modernist duct tape art by dall-e
SVB’s failure seems to have been caused by a mix of bad luck, wrong decisions, and terrible crisis management.
The fallout revealed weakness in the broader banking system, resulting in a significant Fed intervention. For all of us caught by surprise, the episode reminded us that the banking system, and everything invented by people, is held together with duct tape.
Usually, things work smoothly, or at least as expected, but occasionally, a strong wind brings some of our institutions down and reveals what keeps them standing.
The way I understand it, SVB’s most significant issue was overexposure to a low-risk debt instrument that was super safe but yielded a minuscule interest. No one wants these bonds now that rates are up, so their price is down a ton. That overexposure led to poor decisions and even poorer communications, which made people extra nervous, and as a result, there was a bank run.
Initially, overexposure to underwater assets didn’t surface to most people’s attention because their book value assumed the bank would hold them until maturity. But since SVB had so many of those (almost equal to the number of deposits), a small, harmless piece of accounting duct tape - reporting a bond at face value if held until maturity, even if the market price was down - peeled off just a tiny bit. Everyone saw the duct tape peel off, and then everyone got nervous.
Tons of questions followed: who else is holding such assets until maturity, which are short-term underwater? What? Almost all banks, you say? Do you mean to say this is just an accounting trick, and they could be in trouble if people take their money out? Wait, what do you mean by fractional reserve?…are you implying that banks don’t have all their customers’ money right now?….. This is Outrageous!
Yup. It’s all kept together with duct tape.
Some people see this and get inspired to improve it. After all, it works reasonably well most of the time, and that duct tape is there because someone put it there. Everything was flimsier before, and constantly adding new and improved duct tape makes possible more prosperity, longer lifespan, ever-increasing comfort, and all sorts of wonders, inspiring many to try and improve it. Yes, often, part of our system falters, and at times the brittleness of the whole of our civilization is plain to see, but it does work amazingly well, and we have the means to keep improving upon it.
But others look at it and yell: “DUCT TAPE! DUCT TAPE EVERYWHERE! LOOK, IT’S ALL ABOUT TO COME CRUMBLING DOWNl!!!!!”.
That’s very scary. Because underneath that duct tape is an older, lesser duct tape. And the further you go, the more feeble everything looks and feels. And the less structure we have under our feet, over our heads, and between us, the nastier and brutish life turns.
Who yells duct tape? First, we have the understandable first-timers: the young are prone to yell duct tape! Once they realize the world of grownups is shaky and random. There is also a contingent of people who are light on their nerves, which is also expected.
But there is a more problematic duct tape yeller: the cynic. He thinks the duct tape means the world is a farce and nothing is to be trusted. This is an issue because our world is a delicate and critically important construct. And we want to protected it.
The first, most obvious reason to protect it: this world, put together with duct tape, is way better than whatever savage, pre-civilization thing would have preceded it. Having it hold on for us is a precious thing.
Second: Everywhere around us, there is duct tape due for improvement, so we should work on improving it.
Third, we can’t remove all duct tape and replace it with something shiny. The history and traditions behind all this duct tape are not superficial; if nothing else, it is reasonable to assume we should try and understand it before we change it. And in doing so, we are likely to find things that work quite well and are worth preserving. But also, practically, if we pull it all at once the whole construct will crumble.
So how does the duct tape work? The fundamental trick that makes it all work is to elicit a certain degree of trust and optimism from all of us. There have been worse and better duct tape in the past, but it is up to us to keep it standing and improve it.
Doing all the work alone is impossible, so we must find a way to trust each other to get stuff done. So every time trust is lost and optimism wanes, the whole system shakes.
How can we build so large and with such resilience with just duct tape? Because we have trust in each other and our institutions. And because we share a general optimism that things can be better tomorrow than they are today and that this better future will be shared by all who work on it.
If we constantly focus on duct tape and try to pull it, change it all, or believe that someone else will do such things, it can fall apart.
The enemy of the duct tape is not truth (seeing it for what it is), fear (a natural reaction to seeing how fragile it all is), nor blind optimism (that assumes that it is a simple thing to change and add to). The number one enemy is Cynism; that’s why it is such a big problem.
We have mounting evidence that cynism in our country is growing. A recent WSJ survey asked people which values were “very important” to them. The results show that across all age cohorts, the values of patriotism, religion, having children, and community involvement are dropping fast, and only money continues its rapid rise.
A disregard for the lessons of the past, a generalized mistrust in others, and a pervasive pessimism about the future underlineof the values depicted in this survey. In short, we have chosen what to believe in and settled on cynicism. That’s not good.
Without the church, the nation-state, our bowling alleys, and our neighbors, we have been left with nothing but money. But we have something; we have this world of man, even if it is shakier than it appears on first impression. It’s the force that brought all those things that we cherish and the same force that can renew and bring new things.
We have also seen how cynism hollows out other nations, and it should serve as a warning sign for the US.
Francisco de Miranda is my favorite Venezuelan founding father. And this is my favorite phrase from him: “¡Bochinche, bochinche! Esta gente no es capaz de hacer sino bochinche” which translates to something like: “ Chaos (or maybe pandemonium), chaos! These people are only capable of generating chaos!”. He wasn’t talking about the Spaniards by the way, he was talking about his own people.
This phrase is so good because it describes what makes Latin American countries charming but also politically unstable. As I see the rise of cynicism in the U.S, this Venezuelan phrase has come to mind repeatedly (not so much for its charm, but for the political instability part)
A cynic sees no point in originality, only in doing the things that get him what he wants. It’s hard to care about beauty, public spaces, nature, and the strangely other among us if we are cynics. It prioritizes the present over the past and the future. Cynisms make it hard to honor and admire others, and it makes it hard to dream about a different, better world.
