We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Samizdata quote of the day – “creative destruction” edition

The idea of creative destruction in capitalism is frequently bandied around, particularly among techies, but rarely is it ever allowed to work its magic in today’s world, where seemingly everyone is looking for a handout, from the biggest auto companies to the tiny little community coffee bar at the end of the street, and from the wealthiest financier to the poorest welfare claimant.

Jeremy Warner, Daily Telegraph (£). The title of his article, which is about the federal government protection of depositors in Silicon Valley Bank, is “Capitalism is dead unless institutions that take bad bets are allowed to fail, nobody ever learns the lessons”.

33 comments to Samizdata quote of the day – “creative destruction” edition

  • Y. Knott

    I modestly { – modest? MOI???! – } propose two new addenda to our body of laws. It’s widely bandied-about “over here” that FDR prolonged the Great Depression ten years with his New Deal, rather than letting nature take its course and the bad paper clear itself – but of course it must be mentioned that he’d never’ve become the only U.S. President to serve three terms, had he done so. So anyway, my addenda are as follows:

    (1) failing institutions are allowed to fail. There’re always lots of jackals ‘n vultures loitering-around the corpse licking their lips for spoil – and the knowledge that they, too will be allowed to fail in their turn, will hopefully introduce some sobriety into their exuberance. History is replete with examples that “Be the FUN in Dysfunctional” is not a robust business strategy, no more than “Too Big to Fail” has ever been. And,

    (2) far too often, when auditors arrive on-scene to sift through the suppurating mess of a failed business, it’s found that the cause of the stench is a whiff of good old-fashioned lawbreaking for fun ‘n profit. So the CEO and the Board of all such failing businesses, are notified at the outset that to take their places in the corner office, they must provide their measurements – for purposes of tailoring tres chic orange jumpsuits. History is replete with mammoth $crew-ups and open mis/malfeasance, in both business and government, for which nobody went to jail and the taxpayers ended-up on the hook – this trend will be reversed, if for no other reason than pour encourager les autres – and to encourage them to foster good business practices in their firm, so as to avoid such a fate in the first place.

    SVB only too clearly suffered the old banker’s and governor’s pitfall – “It’s easy to $crew-up with somebody else’s money…”

  • Paul Marks

    Under Federal Law (I do not agree with the law – but it is on the books) deposits up to 250 thousand Dollars are protected.

    However, to protect the rich “Wokeists” of Silicon Valley the American government has made a choice to protect their deposits without limit – in return for both the campaign contributions these people make to the Democratic Party, and the other political help these people give to the left.

    All this should be called what it is – corruption.

    Under the law if an individual or company puts money in a bank only the first 250 thousand Dollars is protected if the bank goes under – not a Dollar more. That should be obeyed.

  • phwest

    The problem is, what if allowing some companies to fail creates an economic contagion that ends up with all companies failing? Fractional reserve lending is effectively lending on margin (from a societal standpoint). 10% reserves means a 10% drop in the value of national assets wipes out the entire banking system if the losses are allowed to be fully realized. We’ve already seen long-term treasuries (which banks are basically required to have as a large part of their loan portfolio) lose more than that. It was losses on their treasury portfolio alone, which were forced to be realized by the run on deposits, that wiped out all of the shareholder equity in SVB. If being over-exposed to treasuries is an existential risk to a bank then how do you have one?

    Once you start down the road of guaranteeing some deposits in a fractional reserve system, you are going to wind up guaranteeing the vast bulk of deposits. What the law explicitly guarantees is in the end irrelevant, allowing the money supply to collapse wipes out the prudent and imprudent alike, so you have to do whatever it takes to support it.

    For a breakdown of how this unfolded at SVB see – https://accordingtohoyt.com/2023/03/14/svb-a-guest-post-by-francis-turner/

    A quick summary of the post is that SVB saw a vast influx of deposits in 2020/21 from all the COVID money that individuals and business got but didn’t have an immediate use for, and since they couldn’t invest that magnitude of inflow in their normal portfolio, put the money in treasuries and mortgages. When the Fed started raising rates they lost value, and once the net inflows stopped and depositors found things to do with the money a classic bank run was started.

