Tag Archives: economics

No Chief Risk Officer

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That’s what Silicon Valley Bank had for the last 8 months of 2022. Much is being made of SVB’s choosing to employ a Diversity, Equity, Inclusion person in an executive position during that time frame, but a more important function is being missed in this kerfuffle. That is the answer to this question:

It is not clear who handled [SVB CRO until April ’22, Laura] Izurieta’s duties in the last eight months of 2022.

SVB has a President, a Chief Credit Officer, a Chief Operations Officer, and a Chief Auditor. Each of those persons are, or should have been, fully capable of assessing the level of interest rate risk involved with the interest risk of the bank’s holdings with the Fed vs the interest rates it was paying its depositors.

Each of those worthies are, or should have been, fully capable of assessing the demand and cash flow risk associated with the concentration of particular categories of depositors—startups and venture capitalists—with intrinsically very high cash flows and so high rates of cash deposits and withdrawals compared with “ordinary” consumer depositors’ rates of deposits and withdrawals.

Each of those persons are, or should have been, fully capable of assessing the amount of cash held in accounts above the FDIC-insured maximum of $250,000 compared with the amount held in accounts smaller than that limit. Each of those persons are, or should have been, capable of assessing the closely related risk from the degree of concentration of those large accounts in the hands of a relative few account holders and so the risk of any one of those holders withdrawing all of their money.

The presence of a CRO on the payroll and on duty would have been the one to concentrate on those risks, freeing the rest of SVB’s management team to concentrate on other areas, but management, for one reason or another chose not to employ one for those critical eight months. And that management team failed to pay attention, chose not to pick up the slack.

An Attack on Workers’ Rights

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Hypocritically, it’s by the Progressive-Democratic Party, which runs Michigan’s government. That’s the party that claims to champion the rights of America’s workers.

[State] Senate Democrats voted along party lines in support of repealing the decade-old “right-to-work” law in a state long considered a pillar of organized labor.

The State’s House already had passed a substantially similar bill, now the two go to conference to reconcile the differences, then the result will be voted up in both houses and sent to Governor Gretchen Whitmer (D) to be signed into law.

Michigan’s workers, for the last decade, had been able to speak for themselves, to join or not join unions, to not pay dues to unions to which they didn’t belong.

The Michigan government is telling those workers they have no voice, and their wishes have no importance. Oh, and pay up, suckers.

So much for workers’ rights when Progressive-Democrats reign in Michigan.

Balancing Act

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That’s what conventional “wisdom” says confronts the government of Australia as it contemplates buying nuclear-powered submarines from the US. The buy is part of AUKUS’ combined effort to counter the People’s Republic of China’s military buildup and its continued strengthening of the PLA in the PRC’s occupation of the South China Sea.

Australia is trying to strike a balance between its close relationship with the US and its ties to China, which buys much of its valuable iron ore and is its largest trading partner.

There’s nothing to balance here. There are lots of nations, all over the world, with an interest in buying Australian iron ore, Australia’s iron processed from that ore, such steel as Australia chooses to produce. There is a wide world of existing and potential trading partners for Australia’s other goods and services. Shipping need not be that expensive, either: the nations metaphorically next door that rim the South China Sea, the Republic of China, the Republic of Korea, and Japan all have need of iron ore and iron and are interested in the plethora of additional goods and services that Australia might sell.

Australia has no need of the PRC’s market, and the sooner it divests itself, the sooner it will shake its dependency on and pressure from the PRC.

Further to the Government Bailout of SVB Depositors

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The Biden administration and his…regulators…are, indeed, bailing out all SVB depositors, including those with deposits larger than the FDIC’s insurance of deposits worth $250k or less. This is being done under the administration’s claimed “systemic risk exception” in order to bail out the bank’s uninsured deposits—which is to say the bank’s uninsured depositors.

That is a power that was used during the 2008 financial crisis. Measures such as this can be controversial, with some arguing that it creates what is known as a “moral hazard”—that by letting banks or their customers know the government will backstop them in a crisis, they will think less about risks.

The move was a mistake in 2008, which the House recognized when it rejected that bailout before caving and voting for it, and it’s a mistake now. It does, indeed, create the moral hazard that Uncle Sugar will save investors from their risk folly—or even from accurately assessed risk, but the odds came home against them, so there’s no need for investors to worry about risk. Here is that moral hazard made concrete:

The Federal Reserve took another action on Sunday, which was to establish something called the Bank Term Funding Program. What this will do is ensure that a bank that is holding safe assets, such as Treasurys or government-backstopped mortgage bonds, can bring them to the Fed and swap them for cash for up to a year. They could use that cash to grant customers’ requests for their deposit money.

