One more time… typo not type. I know it is late and I am tired. But something seems off with auto-correct (and me). Anyway, one more time with feeling:
Here is a reduced-typo version (I’m not looking at this anymore. There are probably still typos. I will do better on my next new post – I hope.):
First, thanks to Ed A. for bringing this article to my attention. I lived in Silicon Valley and worked in the semiconductor industry during the dot-com and internet bubble. I remember how fiber optic companies were all the rage. Then the bubble burst and there was frequent talk of all the “dark fiber” in the ground. Dark fiber are all the fiber optic cables laid in the ground for the “guaranteed” growth in internet traffic. Well, like all technologies, adoption takes time.
The WSJ article provides other examples of hype-driven overspending and subsequent bubble bursting such as UK railroads. It did not mention another recent and prominent example: 3D printers. If you forgot about the hype and subsequent bubble burst of 3D printers, all you need to do is look at a 5 or 10 year chart of DDD or SSYS to jog your memory.
So in short, an unprecedented amount of growth is priced in “AI” stocks and data center construction projects. There’s also a lot of potential damage to the rural areas where these centers are going up: higher electric bills, water pollution, air pollution, increased housing costs, etc.
If you read the book AI Snake Oil, it too talks about not only the hype but the drivers of the hype: the very companies selling you their AI products, the media that needs clicks and views, and public figures incorrectly placed on pedestals as knowing the future.
Have a look at the WSJ article. The numbers are staggering. Then put it in the context of the circular financing we saw announced over the past week or so (e.g., Nvidia invests $100B in Open AI so Open AI can buy $100B of Nvidia chips, Open AI striking a “deal” with Oracle for $300B for “planned” purchases). Lots of plans and intents. Lots of data centers being constructed with no customers too.
Please forgive the first version. I drafted it while sitting in my lounge chair on my phone. I didn’t proof read. It is late.
Nevertheless, here is a reduced-type version:
First, thanks to Ed A. for bringing this article to my attention. I lived in Silicon Valley and worked in the semiconductor industry during the dot-com and internet bubble. I remember how fiber optic companies were all the rage. Then the bubble burst and there was frequent talk of all the “dark fiber” in the ground. Dark fiber are all the fiber optic cables laid in the ground for the “guaranteed” growth in internet traffic. Well, like all technologies, adoption takes time.
The WSJ article provides other examples of hype-driven overspending and subsequent bubble bursting such as UK railroads. It did not mention another recent and prominent example: 3D printers. If you forgot about the hype and subsequent bubble burst of 3D printers, all you need to do is look at a 5 or 10 year chart of DDD or SSYS to jog your memory.
So in short, an unprecedented amount of growth is priced in “AI” stocks and data center construction projects. There’s also a lot of potential damage to the rural areas where these centers are going up: higher electric bills, water pollution, air pollution, increased housing costs, etc.
If you read the book AI Snake Oil, it too talks about not only the hype but the drivers of the hype: the very companies selling you their AI products, the media that needs clicks and views, and public figures incorrectly placed on pedestals as knowing the future.
Have a look at the WSJ article. The numbers are staggering. Then put it in the context of the circular financing we saw announced over the past week or so (e.g., Nvidia invests $100B in Open AI so Open AI can buy $100B of Nvidia chips, Open AI striking a “deal” with Oracle for $300B for “planned” purchases). Lots of plans and intents. Lots of data centers being constructed with no customers too.
Greetings everyone. I know it has been a while since my last post. But after several months of tuning out of the news and focusing, this article seems like one to share. In fact, it was shared with me this morning by an old friend. While reading the article, the following items came to mind that are consistent with the conclusions of the former DOGE engineer.
Government spending actually increased during all this talk of cost cutting. According to the Committee for a Responsible Federal Budget, the Federal Government spent $166 billion more in the first four months of 2025 than in first four months of 2024: HTML.
DOGE savings are just false claims. BBC found that of the proposed $2 trillion ($2,000 billion) in cost savings, later downward revised to $1 trillion ($1,000 billion), only $61.5 billion are itemized and of those line items, only $32.5 billion are verifiable: HTML.
