Silicon Valley Bank Blowup & Your Money! Ep. #169 Artwork

Capitalist Investor

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Capitalist Investor

Silicon Valley Bank Blowup & Your Money! Ep. #169

March 16, 2023 • Mark Tepper

This week's episode of The Capitalist Investor features the three amigos discussing the recent collapse of Silicon Valley Bank. The Federal Government had to intervene as the bank had a high concentration of large depositors, many of which were tech companies. Unlike other banks, SVB had a very high concentration of a single area of focus, like Venture Capital This differs from other banks that are more accustomed to having deposits of firms and consumers with different backgrounds and professions.

SVB recently took large deposits of money and invested in long-duration bonds over the past decade. However, with the recent rise in interest rates, the asset prices of these bonds have gone down, resulting in a significant financial loss for SVB. This bad management of deposits resulted in a loss of billions of dollars that was left unhedged against. That is complete moral incompetence and a moral hazard.

What should the Federal Reserve response be in responding to the default of Silicon Valley Bank in the wake of rising inflation? One of the biggest concerns is the concern around a contagion and the strength of the overall banking system. The system has changed over the years as the banking system uses numerous financial instruments, such as derivatives and options, and no longer just the usual hand the money over to the bank and then loan it out to someone else. This amount of complication within the banking world has made the extremes more extreme when things go wrong. This also leaves much less room for error.

What does this mean for Crypto Currency? Essentially these faults in the banking system are the exact reason that crypto came into light in the first place. The free markets are no longer free when the government intervenes, creating more extreme cycles. When things go wrong, consumers and companies want bailed out. But when you reward bad behavior, you get bad results.

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Topic: Silicon Valley Bank Collapse and the Federal Reserve's Intervention