SVB held most of its assets as precisely those Treasurys.

The problem that SVB…had with its investment securities was that the rise in interest rates last year depressed the market value of even safe assets that will almost certainly repay the banks’ money, just not for a long time. But had the banks gone to sell them now to cover deposit outflows, they wouldn’t have gotten back what they paid for them.
…
It is an issue that isn’t just concentrated in one or two banks: the FDIC has said that across all banks, there were about $620 billion in what are called unrealized losses as of the end of last year.
The Fed has now promised to swap these securities for cash at face value, meaning banks won’t have to realize any losses on them for now.

That spreads the moral hazard all over the banking system. No banking investor or depositor will take any risks; those risks are being laid off on us average Americans.

And this:

So regulators might have to walk a fine political line: indicating strength and decisiveness to stem further bank runs, but not looking like they are granting a free pass to banks. The regulators said any losses to the Deposit Insurance Fund to cover uninsured deposits would be recovered by a special assessment charged to banks.

No, they don’t have to walk that line at all. They could just say “No.” Instead, they’re planning on making things worse: that bit about making other banks pay for the regulators’ decision to bail out SVB’s investors. Those other banks had nothing to do with SVB management failure or the risks its depositors chose to take. Guilty, anyway, pay up, suckers.

Too, there’s a critical difference between the current situation (and the 2008 predecessor) and the Panic of 1907. The Federal government then had neither the tools nor the finances to stop that depositor run on the banking system. Private citizen, banker, and Evilly Stinking Rich, JP Morgan, along with a number of his fellow Evil Rich guaranteed their fortunes against the banks’ ability to pay depositors. The run stopped. Government intervention wasn’t needed; private citizens acted.

We don’t need government intervention today, even though wealth isn’t nearly as heavily concentrated today as it was those 115, or so, years ago. We certainly don’t need the regulators’ deliberately manufactured moral hazard systemic bailouts.

Retirement Age

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Senator John Kennedy (R, LA) says Congress “of course” should talk about changing the retirement age for federal entitlements.

The life expectancy of the average American right now is about 77 years old. For people who are in their 20s, their life expectancy will probably be 85 to 90. Does it really make sense to allow someone who’s in their 20s today to retire at 62? Those are the kind of things that we should talk about.

He’s right, but there’s more underlying the current age-to-retire paradigm than just raw life expectancy, and those factors need to be addressed as well.

Two such factors are these. One is that when Federal Social Security was enacted during the reign of then-President Franklin Roosevelt (D), the worker-to-retiree ratio was in the neighborhood of 7:1, meaning that there were seven workers paying into the Social Security system for every American who’d retired. Today, that ratio has fallen to less than 3:1, and it’s continuing to shrink. There is less and less money coming into the system compared to what’s being paid out to retirees.

The other factor is the relative life expectancy of retirees, not just the raw longevity of Americans today. When Social Security was first enacted, the average life expectancy for a retiree was about seven years—a retiree lived about seven years after he’d retired. Today, that post-retirement life span is in the neighborhood of fifteen years and slowly lengthening. On top of less money being paid into the system per retiree, that more money being paid out also is being paid out for a longer period of time.

These are the problems that need to be solved. Raising the retirement age and/or raising taxes collected for the system are only stopgap measures that kick the heavily abused can down the sidewalk a short way.

The solution to both problems is to eliminate them. Privatize social security, making the tax payments a worker pays into the retirement system for the benefit of current retirees payments instead into a future retirement account for the worker’s own, and sole, benefit, with that account under the worker’s own investment control. Certainly the conversion from the current system to the new will be deucedly expensive, but that cost will only get worse the longer we delay the conversion.

In parallel with that, Congress needs to eliminate the limits on existing private retirement accounts to which workers have access: Traditional IRAs and 401(k)s, Roth IRAs and 401(k)s, 403(b)s, etc. There should not be (never should have been) any limits on the amounts a worker can contribute annually to these accounts, nor should there be any income limits even to eligibility to contribute.

If a worker, highly compensated or minimum wage, has his own money in his own retirement account, he’ll take much better care of it than Government can ever hope to do. That’s especially true of the minimum wage worker, who understands priorities, risks, and the value of his dollar much better than any Government bureaucrat, however well-intended that bureaucrat might be.