Is Accidentally Spreading a Disease the Same Thing as "Aggression"?
Is Accidentally Spreading a Disease the Same Thing as "Aggression"?
In my latest Mises Wire article, I argued why I believe the State—or, for that matter, the collectivity—has no right to coerce individuals into taking vaccines. However, let’s assume someone retorted as follows: “Ok, I agree the State has no right to impose vaccinations upon citizens; that said, if one person (say, A) does infect another one (say, B), then the former has aggressed against the latter—and therefore needs to compensate for the damage done. Hence, vaccination (or mask wearing, etc.) is to be considered as a legitimate preemptive measure taken upfront by the State so as to avoid aggression”. Then, how could my Rothbardian ethical stand be defended?
The fact is that, as I will briefly argue, such a counterargument can be easily proven untenable, because it misconstrues the Rothbardian definition of “aggression”—which, incidentally, seems to me the only sensible one.
So, how do we define “aggression”? An aggression occurs when A imposes his will over the legitimately acquired property of B, thus depriving B of his right to enjoy his property to whatever extent he deems appropriate.1 Or, put it differently, “an aggressor interposes violence to thwart the natural course of a man’s freely adopted ideas and values, and to thwart his actions based upon such values.”2
Now, let’s consider some practical examples of infections. First, let’s consider, e.g., venereal diseases. Would we contend that, if A and B agree to have an unprotected sexual intercourse, and A carries (unwittingly) a venereal pathogen and infects B, then A aggressed against B? Of course, we would not—at least, if we accept the definition of “aggression” I provided. In fact, A did neither deprive B of the possibility of having sex the way the latter deemed fit, nor employed violence to thwart B’s freely adopted choice of having unprotected sex: as a matter of fact, both A and B voluntarily agreed not to take precautionary measures. Thus, B employed his property (his body) how he freely chose to, accepting the risks (getting venereal diseases) involved in the course of action (unprotected sex) he freely engaged in.
Second example: fungal infection of the skin. Let’s assume A and B go to the same gym, and A (again, unwittingly) carries a fungal pathogen. Let’s assume, moreover, that the gym owner does not mandate wearing flipflop in the changing room. Then, if both A and B walked barefoot in the gym’s changing room, and B got infected by the fungal pathogen carried by A, could we assert that A aggressed against B? Of course, again, we could not, because B freely chose to walk barefoot and accepted the risk of getting a fungal skin infection.
In both cases, even though A’s behavior did—to some extent—cause, at least indirectly, a damage to B, we cannot speak of “aggression”—because B was never coerced into doing anything he did not want to. In other words, such a scenario is no different from A and B freely signing a contract regulating the employment of their properties (their bodies) and/or the physical goods they freely and legitimately rented (or bought) from a third party (the gym’s premises).
So, if we accept this kind of argument, why should things be different with covid, vaccines, masks, etc.? If A and B enter a restaurant whose owner does not mandate mask wearing, and B gets covid from A, why should we accuse A of having aggressed against B? They both freely signed a contract with the restaurant owner, and neither of them was hampered in his right to freely enjoy—to the extent he deemed fit—his property in his body and/or physical goods.
Both A and B chose where to be (in the restaurant) and their course of action (relax themselves while eating and drinking something), and freely accepted the risk involved in the consumption of the goods and services they bought from the restaurant owner. They both valued the “expected” (i.e., potential) uneasiness of getting infected less inconvenient than the trouble of wearing masks at (or getting vaccinated before entering) the restaurant.
Now, one possible counterargument against my stand could be the following: “Ok, you claim that aggression cannot occur when people voluntarily engage in behaviors involving some extent of risk. So, let’s assume B accepts walking in a dangerous neighborhood; then, if he gets robbed and/or battered by A, your argument would compel you to maintain that A did in fact not aggress against B, because B freely accepted the risk involved in walking in a dangerous neighborhood. But then, wouldn’t the very concept of aggression become (in practice) useless and unworkable?”
