Matthew Hornak

30 May 2023

Introduction: Does Anybody Care?

When President Biden explained his administration’s response to the early March collapse of California’s Silicon Valley Bank and New York’s Signature Bank, he emphasized one key aspect: “No losses will be borne by the taxpayers. Let me repeat that: no losses will be borne by the taxpayers.”[i]

The term bailout has been seen as politically toxic ever since the 2008 Financial Crisis was mitigated by the taxpayer-funded Emergency Economic Stabilization Act of 2008.[ii] In essence, the legislation empowered the government to wash away debts incurred by these companies by taking on the debt itself and paying it off with congressionally allocated funds. The concept of bailing out major financial institutions rocked public trust in financial institutions[iii] and in the government’s ability to mitigate these crises.[iv]

So, with 62%[v] of registered voters considering the Biden administration’s actions as a bailout, we can expect general dissatisfaction with the handling of the crisis. Except that isn’t the case. The same poll found that 60%[vi] of registered voters supported the administration’s steps. This majority approval of current policy certainly isn’t due to voters suddenly taking the Biden administration’s word as truth: when asked if they trust the government’s pronouncements that taxpayers won’t end up footing the bill, 47% of registered voters said no.[vii]

Survey data seems to suggest a much more innocuous answer: people really don’t care. When asked if, after these banks collapsed, they had moved any of their deposits out of banks, 82%[viii] of registered voters said no. 74% of these voters similarly had some or a lot of trust in banks in general.[ix] Despite plenty of pieces that claim trust in the financial system is crumbling[x] or in need of serious reevaluation[xi] after these collapses, representative slices of America paint a picture of apathy toward banking policy and regulation. If anything, Americans seem eagerly optimistic that their banks are doing the right thing for them.

Banking is the most familiar arm of the financial industry. It’s where the wages we earn, birthday money we receive, checks we collect, and our hopes for a sound financial future lie, seemingly in wait for the day we need them most. The bank’s vault holds onto an asset that sets the boundaries for what is possible for us today and what may be possible in the future. In other words, the bank is where we define value itself, by determining how much spending and its associated pleasures we are willing to forgo for a future we want more than anything. So why doesn’t our trust in banks falter in times of crisis?

Cruel Optimism

Lauren Berlant argues that one dimension of the cruelty of life under late capitalism is that we get attached to a cluster of promises regarding the good life that are generated by and embedded in conditions that are already not working. Thus, we get attached to the very conditions that defeat the fulfillment of those promises.[xii]

Calling banking may seem like an unfair epithet. While the collapse of Silicon Valley and Signature banks may certainly spell out “conditions that are already not working,” it’s fair to recognize that their collapse was a result of an age-old problem with no empirical solution: a bank run. Depositors in these banks lost trust that they could get their money back[xiii]. While the management of these banks did comically little to assuage these doubts[xiv], the execution of the crisis playing out as it did is on the customers.

But after watching how regulators and economists managed to stave off a nation-wide bank run, something striking appears: the American government is quite good at solving bank crises. Since 2021, the Federal Reserve has issued multiple urgent warnings to the bank about the more than 97% of its deposits being uninsured and its illiquid assets losing value, with a July 2022 supervisory review confirming that the risk assessment team of SVB was overextending itself by holding onto increasingly worthless long-term bonds and loans[xv]. Despite Trump-era legislation that alleviated most regional banks from intense federal scrutiny, SVB’s $175 billion has been large enough to warrant regular oversight since 2018[xvi]. In their 2022 Securities Exchange Commission (SEC) filings, SVB noted itself that “Liquidity risk could impair our ability to fund operation and jeopardize our financial condition.[xvii]” Every indicator the government has created to catch potential financial collapses showed that SVB was barreling toward failure. One the crisis hit, the Federal Reserve along with five other central banks agreed to increase the availability of USD through early April to help private banks keep households and business afloat financially by protecting and expanding the credit they can issue[xviii].

The government had very clear indicators that a fundamental arm of the powerful Silicon Valley region was festering, yet the banks still collapsed. Jesse Eisinger notes in the Atlantic how ludicrous this scenario is because bank regulators have immense power to demand changes in the operation of a bank. Chris Whalen, a financial analyst Eisinger cites, highlights the cruelty dead-on: “The regulators are like all the conflicted agents in ratings [agencies] and other areas […] They go with the flow in good times and drop the ball in bad times.”[xix]

The crux of the cruel operation of banking lies in the “going with the flow in good times” because it carries the heavy implication that, according to regulators, if a bank isn’t actively crumbling to pieces it is doing the right thing. The good thing.

