Subject: Re: SVB bailout
Rational Walk didn't like the first comment, because he never said the Fed should do nothing - he said that the Fed's traditional response (lending generously against good assets, taking over an insolvent bank, providing liquidity, etc.) was appropriate, without bailing out unsecured depositors. Goofyhoofy responded by saying that other people had suggested abolishing the Fed, allowing banks to fail, etc., which is true, but by asking RW "What do you think would have happened if the Fed had done nothing?", he did make it sound like that was RW's proposal.

Disagree. You are imputing to me words I never said, nor said that RW said. I do understand how to use quotation marks. I asked a simple question for illustrative purpose, and I repeat it now: what do you think would have happened if the Fed did nothing? There is a wide range of possibilities - including what they eventually did do. I offer the thought process and hope to include all readers, not just one of those (who may or may not include RW) who have advocated positions all the way from 'get rid of regulations!' to 'insure everything!' kinds of answers.

Here. An illustration of quotation: The failure of SVB itself is not a systemic risk to the economy, but systemic risks could arise if the bank run on SVB becomes a stampede next week. Small depositors are protected due to $250,000 of FDIC insurance. Large depositors should view themselves as creditors and must accept risk of loss. It should go without saying that those who invest in stocks and bonds of banks should be prepared to bear losses. [italics added]
https://rationalwalk.com/the-f...

Of course if 'next week' had come around without action that 'could arise ' would surely have been a disaster, especially with the ease of moving money with a mouse now on every desktop. Heck, SVB had redemptions of $42 BILLION, 25% of capitalization in 36 hours at the end of the week. Maybe better not to wait until 'next week' in my view.

Counseling 'tsk tsk tsk' about how you must learn to accept the loss of funds may be morally upright theory but would be disastrous in practice. (So is moral hazard!) I agree with you there are better remedies than 'a bond ladder', which introduces needless complexities with mostly similar results.

I am not forgiving SVB for their stupidity (well, I guess I am by approving this bailout, even though I'm really trying to protect myself by not crashing the entire system), many things were done badly; the over-extended 0% rates, the high concentration of deposits in one volatile sector bank offset by an obtuse bet on long duration assets, the lack of a risk officer, the lobbying to avoid stress-testing and/or regulation, and so much more.

I will merely note that had we waited until Tuesday - instead of Monday - a large part of the bank world would have been tied in knots, perhaps as we saw in 2008. Slowly at first (Thursday night/Friday), then all at once (Monday morning.) How sudden was it? Bloomberg BusinessWeek, which goes to press Thursday night, had not a single word of it in last week's issue. This week it's the cover, of course.

Anyway, it will take some new thinking about this, it was not a situation very well contemplated even in the laws emanating from 2008. Sector concentration, liquidity needs, duration risk, FDIC limits ($250k is now $400k just via inflation, FWIW), and so on. I'm sure we will see a blizzard of proposals, some appropriate, many not. I expect I will chime in on part of that discussion should it arise here.