    SVB was almost certainly the most exposed bank (that’s why they failed first), as the deposits they took in were roughly double what they had prior to COVID. But ironically enough all the banks are going to take losses because millions of people got COVID money they didn’t need and prudently stuck in the bank for a while until they figured out what to do with it.

  • Paul Marks

    phwest – as you know the Credit Bubble monetary and financial system is going to fall, policy has delayed this fall (year after year) – but, by so doing, has made the eventual fall worse. Yes – worse, vastly worse than had the fall been allowed to occur in, say, 2008 (mortgage bubble), or 2000 (dot.com bubble), or before.

    The American, indeed Western world, economy is now so twisted (the malinvestments so distorting the Capital Structure) that the fall will be terrible indeed. This may well be an economy with no bottom on it.

  • Paul Marks

    “what happens if all companies fail” – well then all companies fail, that would NOT have been the case had the (inevitable) bust been allowed to happen some years ago.

    It is the endless propping up of the Credit Bubble economy (again-and-again-and-again – over the years and decades) has produced this utter mess.

  • Kirk

    Where all this should end is in politicians and the “connected” dangling from lamp posts.

    They started pushing all this crap back during the 1980s, got away with it, and have kept doubling-down on the stupid ever since, thinking that if they got away with it then, they’ll get away with it now. We’ll see how long this house of cards can keep on keeping on.

    Given the overall demographic collapse we’re seeing around the world, I don’t think that the current system is at all likely to continue much past mid-century, no matter how much they try to push it.

  • Jim

    From the article:
    “An arrogant lot these self-proclaimed disruptors tended to be, too, with their right-on libertarian views”

    Whats the odds the SVB depositors are more likely to be Democrat donors than Randian libertarians?

  • bobby b

    “Libertarian”, to me, is almost by definition a right-leaning term, but in America, most associate it with the left. If all the public ever sees of libertarians is a “legalize drugs!” effort, it’s understandable. Big-L Libertarianism in America is basically NORML with fewer pictures of Cheech and Chong.

  • Steven R

    Libertarianism, whether Big L or small l, is a non starter in the US. They might get away with the pro-legalization of pot, but open borders drives away the right and doing away with local government services drives away the left. If they can’t get elected at the local level, and clearly they can’t, you can forget about the state and federal levels

  • bobby b

    Steven R, you sort of make my point. American Libertarianism’s public face is decidedly centered on those two specific issues, much more strongly on the first than the second.

    They would do better to concentrate more on how smaller government and more personal liberty is better than what we have now. If I ask a typical person what libertarianism means, the first answer I get is legal pot, the second is open borders, and there’s usually no third choice. They have no clue because Libertarianism sells itself so poorly here.

    But if you talk to people about shrinking government, that resonates with them. Unfortunately, they have no reason to associate that concept with libertarianism.

  • Chester Draws

    The original post confuses two things.

    Depositors, who haven’t really done very much wrong, are being reimbursed. That is to prevent contagion.

    The owners of the bank are not being reimbursed. That’s a different class entirely. The bank has already failed.

  • bobby b

    “The owners of the bank are not being reimbursed. That’s a different class entirely. The bank has already failed.”

    Dumb non-banker question:

    The owners of the shares in the bank corporation itself saw the value of their shares approach zero on Friday. Then the fedgov stepped in and made depositors whole.

    Doesn’t the share price now reflect a rescued situation? Or did the fedgov do something that removed ownership of the bank shares from the shareholders? (I’m trying to see what due-process protections the bank shareholders receive in such a situation. Normally, one doesn’t see a complete taking of value without it.)

  • Fraser Orr

    @bobby b
    Big-L Libertarianism in America is basically NORML with fewer pictures of Cheech and Chong.

    TBH I haven’t really followed the libertarian party for a while, and that might be true of them. But my first real introduction to libertarianism (after being the only Thatcherite in Scotland) was through Harry Browne. His great libertarian offer: “Would you give up your favorite federal program if you never had to pay taxes again?” was one of his slogans. (Back then this resonated because the majority of people actually paid taxes). His 1996 campaign: “Why government doesn’t work”. I have both his campaign books somewhere, they are masterpieces.

