Who's To Blame for the Silicon Valley Bank Crisis? | Opinion

In his classic little book The Great Crash: 1929, the economist John Kenneth Galbraith introduced the concept of "the bezzle," which he described as the "inventory of undiscovered embezzlement." "In good times," Galbraith wrote, "people are relaxed, trusting, and money is plentiful." Money is so plentiful, in fact, that "the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly." When times turn tough, however, and money gets tighter, it "is watched with a narrow, suspicious eye.... Audits are penetrating and meticulous." In short, then, "Good times...tend to foster corruption," while "Hard times...tend to provide the antidote for corruption."

What the American financial system is witnessing with the collapse of Silicon Valley Bank (SVB) and the related instability in banking more generally are the results of the 21st-century version of Galbraith's "bezzle." It increased rapidly for years, and now it will contract just as rapidly, if not more so.

Now, to be clear, no one at SVB has been accused of embezzlement, and there has been no evidence presented that any crimes were committed at the bank. But, then, that's not the point. The contemporary version of the bezzle is more nuanced and complicated than Galbraith's version, but it's also likely been far more widespread.

For more than a decade, the Federal Reserve has ensured that money has been plentiful and, indeed, practically free to borrowers. Interest rates have been kept artificially low, and both corporations and investors have had access to as much credit as they could ever possibly want. As a result, they all grew comfortable and, in many cases, careless. They have been relaxed and trusting, as Galbraith put it, and they've used the Fed's gift to build unhealthy and unsustainable business practices.

In the immediate aftermath of the SVB failure, some observers insisted that the bank's troubles were caused by its pronounced involvement in the world of ESG—Environmental, Social, and Governance investing and management. Chairman of the House Oversight Committee Rep. James Comer (R-Ky.), for example, attacked SVB as "one of the most woke banks" in the country, insisting that many of its problems were the result of its "quest" for "ESG-type policy and investing."

While there is little doubt that Silicon Valley Bank was up to its proverbial eyeballs in ESG, lending to risky "sustainable" environmental startups and backing "woke" business practices, none of this was directly related to the bank's immediate troubles. The good congressman was almost certainly mistaken. Even Matt Cole, chief investment officer and head of fixed income for Strive Asset Management, the Vivek Ramaswamy-founded anti-ESG investment firm, was clear about this, writing that "The SVB failure had about as much to do with ESG/Stakeholder Capitalism as ESG/Stakeholder Capitalism has to do with making money—nothing." SVB had a number of problems that directly affected its viability. They were not ESG-related.

All of that said, however, it is worth considering how ESG and SVB's unhealthy obsession with it fit into the broader financial narrative. ESG is what one might call a "first-world problem." It is an indulgence, something that occurs on a mass scale only when times are good and money is plentiful for such extraneous, non-functional business expenditures. ESG's defenders like to say it is a "risk-management" tool, a mechanism by which investors can evaluate long-term energy and reputational risks. Whatever one thinks of this argument (I wrote a whole book debunking it), in the short term, ESG is nothing more than a distraction, a shiny bauble that keeps corporate executives from doing what they're supposed to be doing and that, as a result, contributes to the modern-day bezzle.

Part of the reason Silicon Valley Bank was so thoroughly caught up in the ESG web was political. The executives at the bank—especially those in its risk management group—were ideologues who believed the culturally leftist political ideas underpinning ESG. Part of it was systemic, which is to say that capital markets today are heavily saturated with the rhetoric of social activism and are controlled to a great extent by large asset management firms that have professed an investment creed that treats long-term "sustainability" as the most important criterion in their capital allocation processes.

The biggest reason SVB (and countless others like it) dedicated so much time and so many resources to ESG, however, is because they could—because the Federal Reserve's interest rate policies over the last 15 years enabled them to do so. ESG is part of a wild and distressing pattern of misallocation of capital for non-pecuniary purposes that constitutes a genuine culture of corruption throughout American business today. And that culture of corruption—the updated version of Galbraith's bezzle—is almost entirely a Federal Reserve-created phenomenon.

For years, economists warned that the Fed's easy money policy would, in time, lead to policy problems that would become entrenched and nearly impossible to solve—at least without serious financial pain. Rampant inflation was always the most obvious potential problem and, clearly, those warnings have come to fruition.

But inflation is not the only Fed-induced problem. At Silicon Valley's much-ballyhooed tech firms—many of which were SVB customers—innovation and creativity have been compromised because practically free money made them less critical to a business's survival than has historically been the case. Countless alternative energy projects were funded over the last decade, despite the high likelihood that they would fail, wasting capital and effectively decapitalizing more proven energy investments because of their assumed political risks. Banks lent foolishly. Corporations in all sectors focused on non-business-related social and political matters, donating hundreds of millions of dollars of borrowed money to social justice causes and campaigns, putting shareholders on the hook for executives' activism. The bezzle grew and grew because the Fed enabled it to.

Even the bailout of SVB's uninsured depositors—who reportedly accounted for 93 percent of the bank's deposits—is a byproduct of the carelessness and "relaxed" approach to money encouraged by the Fed. If the bank, its customers, and even regulators had been paying attention as they should have, then the recklessness of some depositors (looking at you, Roku) could have been addressed. As it is, the bailout of depositors will only reward bad behavior, encourage lax risk management, and convince the reckless and corrupt that their actions will never have any negative consequences. This is bezzle-building on an enormous scale.

As Treasury Secretary Janet Yellen admitted in recent congressional hearings, depositors from other banks will not receive the same treatment. Only those deemed "systemic risks" (which translates to "politically connected") will be treated so generously. This is an example of the worst type of systemic corruption at the worst possible moment. Whether or not Secretary Yellen is able to see it, the bill is coming due. The bezzle will be shrunk, if not voluntarily, then by the vicissitudes of the marketplace. Silicon Valley Bank was not just the second largest bank failure in the nation's history. It was also a warning, a harbinger of things to come as times get tough and money gets tight.

Stephen R. Soukup is the publisher of The Political Forum and the Director of The Political Forum Institute. He is the author of The Dictatorship of Woke Capital (2021) and the co-author (with Andy Puzder) of Other People's Money (Fall 2023).

The views expressed in this article are the writer's own.