NEWS AND COMMENT
What the latest banking collapse means for bitcoin and your savings
Over the past month, the world was shocked by news that a major bank collapsed in the span of just 48 hours. But in the aftermath of this collapse, it seemed almost inevitable that the US government would step in and play clean up yet again.
This relationship between financial institutions and their caretaker (the government) is part of a broader pattern that reinforces the importance of leaving the current financial system behind.
On March 9, Silicon Valley Bank’s customers withdrew $42 billion USD in a single day. This bank run — ignited by fears of a bank run — left SVB with a negative bank balance. The following day, federal regulators shut down Silicon Valley Bank.
Thanks to the Federal Deposit Insurance Corporation (FDIC), anyone who deposits money in an FDIC-insured bank is promised a return on all of their funds up to a limit of $250,000 USD in the event that their bank fails. People and businesses who had more than $250,000 deposited in SVB, however, quickly looked to the government for help in recuperating the portion of their funds that were not covered by this insurance.
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Account holders have come to expect that even the portion of their funds that are not covered by insurance will be returned to them, which placed significant pressure on the US government to step in and help those who lost money as the result of SVB’s collapse. At the same time, however, bailouts have become broadly unpopular in the current US landscape in the wake of the 2008 financial crisis.
In fact, a recent poll released by Reuters found that the majority of Americans oppose bailouts. 84% of the two-day poll’s respondents believe that the duty of resolving problems caused by irresponsible bank management should not fall on taxpayers. At the same time, only 49% of Americans favor the government bailing out financial institutions.
In other words, in the wake of the SVB mess, the government was left attempting to design a remedy that needed to do two key things. First, it had to ensure that people and businesses could still access their uninsured funds in order to maintain faith in the broader banking system. Second, any intervention would have to take place without the stigma that surrounds bailouts in the current political landscape.
On March 12th, Treasury Secretary Janet Yellen said that the government would not bail out Silicon Valley Bank but was working to restore faith in banks and get people their money back. Their solution was to pass the expense on to other FDIC-insured banks, allowing SVB to fold in the US while making sure that people could still get their money back.
Whether or not this intervention is seen as a bailout is up for debate. Many argue that only SVB’s customers were bailed out and point to the fact that taxpayers were not directly expensed in this process. Unlike the banks that survived the 2008 financial crisis thanks to bailouts, SVB is no longer afloat in the US. Overseas, it is worth noting that SVB’s UK arm has since been acquired by HSBC for just £1.
Regardless of if we should label the government’s intervention in this instance as a bailout, a much larger debate needs to take place: Why should decisions made by individual banks have the power to throw financial systems into chaos and essentially force the government to play clean up?
In an illuminating article published by The Atlantic, journalist Annie Lowrey emphasized that mitigating the potential consequences of SVB’s collapse should not be seen as a “success story.” “The complexity of financial regulations and the dullness of balance-sheet minutiae should not lull any American into misunderstanding what has happened,” she wrote. “Nor should the lack of a broad meltdown make anyone feel confident. The bank failed. The government failed. Once again, the American people are propping up a financial system incapable of rendering itself safe.”
True to her words, it can be easy to get lost in the weeds of trying to define whether or not this was a bailout or focus only on the end result of people getting their money back. Instead, we need to focus on the fact that the entire US financial system was thrown into crisis as a result of financial institutions yet again.
SVB’s collapse was one of the largest bank failures in the US’ history. The top spot belongs to Washington Mutual, which collapsed during the 2008 financial crisis. At that time, banks were deemed “too big to fail” and were bailed out as a last ditch effort to save an economy that seemed on the brink of collapse.
For now, it appears that the way in which the 2008 financial crisis was handled has made the idea of directly bailing out the financial institutions politically inadvisable. However, the SVB crisis nonetheless highlights that many of the same flaws that contributed to the crisis still exist in our current financial system more than a decade later.
