard there were funding problems at Silicon Valley Bank. On Wednesday, the crisis accelerated. By the end of the day Thursday, led by venture capitalists who urged the early-stage companies they had funded to pull their money out, the largest bank run in history was on. By the end of the week, SVB was shut down by bank regulators, and the debate on the importance of preventing contagion, even if it meant bailing out the fat cats, roiled the Internet. 

The backstory is fairly succinct. Silicon Valley Bank was unlike any other commercial bank in the country. It was founded forty years ago to meet the needs of startup companies, and for decades had a symbiotic relationship with Silicon Valley’s leading venture capital firms. Venture capitalists urged their start-up and early-stage portfolio companies to keep their funds in SVB, and SVB in turn maintained a multi-billion venture investment unit that held equity stakes in those same companies, as well as in the venture capital firms themselves. As venture capital funding exploded over the past half-decade, growing from $90 billion in 2017 to $345 billion in 2021, SVB kept pace, with deposits growing from $49 billion in 2018 to $189 billion in 2021. 

Before its collapse in March, SVB’s ten largest depositors had an average of $1.3 billion parked in SVB, and only 7% of SVB’s deposits fell within the $250,000 limit covered by FDIC deposit insurance, compared to upwards of 60% at most commercial banks across the country. In sum, SVB was a major player in the closed, incestuous Silicon Valley world, where venture capital rules, and billionaires help other billionaires create new billionaires. 

It remains unclear why a handful of leading venture capitalists turned on Silicon Valley Bank. For years, venture capitalists had directed their portfolio companies to use SVB as the depository  for their funds. One would have expected that those venture capitalists – touted far and wide as among the most brilliant financiers on the planet, and with billions of dollars of client funds at stake – would have paid attention to issues SVB was facing as the Fed was increasing interest rates. After all, the challenges facing commercial banks as rising rates were translating into losses on their bond holdings had been written about months earlier in the Wall Street Journal, and this past November JPMorgan raised specific concerns about the impact on Silicon Valley Bank. 

And it is hard to imagine that there weren’t solutions to the problems Silicon Valley Bank was facing. As one SVB insider suggested, one would imagine that any number of sovereign wealth funds would’ve been happy to take a piece of Silicon Valley Bank and in doing so secure its place as a player in the most dynamic economic region on earth. Yet somehow it all came tumbling down, when rather than fix the problem, leading venture capitalists in the Silicon Valley chose to cut and run.

As the run on Silicon Valley Bank began to gain steam that Thursday, those same venture capitalists and hedge fund gurus took to social media to demand that the federal government step in and fix the situation. The irony was lost on no one, as a cabal of erstwhile libertarians, who had long lectured the nation on the evils of government regulation, thought of every excuse under the sun why the federal government must immediately step into the breach. 

They were not just pleading for a bailout; they were demanding one. Not for Silicon Valley Bank, mind you, but for themselves. It turns out they had little interest in whether SVB survived – or they would have fixed the problem themselves – but they had a huge financial stake in protecting the billions of dollars of deposits their portfolio companies had tied up in those uninsured accounts. As one observer put it, every libertarian becomes a socialist the moment the free market screws them. 

Early that Saturday morning, hedge fund billionaire Bill Ackman threw down the gauntlet: Jerome Powell and Janet Yellen had 48 hours to guarantee all of the deposits in Silicon Valley Bank or there would be a run on the entire banking system, leaving no banks in the country standing save the four largest banks, which have been deemed “too-big-to-fail” since 2008, and where the government effectively guarantees all deposits

And he was right. In the early moments of the crisis, many observers – including former Treasury Secretary Larry Summers and hedge fund superstar Ken Griffin – presumed that SVB had the perfect profile of a bank that could be allowed to fail without significant risk of contagion, given its narrow regional and industry focus. But that turned out not to be the case. Unlike 2008, when the contagion that came close to cratering the global financial system was a product of the very real linkages among mortgages, mortgage-backed securities, and mortgage-based derivatives that fell apart when the housing market went south, contagion this time around was as much a behavioral phenomenon as a financial one.

