:D:D:D "all that progress on building AI-generated cat picture platforms, or killer drone technology, or mind-control devices, or surveillance tech is called into question too." Oh nooo! 😱
That gloating description of SV got me by surprise. Had to laugh loud.
Hey Brett, hope you're doing well and I'm glad to see you writing on Substack again.
Re: "the contradictions of capitalism" and "seemingly unaware that in doing so they’d trigger a chain reaction that would undermine the collective interests of all the startups in whole ecosystem.".
This is somewhat of a pet peeve of mine. Although I am not part of the SV ecosystem and don't have access to any of their group chats, I very much doubt it happened the way you describe. I suspect everyone, especially the most connected/powerful knew exactly that mass withdrawals could undermine the bank and that it would be better for them, collectively, that they not do that.
That does NOT mean they had the power to stop it or even that attempting self-sacrifice by not withdrawing themselves was a good idea..
Collective action problems are hard, actually. Nor are they limited to 'capitalism', they happen in any social system. There are countless historical examples of armies that had a good chance of winning if they stuck together breaking on contact with the enemy and getting routed.
Knowledge alone is not a solution to a collective action problem. Actual solutions require either very strong interpersonal solidarity (not easy to get, not the kind of thing you can build in group chats) or some sort of institutional power to enforce the collective good.
For instance, if the casino chip owners of SVB had previously organized a "withdrawal institution" (WI) that had the sole right to request withdrawals from SVB, they could have used this to stymie the bank run by having that institution reject withdrawals that were unnecessary and save SVB.
Of course, this WI could have led to a lot of other issues. More paperwork for normal withdrawals, the costs of needed withdrawals being flagged as 'unnecessary', abuse of power by the WI, capture of the WI by SVB, etc.
Institutions are hard, actually. Concentrating power to enforce solutions to collective action problems safely is something people have been trying to do for thousands of years. With very mixed success.
"If only they had organized and worked together instead!" says the left. "They could have easily solved their problems".
"What a brilliant insight!" I say, "Dangling off the edge of this cliff would be a lot less dangerous if I could just sprout wings and fly off. How about that huh?"
Hey Ben, I'm not really trying to make a strong value judgement on this and I'm aware that collective action problems extend throughout society. I do actually believe that individual VCs probably didn't think much about the collective consequences, believing that they were getting in first. Remember that in 2007/8 etc all the big investment banks were suddenly made forcefully aware of how interconnected they were, and 'systemic risk' suddenly became a big topic among regulators, whereas I'm not sure VCs have ever had a moment like this where they were suddenly made aware of how interconnected and fragile their ecosystem is. I think going forward they'll probably have a higher awareness of their unique systemic risk.
Also, for the record, I'm not really making the claim that this would have somehow been better if the depositors had somehow coordinated, or even that they should have - crises like these are so normal in market systems that they really don't surprise me, but I'm not assuming that there is some better way to do it within this particular context.
For the record, I doubt many people on the left would say "If only they had organized and worked together instead!" - insofar as people on the left care about this issue, it would probably be related to the possible effect on lower-income employees who face the consequences of this (call centre workers etc), and systemic effects on the rest of the economy. I doubt there's much concern for highly paid startup founders and VCs
I agree that they a lot of them were probably herd following and didn't think about the systematic issues. I also agree that the mechanism I just made up probably isn't a good idea, that was more an example.
I'm more trying to push back against the reflexive tendency I see on Twitter and the like to say "these VCs think they're so smart but if you're so smart how come you bank run huh??". Now I'm no defender of SV VC 'intelligence', but bank runs are not a problem that can be solved by being smart, quite the contrary in fact.
It's Twitter so why I am expecting anything, but it just annoys me because the burn "you may be very clever, but in the end you succumb to bank runs like everyone else" is much more accurate but I never see it. Anyway, this is mostly pointless because I know your thinking is a lot more sophisticated so I'm arguing with the wrong person.
I'm confused, where did the startups get L1 money? isn't the only L1 money available to the public is physical notes and coins as you stated in your CBDC article? rest of the digital money in the banking system is originated through deposit creation via loans ie bank chips no?
Well I've glossed over a few steps here - Venture capitalists who have just agreed to fund a startup would have initiated bank transfers of L2 chips from one bank (e.g. JP Morgan Chase) to the SVB account of the startup, which would manifest in the bank settlement system as JP Morgan having to transfer L1 reserves to SVB. So, it's true that the startup was not sitting with $10 million in cash that they literally deposit into SVB, but economically the effect is the same as SVBs reserves go up due to bank transfers. I can probably explain this better, but I'll have to do that some other time!