    Here is his platform for one of his Presidential runs. When I read it back then, it was a breath of fresh air and sanity. It still is, even if it is a bit anachronistic.

    Like most political “parties” Libertarianism is, as they say amongst the punditry, a big tent. Certainly there is the drugs and free love branch. But there is also the “Don’t tread on me, from my cold dead hands crowd”, and the “buy gold and profit crowd”, and many others. From what I understand half your life you are surrounded with the non “Age of Aquarius” libertarians. So I’m not sure you should allow your enemies to define you any more than it is reasonable for us to believe Trumpies are all white supremacists just because Blithering Biden says so.

  • bobby b

    Fraser Orr: Don’t get me wrong – I don’t mean to denigrate the libertarian scene in America. There are some great thinkers and speakers and writers here, and some of the pols put forth programs and thoughts that I can support.

    But all of that thought and talk and debate is intramural and hidden from the average American. It’s all libertarians talking to libertarians. We can solve the ills of the world, but it does us no good if we don’t communicate to the mass of voters. And Libertarianism – big-L – doesn’t do that at all here. It has fastened on what it thinks are the winning issues, but they’re not.

    Browne stood for some good stuff. Find me an American – one who doesn’t spend his time on internet politics sites – who knows who he was, and anything he espoused. Good luck.

    I can’t blame this on the dumb voter. They all know the essential (theoretical) differences between R and D. They know partially because those parties get their messages out. L’s don’t.

    I suppose it’s partly because people who abhor state power aren’t great at acquiring it. They’re above all that, or something.

  • Fraser Orr

    @bobby b
    Fraser Orr: Don’t get me wrong – I don’t mean to denigrate the libertarian scene in America. There are some great thinkers and speakers and writers here, and some of the pols put forth programs and thoughts that I can support.

    Right but you hit on this right there. You, no doubt can support them, the average American? You might as well be talking Swahili. As I have said here before, really the problem isn’t politicians at all, it is that the people. The reason libertarians aren’t heard is because nobody is at all receptive to their message. To offer an example, Thomas Sowell is an excellent communicator on economics. He also has been born with enough intersectional victim attributes to be allowed to have an opinion unlike white supremacist misogynists’ like you and me.

    Yet he is muzzled by almost every form of communication medium possible, and when he does speak, people often think he is crazy because he speaks a different language. People can’t for example, imagine a world in which every problem isn’t the government’s responsibility, where failing to bail out billionaires in a bank is utterly lacking in compassion, where the feds have to decide whether to use roundabouts instead of stop lights rather than local governments. Rs and Ds are really sides of the same coin. It is not whether to use state power, it is what to use it for.

    Libertarianism can’t resonate for the same reason Shintoism can’t resonate with Christians. They haven’t been raised with the language and thought patterns to even understand that way of thinking.

    But you’re right, libertarian political party is almost a contradiction in terms. Like a feminist arranging a red pill conference.

  • But you’re right, libertarian political party is almost a contradiction in terms. Like a feminist arranging a red pill conference.

    Indeed, I agree completely. Libertarianism works great as a cultural and intellectual vector, it is a non-starter as an overt political party, indeed close to a contradiction (not entirely but close).

  • Paul Marks

    Jim – of course both the people in charge of the bank and the rich depositors are Democrats.

    Anyone who claims they were mainly “libertarians” (“right on” or otherwise) is ignorant of the facts. Indeed these banks supported Marxist BLM and other such groups – they gave many millions of Dollars to such Collectivists.

    Nor is it just California. For example, in once conservative New Hampshire (at the other end of the United States) the Democrats outspent the Republicans ten-to-one in the Senate midterm elections last year. Ten-to-one – for every Dollar the Republican candidate (a retired General) had to spend, his leftist enemies had ten Dollars. And, on top of that, the support of the “free” Corporate media and the education system (the schools and the universities).

    Why do so many rich people and vast corporations in the United States support the left, support ever more government spending and regulations?

    Well partly because they are influenced by the education system and the media – but also because the wealth of many of these individuals and corporations comes, indirectly, from the Federal Reserve (hello Cantillon Effect).

