In the grand scheme of things the failure of SVB seems due to inflation. It’s the basic cause of SVB’s rapidly expanding balance sheet, and then it’s rapidly shrinking one a year later. Literally… SV nerds get bundles of cash and put it in the bank. SVB secures their deposits with treasuries. Inflation wipes out the value of the treasuries at the same time as the end of the inflationary gravy train requires these SV nerds to withdraw more of this money to meet ongoing obligations.
Now, mostly the political and media response has been to look for bad guys, as usual, while the administrative response has been to focus on the minutiae of banking regulation.
But in the bigger picture, isn’t the simple explanation (inflation) enough? An inflationary cycle is like driving in bad weather. Just like a good driver should be able to drive in bad weather, a good bank should be able to navigate difficult financial conditions. But… we know that even good drivers get into accidents in bad weather sometimes.
It seems like the real problem here is that the bad weather was completely of our own choosing. Would “tighter regulation” have helped? At the margin, but it’s hard to see how it wouldn’t end up being a problem when it’s a systemic problem. Well, Barney Frank sure didn’t think regulation was the answer.
Quantitative easing and infinite deficit spending (e.g. ARA, active participation in the war in Ukraine, long-term housing supply limitations and regulations) are also policy choices. Let’s do a helicopter drop of money, finance it with debt, and then inflate away the debt. That was the policy, and it’s straightforward that this would lead to the kind of cashflow and interest rate whiplash that’s hard for investors to navigate.