Value Versus Wealth

As I noted previously, banks are where people seek to define value by cooping up money they could be spending now. This conception of banking doesn’t really regard checking accounts and debit cards that act essentially as a plastic analog of paper cash. Instead, the focus on banking in this article dials into the savings and protection of deposits that banks undertake.

When we save, we as individuals are definitively taking part in an act of definition. For example, I could hold a $10 bill that could buy a $10 coat, a $10 drink, etc. When I place that $10 bill in the bank, I signal to myself and the world that I believe some other $10 opportunity in the future will be better than any other $10 opportunity that exists now. I essentially escribe a new meta-value to that $10 bill that it did not have before, defining “more” and “less” valuable not by a difference in price, but across time. Value isn’t something that exists in any traditional sense, but rather a quality that we escribe to specific things, with money – and our withholding of it – as the medium through which we communicate that quality.

On the contrary, financial institutions are not engaging in defining value. Banks are only one arm of a wide-ranging industry dialed into creating value that did not previously exist. Banks notably create money through accounting maneuvers utilizing credit because most of the Western world utilizes a fractional reserve system[xx]. But on a more philosophical note, financial institutions create wealth. Horacio Ortiz writes in American Anthropologist that since 2008 Western economies have focused on keeping financial institutions – banks, investment firms, insurance companies, to name a few – as the center of distributing resources, based on the belief that these institutions are best suited to allocate money in the most efficient and optimal way. Ortiz further highlights that in his interviews and conversations with financiers they had a deeply ingrained aversion to defining value. These workers very clearly believed they were in charge of creating value because, as Ortiz notes, they followed the line of thinking of capitalism’s progenitor Adam Smith that optimally allocating resources creates a social value, which he called wealth.[xxi]

The financial game that everyday individuals and major institutions play looks fairly similar, albeit on orders of magnitude different scales. Both parties are moving money around because they believe it will suit their interests in the future to do so. Critically, though, individuals and institutions are doing so with diametrically different intentions. Individuals are defining what matters to them now versus what matters later. Institutions are choosing to invest in whatever method will end up returning the most amount of money later.

Happily Watching the Same Game

Jerusalem Demsas writing in the Atlantic noted that “when [Silicon Valley Bank] imploded, politicians took a back seat to bureaucrats who oversaw a pre-choreographed dance that would have looked very similar from administration to administration.”

The pre-choreographed nature of the government’s response is derived from the predictability of how financial institutions operate. They may invest in different products and create different types of funds, but at heart they are all playing the same game Ortiz notes: allocating resources they see as optimal. The investment product at the heart of the 2008 Financial Crisis were Mortgage-Backed Securities (MBS). Simplifying to an extreme level, nearly every major financial firm utilized MBS’ or insured them on the belief that their value would never change drastically, because mortgages were always secure – people always needed a house. However, once a few institutions noticed that some of those mortgages weren’t so secure and stopped valuing them so highly, the entire American financial system tried to throw them away as quickly as possible. The game of creating value with MBS’ was over and being left with too many MBS’ only meant disaster for your firm.

In contrast, individual depositors are defining value on an incredibly subjective level. If your interests change and you no longer want to buy the thing you have been saving in the bank to buy for years, nobody else will suffer. And more likely than not, nobody will care, at least until everyone changes their mind at once as happens during a bank run.

Silicon Valley’s collapse was instigated by a mixture of individual and systemic pressures. As highlighted by the indicators the Federal Reserve was watching, Silicon Valley Bank was holding onto assets meant for long-term growth, and as such were not easily transferable to cash – something a number of banks (such as Signature bank) take part in. When individual depositors and small business customers all suddenly changed their minds about the value of saving money with Silicon Valley, the crisis was unstoppable.

The federal government has a pre-choreographed dance for solving these problems because they play out the exact same way each time. And the excuse for not stopping it sooner was that regulators didn’t make high-ranking officials aware of it soon enough[xxii].

Earlier, I described Lauren Berlant’s concept of cruel optimism. What made it so cruel was that banking regulation relies on an implication that can’t be readily agreed upon: that banks fundamentally operate with good faith and are doing things right if they aren’t actively failing. But Berlant’s work is not complete without the optimism that is attached to this implication. We are diluted into believing that the government has the willpower and authority to stop these crises – the exercise of regulatory management after a collapse seems so mundane, so practiced. Surely the government knows what it’s doing.

