It’s Important to Let the Banks Fail

It’s Important to Let the Banks Fail

By Dr. Thomas Patterson |

Joseph Schumpeter was an Austrian born economist who last century coined the term “creative destruction” to describe the method by which capitalism continually reinvigorates itself. Unlike the static monarchical guild-based economies or the now-pervasive socialist states, capitalism is in constant turmoil. Ceaseless competition produces winners, losers – and progress.

Schumpeter’s key insight was that failure is essential to capitalism’s success. The outmoded and inefficient must give way to more successful models for capitalism to work its magic as the most beneficial-for-all economic engine of all time.

But that doesn’t mean the short-term consequences of failure aren’t painful to those who bear them. Buggy manufacturers, candlemakers, and others overtaken by progress were convinced that the demise of their industries would inflict lasting damage not only on themselves, but on the economy.

But the harm was mostly short term. American lore is full of stories of honest strivers who learned from their disappointments and went on to great success. Reasonably flexible workers found employment in new fields where they were often more productive.

Schumpeter was right that capitalism is fundamentally a “no pain – no gain” deal. But that can be a hard sale in a culture that has come to believe nothing bad should happen to anyone, that pain and failure are indicators of injustice.

We ditch merit-based exams because some students may feel bad. We award participation medals. We mandate facemasks just in case.

Thus, the Obama administration, after the banking collapse of 2008–09, soothed the wounds of the too-big-to-fail lending banks by bailing them out with billions of taxpayer provided funds. But the banks were engaged in exactly the behaviors that Schumpeter believed free markets were designed to punish.

The banks (at the insistence of the feds) made thousands of “sub-prime” loans, using underwriting criteria which would previously have been considered unthinkable. Worse, when the loans began to go sour, instead of cutting their losses, Wall Street repackaged them as “mortgage-backed securities.” These were sold off as far more valuable than the mortgages of which they were composed.

We all know how that ended. Yet because of the bailout, no banks failed. The perps walked away from the train wreck they had caused.

The mortgage lenders 15 years ago clearly did not fear the discipline of the market. Neither did the decision makers at Silicon Valley Bank (SVB), which has also failed due to unwise risk-taking.

SVB occupied a desirable niche, serving the local venture capitalists and tech startups. The fed pumped trillions of dollars into the economy while interest rates were held near zero, making us all feel rich. The stock market, especially tech investments, soared.

Times were good. Deposits in SVB tripled in the three years after 2019. SVB could offer generous loan terms to favored borrowers and above market returns on deposits.

But the music had to stop eventually and so it did. The feds finally raised interest rates in response to roaring inflation. SVB was forced to raise capital and sell some assets at a loss, sparking a run by depositors, which SVB was unable to withstand. The bank collapsed.

SVB had been warned. It lacked the liquidity to respond to stress because the present market value of its held-to-maturity bonds was $15.9 billion less than face value at maturity, which was the number on the balance sheets. The cash wasn’t there when needed.

Most commentators deemed this a regulatory failure. But does a banker really need a regulator to tell him not to count on zero-interest rates indefinitely? That loans to shaky borrowers might default? That bond values fall when interest rates rise?

Of course they knew. They just didn’t care – enough. If they believed their losses would be borne by others, then charging ahead through all the yellow lights to maximize gain actually made sense.

SVB, its depositors, and associated banks have all been bailed out to “stop the contagion.” That’s politically astute, even though the demise of Lehman Brothers 15 years ago hardly fazed financial markets.

But relying on government regulation, rather than market forces, to discipline bank behavior has produced a chronically unstable financial sector which lurches from crisis to crisis.

Let them fail.

Dr. Thomas Patterson, former Chairman of the Goldwater Institute, is a retired emergency physician. He served as an Arizona State senator for 10 years in the 1990s, and as Majority Leader from 93-96. He is the author of Arizona’s original charter schools bill.

Sen. Mark Kelly Suggests Government, Social Media Censorship Program

Sen. Mark Kelly Suggests Government, Social Media Censorship Program

By Corinne Murdock |

Sen. Mark Kelly (D-AZ) suggested that the government should coordinate censorship with social media companies during a conference call with federal agencies on Sunday.

Kelly asked the Federal Reserve, Treasury Department, and the Federal Deposit and Information Corporation (FDIC) about the feasibility of their agencies working with social media companies to censor information in order to prevent a run on the banks. The senator posed the question within the context of the Silicon Valley Bank bailout over the weekend. 

The bank failed due to a massive run following a troubling announcement from its parent company, SVB Financial Group, last week. Depositors panicked en masse after learning that the company was attempting to sell $1.75 billion worth of shares to make up for the $1.8 billion hit on $21 billion of assets sold. The mass withdrawals caused the bank to become insolvent.

Kelly sits on the Joint Economic Committee, chaired by Sen. Don Beyer (D-VA). Other members on the committee are Sens. Martin Heinrich (D-NM), vice chairman; Amy Klobuchar (D-MN); Margaret Wood Hassan (D-NH); Peter Welch (D-VT); John Fetterman (D-PA); Mike Lee (R-UT), ranking member; Tom Cotton (R-AR); Eric Schmitt (R-MO); and J.D. Vance (R-OH). 

Their next committee hearing is on Thursday.

Kelly also sits on the Armed Services Committee, chairing the Airland Subcommittee, while also serving on the subcommittees for Emerging Threats and Capabilities, Readiness and Management Support, and Subcommittee on Strategic Forces; Energy and Natural Resources Committee; Environment and Public Works Committee; and the Special Committee on Aging.

About 200 people were on the conference call, including a bipartisan mix of Congressmen and their staffers. Senate President Chuck Schumer (D-NY) led the conference call, according to Rep. Thomas Massie (R-KY-04). 

Rep. Lauren Boebert (R-CO-03) also referenced Kelly in a tweet. Boebert claimed that Kelly, whom she referred to only as “a member,” asked if the Federal Reserve, Treasury Department, and FDIC were reaching out to Facebook and Twitter to monitor misinformation and bad actors.

“And this administration AGAIN just committed the federal government to interfere with free speech. Unacceptable!” tweeted Boebert.

Prior to confirming that Kelly was the unnamed member of Congress who apparently encouraged the federal agencies to coordinate censorship efforts with social media companies, Massie identified him only as “a Democrat Senator.” Massie noted that Kelly had asked whether there was a censorship program in place that could prevent a run on the banks.

Neither Massie or Boebert included the three federal agencies’ answers. 

Rep. Dan Bishop (R-NC-08) confirmed Massie’s identification of Kelly with House Speaker Kevin McCarthy (R-CA-20), as reported in Public. 

Corinne Murdock is a reporter for AZ Free News. Follow her latest on Twitter, or email tips to