Change makes fools of us all, and we are living through an era of change. Three changes, in particular, are worth thinking about right now.
In his 2020 letter to investors, Seth Klarman, the CEO and portfolio manager of the Baupost Group, a hedge fund, wrote, “The idea of persistent low rates has wormed its way into everything: investor thinking, market forecasts, inflation expectations, valuation models, leverage ratios, debt ratings, affordability metrics, housing prices and corporate behaviour.”.
The reason Silicon Valley Bank’s travails have led to a wider panic — one now engulfing banks with very different characteristics, like First Republic and Credit Suisse — is that Silicon Valley Bank’s circumstances might’ve been specific, but its problem generalises: The financial economy we’re in was built atop low interest rates.If you ask the question “Who holds a lot of long-term bonds and provides banking largely to tech startups in the Bay Area?” not many institutions fit the description.
There is a question that has lurked on the edge of financial regulation for years now: Should we slow the system back down to a speed humans can work at? No one idea here would address all cases — a financial transaction tax would curb high-speed, algorithmic trading, but it wouldn’t stop a bank run — but it’s worth wondering whether speed should be seen and addressed as a financial risk factor unto itself.
Becker and top executives at many other midsize banks argued that this cutoff was too low and too simplistic. You could not be a systemic risk, in their telling, unless you were a large bank attempting exotic financial engineering. “SVB., like our midsize bank peers, does not present systemic risks,” Becker said. “We do not engage in market making, securities underwriting or other global investment banking activities.
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