However, such a counterargument is obviously a fallacious one. Indeed, whereas any case of infection implies accepting some kind of (direct or indirect) contact with other people, this is absolutely not the case when B walks on the street. In fact, when B walks on the street—assuming we live in “Rothbardian-land”, with privately owned streets—he is renting some “range of motion” from the street owner. But still, B moving his body on that street does not imply (unless explicitly mentioned in the contract) that he also accepts the risk of being battered or robbed. In other words, whereas it is perfectly conceivable for B to walk on the street expecting no physical contact with A, it would—on the contrary—make no sense for B to enter the restaurant (or walk barefoot on the gym floor) without contemplating the possibility of getting infected by A.
To stress this point further, consider the difference between battery and a boxing match. In the former, if A batters B, then A has deprived B of his right to the full enjoyment of his body. In the latter, instead, A and B freely sign a contract agreeing on certain rules for the boxing match: they both are enjoying their properties (their bodies) the way the deem fit—e.g., testing their physical prowess. In fact, on the contrary, it should definitively be considered an instance of aggression if one or more third parties—e.g., the State—prohibited A and B from having their boxing match, thus employing coercion to thwart the natural course of their freely adopted choices.
Lastly, we ought also to consider that, in practice, it is impossible to tell who does actually infect whom. If (say) thirty people enter a restaurant and (say) five among them are carrying a respiratory disease, and then—say, a week later—ten more people develop the same disease, how could we know which one among the initial five infected people did infect the other ten? Moreover, if one person visits more than one place, encounters more than one infected person, and then gets infected, how could we ascertain where did he get the infection? And who did infect him?
The argument warranting State-mandated vaccination (or mask wearing, etc.) in the name of the Non-Aggression Principle is evidently untenable. Even if we set aside practical considerations, there can occur, in principle, no aggression when human beings freely engage in purposive behavior—and this holds true for activities involving infection risk as well.
The Instability of Stablecoins
At the Austrian Economic Research Conference (AERC 2023) event in Auburn, Alabama, behind a wooden podium once used by Ludwig von Mises, I presented my paper: The Instability of Stablecoins.
Whether it’s called a pyramid, ponzi, shell game, or a grand delusion containing fraudulent elements, there’s something peculiar going on in the stablecoin industry; almost too familiar, and it requires explanation...
As of time of writing, CoinMarketCap shows the top three stablecoins by market cap being: Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), valued at $79 billion, $33 billion, and $8 billion respectively.
These stablecoins work as follows:
You have $100 USD. You deposit this money with the Circle company (operator of USD Coin). In exchange, they create 100 USDC coins and give them to you. You are now free to use the coins at your discretion by holding them in a digital wallet, depositing on a crypto exchange, sending to friends, or making purchases online at participating retailers.
“Stability you can trust,” is a heading on USDC’s website, as explained:
Known as a fully-reserved stablecoin, every digital dollar of USDC on the internet is 100% backed by cash and short-dated U.S. treasuries, so that it’s always redeemable 1:1 for U.S. dollars. USDC reserves are held in the custody and management of leading U.S. financial institutions, including BlackRock and BNY Mellon.
They didn’t include Silicon Valley Bank as a leading institution, but more on that in a moment.
Tether and Binance tout similar claims. According to Tether’s main page:
All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves.
According to Binance’s main page:
All reserves are held 100% in cash and cash equivalents; hence customer funds are always available for 1:1 redemption.
Sounds promising! The depositors simply exchange US dollars for newly minted stablecoins, supposedly always redeemable, on demand at a rate of 1:1 with US dollars. Hence the term stablecoins.
The natural due diligence to follow is to examine each company’s reserves to see what exactly comprises their asset base. Here’s Tether Holdings Limited Independent Auditor’s Report on the Consolidated Reserves Report, as of December 31, 2022.
Unfortunately no footnotes were provided that elaborate on what comprises Corporate Bonds, Funds & Precious Metals, Other Investments, or Secured Loans. However, readers should see the potential problem, which, Dr. Jonathan Newman recently articulated when referring to the banking sector:
When banks practice this kind of maturity mismatch—potentially immediate-term liabilities (deposits) backed by long-term assets (loans and Treasury securities), it is called “fractional reserve banking.”