In the near-immediate wake of SVB’s collapse, the bank run spread to other financial institutions. This led to federal regulators closing Signature Bank as well. As with SVB, the government returned funds to Signature Bank clients beyond just the $250,000 insured by the FDIC. Without any intervention, it is likely that this bank run would have spread to other financial institutions as well.
These recent interventions emphasize why governments will always essentially be pressured to intervene when banks fail. Despite the fact that the FDIC clearly only insures up to $250,000 and that consumers should be able to trust FDIC-insured banks to not suddenly go up in flames in the first place, the government felt an obligation to take action. If not, there would likely have been broader consequences as a result of the damage done to the financial systems that we have built our lives around.
The consequences of banks having so much power is by no means confined to the United States. In fact, the collapse of SVB and Signature Bank had a domino effect overseas. Credit Suisse, a 167-year old bank, was recently sold to Switzerland’s largest bank (UBS) after fears that the bank collapsing could take the broader financial markets down with it. As a quick solution, Swiss regulators issued an emergency ordinance that allowed the merger to take place without the approval of the shareholders.
As experts debate the root causes of these failures, there will be many retrospectives written about why these financial institutions collapsed. One contributing factor worth paying attention to is the fact that regulation passed in 2018 increased the threshold at which banks like Silicon Valley Bank have to receive enhanced supervision. According to The Guardian, regulators justified raising the threshold to $250 billion USD by arguing that banks of this size could never prove “too big to fail”.
Not even five years later, the government had to step in to stop SVB’s failure from taking the rest of us down with it. This dynamic is particularly concerning as financial institutions know that the government will essentially be forced to intervene when they slip up and hurt the public. As a result, there is little motivation for these major institutions to not behave recklessly when presented with opportunities to maximize their earnings.
When the government uses money to bail out banks, it has to come from somewhere. If the government borrows money, this could increase national debt, and taxpayers would ultimately be responsible for repaying it over the years or decades to come. Alternatively, the government could raise taxes or cut back on funding for public services which could be especially burdensome for lower-income taxpayers.
Most often, the government will simply print more money, which results in inflation and a subsequent decrease in purchasing power. This has been especially prevalent in recent years, as thirty percent of all dollars in existence were printed since 2020, meaning your savings have lost a third of their value. Banks may be ‘saved’ and governments may be praised but at the end of the day, there are long term consequences that, more often than not, ordinary citizens will suffer. Fortunately, there is another option.
From its inception, bitcoin has stood in opposition to the overwhelming power that financial institutions hold over both the economy and our lives. Stored within bitcoin’s very first transaction is a hidden message that states:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
This message is a reference to an article published in The Times in the year that bitcoin launched. At that time, regulators were deciding how to inject life into an economy that had been badly wounded by the reckless actions of banks leading up to the 2008 financial crisis.
Bitcoin is, in most every sense, designed in a way that is completely contrary to how that crisis was handled. Unlike fiat currencies such as the US dollar, bitcoin has a strictly limited supply. While more money can always be printed, there will never be more than 21 million bitcoin. Further, lost and destroyed bitcoin further limits its supply.
As a result, bitcoin is often likened to a digital form of gold; one of its core use cases is as a store of value. Importantly, each and every person who holds bitcoin serves as their own individual bank — preventing any entities from becoming “too big to fail.”
If you fail to store your bitcoin safely and correctly, it is not the government’s job to bail you out. While this can be a scary concept and has long been used as a critique against the crypto industry by some, it is actually a very powerful feature of decentralized spending networks.
When you store your bitcoin, you can (and should) do so independently by using a hardware wallet. From there, your transactions take place through an open and transparent peer-to-peer network that exists without the involvement of financial intermediaries like banks.
With banks constantly forcing the government to help clean up their messes, there is no reason to believe that those in charge have walked away from these failures having learned any real lesson about risk management. In fact, these failures have only reinforced how much power banks actually have. Until more is done to take power away from them, banks can continue putting us all at risk in the pursuit of their own gains.