As rumors of the run on SVB rocketed across the Internet on March 9th and 10th, individuals thousands of miles away watched the crisis unfold in real-time and wondered how they could be sure their own bank was safe. And many of them decided not to wait to find out. At that moment, we learned that the nature of contagion had changed, as the impact of the collapse of Silicon Valley Bank was both immediate and severe. In the blink of an eye, hundreds of billions of dollars were drained from regional banks nationwide

Then, as suddenly as the 2023 bank crisis burst onto center stage, by Sunday March 12th it was over. Using their authority to waive the limits on FDIC deposit insurance in the face of what they deemed to be a systemic threat to the financial system, Powell and Yellen did what Ackman and others had demanded and guaranteed that all depositors at Silicon Valley Bank would be made whole. 

Call it what you will, sound judgment or capitulation, but Powell and Yellen waved their magic wand, the sense of crisis dissipated, and people began to move on. Was it a bailout? Of course it was. Yellen publicly insisted that they did not bail out Silicon Valley Bank, but that was just a matter of semantics. SVB shareholders may have lost out, but depositors who had no legal right to be protected from financial loss got their billions back – including those who instigated the run in the first place. Given that essential fact, it is disingenuous to suggest otherwise. 

The political retribution was swift and furious. Critics on both sides of the aisle piled on, blaming federal regulators for being “asleep at the wheel” for failing to identify the problems at Silicon Valley Bank early on. Yet that turned out not to be the case, as for more than a year federal bank regulators had repeatedly and with increasing urgency warned SVB management of the risks it faced in a rising interest rate environment. Management, the bank board of directors, and the venture capitalists were all culpable for SVB’s collapse, but only the VCs walked away unscathed.

In the wake of the collapse of Silicon Valley Bank, Bernie Sanders returned to the themes of the 2008 crisis and the outrage at once again seeing those who had done so much to instigate a crisis reap a financial windfall from its resolution. For Sanders, that meant doubling down on his insistence that commercial banks should be broken up to put an end to ‘too-big-to-fail.’ 

Looking back at events in March, however, it’s hard not to reach the opposite conclusion. As deposits flowed out of regional banks on March 9th and 10th, much of the money withdrawn from small regional banks flowed into JPMorgan Chase and Citibank. Many of those who had followed the collapse of Silicon Valley Bank on their laptops and smartphones, and feared that their bank might be next, chose to transfer their money to banks that the federal government had officially confirmed would not be allowed to fail.  

As it turned out, this time around too-big-to-fail banks were not a part of the problem, but instead part of the solution; for panicked depositors at least. While FDIC insurance may officially be limited to $250,000, the public knows full well that the nation’s largest banks will be bailed out come hell or high water. Therefore, for those banks, federal deposit insurance is effectively unlimited. 

In today’s world, where people can move their money instantaneously from apps on their phones, it should come as no surprise that as soon as news broke of the collapse of a little known bank, hundreds of billions of dollars were moved nearly instantaneously to those banks people knew would never be allowed to fail. The confluence of social media, smartphones, and financial technology have become the new catalysts for contagion, and a central question arising from the 2023 bank crisis is not whether we need to get rid of banks that are too big to fail, but whether the small-enough-to-fail banks of Bernie Sanders' imagination have ceased to exist.

Artwork by Joe Dworetzky.  Follow his cartooning on Instagram at @joefaces and his journalism at authory.com/JoeDworetzky

Red States aren't victims, they're flush with Blue State money .

Marjorie Taylor Greene thinks it is time for red states and blue states to go their separate ways. “Everyone I talk to says this,” she tweeted, “From the sick and disgusting woke culture issues shoved down our throats to the Democrat’s traitorous America Last policies, we are done.” 

She may have a point…

 

For at least a decade now, I have argued that blue state America has been dealt a bad hand, politically and financially. I circulated a book proposal six years ago with the title “FedExit! To Save Our Democracy, It’s Time to Let Alabama Be Alabama and Set California Free,” but to no avail. It seems, however, that like a Chinese balloon, once you float something, you never know where it could end up. In this case in the hands of Marjorie Taylor Greene. 

 

Politically, the Constitution from day one gave disproportionate political power to small and rural states – which today are by and large red states if you ignore Delaware and Rhode Island – by giving each state two senators regardless of size, and then compounded that political advantage in the structure of the Electoral College.