The propensity for there to be a “run” on a stablecoin or discounting the price below 1:1 on the US Dollar should be considered an ever-present threat.
During the week of AERC, the banking crisis dominated news headlines. After a tumultuous weekend, on Monday, March 13 CNBC wrote:
Last week Circle said that $3.3 billion of its cash reserve is with SVB. After the bank’s collapse, USDC lost its $1 peg, falling as low as 86 cents on Saturday, according to CoinDesk data.
Despite the Fed not being in the business of bailing out stablecoin operators, USDC coin was saved because the Fed unveiled a multi-billion dollar bailout for collapsing banks. The intervention secured USDC’s cash reserve and the coin went back to par with the US Dollar.
Yet the pyramid is still being built!
As illustrated through BlockFi, a crypto exchange that filed Chapter 11 as of November 28, 2022, who once paid interest on stablecoin deposits just like a checking or savings account, customers could deposit their USDC at BlockFi and earn a rate of interest.
Unfortunately, these weren’t term deposits, as the fine print details:
You may make a request for complete or partial withdrawal of principal from your Crypto Interest Account at any time.
Once again there exists the same maturity mismatch between liabilities (customer’s stablecoins) due on demand against what could only be longer dated assets (e.g., US treasuries) providing interest income to BlockFi… until the scheme imploded.
In a world full of hope and desperation, in which demand deposits have become a risky endeavor, this offers very little confidence; first we must hope the crypto exchange can honor the deposit, then that the stablecoin company can honor the deposit… and in 2023 we must now hope the bank can honor the deposit!
Stablecoins offer valuable insights into how a truly free banking system could look; understanding that in a truly free banking system, there would be no bailouts. While lots can be said about stablecoins, the real systemic threat doesn’t lie within these private companies voluntarily offering services to customers. Rather, the real instability will come from an involuntary, legal tender, forced upon society – stablecoin – known as a Central Bank Digital Currency (CBDC)... Coming soon whether we like it or not.
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QT or QE: What Is This?
Leave it to the Federal Reserve to throw a knuckleball when the batter is expecting a fastball. These last few weeks have been just that, with the Fed saying nothing of abandoning their Quantitative Tightening (QT) position while engaging in what appears to be a Quantitative Easing (QE) position.
The general public may be familiar with the term QE, but it’s nothing more than inflationism as public policy, with known detriments as old as money itself. But inflationism or currency debasement doesn’t sound as appealing as Quantitative Easing, and so selling economic destruction as a cure-all is more of a successful branding initiative than anything else.
In the last two weeks, the Fed has almost completely undone a year of balance sheet wind down, conjuring up $400 billion as of last Thursday’s data release.
The problem is that QE or QT is not “economics” per se. There’s no credible theory behind money printing nor are there any guidelines which determine what exactly constitutes these terms.
If the terms QE/QT are broadly given to the direction of the Fed’s balance sheet, then we could say that in the last two weeks, they’ve been doing QE, since the net change to the balance sheet was positive.
However, if the terms are more narrowly defined to only mean the change in US Treasury holdings and Mortgage-Backed Security holdings, then we could say that the Fed is still engaging in QT, since they are still rolling off these securities. The net balance sheet increase has only been due to lending programs that temporarily help banks out of this current crisis.
Yet the magnitude and length of time must also be considered.
On Monday CNBC announced that First Citizens Bank will purchase “around $72 billion of Silicon Valley Bank assets at a discount of $16.5 billion.” The role of the Fed and FDIC is instrumental to this bank merger, with the final cost of the bailout still not known.
The [FDIC] regulator added that the estimated cost of SVB’s failure to its Deposit Insurance Fund (DIF) will be around $20 billion, with the exact cost determined once the receivership is terminated.
