When even the leftist corporate media starts to pick up on the perilous state of the banking system, you know things are going to get a lot worse. This is what zero percent interest rates get you combined with government sanctioned accounting tricks that let you invent whatever asset valuations suit you.

Economist Keith Weiner goes into the history behind the implosion of Silicon Valley Bank and why it’s premature for Keynesians to declare victory. As we write this, there seems to be trouble brewing at Credit Suisse. The fact that one of the world’s largest banks is on the ropes should give pause to Canadians who are dismissive of any possibility of a bank run just because Canadian banks are so massive.

The root cause of the collapse of SVB was not stupidity at the bank, insufficient regulation, or corruption at the ratings agencies. The root cause is government interference in money and credit, especially including its irredeemable currency which necessarily inflicts interest rate instability upon the world.

During periods when interest rates are falling, most people love it. Who would dislike endless bull markets and hence capital gains, and rising transaction volumes, and hence profits for investment banks? Economists praise it as a “strong economy.” 

The economy was not strong. It was in a false boom, during the Fed’s binge phase. When the Fed went into purge mode, the boom turns to bust (this is starting to happen, but not fully realized yet). In the bust, banks fail, depositors lose their cash, etc. And the pressure grows to bail everyone out, thus leaping back into binge mode and another boom phase. 

Without a doubt, the collapse of Silicon Valley Bank will be a cue for every Keynesian on earth to pound the table and call for more regulation, as if too much freedom is what causes businesses to go bust. As economist Daniel Lacalle points out, SVB did exactly what banks had been told to do post 2008.  Its collapse was the result.

SVB was the poster boy of banking management by the book. They followed a conservative policy of adding the safest assets -long-dated Treasury bills- as deposits soared.

SVB did exactly what those that blamed the 2008 crisis on “de-regulation” recommended. SVB was a boring and conservative bank that invested the rising deposits in sovereign bonds and mortgage-backed securities and believed that inflation was transitory as everyone except us, the crazy minority, repeated.

SVB did nothing but follow regulation and monetary policy incentives and Keynesian economists’ recommendations point by point. SVB was the epitome of mainstream economic thinking. And mainstream killed the tech star.