Reducing waste may be more costly than beneficial. In How Not to Be Wrong: The Power of Mathematical Thinking by Jordan Ellenberg, page 236 notes the Social Security Administration (SSA) example. If you stop at “the agency improperly paid $31 million in benefits to 1,546 Americans believed to be deceased” you could [falsely] start screaming “look how inefficient Social Security is.” However, if you realize that “$31 million represents 0.004% of the benefits disbursed annually” you realize that the Social Security Administration is actually very efficient. I have first-hand experience of SSA’s efficiency with a family member’s passing a few years ago.
Delayed travel reimbursement over $2 or $3. I travelled to NY for work in April. My recent NY travel expense reimbursement was held up because of a minuscule tax differential on my room tax reimbursement. We are reimbursed for rooms up to $333. My room was $339. My reimbursement was held up because even though I put in $333 for the room expense, I didn’t pro-rate the tax based on $333 vs $339. We are talking about $2 or $3 difference in total expenses. If you monetize the time spent by the accountant (who is very good to catch such details) and my time to re-do the expense report, it is far more than the $3 in savings.
Parting thoughts…
Just because someone has wealth, political clout, or holds a CEO title does not make that person an expert in operational efficiency. This is especially evident when considering the origins of their wealth or their track record. For example, prior to his first term, President Trump’s businesses filed for bankruptcy six times, which indicates repeated and serious operational failures.
If cost cutting and efficiency are the true goals, then one should either (a) become informed by reading works such as How Not to Be Wrong: The Power of Mathematical Thinking and by consulting with experts, or (b) hire someone with a proven record in the field. Installing a hatchet man who has likely never considered the subtle nuances of complex cases, such as the Social Security Administration example mentioned earlier, set the stage for the acrimonious outcome we all witnessed: HTML.
I could go on about how those in power create demonstrably false narratives about their greatness and keep repeating the falsehoods until they stick, but hopefully you all get the point: don’t buy everything they are selling to you.
Former DOGE engineer on his experience working for the cost-cutting unit
Juana Summers8-Minute Listen
Sahil Lavingia, former DOGE engineer, says he didn’t see the fraud and abuse in government spending that he was expecting.
Sahil Lavingia
A former employee of the Department of Government Efficiency says that he found that the federal waste, fraud and abuse that his agency was supposed to uncover were “relatively nonexistent” during his short time embedded within the Department of Veterans Affairs.
“I personally was pretty surprised, actually, at how efficient the government was,” Sahil Lavingia told NPR’s Juana Summers.
Lavingia was a successful software developer and the founder of Gumroad, a platform for online sales, when he joined DOGE in March. Lavingia said he had previously sought to work for the U.S. Digital Service, the technology unit that was renamed and restructured by the Trump administration. He told NPR that he just wanted to make government websites easier for citizens to use and didn’t really care which presidential administration he was working for, despite protests from his friends and family.
Lavingia said the overall message at DOGE was transparency and a vibe of “ask for forgiveness, not permission.” So, when a blogger asked for an interview about Gumroad, he agreed. And when asked, he talked about his work at DOGE, including how little inefficiency he saw compared to what he was expecting.
“Elon [Musk] was pretty clear about how he wanted DOGE to be maximally transparent,” Lavingia said. “That’s something he said a lot in private. And publicly. And so I thought, OK, cool, I’ll take him at his word. I will be transparent.”
Shortly after the interview was published online, Lavingia got an email. Just 55 days into his work at DOGE, his access had been revoked.
This interview has been edited for length and clarity.
Sorry about sending this in triplicate. 😦
Now this final re-send must include the link (HTML) to the source LA Times article.
Take III…
Greetings everyone. It has been a looooong time since my last post. This news article just came across my radar. It seemed too current and relevant to pass up.
By now, we’ve all probably heard talking points about how raising the minimum wage for fast food restaurant workers in California will cost jobs. This article describes that claim as “baloney, sliced thick.” That brought back fond memories of frying baloney and seeing it form into a cup. I don’t eat the stuff anymore but I digress…
The baloney description is correct. As an academic who frequently works with time series data, I understand the importance of seasonality, a factor that significantly impacts the restaurant industry. The wage increase critics based their arguments on non-seasonally adjusted numbers, failing to account for the industry’s regular employment cycles. Using seasonally adjusted numbers, fast food employment actually went up. See the article below for details.