By simply making available new funding programs for banks and FDIC, it appears the threat of bank runs has subsided, for now. And if we’re really lucky, the Fed’s lending schemes are nearing the end, stopping at only a few hundred billion and not several trillions of dollars.
Again, “if” the money the Fed loaned is paid back promptly, and “if” the banking crisis subsides, the balance sheet should resume its downward trajectory. Then history would consider this as still part of the QT phase. Conversely, if this lending program is only just the start of much longer and larger programs to come, history will show QE began two weeks ago.
Regardless of whether this is QT or QE, we remain in uncharted waters with nothing but a promise of a bigger storm ahead. Should these lending schemes be hailed a success, then it stands to reason that when the next bank fails, the Fed will go back to the same playbook, again and again…
As for what tomorrow brings, no one knows. But Minneapolis Federal Reserve Bank Neel Kashkari continues to have no shortage of foresight for the problems he helps create, as told to CBS over the weekend:
He said that banks holding commercial real estate assets could also see losses in the future.
And in his own words saying:
But right now it's unclear how much of an imprint these banking stresses are going to have on the economy.
Noting that it was too early to determine the impact on inflation.
Clearly the Fed remains on standby, ready and willing to create money to prop up failed banks, at the same time staying committed to reducing its holdings of US government and mortgage debt. And so, the Fed really is the lender of last resort, functioning only in terms of “need” for the big banks. So long as no bank asks for money from the Fed, the Fed won’t give them any. But the minute a bank needs the Fed, the Fed will be there like any other insurance company… with an infinite amount of cash on hand, prepared to inflate dollars at little cost to them, but at a big cost to society.
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Ginning Up a Fake China Threat
Critics of the increasingly bipartisan consensus of conflict with China face a difficult task. For the (fake) China threat is not a single concrete thing that can be pointed to or otherwise signified. Rather, as a manufactured thought climate produced by a series of interlocking incentive structures, like Kafka’s Castle it looms inscrutable but no less ominous.
Upon close inspection, however, the inner workings of the (fake) China threat reveal nothing new about the anatomy of the state.
First, it serves as a legitimating device, a new reason for the continually climbing defense budgets, new toys for generals and admirals, overseas bases, the meddling by comfortably ensconced state department officials in the affairs of other states, and the existence of an intrusive national security apparatus. Stoking the fear, representatives of the state spin conflicts they seek as looming threats to everyday Americans in order to justify their continued position of power over them, with a well-funded network of think tanks and the corporate press helping prescribe the acceptable limits of public discourse in order to marginalize dissent.
Second, the (fake) China threat serves as a convenient scapegoat for the end results of the bad policies Washington itself pursued. America deindustrialized? China’s fault. Millions of Americans hooked on drugs? China’s fault. The Saudis and Iranians don’t want the Americans around anymore? China’s fault.
Et cetera.
There is one element of truth to the (fake) China threat, however. That is, the existence of an independent China (or Russia) is a threat to Washington’s accustomed privilege of being able to do more or less whatever it wants wherever it wants.
But the existence of an independent China is already a fact.
Refusal on the part of Washington to accept it will cause more than theoretical problems.
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Bank Busts Lead to Sweetheart Deals
Amidst the wreckage of bank failure grow lucrative deals. Shares of New York Community Bank Inc. surged with the announcement that the FDIC had made NYCB a “sweetheart deal” as the deposit insurer “priced the assets to move quickly,” wrote Wedbush analyst David Chiaverini in his upgrade of the stock, as reported in Bloomberg. “In exchange for the $2.7 billion discount on acquired loans [assets], plus the interest income earned on the loans and securities, NYCB will give up only $300 million in equity appreciation rights to the FDIC,” added the Wedbush analyst.
Plus, the takeover didn't include Signature's $4 billion in crypto-related deposits, included all of Signature's branches, and some of its loan portfolio, reports Business Insider. Emphasis was added because Signature didn’t have to take any bad loans.
