Derek welcomes back the economic roundtable of Michael Batnick and Ben Carlson, cohosts of the Animal Spirits podcast, to debate who killed Silicon Valley Bank, how much we should blame the Fed, how much we should blame Silicon Valley venture capital firms, whether this will change the direction of monetary policy, and whether the U.S. has too many banks in the first place.
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In the following excerpt, Ben Carlson and Michael Batnick talk about the financial ecosystem that led to the collapse of Silicon Valley Bank.
Derek Thompson: All right. Let’s talk about Silicon Valley Bank myths, lies, nonsense. I am interested, first and foremost, in teasing apart the good takes from the bad takes in terms of why what happened happened. And I first want to talk about the phenomenon of ZIRP, zero-interest-rate policy, from the Federal Reserve. One of the themes, I think, that have emerged from the last year, 15 months, has been that lots of things that we thought were the wave of the future were in fact what I would call LIRPs, low-interest-rate phenomena. We are living in the ashes of a LIRP economy.
We thought that all sorts of tech phenomena, like the rise of Peloton, streaming clearly taking over the world as a profitable business model of entertainment, that these were the wave of the future, and they turned out to be low-interest-rate phenomena. We thought crypto was going to take over. That turned out to be a LIRP as well. Metaverse, maybe that’s a LIRP as well. And Silicon Valley Bank, it seems to me, was sort of caught LIRPing. They had a bunch of depositors that were early-stage tech guys. They had a bet that depended upon low interest rates, this bet on held-to-maturity securities. One big question that I have for you, Ben, let’s start with you, is how much of what we’re looking at when it comes to the death of SVB is simply the latest chapter of a book called The 2010s: A LIRP Story?
Ben Carlson: Well, if you look at Silicon Valley Bank in the pre-pandemic days, at the end of 2019, it was like an $11 billion market cap. By the end of 2021, it was $44 billion. This thing was a bank. These things should be boring, sort of dividend paying. They’re not supposed to be these crazy moon shots. And this bank quadrupled in value, and it was trading like it was crypto or the Metaverse or some sort of tech startup. And that shouldn’t happen in something as boring as the banking system. And obviously, people were assuming, OK, this party’s never going to end. And to your point, a lot of it was just low interest rates. And because the Fed just pulled the rug out on everyone, it went from 0 to 60 or 60 to 0 so fast. I do think that there are a lot of people who had this paper wealth that thought it was just going to keep growing forever and ever. And raising interest rates put an end to that very quickly.
Thompson: Michael, there’s a bit of a debate about whether the most important contributor to the demise of Silicon Valley was the depositor side, the fact that their depositors were an ecosystem of early-stage tech startups who were talking to each other, who might have had a herd mentality when it came to pulling out their money, and who were also very vulnerable to a rise in interest rates, which shut down the VC spigot. Or whether they sealed their fate by placing this $80 billion bet on long-term securities that were a bet that was destroyed, that I think lost $15 billion when interest rates started to rise. When you look at the death of SVB, do you think it sealed its fate more on the depositor side or on the asset side?
Michael Batnick: Well, all right, this is a very good question. And to Ben’s point, this is a live by the sword, die by the sword type of situation. Silicon Valley Bank was a huge beneficiary of what you’re referring to as LIRP. If you were a venture-backed startup, there was a one-in-two chance that you banked at Silicon Valley. So the question of whose fault this is—everyone’s trying to point fingers, and you need to be like Inigo Montoya. No, the guy that killed his father, I’m sorry. You need six fingers to point at all the people that are to blame. You’ve got, first and foremost, the Fed. I think they are probably at the epicenter of this. What do I mean by that? The Fed took interest rates to 0, appropriately so, and they left them there for way too long. They left them there for two years. Even as inflation was over 6 percent, they still weren’t raising rates.
So they were way behind the curve, and they allowed this bubble to get blown into the venture capital ecosystem, which was averaging something along the lines of $300 billion worth of financing for these companies. In 2021, that was $600 billion, and all of that went into Silicon Valley Bank. The problem is that these companies were so flush with cash that the banks didn’t need to make loans. They needed to manage their depositor money, and they did so with various interest rates and yielding securities. OK, so then you go to the point of, well, did the bank completely blow it? Is it their fault? Probably. Is it the fault of venture capitalists for funding all these companies? Well, what were they supposed to do? They’re getting the money in, right, from LPs, from investors. They had to fund these companies. And then, wait a minute, what about the regulators?
What is their culpability in all this? And the auditors. KPMG just gave them a clean bill of health. And the analysts. J.P. Morgan had an overweight on the bank. And so there are so many people to fault and point fingers to. The venture capitalists for pulling the rug and saying, “Get your money out.” But there’s also a bigger culprit, and it’s the pandemic. And I know you spent a lot of time talking about the meteor—not the ripple—the meteor into the Pacific Ocean that was the pandemic. That is what started all of this. And I think it’s really easy to forget that. So we’re going to talk more in depth about it, but it started with the pandemic, first and foremost. After the pandemic, the Fed doesn’t keep rates at 0 for too long. It doesn’t go from 0 to 4 to 75 basis points in 12 months, which is the fastest hiking cycle ever. None of this happens without the pandemic.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: Michael Batnick and Ben Carlson
Producer: Devon Manze
Subscribe: Spotify