:D:D:D "all that progress on building AI-generated cat picture platforms, or killer drone technology, or mind-control devices, or surveillance tech is called into question too." Oh nooo! 😱
That gloating description of SV got me by surprise. Had to laugh loud.
I was just doing my best to be fair, accurate and unbiased :)
It really tickled me too!
Hey Brett, hope you're doing well and I'm glad to see you writing on Substack again.
Re: "the contradictions of capitalism" and "seemingly unaware that in doing so they’d trigger a chain reaction that would undermine the collective interests of all the startups in whole ecosystem.".
This is somewhat of a pet peeve of mine. Although I am not part of the SV ecosystem and don't have access to any of their group chats, I very much doubt it happened the way you describe. I suspect everyone, especially the most connected/powerful knew exactly that mass withdrawals could undermine the bank and that it would be better for them, collectively, that they not do that.
That does NOT mean they had the power to stop it or even that attempting self-sacrifice by not withdrawing themselves was a good idea..
Collective action problems are hard, actually. Nor are they limited to 'capitalism', they happen in any social system. There are countless historical examples of armies that had a good chance of winning if they stuck together breaking on contact with the enemy and getting routed.
Knowledge alone is not a solution to a collective action problem. Actual solutions require either very strong interpersonal solidarity (not easy to get, not the kind of thing you can build in group chats) or some sort of institutional power to enforce the collective good.
For instance, if the casino chip owners of SVB had previously organized a "withdrawal institution" (WI) that had the sole right to request withdrawals from SVB, they could have used this to stymie the bank run by having that institution reject withdrawals that were unnecessary and save SVB.
Of course, this WI could have led to a lot of other issues. More paperwork for normal withdrawals, the costs of needed withdrawals being flagged as 'unnecessary', abuse of power by the WI, capture of the WI by SVB, etc.
Institutions are hard, actually. Concentrating power to enforce solutions to collective action problems safely is something people have been trying to do for thousands of years. With very mixed success.
"If only they had organized and worked together instead!" says the left. "They could have easily solved their problems".
"What a brilliant insight!" I say, "Dangling off the edge of this cliff would be a lot less dangerous if I could just sprout wings and fly off. How about that huh?"
Hey Ben, I'm not really trying to make a strong value judgement on this and I'm aware that collective action problems extend throughout society. I do actually believe that individual VCs probably didn't think much about the collective consequences, believing that they were getting in first. Remember that in 2007/8 etc all the big investment banks were suddenly made forcefully aware of how interconnected they were, and 'systemic risk' suddenly became a big topic among regulators, whereas I'm not sure VCs have ever had a moment like this where they were suddenly made aware of how interconnected and fragile their ecosystem is. I think going forward they'll probably have a higher awareness of their unique systemic risk.
Also, for the record, I'm not really making the claim that this would have somehow been better if the depositors had somehow coordinated, or even that they should have - crises like these are so normal in market systems that they really don't surprise me, but I'm not assuming that there is some better way to do it within this particular context.
For the record, I doubt many people on the left would say "If only they had organized and worked together instead!" - insofar as people on the left care about this issue, it would probably be related to the possible effect on lower-income employees who face the consequences of this (call centre workers etc), and systemic effects on the rest of the economy. I doubt there's much concern for highly paid startup founders and VCs
I agree that they a lot of them were probably herd following and didn't think about the systematic issues. I also agree that the mechanism I just made up probably isn't a good idea, that was more an example.
I'm more trying to push back against the reflexive tendency I see on Twitter and the like to say "these VCs think they're so smart but if you're so smart how come you bank run huh??". Now I'm no defender of SV VC 'intelligence', but bank runs are not a problem that can be solved by being smart, quite the contrary in fact.
It's Twitter so why I am expecting anything, but it just annoys me because the burn "you may be very clever, but in the end you succumb to bank runs like everyone else" is much more accurate but I never see it. Anyway, this is mostly pointless because I know your thinking is a lot more sophisticated so I'm arguing with the wrong person.
Thanks for clarifying Ben. Understood
I'm confused, where did the startups get L1 money? isn't the only L1 money available to the public is physical notes and coins as you stated in your CBDC article? rest of the digital money in the banking system is originated through deposit creation via loans ie bank chips no?
Well I've glossed over a few steps here - Venture capitalists who have just agreed to fund a startup would have initiated bank transfers of L2 chips from one bank (e.g. JP Morgan Chase) to the SVB account of the startup, which would manifest in the bank settlement system as JP Morgan having to transfer L1 reserves to SVB. So, it's true that the startup was not sitting with $10 million in cash that they literally deposit into SVB, but economically the effect is the same as SVBs reserves go up due to bank transfers. I can probably explain this better, but I'll have to do that some other time!
Why is your perspective of why government is going after the small banks like Signature?
I'm still in the process of delving into that!