    This is not Josiah Wedgewood building up a business and using his profits (and the loans of Real Savings, the actual sacrifice of consumption, from other people) to, eventually, build a factory and go into large scale production. This is people playing with the Federal Reserve Credit Money.

    Of course they can indulge in BLM and “Climate Change” (the C02 is evil theory) and all the rest of it (DEI, ESG, United Nations Sustainable Development Goals, Corporate State “Stakeholder Capitalism” and-so-on) – they are not really businessmen at all. They are very rich because of the Credit Money – not because they have invented or produced anything worth while.

    They go from the universities into the Corporate bureaucracy in much the same way that their friends go from the universities into the government bureaucracy – they have similar attitudes and beliefs, they are not serious people, they are a waste-of-space.

    That is why it is hard not to laugh when the “we have got to bail them all out – or the system will collapse” shills turn up.

    Of course the system is going to collapse – it deserves to collapse, it must collapse. The system is nothing to do with free market capitalism – the system is a Credit Bubble “Woke” abomination. And the endless bailouts (again and again and again – over the years and decades) have made the pain and disruption of the, inevitable, collapse much worse (vastly worse) than it would have been had the system been allowed to collapse many years ago – as it should have.

  • Steven R

    It isn’t that the libertarian message can’t get out or isn’t understood by the rubes; it’s that they don’t want what you’re selling.

    Look at what your local government does. Parks, roads, water and sewer, police, fire, EMS, public schools. You’re never going t be able to get elected running on a platform of getting rid of government doing those things, and just letting some private business do them. Reduce funding for them, change their oversight, alter their areas of responsibility those are areas you might get away with, but if you can’t get elected in your average city council or county commission, how can you possibly end up in the statehouse or up on Capitol Hill in DC?

    Your average American wants government running the show and they want it done right. They don’t want their tax dollars going to fund some grant for a Women’s Studies program to investigate the ratio of Andean Lesbian TV shows to normal TV shows over a five year period in Valparaiso, but they do want the FDA to make sure food safety standards are met because big business has shown in the past that they will sell tainted food and not think twice about it. They don’t want a bureaucracy where you send for a form so you can request another form that will arrive in 6-8 weeks, but they do want some kind of social safety net because they don’t want people starving to death in the streets in America. They don’t want an overbloated and wasteful weapons procurement system but they do want a military that can rock your world when called upon to do so. They don’t get what they want because we have two equally repugnant choices with their own agendas and politics has become professional wrestling in this country, while libertarians are the old public access shows.

  • Paul Marks

    Steven R – if one looks at many of the big cities of the United States (and not just the United States) the nice things you list are already collapsing. And yet government spending is higher than ever.

    When will most people understand that ever more government spending will NOT prevent the nice things you list falling apart? I do not know.

    But if most people do not eventually understand that – then civilisation is doomed.

    As for it being impossible to be elected and re elected on a platform of reducing government spending – it is difficult but not impossible.

    For example, President Harding said he would do this in the election of 1920 and he did it (that, not corruption, is the real reason that establishment historians hate Warren Harding) – and Calvin Coolidge did it as well.

    In the late 1930s, in the teeth of the Great Depression, the South Dakota Republican Party committed itself to reducing government spending.

    This seemed insane – after all even Republican President Hoover had increased government spending and taxation, reducing them was (surely) hopelessly “Reactionary”.

    But it worked – the reduction of government spending in South Dakota in the late 1930s enabled such things as the State Income Tax to be abolished – and it is has not returned.

    In the late 1940s both the Japanese and the German Government turned away from statism.

    The Dodge Plan in Japan meant some hardship (yes it did) – but retrenchment was vital.

    Just as the policies in West Germany (including the “skinflint” Bavarian Finance Minister in the Federal Government of Germany) were necessary.

    And the people supported this retrenchment – because they understood that it was necessary and they could see its success in both Japan and West Germany.

    What the public do NOT support is talk of “austerity” when the practice of wild spending continues.

    I remember Mr Cameron and Mr Osbourne (Prime Minister and Chancellor) in the United Kingdom talking endlessly of “austerity” while they, at the same time, flung money at “overseas aid” and any other fashionable cause they came upon.

    That was not a policy of reducing government spending – it was a policy of hitting some departments in order to give more money to others, with spending overall (bank bailouts aside) going UP and UP.

