Crypto did not create this crisis
President Biden says they will find and hold those responsible for the Silicon Valley Bank collapse. Ha ha. It’s Joe Biden because the entire disaster is a function of government policy.
Silicon Valley Bank broke because the US forced the banks to buy their debt as Tier 1 capital, then debased it. Regulation has forced industries to concentrate their banking services and generate banks with undiversified customer portfolios by draconian AML/KYC/risk modelling, and what do you know, it’s bad for the bank’s soundness. Put the two together and you have a doyen bank, with a godly client base of lauded VCs with their miracle unicorn invested companies, the golden children of the US economy, and you end up with a 5 star disaster.
Until the exit of Silicon Valley Bank, everything was about the evil crypto-demons corrupting the US financial system. It was Silvergate all the way; so kaaaaabooooom goes down Silicon Valley Bank, the eighteenth largest bank in the US Why? Because their clients were VCs, who suddenly didn’t bring in deposits, whose investees were also banked there and buried their deposits with abandon.
But the killer blow was that regulators had long ago told the banks “to buy our twisted government debt, or it’s triple AAA and has never defaulted, this is what your reserves have to be made of”. Except when they raised interest rates, they crushed the value of those assets (which isn’t default or no, no, no!) but threaten to bust banks that have followed those instructions and trust that these devalued assets are solvent.
This is what happened to the UK pensions industry, which almost crashed and burned in September. Rising interest rates “raise” their bond positions, which is why the BOE backstopped it with $100 billion to save the day.
So who is more dangerous, young sociopathic crypto-entrepreneurs running billion dollar balance sheets at Starbucks
The government or Sam Bankman-Fried, who is really more dangerous, we all know of course, how could it be otherwise?
But it’s a little unclear, because the regulators can fix their mistakes because they are the wizards of the magic money tree we all have stored in, and with a wave of a digital wand, they make everything right again if they sleep in the printing press.
This weekend they worked hard on the money magic and kaboom, new rules, our money is completely safe, everything for everyone big and small. Only the investors become atomic bombs!
Not that this hasn’t crashed the European markets… Which will probably bounce on Wednesday, unless this whole farrago has destroyed something in the bowels of the Eurosystem.
But where does this leave crypto? Interesting. I think this:
Crypto holds $100 billion in short-term US Treasuries. It’s a big customer, and if it shuts down now, $100 billion will be dumped into the short-term Treasury markets, and up will raise interest rates, and down will cover the regular banks’ assets. It will be a double loss, you have to QE and you have to replace the customers.
Suddenly, cryptostable coins can seem attractive to the government rather than a danger, an attachment rather than a threat, a nice captive customer instead of a gang of marauding robbers.
Anyway, trying to massage the secondary US banks over this lump is going to put crypto “operation chokepoint 2” on the back burner and may well turn the government’s thinking away from suffocating the infant to thinking it might be a good customer for government confetti.
What brought all these banks was the stranglehold on banking that makes it difficult for some customers to bank with the big boys or the bank at all. This concentrates risk via two points:
1) A business crowd of risky customers desperate for a bank, no matter how expensive, flocks to a bank with an appetite for that risk and turns that financial institution into a powder keg.
2) Create banks with undiversified client bases with adapted cyclical economic characteristics, and create boom/bust profiles for these banks. It doesn’t matter if it’s a bunch of Sams or blue chip VCs, lack of diversification is almost always fatal in investment and business.
So here we are on the descent to a crisis.
The regulators moved quickly and decisively, the last great American trait. The disaster was averted, but there will now be a secular shift. If the idiotcracy wins it will be a big negative, if the economic brains in the government focus it could be a big turning point.
I think $100 billion in liquidation of government bonds will be enough to concentrate the mind for a good result.
In the end I didn’t lose any of the huge sum that could have gone south and that’s a good start.
However, we are in hidden variable territory, where there may be many nagging economic pustulants to be revealed, so it pays to be very vigilant and perhaps ready to buy the bottom of a catastrophe. But my idea is that the US is on its toes and ready to hold its own, barring Godzilla coming ashore, which should mean we won’t have a 1929, 2008 event, because if they nip these things in the bud, According to this weekend, life goes on.