Despite the inaccuracies, it’s unlikely that outlets like the Wall Street Journal, New York Post, and Hoover Institution, which have been criticized for using non-seasonally adjusted numbers, will issue retractions. This is reminiscent of the media’s refusal to retract the “$1 Trillion Black buying power” myth when challenged by Dr. Jared Ball [1].
The Buddhist perspective offers a multi-step process for the “Final Arrival at Truth” [2]. The first step is to investigate the source: is it free from greed, hate, and delusion? In that spirit, I leave you with a quote from the Buddha:
“Do not accept my words simply out of respect for me. Accept them when you see that they are true.”
Stay serene,
-Dr. Moore
The LA Times article, The fast-food industry claims the California minimum wage law is costing jobs. Its numbers are fake: HTML.
My footnotes:
[1] You can find Dr. Ball’s The Myth and Propaganda of Black Buying Power on Amazon (HTML) or your local library. Another book related to these matters is How Not to Be Wrong by Dr. Ellenberg (Amazon: HTML or your local library).
[2] In the Buddha’s Words pages 100-103 (Amazon: HTML or your local library).
Greetings everyone. It has been a looooong time since my last post. This news article just came across my radar. It seemed too current and relevant to pass up.
By now, we’ve all probably heard talking points about how raising the minimum wage for fast food restaurant workers in California will cost jobs. This article describes that claim as “baloney, sliced thick.” That brought back fond memories of frying baloney and seeing it form into a cup. I don’t eat the stuff anymore but I digress…
The baloney description is correct. As an academic who frequently works with time series data, I understand the importance of seasonality, a factor that significantly impacts the restaurant industry. The wage increase critics based their arguments on non-seasonally adjusted numbers, failing to account for the industry’s regular employment cycles. Using seasonally adjusted numbers, fast food employment actually went up. See the article below for details.
Despite the inaccuracies, it’s unlikely that outlets like the Wall Street Journal, New York Post, and Hoover Institution, which have been criticized for using non-seasonally adjusted numbers, will issue retractions. This is reminiscent of the media’s refusal to retract the “$1 Trillion Black buying power” myth when challenged by Dr. Jared Ball [1].
The Buddhist perspective offers a multi-step process for the “Final Arrival at Truth” [2]. The first step is to investigate the source: is it free from greed, hate, and delusion? In that spirit, I leave you with a quote from the Buddha:
“Do not accept my words simply out of respect for me. Accept them when you see that they are true.”
Stay serene,
-Dr. Moore
The LA Times article, The fast-food industry claims the California minimum wage law is costing jobs. Its numbers are fake: HTML.
My footnotes:
[1] You can find Dr. Ball’s The Myth and Propaganda of Black Buying Power on Amazon (HTML) or your local library. Another book related to these matters is How Not to Be Wrong by Dr. Ellenberg (Amazon: HTML or your local library).
[2] In the Buddha’s Words pages 100-103 (Amazon: HTML or your local library).
Ever been to a restaurant with a small party (1-4 people) and received a bill with 18% tip included automatically? While that alone seems a bit weird to me, the line for “additional tip” was even more bothersome. Also, have you noticed that tip screens keep being pushed in front of you even though you are not dining in somewhere? Something is up…
The search begins… I decided to research the origins of tipping culture because it seems uniquely American. Others and I, who have traveled overseas, have been told that tipping is insulting. I wanted to look further and get a sense of why.
Not alone in tipping fatigue. I came across an NPR article titled Got tipping rage? This barista reveals what it’s like to be behind the tip screen: HTML. The title itself suggests many experience tipping fatigue. As I read that article I thought “okay, I get it, the barista is paid less than minimum wage and tips help them earn a living wage.” But I could not also help but wonder two questions:
Why are baristas (and restaurant workers) paid less than minimum wage?
