Sunday, March 12, 2023

Our Analysis on Banking Vindicated

 There’s a good explanation of why the Silicon Valley Bank failed here:

“Silicon Valley Bank has been bleeding deposits as the Federal Reserve has aggressively raised borrowing costs to fight inflation. Higher interest rates bludgeoned many of the tech businesses that had deposited their money with the bank. As venture capitalists retreated from offering companies fresh infusions of capital to sustain their businesses, startups needed to burn through the cash in their accounts to stay afloat. Deposits the bank had on hand have fallen steadily over the last several months, according to S&P Global Ratings. Higher rates also meant more investments offered an attractive yield, leading some clients to pull out their deposits and put them elsewhere.”

To try to compensate for this, the Bank sold off its holding of government and other bonds. Unfortunately for them, rising interest rates meant that the price of bonds went down and they couldn’t raise enough. And they went bust.

“When banks run into trouble, they can be forced to sell off investment assets, typically U.S. government debt and mortgage-backed securities, that they purchased to earn a return on their customers’ deposits. As interest rates climb, the price of those older securities fall — which means the banks sell those investments at a loss.”

If banks could, as some claim, simply create money to lend “out of thin air” and get interest on it, why would losing deposits make any difference? 

If a bank was short of money, all it would have to do would be create some more to lend and get the money as interest on them.

That this didn’t happen shows that banks cannot create money out of nothing but are only financial intermediaries borrowing money at one rate of interest to cover loans at a higher rate.

Our theory of the nature of banking stands confirmed. 

New wealth can only be created by humans applying their mental and physical energies to change the form of materials that originally came from nature, not by banks practising magic or financial alchemy.


For more see: The Magic Money Myth –

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