Stop playing around with the debt ceiling. The real lesson behind the SVB collapse is just how important government debt is to our way of life.
Politicians and Americans from both parties should take notice just how much of our world is dependent on the “Full Faith and Credit of the United States Government”. It is fair to say SVB was mismanaged, however the bank's problems were, if not caused by at least compounded by, a drop in the current face value of government assets. Universally and without exception, every bank in the country is totally dependent on government debt to operate. And for good reason, but more on that later.
If the government ever defaulted or deferred payment on its debt, you can easily imagine the entire financial system collapsing. In 2008 some banks bought too many Mortgage-Backed Securities (MBS) and the issue was nobody was sure what they were worth. If the government defaulted or deferred payment, every bank in the nation would be unsure what their government debt was worth. While some banks in 2008 did not have too many MBS, allowing them to help fix the problems, every bank, without exception, holds massive amounts of government debt. Banks would not be able to give customers their money, meaning no bills get paid, no payroll gets paid, no cash gets withdrawn. Our everyday lives would be in complete disarray.
Why is the banking system so dependent on government debt? You could quickly say because of regulations that require it, but while true, that is misleading. Regulations require the banks hold government debt because every banker in the world both today and at the time of creating these regulations would agree that government debt is the best thing to force banks to depend on. When you deposit money in a bank, they must earn something on that money. We require them to hold a certain amount of your money in pure cash, but the bank has expenses to pay, it must earn money on your money. The banks prefer to put that money into higher yielding assets, but the issue is higher yielding assets often fail. Sometimes people don’t pay their mortgages or credit card bills, sometimes business default on debt.
Banks require an asset they can safely park money in that they know they can quickly sell tomorrow for a fair price if they need cash. With roughly $16.6 trillion of gold in the world (with 57,000 metric tons of that being underground) and $17.5 trillion in bank deposits, the price of gold would swing wildly as banks bought and sold. There’s $31 trillion of US government debt, that massive amount allows banks to buy and sell huge amounts of debt without massively impacting the value of the debt. Congress can tax at whatever rates they choose, they can spend whatever amount they choose, and congress can print money to pay debt if it chooses. The US government defaulting is a choice, never a necessity. The amount of debt available to purchase combined with the logic being that the government would never choose to default is what makes our system work. Why would they choose to default?
Both political parties have routinely hinted that they would rather see a default than see the other party get what they want. Neither party has a single major agenda item so bad that its worth destroying our economy over. I would like to think both parties know this, but I’m not certain. What I am certain of is that both parties have become far too comfortable using this threat as a means of negotiating. Make no mistake, the parties are not pointing loaded guns at each other’s heads, they are pointing them at our heads. They say that they are just playing around and what they are doing is stopping the other party from pulling the trigger. But when they play games with the debt ceiling, they are one mistake away shooting hurting us.
Policy should be debated, and agreed upon deadlines are a great tool. But the debt ceiling is not a tool, it’s a gun pointed at our heads. Put the guns away. Stop playing games with the debt ceiling.