Why don’t workers demand higher pay from their employers instead of demanding higher tips from customers?
So I continued the search…
What I found. NPR has a 46 minute podcast that goes into excruciating detail on the legacy of tipping here in America. When you have time, take a listen to Why We Can’t Escape Tipping: HTML. There is also a 2015 NPR article titled When Tipping Was Considered Deeply Un-American: HTML. A couple things jumped out to me right away:
Tipping is a feudal tradition from the Middle Ages that supports a class/caste system. As mentioned in that podcast “by tipping someone you render them inferior.”
The United States had several states with bans on tipping until 1926. Even The NY Times had many editorials against tipping in the 1870s and 1880s.
But that’s not the real a-ha! moment…
Tipping in America is rooted in slavery. Or as stated earlier, tipping supports a class/caste system.
Tipping took off after the Civil War. Why? Millions of freed slaves were now looking for work. Business owners didn’t pay recently freed slaves just as slaves were not paid before being freed. Enter tipping.
Pullman luxury railroad cars only hired Black, and specifically Southern Black men because, apparently as Pullman himself stated “the plantation trained them how to be pleasing.”
The Pullman “Palace on wheels” created an upper class fantasy for middle and lower class people.
Dr. Moore comment: Sounds a little like “influencers” and wasting time watching them.
Journalist John Speed wrote in 1902 “Negroes take tips, one expects that of them – it is a token of their inferiority. But to give money to a white man was embarrassing to me.”
On the anti-tipping movement. In addition to anti-tipping editorials in The NY Times and people who shared the perspective of John Speed:
Several notable anti-tippers include Leon Trotsky, Willam Howard Taft, Mark Twain, Rockefeller, Carnegie, Babe Ruth.
The labor force was also against tipping because it demeaned them.
The Georgia Anti-Tipping society had 100,000 members.
Traveling salesman felt like the were bearing the burden of tipping.
Several states enacted laws that made accepting or giving a tip a misdemeanor. But it was impossible to enforce.
In 1916 William Scott published The Itching Palm – a “long diatribe” against tipping.
On that Itching Palm book. You can find a copy here: HTML. Here are my take-aways from listening to a discussion of the book during the NPR podcast:
Tipping is equivalent to flunkyism – 5 million itching palms in America.
“Tipping is the price of pride“ and “a new form of slavery.”
He even quoted the Bible while equating tips to gifts: Exodus – a gift destroys the heart, Luke on covetousness.
Paying a tip is like paying a ransom to a pirate to avoid having your ship sunk. I.e., akin to a bribe to have your food delivered the way you requested.
Tipping is an exploitative labor practice.
However, William Scott was very much for better wages for laborers – from their employers.
So what killed the anti-tip movement? Three things.
Formation of the National Restaurant Association lobbying group in 1919. This smells like the American Medical Association and abortion (See Before Roe: The physician’s crusade: HTML)
Prohibition (1920-1933) lead to reduced restaurant revenues. That necessitated tipping.
The first minimum wage law in 1938 that was part of FDR’s new deal – but that law excluded restaurant workers! Looks like the National Restaurant Association was successful in their lobbying!
The main person in the podcast, Nina Martyris, states tipping is an “Un-American, two-tier system to exclude restaurant workers.” I would almost disagree. America was founded on slavery. So the two-tier system Martyris refers to is just an extension of the two-tier system in America’s founding DNA. A never-ending pursuit for free or near-free labor by the wealthy few.
Meanwhile, Europe included a “service charge” in restaurant bills. So, as tipping faded away in Europe where it started it was only reinforced in the United States. Read on…
1966 Congress enacted sub-minimum wage tip credit.
Until this point, restaurant owners could pay employees $0. (Free to near-free labor again)
Then, with the passage of sub-minimum wage tip credit, the tip had to make up the difference between sub-minimum wage ($0.63/hr) and minimum wage. If tips did not, restaurant owners must make up the difference. Read: unenforceable.
The sub-minimum wage amount tracked minimum wage (about 40-50% of minimum wage) until 1996 when…
1996 Congress fixes sub-minimum wage at $2.13/hr.
Why, what prompted this? Lobbying by the Restaurant Association.