 

The bad financial deal for blue states came more recently, with the ratification just over a century ago of the 16th Amendment that created the federal income tax, which shifted the burden of paying the cost of the federal government onto the wealthier states and taxpayers at the time in the Northeast and Midwest.

 

A comparison of the federal income taxes paid and benefits received between Delaware and West Virginia provides a case in point of how that impact is felt today. Based on data compiled for the year 2014 by the National Priorities Project, West Virginia received over $7,000 in federal aid per capita – largely from entitlement programs such as Social Security and Medicare – while paying less than $3,000 per capita in federal income taxes, for a net subsidy from the federal government of $4,000 per person. At the other end of the spectrum, Delaware paid the federal government $19,800 per capita in federal income taxes while receiving $6,400 per capita in federal aid, for a net outflow to the federal government – and then on to red states like West Virginia – of $13,400 per capita.

 

The reason for that difference is simple: the Delaware economy is more productive than West Virginia’s, with per capita personal income of $36,000, or roughly 50% more than West Virginia’s $24,400. Delawareans earn more, pay more in federal income taxes, and rely less on federal government social programs.

 

The notion that the federal government operates a massive system of income redistribution from blue states to red states is not just spin offered up by some progressive think tank. Rather, it is a view laid out cogently by the center-right Tax Foundation. In its study entitled “Federal Tax Burdens and Expenditures by State,” the Tax Foundation went even further, emphasizing that the federal income tax not only redistributes income from the wealthy to the poor – as progressive supporters of the 16th Amendment hoped would be the case a century ago, and no doubt many Democrats would support today – but that it redistributes income from the middle-income residents of high-cost states to the middle-income residents of low-cost states, a form of redistribution that has little political, much less moral justification.

 

The net outflow of dollars being sucked out of blue states is huge. In 2021, for example, New York State taxpayers paid $285.1 billion in federal personal income taxes, an amount that was $73 billion – or $3,700 per capita – higher than it would have been had the federal tax burden been shared among the states on an equal per capita basis as the Constitution originally required. That means that New York taxpayers contributed an additional $73 billion – an amount greater than New York State’s personal income tax and sales tax collections for that year combined – into the federal kitty to pay for federal programs provided to residents of those states that Marjorie Taylor Greene suggested would like out.

Of course, far from appreciating this built-in system of blue state largesse, the fact that red state residents are financially dependent on blue state charity has only compounded the resentments that divide us. Indeed, even as they ridicule New York, the Left Coast, and Taxachusetts, red state politicians are never able to explain why, after decades of their low state tax policies – to say nothing of literally trillions of dollars of subsidies that have flowed to their states from blue state coffers – their states remain near the bottom in state rankings of key economic and demographic outcomes, while the high-tax blue states they deride continue to produce higher family incomes across their populations. 

While economists like Art Laffer and Stephen Moore regularly proclaim tax cuts to be the panacea that will assure economic prosperity, the simple fact is that educational attainment has long been the primary driver of state and family financial success, and investments in education – including K-12 schooling, community colleges, and research universities – rather than tax cuts have been the key to improving family incomes over time.

 

As I studied the financial inequities created by the ratification of the 16th Amendment, I never concluded that a “national divorce” was the solution but instead suggested eliminating the federal income tax and restoring a greater degree of federalism and state self-reliance. Year after year, blue state advocates of single-payer healthcare or investments in mass transit wonder why their states lack the money to achieve their hopes and dreams, and the answer is simple: their money has been shipped off to Alabama. 

Suffice it to say, if Greene explained that each man, woman and child in New York would get to keep that $3,700 each year as part of the deal, she could probably count on their support for the constitutional amendment that would be required to let the red states leave.

 

But the blue state argument for ending the century-long experiment in federal redistribution is not simply that California, New York and others should not be forced to continue to subsidize less economically productive states – particularly ones that appear to loath their “sick and disgusting woke culture” – but also that decades of federal subsidies have brought with them the sort of moral hazard of which conservative commentators have long warned: Flush with the flow of federal money decade after decade, red states appear to have had fewer incentives to use their own resources to make the kinds of investments that would have increased family incomes in their states over time, and ultimately reduced reliance on blue state money.