"With New York Community's addition of certain deposits and assets of Signature's Bridge Bank, NYCB's balance sheet could be improved with less reliance on higher-cost wholesale funding. NYCB's loan-to-deposit ratio should decline from a high 119% in Q4 with the assumption of Signature deposits, while $12.9B in loans were bought for $2.7B, which equates to a 79% haircut," Bloomberg Intelligence analyst Herman Chan commented.
The FDIC killed two birds with one stone with the move, moving cherry-picked assets and deposits from a failed bank (Signature) to one that was overleveraged (119% loan-to-deposits) and possibly headed for trouble (NYCB).
Of course, sweetheart deals are nothing new. Post the 2008 crash, Rialto (a division of homebuilder Lennar) bought a 40 percent share of $1.2 billion in loans from failed banks for 40 cents on the dollar, with the FDIC carrying a loan for $1 billion of the deal at zero interest for seven years.
This was called a partnership, however, when a government entity carries its partner’s share at zero percent interest for seven years that term doesn’t seem to apply. The RE Action Committee explained at the time:
Lennar (Rialto) acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team. The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.
Attorney Bryan Knight, in 2011, called the Private-Public Investment Programs (“PPIP’s”), such as Lennar/Rialto “ the biggest waste of government spending and most damaging program to the American public.”
Knight wrote:
Rialto was given a $600 Million interest free non recourse loan by the Federal Government to purchase assets of failed banks. Therefore, Rialto has no risk in collecting on assets because no interest is accruing and Rialto is not liable to pay back the loan since the loan is a non-recourse. This gives Rialto even more incentive to refuse loan workouts and to collect asset management fees. It is not rocket science, a bank that has risk of taking a loss is more likely to work with a borrower. Here Rialto has no risk.
How the FDIC hands out favors is described perfectly by Patrick Newman in his book Cronyism writing:
Cronyism [is] when the government passes policies to benefit special-interest politicians, bureaucrats, businesses, and other groups at the expense of the public.
He continues:
The rewards of cronyism take the form of monetary gains, particularly increased incomes and profits for individuals and businesses, or psychic gains from greater power and authority.
The case of Silicon Valley Bank is especially egregious cronyism. Joseph Wang, the CIO at Monetary Macro who previously was a senior trader on the Fed’s open markets desk told Roger Hirst on Real Vision:
So, the bailout of Silicon Valley Bank was, in a sense, the bailout of millionaires and billionaires who weren't the clientele of Silicon Valley Bank. Those are guys who mismanaged your cash badly and wanted to bail out. Now, if you were going by the rule of law, you'd say that yeah, you guys. You can take it, and these are the rules. But these guys were also politically connected and very loud in social media and in the press. And so, they have influence and they can, I guess, encourage the government to bend the rules in their favor.
Winston Churchill and later Rahm Emmanuel famously said “Never let a crisis go to waste.” Cronyism never does.
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Artificial Intelligence Enhances Consumer Sovereignty
Despite the fears that Artificial Intelligence will disempower consumers, companies find it easier to keep up with ever changing preferences of consumers by applying AI technology. Companies apply AI to the infinite areas of business operations, production, pricing, customer experiences, and manufacturing processes. Firms are racing one another to integrate AI applications into their business practices to meet consumer needs.
The reality is that consumers do, in many ways, steer the production and prices of economic goods and service offerings. The consumer is sovereign in a market economy; unfortunately, some still think otherwise. Why? Because artificial intelligence is mediating streams of knowledge between buyer and seller, exposing consumers to changing market conditions, prices, and circumstances. There is an antimarket camp; this camp is not keen on the fact that consumers steer the direction of pricing and production. The result is that AI integration into business practices is strikingly on the consumer's side.