Federal sub-minimum wage was $2.13/hr in 1996, it is $2.13 today in 2023. (Free to near-free labor again)
Some states require restaurant workers get paid a minimum wage or above. In California, minimum wage is $15.50 (compared to federal minimum wage of $7.25/hr). But for tipped employees it is $11 to $12/hr but must earn at least $15.50 with tips. If not, the employer is supposed to make up the difference.
Closing thoughts from podcast interviewee Nina Martyris (HTML)
She is surprised more people are not bothered by the systemic inequality inherent in tipping culture.
One reason why not, which relates to what is in the American DNA: Majority of service workers are women and people of color (40% apparently are people of color).
Dr. Moore comment: this speaks to Isabel Wilkerson’s book Caste and how race is a smokescreen for caste.
Tipping also fosters sexual harassment. Make yourself more sexually appealing to get a bigger tip.
The power dynamic is reinforced by the tipping mechanism.
Closing thoughts / possible action plan of Dr. Moore
Be aware (woke?) of the legacy of tipping and what is embedded in tipping culture DNA today.
I’m early in trying this, but for now, when I go to a bakery to purchase something off the shelf, I no longer tip. I routinely observe those in the dominant caste happily refuse to tip in these situations (channeling their inner William Taft or Babe Ruth?). I will not channel my inner “traveling salesman” and bear the burden as described earlier.
My response if there is any complaint: “I fully support you earning a living wage but not through this caste-based servility tipping culture. Your employer should, pardon the pun, bake the labor costs into the price of the item. At that point, all customers will share the burden more equitably.”
When at a restaurant, I do tip. But now I am fixing it at 18% of the pre-tax amount everywhere no matter what. Phones have calculators. Or for mental stimulation, pull out a pen and paper and do the calculation.
If things get too confrontational (if service diminishes because I didn’t bribe, I mean tip, enough), then just avoid situations that involve tipping. I.e., cook at home, more prepared foods from grocery stores, etc.
Or, move to Europe or other location where there is no tipping.
Well, I suppose that is enough “food for thought” for now.
Here we go again: CFPB Takes Action Against Bank of America for Illegally Charging Junk Fees, Withholding Credit Card Rewards, and Opening Fake Accounts: HTML.
Wells Fargo deceptive history. I posted about Well’s Fargo many times over the years.
2018 – forcing unwanted insurance on customers: HTML. (Note: BofA tried to do this to my uncle in Los Angeles with flood insurance for his house on a hill.)
2018 – modification of business loan customer documents without permission in 2018: HTML.
2022 – charging illegal fees and interest: HTML. The article linked in that post states: “Wells Fargo has been sanctioned repeatedly by U.S. regulators for violations of consumer protection laws going back to 2016, when employees were found to have opened millions of accounts illegally.”
Bank of America too. I also posted about Bank of America several times as well.
What’s a consumer to do? I tell students every semester to consider using credit unions instead of big banks. Regardless, here are three related perspectives:
“Proceed as if everyone is trying to **** you.” -late friend W.C.
“Know the condition of your flocks.” -Biblical perspective
Yes that is an attention-grabbing title. In short, Dave Ramsey says Americans didn’t flinch at inflation. Rather than cut back spending, Americans borrowed more.
Quick check. Not having 100% confidence in what Dave Ramsey (or any human) says, I did a quick check on the economic data. It turns out the data do support Ramsey’s argument. Figure 1 below shows that as inflation (blue) increased starting June 2020, consumer credit (red) and spending (white) also increased.
Two Takeaways
Reflect on your own spending and debt patterns of the past couple years.
Adjust if you are on the path to wealth destruction rather than wealth construction.
Figure 1. Inflation, spending, and consumer debt over time. PCE CUR$ (White): A measure of U.S. consumer spending. Specifically, U.S. Personal Consumption Expenditures in nominal dollars. CPI YOY (Blue): A measure of U.S. inflation. Specifically, Year over Year changes in the Consumer Price Index. CCOSTOT (Red): A measure of U.S. consumer debt. Specifically, Federal Reserve Consumer Credit Outstanding Total Seasonally adjusted in billions of dollars.
