Oops, I Did It Again

I wonder if some angst-filled teen will wander in here in the misguided hope that Britney Spears may be lurking in the undergrowth.

Depart, ye, be gone! For our notions are not your emotions, we come hither to reflect on the human condition that is known as greedity—a mythical monster that is half greed and half stupidity.

That’s right, this week we did it again.

The problem is ‘Oops’ doesn’t cut it—we are fully cognizant of the consequences of poor financial management, we have tools in place (but clearly not the governance) to prevent financial debacles like the collapse of Silicon Valley Bank, and yet… we did it again.

My novel Atmos Fear is set in the period of the Lehman Bros. collapse, and although the core of the story is about planetary change driven by technology—a slight change in the acceleration of gravity, the last physical force that remains a mystery to physicists—there is a lot in the book also about the financial world.

So, the banking system, stock market, and the wider public suddenly became aware that a California bank, which by virtue of the pandemic had grown into the sixteenth-largest US bank, was in deep shit.

The bank was special, because unlike retail banks that have many small depositors, it had relatively few, very large accounts—tech companies that piggy-backed the pandemic. Reuters mentions Roku, Buzzfeed, Alkami, and Trustpilot as examples.

That meant that the loss of confidence in the bank triggered a run by large clients—the bank’s liquidity vanished. Why did an apparently solid bank sublimate?

The immediate reason was that it could only meet the withdrawal requirements by selling assets, which were largely invested in long-term US government bonds.

Since bonds have a fixed rate of return, when inflation goes up, bond values go down. If a ten-year bond has a two percent return and you own a thousand dollars of bonds, you earn twenty bucks per year, two hundred over the decade, and at the end you get your grand back.

But you have to wait ten years.

When inflation increases, as it has been doing, companies and governments borrow money—issue bonds—with higher remuneration rates, so your 2% bond looks pretty sad.

Bonds are bought and sold like anything else and the only way you can get your money back quickly is by selling your thousand dollars of 2% bonds for less, possibly a lot less. Cinderella has morphed into the ugly duckling.

As always, time and money have an intimate relationship—and usually a non-linear one.

So here we have a perfect storm. Inflation goes up—patently obvious to anyone who pays bills—interest rates rise to control it. Bond prices go down, particularly for those with long-term maturity. Folks are saturated with pandemic domesticity—they want to travel, eat out, dance, beach, socialize, socialize, socialize, make up for all that lost time.

Closet digitalia, underwear Zoom, and virtual vicariousness have quickly lost their appeal—not overnight, but not over years either. How quickly words like confinement, quarantine, and—yes—covid, have vanished from our thoughts, words, and deeds.

US inflation between 1914 (start of the First World War) and 2022 (‘official’ end of the COVID 19 pandemic).

Firms that catered to our enforced domesticity suddenly let go thousands of employees. All that tech suddenly replaced by analog pursuits like water parks, rock concerts, and football games.

All those checks and balances put in place, the buzzwords—too big to fail, too fig to bail, yaddayaddayah…

Before the SVB collapse, Moody’s gave it an A1 rating, according to Reuters. After the bank collapsed, credit ratings were slashed to Caa2—presumably there is no C-r-a-p rating.

So, ratings agencies totally missed the boat on this one—who knew? Banking regulators also, it would seem. And this is where the greedity comes in—the sector understands these issues— they are not unknown unknowns, they are known knowns.

Since the FDIC only insures up to two hundred fifty thousand dollars per deposit, the US government came in to bail out the bank—the same day, tech shares soared on the US stock markets, a run that still has legs—sprint, ye lemmings…

The whole thing is shocking in its lack of foresight—we’re used to economic predictions based on the rear-view mirror rather than the crystal ball, but this collapse is a financial crisis—eminently predictable.

Much more interesting, but very dark, is the historical macroeconomic picture—and my articles are rooted in history.

Every time in the past hundred years that the world suffered major economic shocks, inflation sky-rocketed. You see it after the two world wars, the oil wars of the 1970s, and the recent pandemic—with a regional-cum-European-cum-world war thrown in the mix.

And after each inflation peak, there are rate hikes to control the beast, and far-reaching economic consequences as ordinary people despair of the gap between earnings and living costs.

Strikes, job losses, extreme social discontent, and civil unrest are the handmaids of despair.

Those presents plunge politicians from pedestals and promote pundits of populism.

There is much more to come.

This image has an empty alt attribute; its file name is TIR-AF-CE-FT-2019.jpg

The India Road, Atmos Fear, Clear Eyes, and Folk Tales For Future Dreamers. QR links for smartphones

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