    Of course such behaviour can not be defended – and I would not try and defend it.

  • Paul Marks

    Overall the size and scope of government in the United Kingdom has been on the rise since 1870 (1875 in my home town – as we did not adopt a local school board under the the 1870 Act and central government spending and regulations did not really start to increase, as a proportion of the economy, till 1875).

    But it has not been a uniform process, it has not been the case that every year, or even every decade, has seen government grow in size and scope. It is NOT true to say that liberty has declined in every year since 1870 – although, yes, Britain today is a vastly more statist place than it was a 150 years ago.

    For example, the period that Margaret Thatcher was Prime Minister (1979 to 1990) witnessed a modest reduction in the size of government, as a proportion of the the economy, and some (net) deregulation.

    It is possible, possible, to say that the United Kingdom was a freer (less statist) place in 1990 than it had been in 1979.

  • Paul Marks

    In the late 1960s and 1970s taxes on investment in the United Kingdom were over 90% – essentially the British economy by 1979 was a Potemkin Village, it had been insane to invest in manufacturing for many years (due to both high taxation and government granted union powers – see W.H. Hutt “The Strike Threat System”).

    Margaret Thatcher got the blame for the “collapse of manufacturing” – but British industry (see above) was a facade by 1979, it was about to fall down (because it had not been sane to invest in it for many years), whoever the Prime Minister was.

    Would you invest in manufacturing if the taxes on your investment were over 90% and unions could call a “strike” and blockade your front gate (remember you were not allowed to dismiss them for “striking”) whenever they felt like it?

  • Paul Marks

    Ronald Reagan in the United States inherited a top rate of income tax of 70% in 1981 and left a top rate of income tax of 28% in 1989 – yes he got rid of lots of “loopholes” (deductions) but a lower rate without these deductions is a vastly better system. The truly key loophole, the deductability of State and local income tax from income before it is subject to Federal income tax (which was helped create the rich leftists of New York and California – the people that Tom Wolfe satirised, as they supported ever more government knowing they would not really be paying for it) had to wait for President Donald Trump to get rid of it – as he said (when challenged about his own use of this loophole) the person who uses the loopholes the most is the person best qualified to know which loopholes to get rid of – which are used, in order to get lower tax rates.

    Ronald Reagan also deregulated some areas – for example (and people forget this) modern “Talk Radio” where a presenter gives their opinion and listeners choose which radio station to listen to, was illegal (yes illegal) before Ronald Reagan – as FCC rules demanded that all radio shows have the same “balanced” (read – establishment) point of view.

    Yes this means that Marxists can have their own radio shows (or whatever) – but so they should, people should be able to choose what they want to listen to (or watch).

    But YES – Steven R. has a good point, to reduce government spending is much harder than to reduce tax rates.

    Much harder – but vital.

    Absolutely vital – especially now.

  • Alan Peakall

    The very phrase “collapse of manufacturing” should have been suspect because it strategically failed to distinguish between manufacturing output and manufacturing employment.

  • Johnathan Pearce

    From the Wall Street Journal’s editorial pages:

    The biggest illusion is that there is a monetary and fiscal free lunch. Prominent economists and policy makers acted as if they believed Modern Monetary Theory, the quack notion that governments can money-print and spend their way to prosperity.

    First after the 2008 global panic and especially during the pandemic, central banks slashed interest rates to lows previously unknown in human history, while dramatically expanding their balance sheets. This loose money financed fiscal explosions left and right, and often became justification for more deficit spending because, hey, interest rates were so low.

    This fiscal-monetary gusher distorted investment decisions around the world—from Silicon Valley app developers to Italian government bonds to Chinese real estate. Banks, like fish, have absorbed the pollutants in the water around them. Little surprise, then, that crises develop on bank balance sheets as central banks’ belated attempt to fight 40-year-high inflation reveal more and more bad bets, including the interest-rate duration risk on supposedly safe sovereign debt.

  • Johnathan Pearce

    Jim: “Whats the odds the SVB depositors are more likely to be Democrat donors than Randian libertarians?”

