How the Fed Broke Silicon Valley Bank

The Federal Reserve is in a difficult position, tasked with slowing down an economy plagued with excess money and inflation. They achieve their mandate by raising interest rates, which can have unintended consequences, such as the recent events that have led to the second-largest bank run in U.S. history.

The Fed’s Hiking Cycle Breaks Stablecoins and Banks

The Fed’s fastest hiking cycle in a generation has caused problems such as the regulated stablecoins USDC and Gemini Dollar losing their dollar pegs. Additionally, Silicon Valley Bank (SVB) faced a bank run as customers pulled out their uninsured deposits, including tech investor Peter Thiel’s Founders Fund. The losses in SVB’s Treasury portfolio, caused by the Fed’s quick rate hikes that crashed the bond market, amounted to billions of dollars in unrealized losses.

Monetary Policy’s Limited Influence Over Real Markets

Senator Elizabeth Warren argued with Fed Chair Jerome Powell about the effectiveness of high-interest rates in fixing issues such as price gouging, supply chain issues, and the war in Ukraine. However, the monetary policy focuses on money, assets, and banks, with only residual influence over real markets. As a result, Warren missed the opportunity to examine the real issues that monetary policy impacts.

SVB’s Insolvency and Failed Fundraising Efforts

SVB’s CEO, Greg Becker, attempted to raise new money through a creditors’ call but was unsuccessful, despite asking for support. SVB’s Treasury portfolio losses exceeded its equity in September of last year, making it “insolvent” if you ignore accounting tricks such as “held to maturity” rules. Customers drained $25 billion from SVB’s bank deposits towards the end of 2021, leading to the current bank run.

Related Facts

• The Fed promotes maximum employment, stable prices, and moderate long-term interest rates.
• SVB’s customers include startups and venture capital firms, giving it a significant presence in Silicon Valley.
• Uninsured deposits are not backed by the Federal Deposit Insurance Corporation (FDIC), leaving customers vulnerable to bank failures.

Key Takeaways

The Fed’s interest rate hikes, intended to slow down an economically inflated market, have had unintended consequences, such as the recent bank run at SVB. Monetary policy has limited influence over real markets, focusing mostly on money, assets, and banks. Silicon Valley Bank has suffered from significant losses and a failed fundraising effort, highlighting the vulnerability of uninsured deposit holders.

Conclusion

The Fed’s mandate to stabilize an inflated economy is a difficult balancing act in which an imposed remedy can cause its diseases. SVB is just one of several reminders of the implications of this policy’s limitations. The Fed must consider more than just inflation and employment figures while exercising its tightening strategies.