What Exactly is Failing When Banks Fail?
I don’t know about anyone else, but when I hear about a “bank run,” I immediately think of this scene from It’s a Wonderful Life. I think about George Bailey calming the panic and Mrs. Davis withdrawing $17.50. And this is how I think about banking and my money, too. I know the parallel isn’t exact, and that Bailey’s Building and Loan (BBL) works differently from banks. Even most of these townspeople don’t have all their money in shares at BBL, but they rush there when the bank shuts its doors because it can’t cover the depositors. The bank also spreads the crisis by calling in its loan on BBL, who borrowed from them the real money needed for construction of all those houses, and hapless Uncle Billy gives the bank all their cash on hand.
I’ve listened to more stories than is healthy on the failure of Silicon Valley Bank (which even sounds like an unstable and risky place to put one’s money) and mostly what I hear is: “What caused the panicky run on SVB?” and “What should the government do about it?”
We all know that no banks have cash on hand to cover all their depositors. The problem with SVB is they didn’t manage the risk and losses incurred by all banks when the government raised interest rates. Despite having two years’ warning that the rates would be raised, the bank didn’t adjust its investments. Also, there were a few businesses, investment funds, and billionaires with, well, billions of dollars in SVB. These same people had lobbied the government to lower the required reserves for banks of this size. And these funds and individuals were investing in investment products through the bank, not normal depositors. But at the prospect SVB’s investment products might lose money, these billionaires sent out a little email chain and withdrew all their money right away, not just cash deposits but what were supposed to be long-term investments. They panicked. They caused other people to panic. They destroyed SVB and inspired fear that destroyed some other banks. And this kind of panic, if it became a “contagion,” threatened the US economy.
Money in a bank, for most of us, is the same as cash. We treat it like cash, instructing the bank where to send checks or transfer sums to pay our mortgages and other bills. I’ve never worried about a bank run because my money is guaranteed by the US Treasury, up to $250,000, which is more cash than I’ll ever have, but I admit it doesn’t seem like nearly as much as it did in the 1970s when I first learned about the Great Depression and bank guarantees.
But I know that even my cash isn’t sitting in a box with my name on it. I’ve always realized my money was being used by the bank to make more money, either through safe investing or, in my more idealistic flights of fancy, in loans so my neighbors could buy cars and houses and start businesses in my community.
After the Great Depression, the government and Treasury got more involved in banking. But it has only been in the 21st century that we’ve seen how, when banks cheat (knowingly making and bundling bad house loans) and/or fail, it’s the government left holding the bag. But the most recent crisis showed most people very clearly that the banks and their money in them are not safe. Because some people in this country have way too much money, and they are like Mr. Potter, only concerned with their grip on that money and the expectation of getting more. And some banks have become partners with them in engaging in risky investment schemes to bring in large returns. If these wealthy investors get jittery they want their whole stake, and they’ll go home knowing there’s no cash left for those who arrive later. At SVB, investors and wealthy depositors attempted to pull $42 billion from the bank in one day.
And although some must know they have too much uninsured money in that single bank, they expect that the government will still pay them back the rest. But no one asks Peter Thiel, “How much do you need right now, until things settle down?” Surely his answer would not be the reported $50 million his fund withdrew. No one asked that of the long line of people outside the bank the next morning waiting to withdraw all their funds. The next day, to avoid lines like this at every bank, the government told us: “Don’t worry. We’ve got you covered. We’re guaranteeing these people and their accounts. You just keep on trusting your banks.”
We don’t live in a functioning society anymore, because we are not in this together. It is every man and woman and child for oneself. We don’t operate along lines of engagement or mutual concern anymore. The gap between rich and poor is unsustainably large. And we don’t know the difference between an investment and cash.
About a year ago, I took my money, small beans as it is, out of the local credit union (which had been rebranded as Magnifi Financial) and put it in a community bank. It was my own little protest against what I saw as the credit union’s policy harming its members. The credit union was offering Bitcoin, not in its investment arm where it belongs, but right there in people’s savings and checking accounts. You could convert (invest) your money into Bitcoin or even get your paycheck deposited in Bitcoin instead of dollars, as if they were the same thing — but Bitcoin was better, because it would grow! When it crashed, I assume a lot of people learned a harsh lesson. But I still routinely hear people talking about Bitcoin like it is a currency, like dollars or euros or pesos. But it is not backed by anything real in this world at all.
The only way to stop the collapse of banks is for people to see this is a community endeavor. We take out the money as we need it. We make sure the bank manages it wisely. We see banking as a service, not a place for risky investing. This is, in other words, a problem we need to solve, not the government. And there will be no need to panic.