    Quite. The idea that the people who crashed the banking system are followers of Adam Smith, Ayn Rand, Ludwig von Mises, etc is farcical. The errors that have led to this shitshow are the consequences of Keynesian economics, a bastardised form of monetarism, and a mis-reading of what causes recessions in the first place.

    The sad truth is that the global economy has been put on a morphine drip since before the 2008 crash. When the drug wears off, as it does eventually, this is what happens. I am surprised that it hasn’t happened a lot sooner.

  • Fraser Orr
    March 16, 2023 at 4:37 am
    “…. People can’t for example, imagine a world in which every problem isn’t the government’s responsibility, where failing to bail out billionaires in a bank is utterly lacking in compassion, where the feds have to decide whether to use roundabouts instead of stop lights rather than local governments.”

    There’s one little problem I have with this: roundabouts or stoplights. I’ve lived in places with both, and I can get along with both. But when somebody used to lights is suddenly confronted with a roundabout, or vice versa, there is confusion and a much-increased probability of a traffic accident. Minneapolis is suddenly converting lots of intersections to roundabouts, and I’ve met the confusion. My father was a highway engineer, but when he met his first roundabout, he went the wrong way around it because he wanted to make a left turn.

    Some jurisdiction larger than any-old-town needs to make the decisions here. Have one, have the other, or have rules describing which goes where. Surprises are not good. It’s like the preemption laws states are starting to pass about guns. You can’t have every town making up their own rules. I could be carrying a gun quite legally, then cross into a city and become a criminal. Some things are important enough that you want everybody playing by the same rules.

  • Fraser Orr

    Some things are important enough that you want everybody playing by the same rules.

    I think some things are important enough that you want to give people the choice which rules to follow, so that if they hate the rules that big brother sets up they have the option of moving somewhere else.

    I was reading that the OECD is trying to force its members to agree to have a lowest allowable corporate tax rate. There is an a name for this in economics, it is called a cartel.

  • Fraser – I normally agree. This very option is currently being used in New York and California. But we need rules of the road and laws of the sea. Towns, cities, and counties could set clearly-marked local speed limits, states the rules for state highways, and DC the Interstate highways. Liberty is one thing – anarchy quite another.

    I’m not sure about the Feds setting the rules for the Interstate. The appropriate speed limit for New Jersey would be ridiculously slow for Nevada. The Feds like one-size-fits-all.

  • Fraser Orr

    The appropriate speed limit for New Jersey would be ridiculously slow for Nevada. The Feds like one-size-fits-all.

    I think you just made my point.

  • Steven R

    One point Ellen didn’t mention is those Federal rules and regulations on state stuff like roads, schools, Medicare/Medicaid/SNAP, etc., only need to be followed if the state takes Federal money for those things. The states could do their own thing on any number of issues and projects, but letting DC write the checks is simply too big of a carrot to ignore, regardless of the bureaucratic stick that comes along with it.

  • […] “The idea of creative destruction in capitalism is frequently bandied around, particularly among t… […]

  • What I don’t understand, but really don’t, is that nobody seems to see the elephant in the room. The financial system is in such a sorry state that the SVB’s failure would have triggered a monstruous bank run on a lot of US and European banks. So there was no alternative.
    Nevertheless, First Bank is on the hook. Credit Suisse is fighting for its survival
    So despite the SVB bailout, it is possible that we will see a financial crisis more severe than in 1929
    Long term it is inevitable except if we come back to pure laissez-faire capitalism. Politically, it is impossible
    Take a seat and eat popocorn.

  • Paul Marks

    Allen Peakall – manufacturing output (not just employment) fell off a cliff in 1979, but it was always going to (regardless of who was Prime Minister) for the reasons I have already described – the starving of investment because of crushingly high taxes (for many years) and unlimited, and government granted, union power.

    Steven R. – you are quite correct, government spending in American cities has never been higher and much of that spending is funded (in one way or another) by the Federal Government. For example its Covid bailouts.

    Yet every nice thing you mention, from public order, to schools, to parks, to sewers and roads, is falling apart – in spite of the gigantic spending.

    If the public can just free their minds enough to grasp the basic fact that everything is falling apart in spite of, or rather, BECAUSE of, the vast government spending – then, and only then, will there be hope that the United States may survive.