Throughout our history, the US has always had a dysfunctional banking system. There was never a golden age of American banking. That doesn’t mean the system was always in crisis, but the potential for crises was always there.  (Even in the 1970s.)  This isn’t Canada.

There are many problems with the US banking system, but they all tend to revolve around the combination of too many undiversified banks and the socialization of financial losses.  That combination creates moral hazard, which encourages excessive risk taking.

This tweet caught my eye:

There is no “if”.  We are in trouble, and we’ve been in trouble for our entire history.  And if depositors have confidence in deposits that exceed $250,000, then we will be in even greater trouble.  The moral hazard problem will become even greater.  Unfortunately, I suspect that SVB depositors have little to fear.

Dodd-Frank was supposed to fix the “problem” after the 2008 banking crisis.  In fact, it did almost nothing to fix the underlying problem because key segments of the business and political world did not want the problem fixed.  It’s easier to have a system where the profits are privatized and the losses are socialized, with taxpayers picking up the tab.  Neither political party favors any sort of effective reform of banking.  

So here we are again.  In a follow-up tweet the congressman suggested “Bank management must be investigated”:

I’m reminded of that scene in Casablanca where the officer was shocked to discover that gambling was occurring in Rick’s establishment.   It’s politicians that passed Dodd-Frank.  It’s politicians that passed FDIC.  It’s politicians that object to bank mergers that would make banks more diversified, less brittle.  It’s politicians that demand bailouts even to depositors above the $250,000 threshold.  

An investigation?  Look in the mirror.

PS.  I see complaints that sophisticated Silicon Valley investors couldn’t be expected to devise a safe way of storing their funds.  Matt Yglesias provides some useful perspective:

(Bucks fans know that the number 50 has special meaning for Giannis.)