Silicon Valley Bank went bankrupt a few months ago, leaving thousands of customers and businesses in the lurch. Well it turns out that it was not only the fault of its managers, but also of the Federal Reserve (Fed), the central bank of the United States. This has been recognized by the Fed itself in a report that it published on Friday of last week, in which it admits that it failed in its work of supervision and regulation of the bank.
The Silicon Valley Bank was a bank specialized in financing technology and innovation companies. It grew very fast in recent years. But it also got into a lot of financial trouble, such as investing in high-risk assets, lending money to poor clients, or having poor management. The Fed report says that the bank’s board of directors and management failed to manage these risks and made many mistakes.
But the Fed is not off the hook either. According to the report, Fed supervisors didn’t realize how bad the bank was doing until it was too late. And when they found some problems, they didn’t do enough to force the bank to fix them. In addition, the Fed changed some legal rules to fit the bank’s business model, making effective supervision more difficult. Apparently, the bureaucracy, as always, in its slowness and clumsiness, did not respond on time.
The Fed’s vice president for supervision, Michael Barr, has said that, after the bankruptcy of the bank, they must strengthen supervision and regulation of the financial sector. And Fed Chairman Jerome Powell has supported his recommendations and has said he is confident they will lead to a stronger and more resilient banking system. Well, now it’s their turn to pick up the piper.
In summary, Silicon Valley Bank was a textbook case of mismanagement and poor supervision. And now we all have to pay the consequences.
Abolition or reform? No one here is saying that this regulatory body is perfect. Of course it isn’t. Obviously reforms are required. Your job is not ideal. That’s true. But its rulings do not justify its abolition. On the contrary, due to its failures, this need for reform, in a certain sense, confirms its importance. The anarchist and libertarian utopia that calls for its total elimination is not a sensible solution. In other words, replacing faulty supervision with a total absence of supervision is not the best path. What is needed is more effective supervision.
More effective supervision implies that the regulatory body has the resources, independence and capacity to fulfill its function of looking after the public interest. It also implies that are held accountable for their actions and that mistakes and bad practices are corrected. In short, it implies that the rule of law and democracy be strengthened. The abolition of the regulatory body, on the other hand, would imply leaving the economic and social agents without any type of control or guarantee. It would mean opening the door to abuse, arbitrariness and injustice. In short, it would imply weakening the rule of law and democracy. Therefore, the most reasonable and responsible option is to bet on reform and not on abolition.
Can you imagine a world without central banks? A world where banks do what they want, with no one to monitor or regulate them. A world where money is worth what speculators want, with no one to stabilize or protect it. A world where people’s savings are in danger, with no one to guarantee or support them. A world where financial crises are frequent and devastating, with no one to prevent or solve them. Do you like that world? Me neither. Many in the crypto space dream of such a world. Deep down, most don’t know what they’re really asking for.
The central bank is the one that supervises the banks for the good of the public and the economy in general. Because the central bank is the one that controls the quantity and value of money to avoid inflation and unemployment. Because the central bank is the one that insures people’s deposits so they don’t lose their money if a bank goes bankrupt. Because the central bank is the one that acts as the lender of last resort to avoid the collapse of the financial system.
Free market fundamentalism sounds great in theory and in Twitter debates, but it doesn’t work so well in practice. A bank left to the good of God is a monkey with a blade: it can do a lot of harm and little good. That’s why we need a central bank that will take the blade off the monkey and put a muzzle on it.
Would you like to live in a libertarian and anarchist utopia? A world without a State, without laws, without authority. A world where people organize freely, without hierarchies, without coercion. A world where solidarity, cooperation and self-management are the principles that govern coexistence. Do you find it cute and fun? Me too.
But you have to be frank. It is not easy to build a better system in practice. These institutions, like the central banks, that we criticize and attack so much, although very imperfect, have emerged with years and years of crises and problems. They have emerged as solutions to problems of the past. To destroy them from one day to the next is to return to a past from which no one wants to return. A past of chaos.
Reforms are necessary to build a much better system. There is no perfection. But there are necessary evils. Evils that protect us from other worse evils. Evils that allow us to move towards a fairer and freer future.
Did the Fed Fail to Oversee Silicon Valley Bank? Of course. Mistakes were made. And amendments are necessary. We cannot deny the responsibility of the Federal Reserve in the collapse of this bank, which has had serious consequences for the economy and society. The Fed did not know how to detect or correct the risks assumed by the bank, nor did it apply the appropriate rules to regulate its activity. The Fed must own up to its failures and learn from them. It must improve its supervisory capacity and its independence in the face of pressure from the financial sector. It must render accounts of its management and submit to public scrutiny. Ultimately, it must recover the trust and credibility it has lost.
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