But these pre-conceived regulatory abilities are based in the creation of wealth, in making money out of nothing, rather than the definition of wealth, in bounding one’s life with money. Since the entire financial system is playing the same game of “efficiently and optimally allocating resources” with pricing assets and trading derivatives, it’s easy for the government to simply wipe the board and let the system play with new types of assets. When MBS’ failed, the government bought them and cleared the debt these institutions held. When Silicon Valley failed, the government created a short-term loan program to provide banks with enough money to cover their deposits if they were in similarly dire straits as Silicon Valley[xxiii].

The optimism of a banking crisis fallout is believing that the next time a bank is making a poor decision that they’ll be caught under regulatory pressure, or better yet not have made the poor financial decision in the first place. The government’s policies have created a perfect environment to say next time will be different. But the cruelty is that the financial game is being played exactly as its intended to be played, that wealth is being created. Once people start prodding with too many questions about how exactly these institutions do that, suddenly the bank fails. The cruel optimism is complete, where an implicit message is sent that it is better not to question the validity of banking and finance at large; it works for now, and the government will make my deposits whole, so why should I care?

Conclusion: Where the Fault Lies

Financial regulators did exactly what they were supposed to do. Unfortunately, those actions are not what most Americans think they are. The government will always use rhetoric meant to lull Americans back into trusting this system of creating wealth, ultimately making it even harder to imagine a world where wealth isn’t created by blindly betting on comical levels of risk.

I said before that banking for individuals is only about defining wealth. But that isn’t the whole story. Most of us know that if we keep money in the bank, we can earn interest to varying degrees depending on the type of investments the bank is allowed to make with our money. That interest rate functions not just as a reward for choosing that bank or for investing so handsomely toward it, but also as a quiet signal that you too are complicit in the creation of wealth founded upon risks that plenty of very intelligent people know will fail. The cruel optimism is federal regulators and financial institutions alike convincing us that next time will be different continuously. But the coup de grace of the financial enterprise is that institutions can always shift the blame to the depositors who trusted the bank in the first place.

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Image by Minh Nguyen / Wikimedia Commons under Attribution-Share Alike 4.0 International License, https://creativecommons.org/licenses/by-sa/4.0/deed.en.

[i] Khalid, Asma. “Teetering Banks Put Biden between a Bailout and a Hard Place Ahead of the 2024 Race.” NPR. NPR, March 23, 2023. https://www.npr.org/2023/03/23/1165268118/biden-bank-failures-fallout-2024. 

[ii] Congress.gov. “H.R.1424 – 110th Congress (2007-2008): A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.” October 3, 2008. https://www.congress.gov/bill/110th-congress/house-bill/1424.

[iii] Rogers, Kaleigh. “It’s Not Just Silicon Valley Bank – Americans Haven’t Trusted Banks for Years.” FiveThirtyEight. FiveThirtyEight, March 17, 2023. https://fivethirtyeight.com/features/its-not-just-silicon-valley-bank-americans-havent-trusted-banks-for-years/. 

[iv] “Pessimistic Public Doubts Effectiveness of Stimulus, Tarp.” Pew Research Center – U.S. Politics & Policy. Pew Research Center, July 28, 2020. https://www.pewresearch.org/politics/2010/04/28/pessimistic-public-doubts-effectiveness-of-stimulus-tarp/. 

[v] “National Tracking Poll #2303072 March13-15,2023 Crosstabulation Results.” Morning Consult. Morning Consult, March 16, 2023. https://assets.morningconsult.com/wp-uploads/2023/03/15160253/2303072_crosstabs_MC_FINANCE_BANK_TRUST_RV_RVs_v1_KC.pdf. 

[vi] “National Tracking Poll #2303072 March13-15,2023 Crosstabulation Results.” Morning Consult. Morning Consult, March 16, 2023. https://assets.morningconsult.com/wp-uploads/2023/03/15160253/2303072_crosstabs_MC_FINANCE_BANK_TRUST_RV_RVs_v1_KC.pdf. 