[Updated Sections 3 and 4 and added Section 6 on 2023.03.14, 8:41PM]
Blaming rising rates takes the focus off other systemic and firm-specific issues.
WHY IT MATTERS: Understanding the full context of Silicon Valley Bank’s (SVB) failure provides perspective on financial system operations and stability.
By now we all have heard about Silicon Valley Bank’s collapse: HTML. In this post I look at five contributors to SVB’s collapse:
Balance sheet imbalance.
Rising rates.
Mismanagement.
Where were the regulators?
Crypto contagion.
Cut-off the nose to spite the face panic.
1. Balance sheet imbalance
Table 1 shows differences between Bank and industrial company balance sheets.
Entity
Assets
Liabilities
Equity
Bank
Loans. Treasury securities. Other marketable securities (HTML).
Table 1 – Bank vs. industrial company balance sheet differences.
As I tell my students, the “balance” in balance sheets comes from beer, specifically ALE:
Assets = Liabilities + Equity
Commercial banks like SVB provide an asset transformation service. Many short-term highly liquid deposit accounts are transformed into fewer long-term income generating assets such as Treasury securities (HTML), home loans, and loans to businesses. As liabilities are reduced (depositors withdraw) the balance must be maintained through the sale of assets.
In theory, Equity > 0 because the bank operates profitably within the economic environment in such a way that Assets > Liabilities. However, SVB got to the point of having Assets < Liabilities. To “balance” the balance sheet they planned a sale of $2.25 billion in new shares.
That proposed sale sparked a panic in both equity markets (stock plummeting) and with SVB’s own customers (depositors rushed to withdraw money). If you have $72 in assets and $100 in depositors wanting their money, what do you do when you can’t raise > $28 through stock issuance? Collapse.
But let’s move on to how SVB got to this $72 in Assets and $100 in Liabilities situation (by the way, I just pulled $72 and $100 out of the air for illustrative purposes).
2. Rising rates
Rising rates reduce asset values – it’s just math
Presume a $500,000 home loan was issued last year at 3.5% interest. Today, home loan rates are twice that at around 7.0% (Bankrate.com: HTML). So, if the originating bank wants to sell that loan today, it needs to earn 7%. how does a $500,000 loan paying 3.5% interest earn 7%? If that loan sells (banks and investors buy and sell loans) for $337,474, with the payments unchanged, it will earn 7%.
So, the increase in mortgage rates from 3.5%to 7% resulted in the value of this bank asset dropping from $500,000 to $337,474 (a 32.5% reduction in value) – in just one year. The same algebra applies to other fixed-rate assets held by the bank such as Treasuries.
Rising rates make raising capital more costly
Many of Silicon Valley Bank’s customers (depositors and borrowers) are startup companies. Startup companies tend to have less (dare I say negative) cash flow. As such they need to raise capital periodically to sustain operations, R&D, etc. Capital is raised either in equity markets (share issuances be it IPO or SEO) or debt markets (borrowing). Well, with rising rates the appetite for risk in both markets declined.
So what does a startup do that needs cash flow for operations do when it can’t raise more capital, or at least not efficiently? They burn through cash. From SVB’s perspective, that means withdraw deposits. But again, as more and more of SVB’s depositors do this, SVB has to come up with the cash by selling assets. As I described in the previous section, the value of those assets decline during a rising rate environment.
3. Mismanagement
Sacramento State University launched a Masters of Science in Finance this past Fall: HTML. I teach FIN210, Financial Institutions Management. In fact, I taught it just this past October. I last taught the course in 2008 at the University of Memphis. So, every time I teach this course we are staring at financial system calamity. But it’s not my fault.
Financial Institutions Management boils down to a simple goal: measure and manage risk. I won’t go into SVB’s financial details here (full disclosure: I haven’t looked at them. I’ll make it an assignment for this coming October’s cohort!). However, something clearly went awry with the measurement and management of risk.
