SO MANY PEOPLE ARE GETTING THE CURRENT BANKING CRISIS WRONG At its core, the 2008 financial crisis was a story of credit. Toxic assets like collateralized debt obligations. Credit rating

agencies who didn’t appropriately evaluate the creditworthiness of those assets. Mortgage originators and underwriters who turned a blind eye to consumer credit risks. While many have tried

to draw comparisons to 2008, others insist this latest banking crisis is _YET ANOTHER INDICATION OF CAPITALISM’S FAILURE_. They argue that insuring all depositors from failed banks like

Silicon Valley Bank and Signature Bank is yet another example of the rich getting richer and the poor getting poorer. > Corruption everywhere! Despite the fact no shareholders or

biases supported by any new event or fact that comes along. In this article, I’ll explain why this crisis is unique, completely different from 2008, and by no means an indictment against

capitalism. With that said, certain regulatory rollbacks during the Trump years and the accounting treatment of held-to-maturity assets — all of which I discussed here — definitely did not

help matters. Capitalism requires guardrails in order to work safely and soundly. And it has largely done that well all things considered. Look at the amount of innovation and wealth

America’s capital markets alone have created in the past 100 years. Look at what China has accomplished in the past 30 years trying to imitate it. > _DO YOU THINK ANOTHER ECONOMIC SYSTEM 

COULD HAVE DONE IT BETTER?_ That’s not to say it’s without faults. Occasionally, serious and systemic risks appear in the cracks. Guardrails break or are simply removed (as they were in

2018). While there were systemic risks in this current banking crisis, it was NOT the result of fraud or pure greed (at least as of this writing). Let me explain. 2008 WAS A STORY OF FRAUD

AND GREED, WHILE 2023 HAS BEEN A CRISIS OF MISMANAGEMENT AND CONFIDENCE In 2008, the entire mortgage industry from origination to securitization was fraught with fraud and greed. It was

largely unchecked. The swaps market that effectively provided insurance for the industry’s creditworthiness was opaque and basically unregulated. In this environment, bad actors could run

wild. And they did. Numbers were fudged, low credit scores were ignored, and toxic assets were hidden in tranches of securities. Fraud proliferated across all segments of the industry. That

is NOT the case in 2023. Silicon Valley Bank’s (SVB) troubles are best characterized as a liquidity crisis. Bad risk management created a crisis of confidence. And we’re not even talking

about the _risky _kind of risk management. SVB was overexposed to interest rate risk because of its large position in U.S. government securities (which are some of the safest in the world!).

But those losing bond positions were able to hide in plain sight on its balance sheet because regulations and accounting standards permitted it. I wrote more here about how we should add

transparency to these “held-to-maturity assets”, but the broader point is that everything they did was legal (as far as we know today). Their actions were also largely isolated. Those bond

positions were not threatening contagion to the entire industry. Unlike 2008 when an entire industry was implicated, SVB was a single actor who mismanaged its balance sheet amidst rising

rates. Signature Bank was a victim of broader negative sentiment towards crypto banking. Depositors and shareholders didn’t seem to care that Signature’s crypto exposure was far less than

another failed bank, Silvergate. Confidence is crucial to the banking system. A bank could have the strongest balance sheet and financials, but if consumers and investors don’t believe in

it, it is as good as dead. To remove this unease from the market, the Federal Reserve intervened. And you should be thankful it did backstop all of the depositors’ savings at SVB and

Signature. Had it not, we would have witnessed contagion spread throughout the small and mid-size banking market. THIS CURRENT CRISIS IS MORE ABOUT LIQUIDITY THAN CREDIT Had depositors not

run for the exits all at once, SVB may still be here today. Had Signature Bank not been labeled a “Crypto Bank” even though crypto was only about 15% of its balance sheet, they might still

be here too. Even Silvergate was a victim of the FTX disaster, which freaked out much of the crypto market, with many running for the exits en masse. None of these traditional banks were

necessarily engaging in specific _risky _activities that threatened their creditworthiness. Did they mismanage risk? Yes, SVB certainly did. Did they enter risky and unproven industries?

Yes, crypto is a complete fraud depending on who you ask. The point is there were no reasons to be concerned about the solvency of these banks. Until depositors lost confidence in all of

them. Not because of who they were, but because of what they were associated with. For SVB, that was the large loss they reported on its bond sale. For Silvergate and Signature, it was their

association with a crypto industry that was on shaky footing following the FTX explosion. This loss of confidence caused a loss of liquidity. It became increasingly more difficult to cover

customer deposits. No bank is designed to give everyone all of their money all at once. Nor should they be. We all benefit from a banking system that puts money to work by supporting

entrepreneurs, small businesses, non-profits, and the innovators who drive the American and world economy. Now that central banks around the world have intervened, the liquidity crisis has

largely been contained. Those temporary measures should boost confidence in the long run. Of course, there are many reforms that need to be considered to prevent this from happening again.

NOT ALL FINANCIAL CRISES ARE THE SAME The more intellectually lazy among us react in the following way to negative financial news: > “Here we go with the rigged capitalist system again. 

What a Ponzi > scheme.” Or my personal favorite: > _“_Nobody should be bailed out. They got what was coming to them. > They should be more careful next time.” These takes

proliferate regardless of product, risk, activity, market impact, or any other unique circumstance. Many of these “blow-up capitalism” takes treat all financial crises the same.

Unfortunately, many of these people have never studied a day of financial history. Let alone taken the time to understand the specific issues in the current crisis they’re opining on. Yes,

financial crises happen. Welcome to capitalism. Pull the risk lever too far, and traders and bankers will go wild. It’s human nature. But push the regulation lever too much, and capital gets

handcuffed. Traders freeze, fearing their next move could land them in the slammer. Finding the equilibrium between risk and regulations is far from easy. New financial products are created

regularly, new risks present themselves, and new industries (crypto!) pose unique challenges. But until we find better and safer ways that still promote innovation and liquidity in markets,

this is what we have to work with. And it works. Most of the time. If you don’t believe me, just look at what markets did before the FDIC came on the scene in the 1930s. There were hundreds

of bank runs and bank failures every year. Hundreds. In the last decade, we have not even had 100. So while it may be tempting for some to pile on and try to convince you that the whole

system is falling apart, only a small amount of practical critical thinking exposes the hyperbolic flaws in their logic. Not to mention the unpragmatic consequences of what many capitalism

critiques contain. Few people making these arguments have viable alternatives that promise at least similar economic output. Take the 2023 crisis for what it is. Learn from it. Don’t let

others conflate its significance and distort how it fits into their cynical view of the world. _Originally published at __HTTPS://POLISPANDIT.COM__ on March 16, 2023._ _Subscribe to my

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