A certain tragic, yet poetic irony has long surrounded the modern banking industry, which operates wholly on fiat (faith-based, rather than material-based) currency: often the only solution is to compound the problem.
And that’s the discussion happening at Silicon Valley Bank during this attempted $42 billion run from depositors. The bank doesn’t have the money to reimburse depositors because their money never really existed except on a balance sheet (as a liability for the depositors and as an asset for the bank, itself). You see, the entire operation runs on faith — faith that the receivers of loans will continue repaying loans and that the bank will continue loaning money in perpetuity.
Really, the whole banking industry is a house of cards propped up by faith in one thing: the federal government, which issues the currency. American dollars boast no other backing besides faith in the country that issues them. That sentiment sounds nice (even patriotic), but hides a deep, dark problem.
Businesses start and fail all the time, but the government must withstand all storms, financially speaking. Therefore, during a bank run when all depositors demand their money at the same time (which no bank in this country could possibly honor), the only solution to preserving customers’ equity is to simply print more money and distribute it via a federal bailout. In other words, fudge the numbers in the computer, just like the bank did originally by issuing un-backed paper money — paper money based on nothing. And that’s the dirty little secret of banking: the thing the economy needs most (debt) is also the thing that devours it…and the solution is always to just compound the problem.
In the case of Silicon Valley Bank, many tech startups are now facing the largest American bank failure since the 2008 financial crisis.
Silicon Valley Bank lended to high-growth startups that other major banks deemed ‘too risky’
This turn of events is also ironic because tech companies, like fiat currency, largely receive evaluation based on potential reach and speculation, not physical performance.
And as long as business is booming, like it has boomed in Silicon Valley since the bank’s inception in 1983, the house of cards grows gloriously. Some high-growth startups may default, yes, but once in a while a ‘Shopify’ or ‘Pinterest’ becomes a high-value earner for a financial institution. Everyone who plays the game understands that is a bank default is always possible, but what other choice do they have?
“Founders are texting me now and saying they don’t know how to make payroll next week. Will they have to take out personal loans to keep the business running?” Garry Tan, president and CEO of the startup incubator Y Combinator, said in an interview. “This can be an existential risk to competition and innovation in the American economy for the next decade.”
Federal insurance only covers $250,000 per account. Insiders believe that less than 3% of SV Bank’s accounts fall under that threshold, meaning most clients will have to wait to recoup (some of) their money either via bailout or bankruptcy proceedings.
“Venture capital funding had already been in a contraction mode,” Tan said. “So this is really a challenging time for something so devastating to happen.”
So will the government just compound the problem by printing more money in order to avoid fallout from a rigged system? A system that is destined to fail by its very definition? Of course they will; until the day comes that public sentiment loses faith in fiat banking. If history is any indication, the house of cards always falls eventually, little by little, and these days it feels like a strong wind is blowing.