As far as businesses entities are concerned, unsurprisingly, a 2023 customer poll found that "the majority of consumers (73 percent) believe there is potential for impact on customer experience, particularly in digital settings," according to Businesswire. With firms increasing their uses of AI in operations, finance, sales, and production, it becomes apparent that the simplest input into AIaas will likely tilt toward maximizing consumer demand. Techcrunch said in a recent article, "Every organization has their gold-standard employee, and AI learning can analyze employees' traits and behaviors in customer interactions, raising the bar for all." Another tool to used to maximize human productivity within a company! On the bright side, “AI can learn from top performers and share what makes them so great,” The author added, "Every employee can be a top performer.” Ludwig von Mises said, "the consumer is sovereign and cannot be replaced in a marketplace economy." Similarly, a recent Forbes article projected positive AI trends in 2023 and beyond; the author listed ten trends to look for in the use of AI in 2023, except one of the most important, unsurprisingly, the betterment of consumer sovereignty. Consumer sovereignty is not coercive in the exchange relationship between buyer and seller. Instead, it happens “only by serving the consumers, since again, the sale is voluntary on the part of both producers and consumers,” according to Murray Rothbard.
Along with AI technologies, human touch, and interaction are required and expected in many buyer and seller transactions. However, AI will assist business owners in a big way, providing enhanced customer experiences via the use of AI-powered websites, apps, manufacturing, et cetera., and other services that consumers demand. Despite all mounting evidence showing that AI-enabled applications can address customer uneasiness in a market economy because AI is a consumer-centric tool that maximizes consumers' market information, the antimarket camp does not believe that the consumer is sovereign. We must understand that AI is a maximizing tool with generative output data. In other words, AI will allow consumers and producers to spontaneously adjust their actions in market cooperation. Artificial intelligence adapts to consumer preferences and learns the top choices within data input units over time. AI learns via natural learning systems, which virtually enlarges its storage that adjusts to preferences and parameters of pricing and production, especially in reducing cost and adopting price changes.
Therefore, the economics of information – perfect or imperfect information – does not hold in the epoch of AI—spontaneous information dispersed with the aid of AI technology between buyer and seller reigns supreme. However, the spontaneous flow of information aided by AI goes against the precepts of mainline economics that support the economy of information and the so-called equilibrium. AI is an institution of the extended order in a market economy; it drastically changes the perfection or imperfection of information, spontaneity, or stagnate forms of knowledge of market conditions. AI enables consumers' sovereignty by enabling firms to reach and satisfy customers in different places, times, and circumstances giving sellers and buyers more or less information and vice versa, precisely as F.A. Hayek and Mises have preached for so long.
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More Supervision and Regulation to Prevent Bank Runs?
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Was That the Dip?
A few days from now marks the one-year anniversary of the article: Will You Buy the Dip? It was there I told everyone I know that eventually the Federal Reserve will conclude its Quantitative Tightening (QT), and a new round of Quantitative Easing (QE) would emerge. This was both inherent and inevitable due to the inflationary nature of central banks. So the idea was to buy the stock market once the Fed resumed the QE process.
The question is: Did last Sunday’s announcement of the Bank Term Funding Program usher in a new easy money era, i.e., was this the dip / pivot / stock market buy signal?
Consider the last two years of the Fed’s balance sheet. Between March and May of 2022, the Fed’s assets topped out at just under $9 trillion. Since then the Fed began its slow descent into QT, where last month it reduced its balance sheet, composed mostly of US Treasuries (UST) and Mortgage-Backed Securities (MBS), by around $80 billion a month. During this entire round of QT the broad stock market made no new highs and has instead slowly declined.
The Fed’s balance sheet has also become quite interesting as of late:
Incredible! It took one year for the Fed to reduce the balance sheet by $600 billion, and in just one-week, from March 8-15, the balance sheet increased by $300 billion!
This is what I was referring to, some event or crisis occurring that would be used as an excuse to get the Fed to return to the market… but human action is complex, and nothing seems to go according to plan. The increase in the balance sheet is not a result of the Fed buying-up more US debt or mortgage securities. As far as the public is aware, the Fed is still committed to QT via rolling off its existing UST and MBS holdings.
The balance sheet increase actually came from the loans the Fed granted for troubled bank relief. Details in the Fed’s notes reveal the elements comprising the $8.689 trillion balance.