 

Marjorie Taylor Greene may want a national divorce, and if they understood how much money the current system is costing them, many blue state taxpayers might enthusiastically support the idea. But a divorce along state lines will not solve the deep divide in our politics. Greene may choose to view red and blue America as divided along state lines, but the truth is far more complicated. Not only do those divisions exist within each state – as every state includes predominantly blue urban areas and predominantly red rural areas – but they are present within the communities in which we live, and for many of us around the holiday table when we gather together with our families.

 Artwork by Joe Dworetzky.  Follow his cartooning on Instagram at @joefaces and his journalism at authory.com/JoeDworetzky

Sarah Sanders is right, Republicans have to chose: normal or crazy

What is the state of our union? If you look at traditional economic metrics, things are humming along. We have emerged from a pandemic, have weathered the worst of the ensuing inflation, labor markets are booming along at unheard of levels, and even investors have to admit that given all that has transpired, to have the S&P 500 exactly where it was two years ago – and still up almost 20% from Election Day 2020, when Donald Trump said the sky would fall if he was not reelected – is pretty good.

But if you believe in the two party system, this is a bleak moment indeed. As Nancy Pelosi commented the other day, the nation needs a strong Republican Party, but “this is not it.” She may have been pointing to Kevin McCarthy’s weakness as Speaker, but her words were as aptly pointed at Republicans in the Senate, where Mitt Romney – just ten years ago the standard-bearer of the GOP – is regularly shunned by his peers for making eminently reasonable statements that fail to be sufficiently hostile to Joe Biden or the Democrats. So it was last week, when Romney’s irrefutable suggestion that George Santos has no place in Congress, was met by silence among his peers; just one more reminder that nearly the entire Republican establishment has given up the ghost and cowers in fear of offending the party’s vengeful, conspiracy-infected, party base.

Donald Trump’s MAGA movement – the most recent iteration of nativist isolationism that has been deeply rooted in our nation’s DNA since the founding of the republic – has officially taken over the Republican Party. As Marjorie Taylor Greene observed recently, the GOP is 70% MAGA now. While some may refute that number out of hand, it is validated by public opinion polling suggesting that half of Republicans apparently believe Democrats are child-trafficking pedophiles, while two-thirds continue to believe the 2020 election was stolen, despite all evidence to the contrary. MAGA dominance over what George W. Bush once called the “reality-based community” is evidenced by the behavior of formerly mainstream Republicans who have learned to parrot MAGA talking points. 

Last week, when the Chinese balloon appeared over the Montana skies, it provided reams of data, not on atmospheric conditions or the location of Minuteman III intercontinental missile silos – all of which anyone from here to Beijing can pull up on an iPhone – but on the depraved state of the Republican Party.  

When the balloon first emerged in the Montana skies, Donald Trump pounced on the issue, demanding in ALL CAPS on his alternative Truth Social website that the Chinese invading aircraft be shot down. Before one could say the words “Hunter Biden’s laptop,” Republicans across the nation’s capital – with the predictable exception of Mitt Romney – rose up as if on command, insisting that Trump “would never have tolerated this.” Marjorie Taylor Greene, who day by day is supplanting Mitch McConnell and Kevin McCarthy as the face of today’s GOP, seized the moment, tweeting that “literally every person” she knew was talking about how to shoot down the balloon. Then, MAGA darling Kari Lake, as if to prove her own national security credentials as she continues to position herself to be Donald Trump’s running mate in 2024, tweeted a photo of herself in full camo with a gun, looking to the skies, ostensibly ready to take down the Chinese invading balloon twelve miles overhead.

Whatever the facts of Balloongate might be, neither Donald Trump nor Marjorie Taylor Greene could give a hoot. Within hours, as the issue migrated from the risk of satellite debris falling on populated areas in Montana should the balloon be shot down, to a national security crisis of the highest order, it vaulted to center stage across the MAGAsphere. One more defense of Donald Trump. One more source of amped up outrage. One more opportunity to extract a few more dollars from the new base of the Republican Party. 

When Marjorie Taylor Greene screamed “Liar!” at Joe Biden during the State of the Union speech last week, she was not seized by a momentary fit of rage, but rather following a proven gameplan for fleecing her supporters. “Remember,” GOP politicians whisper down the lane to each other to this day, “[South Carolina Congressman] Joe Wilson raised $2 million in twenty-four hours after he screamed ‘You lie!’ at Barack Obama during a speech to a joint session of Congress.” Though that iconic moment took place almost a decade and a half ago, it has become a defining moment in our politics. Forget that Wilson was sanctioned by his peers for his “breach of decorum,” that breach of decorum has become the modus operandi of many Congressional Republicans for a simple reason: it works. Breach decorum; incite outrage; collect money. 