One thing the management did seem to do, and it was a very human thing to do – protect their interests. See 2023.03.10 Bloomberg, SVB CEO Sold $3.6 Million in Stock Days Before Bank’s Failure: HTML. Also, to further vilify executives, check out this 2013 post of mine on corporate bailouts: HTML.
2023.03.14 update: However, concentrating your customer base to startups only, and forcing those startups to sign exclusivity agreements, clearly did not help: HTML.
4. Where were the regulators?
Again, I haven’t looked at SVB’s financial details. However, as taught in FIN210 at Sac State’s MSF program (yes, that is a shameless plug for the program), banks should comply with numerous U.S. and international regulatory capital metrics (e.g., Tier 1 capital ratio, Tier 1 Common Equity / Risk-Weighted Asset ratio, etc.). Was SVB compliant with all capital adequacy ratios? If so, perhaps regulators need to rethink the adequacy of their capital adequacy ratios.
2023.03.14 update: It turns out the regulators were called off by the previous United States President’s Administration: HTML. As such, I do not believe you can fully blame the regulators which were not allowed to apply stricter standards on SVB as a result of the 2018 deregulation move. Although, there is certainly a cased for shared blame: HTML.
5. Crypto contagion
Silicon Valley Bank and Crypto are understandably intertwined. Silicon Valley is a global center of startups. Crypto startups need financing. SVB is there. However, with collapses of crypto exchanges like FTX (HTML), Crypto lenders like Silvergate (HTML), destabilization of so-called stable coins (HTML), crypto wallet thefts (HTML), and general “rat poison squared” nature of crypto as espoused by Warren Buffett (HTML), I question the prudence of intermingling regulated commercial bank operations with unregulated crypto so-called currency operations.
DISCLAIMER: I have JOMO (joy of missing out) with regard to crypto. Never have been a fan. Never “invested” a penny in crypto “assets.” One fundamental problem I have with crypto fanatics is when they say “the USD has no value, it isn’t backed by anything.”[1] Well, then why do you quote the price of your crypto so-called currency in “worthless” USD?
Moving on, SVB was in the business of providing banking services to not just startups, but even some crypto-related startups. A deeper dive into their financials will be an ongoing case study.
6. Panic induced from within startup ecosystem
2023.03.14 update: A former MBA student asked me “What about Peter Thiel inducing this panic.” At present, I have only two things to say about this:
“Feelings are an unreliable guide to reality.” -some Buddhist-related quote.
It is ironic that the very bank, or at least type of bank, that financed Thiel’s companies is one that Thiel served as a downfall catalyst. Human greed and selfishness were on full display.
Conclusion
Something went awry at SVB. Risk was not properly measured and managed. One risk to be measured and managed is interest rate risk. Specific details on SVB’s missteps in this regard require further analysis. I look forward to pushing that off onto FIN210 students in October. For instance, how does SVB’s capital adequacy ratios and interest rate risk measures look over time and vs. other banks.
In regards to other banks, I do think (and hope) that SVB’s collapse is not a widespread issue. However, I do not think SVB will be the last bank failure, especially of those intertwined with unregulated crypto businesses. Keeping my fingers crossed that my credit union has avoided crypto and measured and managed risk wisely.
-Dr. Moore
Update (2023.03.12 4:15PM)
A joint statement by Treasury, Federal Reserve, and FDIC says all depositors (even those with more than the $250,000 FDIC limit) will be made whole – at no expense to taxpayers: HTML. Who pays the expense: “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
Footnotes
[1] The notion that the USD “isn’t backed by anything” is false. The USD is backed by a government that can tax a productive population. The population is productive because we have resources. We have resources because we have a military that can protect and take more. We also have resources due to good ‘ol American ingenuity. However, I won’t go into the role of slavery in the initial capital and resource accumulation of this country. In a similar vain, banks don’t “create money out of thin air” either. When you get a home loan for $500,000, the bank does create a corresponding deposit (liability) of $500,000. However, that $500,000 is backed by the bank’s ability to collect principal and interest from you over the years. The bank has a claim to the future fruits of your labor. Hence, “the borrower is servant to the lender.” I will stop here before I go on another Dr. Moore tangent.
Efficient Minds™ 