Loans amounted to $318 billion, whereas a week prior, it was only $15 billion. The current $318 billion consists of Primary credit ($152 billion) and Other credit extensions ($142 billion). The new Bank Term Funding Program only accounted for $11.9 billion.
On one hand the Fed is reducing ownership of securities owned (loans to government), but on the other hand it’s creating money to loan to banks. It would be great to know how large this temporary one-year program will get, but we’re not privy to this information. However, with no limits on how much the Fed could create, it could amount to trillions of dollars.
Like the World Bank and IMF which grant loans to bankrupt nations, only to make them worse off by ending up in more debt, the Fed appears to be engaging in a similar scheme. By lending to bankrupt institutions, the hope is that within a year from now these failed banks will be better off than they are today, paying back the Fed in full plus interest.
The new funding program may very well push the Fed’s balance sheet to new all-time highs, and if it were to expand by a few trillion dollars more, one could expect to see this reflected in asset prices. But having no idea as to how big these bank loans will get, coupled with the Fed’s continual shredding of UST and MBS holdings, I still lack conviction that the Fed is serious about pumping the stock market back to new highs at the moment. Good luck in your trades.
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How Does a Bank Collapse in 48 Hours?
“How does a bank collapse in 48 hours?” Asks the CNN headline. Especially a bank that reported a profit of $3.4 billion just last year. Murray Rothbard answered the question years ago in What Has Government Done To Our Money?, “No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.”
If you watched the Fed Chair Jerome Powell testify before the Senate and the House this month you heard over and over that banks are well capitalized. The non-sequitur inspiring the Shakespearean quote “Methinks you protest too much.”
The very next day after the hearings, shares of SVB Financial Group, parent of Silicon Valley Bank, fell 60 percent (the bleeding continued in after hours trading) after a Wall Street Journal article revealed, the bank “had sold large portions of its securities portfolio and would raise fresh capital, highlighting a broader problem for U.S. lenders who have seen rising interest rates hammer the values of their bond holdings.”
A day later Silicon Valley Bank depositors ran for the exits attempting to pull $42 billion out on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said. joining shareholders the same day the WSJ article appeared. The FDIC promptly closed the bank Friday morning saying: "Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank."
Almost Daily Grant’s wrote “Total deposits stood at $175.4 billion, with $151.6 billion of those uninsured. Those with deposits in excess of the FDIC’s $250,000 insurance threshold will receive a receivership certificate for their funds, with payments to follow as the regulator sells down remaining assets.” (emphasis added)
Roku, Roblox, and Blockfi are among the companies that had millions on deposit at SVB, uninsured. “The company’s deposits with SVB are largely uninsured,” Roku said. “At this time, the company does not know to what extent the company will be able to recover its cash on deposit at SVB.”
Overseas this weekend, leaders of roughly 180 tech companies sent a letter calling on UK Chancellor Jeremy Hunt to intervene. “The loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years,” they said in the letter seen by Bloomberg. “Many businesses will be sent into involuntary liquidation overnight.”
While SVB was a lender to the venture capital industry and tech sector, the investments that did the bank in were bonds backed by the full faith and credit of the U.S. government. However, the value of those bonds has plunged as interest rates have increased dramatically.
Banks are able to use a little accounting trickery pokery as it concerns bonds designated “available-for-sale,” as opposed to “held-to-maturity.” The available-for-sale label allows banks to “exclude the paper losses on those holdings from its earnings and regulatory capital, although the losses [do] count in equity.” Held-to-maturity allows banks “under the accounting rules to exclude paper losses on those holdings from both its earnings and equity.”
This problem is not particular to the bank serving techland.
The Federal Deposit Insurance Corp. reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $690 billion as of Sept. 30, up 47% from a quarter earlier, reported the WSJ.
Bank analyst Christopher Whalen wondered in a tweet, “Is it possible that nobody has asked Chair Powell about the deteriorating solvency of US banks due to QE? Where do you think that -$600 billion number will be at the end of Q1 '23” (emphasis added)
MarketMaven’s Stephanie Pomboy weighed in on the same subject with this tweet, “I'm puzzling to understand how THIS isn't the only thing people are talking about today????????? Someone tell me about the rabbits. and fast!”