Which takes us back to the state of the union. For somewhat less than half the country – but apparently well more than half of the GOP – the state of the union has become one of preoccupation with really silly stuff, as Balloongate was just the most recent example. While we are coming to understand the intelligence purposes and capabilities of the Chinese balloon, two things appear clear. First, China has been sending surveillance balloons across the globe – including the United States – for years. And second, military and intelligence officials interviewed about the matter do not seem particularly perturbed. 

Surely, no one in Congress can seriously believe that our adversaries don’t spy on us – or that we don’t spy on them. While Marjorie Taylor Greene accused Joe Biden of refusing to stop the Chinese from surveilling our missile silos and military facilities, former Montana Governor Brian Schweitzer, who grew up on a farm just down the road from an intercontinental missile silo, pointed out the absurdity of the hyperbolic response on the right. Anyone, he observed, who wants to see where our missiles are buried can drive by the silos and snap a photo. “Taking a rental car,” he suggested, “would be a lot cheaper than sending a balloon from Beijing.” 

If the issue is overhead photo surveillance, as Greene suggested, spying on the United States is a pretty easy gig, and it has become easier by the year. A decade or so ago, National Public Radio ran a series on the country’s land based intercontinental missile system, together with images of missile silos from Google Maps. One reader at the time offered an ironic response to the publishing of what some might have deemed at the time – and today, apparently – to be top secret information: "Thanks for the map. Can you now publish the GPS coordinates? You've been real helpful, Kim IL Sung." 

And that was ten years ago. Today, Google Maps provides GPS coordinates with a single click, and there are any number of apps that are surely being mined on a regular basis for useful data by foreign intelligence services. One example is Strava, a running app, which a few years ago inadvertently identified and broadcast to the world the location of secret military installations across the globe. And then there is TikTok, the Chinese espionage tool masked as a video-sharing app.

When it comes to intelligence operations against the United States, data gathering is not the challenge. As Vladimir Putin demonstrated in 2016, the art is in the design of strategies that will set us against each other; that will, to use an overused word, trigger our worst instincts. And last week offered an abject lesson: want to take us down a notch and embarrass the United States in the eyes of the world, send a balloon our way and watch us turn on each other like a pack of rabid dogs. And that may well have been the objective, argued Dr Hoo Tiang Boon, a China expert at the China programme at Singapore's S Rajaratnam School of International Studies. "They have other means to spy out American infrastructure, or whatever information they wanted to obtain. The balloon was to send a signal to the Americans, and also to see how the Americans would react." 

In her official Republican Party response to Joe Biden’s State of the Union speech, newly elected Arkansas Governor, and former Trump Press Secretary, Sarah Sanders painted a dissenting view of the state of the union. Forget Biden’s optimistic vision of a nation emerging from pandemic years at home and defending democracy abroad, Sanders mirrored the American Carnage theme from Donald Trump’s inaugural address, painting a picture of the country through her eyes as a dark, forbidding place, with woke mobs ransacking the landscape. With no sense of irony, she suggested that “the choice is between normal or crazy.” 

And so it is. In today’s Republican Party, crazy is firmly in control. But the problem for the nation is not the half of Republicans who embrace QAnon conspiracy theories, the Big Lie, and the venomous nonsense that Greene and her compatriots spew on a daily basis. Rather, the problem is the erstwhile normal Republicans who have continued to play along, and in doing so have vaulted them into positions of power. They want to believe this has all been a bad dream, and one day it will all be over. But it doesn’t work that way. The more power they cede to the MAGA majority in their ranks, the worse things will get. Nancy Pelosi hit the nail on the head; the time has come for Republicans in the reality-based community to make a choice: have the courage to stop cowering in the shadows and take their party back, or have the courage to leave the GOP.  

 Artwork by Joe Dworetzky.  Follow his cartooning on Instagram at @joefaces and his journalism at authory.com/JoeDworetzky