At the root of a weak rule of law, low economic growth, poverty, and inequity is cynism. Cynics believe we can’t trust each other or our shared institutions and should only live for the present, grab what we can, and move on.
Even worse than the cynic is the person who yells duct tape out loud and uses it to its benefit; those people are dicks. There are different ways of being an dick that leads to different political inclinations: The one that says it’s all duct tape, so screw it, let’s grab as much as we can. A different kind says the duct tape is fake, but there is a real and authentic duct tape that we need to put in, and we should start from scratch. Both of them suck.
Sometimes one can find these people in positions of power, and there they can wreak havoc. But I don’t worry too much about them: My sense is that there is a somewhat stable supply of shitty people, and the efforts to deal with them sort of ebb and flow. But cynicism can become a broad societal malady that we need to address head-on.
One of the mechanisms by which cynism undermines all our duct tape is via conspiracy theories. And conspiracy theories can be far more problematic than a few horrible people.
Most conspiracy theories are wrong because they assume few have profound control of the system, and if something moved, it is because someone moved it intentionally. But that’s rarely so, and often things are easier to understand as a set of unintended consequences from a system held up with duct tape.
Conspiracy theories rely on a persistent illusion that looks at the world as something solid, purposeful, and consistent end to end. But it only takes a peak at the duct tape to know this is rarely true.
One thing all conspiracy theories seem to have in common is a deep mistrust of institutions and people who are “other.” Conspiracy theories depend a great deal on cynicism.
Again, let’s look at our current banking issues and the Fed policy that goes along withi, once from the lense of cynicism and one from the realization that everything sticks together with duct tape:
- Conspiracy theory: reckless VCs and startups make reckless, terrible investments but somehow get to profit regardless. The bank goes under because it served this degenerated customer base.
- Duct tape theory: We change the zero interest rate duct tape for the rapid rise rate duct tape to patch up another duct tape (fiscal stimulus) which patches another duct tape (closing the economy due to Covid), and this has a ton of unexpected (for most) consequences, especially for those who already put the wrong duct tape on other issues (overexposure to what looked like safe bonds which are now underwater)
- Conspiracy theory: Those who share fears about the U.S dollar and U.S treasuries are in cahoots with adversary foreign entities which want to undermine the U.S global supremacy.
- Duct tape: People see duct tape, get nervous, and scream duct tape! The system requires trust, and the lack of trust makes people scream duct tape even louder! Adversary foreign entity who wants to undermine U.S supremacy sees a wave and surfs it to the best of its ability (which peels other duct tapes they can’t even anticipate)
Ok, two more:
- Conspiracy theory: An young evil villain funded by the CIA and maybe a foreign entity brainwashes people’s minds for the benefit of the deep state, and maybe something more ancient and sinister (after all, the founder is Jewish)
- Duct tape: Running a product that impacts 2B people changes, fixes and damages all sorts of duct tape out there. It enables the Arab spring but also misinformation. It connects friends and families spread out far and wide, but it also mindlessness distracts. The Meta organization is a bunch of people doing for the most part, the best they can, making tons of forced and some unforced errors. It’s also an organization made of people with conflicting opinions who change opinions with time and with new information.
- Conspiracy theory: An adversary foreign entity in cahoots with big pharma and its lackeys within the US government purposely spreads out a virus to destabilize the US and China to concentrate power into the deep state here and the CCP in China.
- Duct tape: I have no idea what happened, but I know that duct tape holds Bio research labs, as it holds together everything else. So it is easier for me to imagine a mistake over a corporate-US-China conspiracy. Then, I can imagine the government and/or pharma looking at a lab’s ripping duct tape and rushing to put more duct tape, some good, some not so good. I can also imagine the virus escaping a food market and then, just a ton of duct tape.
I actually can’t know what happens in any of these cases. Still, if we look at our own lives and the world around us (our co-workers, neighbors etc) I think the duct tape explanation deserves as much if not more faith than a pervasive cynic view of our institutions.
The issue with conspiracy theories is not that they are built on an illusion; instead that it chooses the wrong one: cynism.
A functioning and ever-improving system is also built on an illusion, a sort of hope, a dream, a vision, that things can be better tomorrow than today because things are better today than 200 years ago. The difference between the conspiracy theories and the hopes of the duct tape theory is straightforward: we can see the duct tape and that it works for the most part.
Cynicism also undermines our ability to put the right duct tape tomorrow. Pessimists make for terrible builders.
Every day, people try to do new things. New laws, art, fashion, technology, and science. Each a new piece of duct tape to keep it all together.
Some of it reinforces old things differently, and some are duct tape in novel places. Some are just ripping up duct tape to make room for new ones.
New things like AI and LLMs, gene editing, space travel, crypto, or new music, art, etc tend to reveal the system’s fragility. One significant change in any of these can peel off tons of duct tape that keeps it all together.
In the face of these changes, some will push for optimism and remind us that everything today was invented by someone, and everything tomorrow will be created by us today. Others worry about the system’s fragility and may want us to move slower or more carefully. Both need to be weighted. But the one that causes real trouble is the cynic who wants us all to be paralyzed by the frailty of it all.
So, how do we conduct ourselves in this duct tape-made reality? We have to accept its resilience and fragility and be ok with all the duct tape, and we need trust in each other and maintain optimism for this to be possible. Politically, my one-liner on this, paraphrasing the social democrats in Germany, is:
As much innovation as possible, as much conservation and regulation as needed. As much new and better duct tape as possible, as much integrity to our duct tape reality as necessary.