[vii] Romano, Andrew. “Poll: No Sign of Populist Backlash against Biden after Silicon Valley Bank Collapse.” Yahoo! News. Yahoo!, March 21, 2023. https://news.yahoo.com/poll-no-sign-of-populist-backlash-against-biden-after-silicon-valley-bank-collapse-212115783.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACnrV7qxwZQTAcz_KJKW2feXbY3NWScrVZaReHt6Qasifeqq9FD7jLn1gov-B9co9sCrZHeb6Y2tRVyj_qfPaWOs7-U7yd5axUhC7D8tm81Xj1AlHtVoffRkiz_RpRd_Jwt2S4BbmY8C_0TdRFITd5GtGkWfXSXSUlFdvFj01NIY. 

[viii] “National Tracking Poll #2303072 March13-15,2023 Crosstabulation Results.” Morning Consult. Morning Consult, March 16, 2023. https://assets.morningconsult.com/wp-uploads/2023/03/15160253/2303072_crosstabs_MC_FINANCE_BANK_TRUST_RV_RVs_v1_KC.pdf. 

[ix] “National Tracking Poll #2303072 March13-15,2023 Crosstabulation Results.” Morning Consult. Morning Consult, March 16, 2023. https://assets.morningconsult.com/wp-uploads/2023/03/15160253/2303072_crosstabs_MC_FINANCE_BANK_TRUST_RV_RVs_v1_KC.pdf. 

[x] Salmon, Felix. “SVB Frayed Trust in the Banking System.” Axios, March 25, 2023. https://www.axios.com/2023/03/25/governments-failure-restore-trust-banking-system. 

[xi] Lowrey, Annie. “You Should Be Outraged about Silicon Valley Bank.” The Atlantic. Atlantic Media Company, March 16, 2023. https://www.theatlantic.com/ideas/archive/2023/03/svb-collapse-fed-regulation-financial-system-safety/673401/. 

[xii] Nesiah, Vasuki. “Indebted: The Cruel Optimism of Leaning in to Empowerment.” In Governance Feminism: Notes from the Field, edited by Janet Halley, Prabha Kotiswaran, Rachel Rebouché, and Hila Shamir, 505–54. University of Minnesota Press, 2019. https://doi.org/10.5749/j.ctvdjrpfs.22.

[xiii] Flitter, Emily, and Rob Copeland. “Silicon Valley Bank Fails after Run on Deposits.” The New York Times. The New York Times, March 10, 2023. https://www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html. 

[xiv] Smialek, Jeanna. “Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems.” The New York Times. The New York Times, March 19, 2023. https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html. 

[xv] Smialek, Jeanna. “Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems.” The New York Times. The New York Times, March 19, 2023. https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html. 

[xvi] Enrich, David. “Back-to-Back Bank Collapses Came after Deregulatory Push.” The New York Times. The New York Times, March 13, 2023. https://www.nytimes.com/2023/03/13/business/signature-silicon-valley-bank-dodd-frank-regulation.html. 

[xvii] Silicon Valley Bank. Form 10-K 2022. Santa Clara, California. Silicon Valley Bank, 2022.

[xviii] “Coordinated Central Bank Action to Enhance the Provision of U.S. Dollar Liquidity.” Board of Governors of the Federal Reserve System. Accessed April 14, 2023. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230319a.htm. 

[xix] Eisinger, Jesse. “So Where Were the Regulators?” The Atlantic. Atlantic Media Company, March 17, 2023. https://www.theatlantic.com/ideas/archive/2023/03/silicon-valley-signature-bank-collapse-regulator-culture/673423/. 

[xx] Nevil, Scott. “Fractional Reserve Banking: What It Is and How It Works.” Investopedia. Investopedia, April 10, 2023. https://www.investopedia.com/terms/f/fractionalreservebanking.asp. 

[xxi] Ortiz, Horacio. “The Limits of Financial Imagination: Free Investors, Efficient Markets, and Crisis.” American Anthropologist 116, no. 1 (2014): 38–50. http://www.jstor.org/stable/24028891.

[xxii] Warmbrodt, Zachary, and Victoria Guida. “’Justified Anger’: Key Takeaways from Senate Hearing on SVB’s Collapse.” POLITICO, March 28, 2023. https://www.politico.com/news/2023/03/28/senate-silicon-valley-bank-hearing-00089166. 

[xxiii] Danner, Chas. “How the U.S. Is Trying to Stave off a Banking System Crisis.” Intelligencer, March 13, 2023. https://nymag.com/intelligencer/2023/03/fed-fdic-act-to-prevent-banking-crisis-after-svbs-collapse.html.