But again on Capitol Hill and at the Eccles Building no one was uttering a discouraging word. However, FDIC Chairman Martin Gruenberg said in a December 1, 2022 speech, “The combination of a high level of longer-term asset maturities and a moderate decline in deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell investments to meet liquidity needs.”
Now Gruenberg’s prophecy is coming to fruition. Silicon Valley said it decided to bite the bullet and sell holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.” The fresh capital could not be had at any price.
Rothbard reminds us, “The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but it's bankruptcy is only revealed when customers get suspicious and precipitate ‘bank runs.’”
So the banks are well capitalized Mr. Powell? Bank depositors and ex-depositors will decide that. Silicon Valley Bank is the first this cycle to fail, but likely not the last.
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How Reporters Manipulate You
An article in the New York Times last night by reporters Jonathan Swan and Maggie Haberman is an excellent example of one of the common ways “hard news” reporters can put their thumbs on the scale and push a preferred agenda.
On Monday Florida governor, and likely presidential candidate, Ron DeSantis said on Fox News that “becoming further entangled in a territorial dispute between Ukraine and Russia” is not a vital interest of the United States.
The people who work at and manage the New York Times clearly disagree with this opinion. That’s clear to anyone who has consumed their war coverage and seen the way they frame the conflict.
However, the paper wants its reporting to continue to appear nonpolitical as can be seen in this disclaimer halfway down the article.
So how do they dissuade readers of DeSantis’s point without appearing to rebuke it? They launder their opinions through experts and notable people with the same view.
In this article, they focus on some of DeSantis’s fellow Republicans who happen to agree with the New York Times on this particular issue.
The article presents reactions from seven Republicans who strongly denounce the DeSantis statement. They rake the Florida governor’s name through the mud with their comments. They call him weak and say that he’s so wrong it’s a risk to national security.
The article also quotes a Wall Street Journal columnist who criticizes GOP noninterventionists for wanting to “surrender” to Putin.
The article has one single quote from someone who agrees with DeSantis, but only because he wants the U.S. to focus more on combating China. Pure noninterventionism is given no voice, only a dissenting interventionist.
In paragraph 23, Haberman and Swan do admit one important detail that the readers who made it that far would be forgiven for getting completely backward. The opinions of those highlighted in this piece are unpopular with the GOP base compared to the skepticism of U.S. intervention in Eastern Europe voiced by Donald Trump and Ron DeSantis.
Readers will come away from this article thinking that DeSantis said something on TV that most people, including leaders and prominent members of his own party, think was stupid.
That is the exact kind of point you’d expect from the paper’s Editorial Board. But here it’s presented by reporters writing in the “hard news” section of the supposed paper of record.
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Larry Summers Apologizes for his Rothbardian Insight and George Selgin Exhales
Larry Summers affirms the Rothbardian critique of fractional-reserve banking on Twitter...
SVB committed one of the most elementary errors in banking: borrowing money in the short term and investing in the long term. When interest rates went up, the assets lost their value and put the institution in a problematic situation. https://t.co/HxsgqpZOuL
— Lawrence H. Summers (@LHSummers) March 14, 2023
...but then takes it back...
Responding to some of the comments here: Of course banks borrow short and lend long, but properly managed and supervised banks limit duration mismatch between liabilities and assets so their capital position is not gravely compromised by rising long-term interest rates.
— Lawrence H. Summers (@LHSummers) March 14, 2023
...and free banker George Selgin breathes a sigh of relief at "Prof. Summers" retraction.
I'm glad to see, upon reading on, that Prof. Summers explains himself in the comments. Still, I was taken aback upon first seeing this tweet by him attributing SVB's troubles to its having done what all banks always do! https://t.co/EAAYc4ZrOS
— George Selgin (@GeorgeSelgin) March 14, 2023
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