NYT OPINION: Change Makes Fools of Us All
By Ezra Klein
Section: Opinion
Source: New York Times
Published Date: March 18, 2023 at 02:00AM
But why choose? Everyone involved in this looks terrible. Regulators did nothing, even though Silicon Valley Bank’s woes had been widely noticed. Bank managers failed at the basic work of hedging against the risk of interest rates rising. Midsize banks, including Silicon Valley Bank itself, successfully lobbied Congress and the Trump administration to be exempted from the regulations attached to too-big-to-fail banks. Venture capitalists sparked a needless panic that annihilated an institution central to their own industry. The Federal Reserve ignored inflation for too long, and the whiplash of its response has become a risk factor all its own.
I don’t think all these people — many of whom performed quite well before in crises and amid uncertainty — are, or suddenly became, idiots. Here’s a more generous interpretation: 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.
Low Interest Rates Came to an End
In his 2020 letter to investors, Seth Klarman, the chief executive 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 behavior.” He went on to say that “by truncating downside volatility, forestalling business failures and postponing the day of reckoning, such policies have persuaded investors that risk has gone into hibernation or simply vanished.”
By Ezra Klein
Section: Opinion
Source: New York Times
Published Date: March 18, 2023 at 02:00AM
Banking is a critical form of public infrastructure that we pretend is a private act of risk management.
Over the past week, an observation by Matt Klein, a financial journalist, has gotten passed around quite a bit. “This was more a case of a ‘bank-run by idiots’ rather than a ‘bank run by idiots,’” he wrote, referring to the collapse of Silicon Valley Bank.But why choose? Everyone involved in this looks terrible. Regulators did nothing, even though Silicon Valley Bank’s woes had been widely noticed. Bank managers failed at the basic work of hedging against the risk of interest rates rising. Midsize banks, including Silicon Valley Bank itself, successfully lobbied Congress and the Trump administration to be exempted from the regulations attached to too-big-to-fail banks. Venture capitalists sparked a needless panic that annihilated an institution central to their own industry. The Federal Reserve ignored inflation for too long, and the whiplash of its response has become a risk factor all its own.
I don’t think all these people — many of whom performed quite well before in crises and amid uncertainty — are, or suddenly became, idiots. Here’s a more generous interpretation: 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.
Low Interest Rates Came to an End
In his 2020 letter to investors, Seth Klarman, the chief executive 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 behavior.” He went on to say that “by truncating downside volatility, forestalling business failures and postponing the day of reckoning, such policies have persuaded investors that risk has gone into hibernation or simply vanished.”
Read more at: https://www.nytimes.com/2023/03/18/opinion/svb-banks-change.html
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