Jerry Bowyer: Financial foundations

MARY REICHARD, HOST: Today is Tuesday, March 14th. Good morning! This is The World and Everything in It from listener-supported WORLD Radio. I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. Up next…the fall of Silicon Valley Bank.

As WORLD reported Monday morning:

KENT COVINGTON: Wall Street is opening to uncertainty today as investors brace themselves for the fallout from the second-biggest bank collapse in US history.

Then, the collapse of another financial institution. On Sunday, regulators closed Signature Bank, which had been heavily involved in the crypto sector.

REICHARD: Today, WORLD Opinions contributor Jerry Bowyer on what’s behind these events.

Bowyer sees more than bad policy here; he sees worldview conflict.

JERRY BOWYER, COMMENTATOR: If a man obeys sound financial principles, he is like a man who builds a house on a foundation of stone. If a man doesn’t obey such principles, he is like a man who builds his house on a foundation of sand.

Houses built on sand look very much like houses built on stone right up until a storm comes, at which point one is washed away. This Biblical vision contrasts with modern theories. Modern portfolio theory is based in Darwinism and skepticism, and it sees risk as essentially random and risk management as investing in assets with low volatility.

The collapse last week of Silicon Valley Bank, or S-V-B, illustrates the difference in worldviews with painful clarity. The storm came and the house collapsed. Or, switching to a slightly less pious analogy, the tide went out and we saw who’d been swimming naked.

SVB was vulnerable in numerous ways. The Fed’s extremely easy monetary policy helped to drive up the price of treasury bonds. By purchasing so many treasury bonds, the Fed created a treasury bond bubble. Low interest rates from the Fed also helped to create a bubble in the tech sector.

COVID policy added to that technology bubble as media consumption grew. People hunkered down in front of social media and streaming services, and that led investors to buy more tech stocks, pushing their price higher and higher.

Of course, all that excess money led to inflation. The Fed eventually admitted the problem and reversed course, selling treasury bonds, driving down the price, and hiking interest rates. All of that hurt technology companies–and banks–in Silicon Valley. Regional banks like SVB had less diversified balance sheets and so were hurt more. And since it owned a lot of long-term treasury bonds, SVB was hit hard by the Fed’s tightening policy. Financial Analyst David Bahnsen says the bank didn’t adequately hedge against that risk.

In a storm, not every house collapses. The shaky ones do, and SVB was shaky. Several issues stand out, such as the bank’s high concentration in long-term treasury bonds. In the past three years long-term bonds underperformed short-terms ones 11 to 1.

Then there’s the issue of managerial focus. SVB was distracted from its core mission. It appears the head of risk assessment refocused a lion’s share of her work toward Pride Month celebrations and other issues of identity politics.

Risk is failing to follow certain foundational principles–in a lifestyle, in a family, in a nation, or in a business. The principle of sound money was ignored by the Fed. SVB violated principles of diversification and prudence. It set aside its fiduciary duty to steward the assets of others and focus on business, not ideology.

As the nation debates this failure, some will turn to old scapegoats like capitalism, greed, and political enemies. But fundamentally, this crisis arose from wrong first principles. Humanistic and technocratic foundations are no substitute for Biblical foundations.

I’m Jerry Bowyer.

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