Icosian Reflections

…a tendency to systematize and a keen sense

that we live in a broken world.

IN  WHICH Ross Rheingans-Yoo—a sometime quantitative trader, economist, expat, EA, artist, educator, and game developer—writes on topics of int­erest.

“Liquidity” vs “solvency” in bank runs
finance

and some notes on Silicon Valley Bank

Originally posted to LessWrong.

epistemic status: Reference post, then some evidenced speculation about emerging current events (as of 2023-03-12 morning).

A "liquidity" crisis

There's one kind of "bank run" where the story, in stylized terms, starts like this:

  • A bank opens up and offers 4%/ann interest on customer deposits.
  • 100 people each deposit $75 to the bank.
  • The bank uses $7,500 to buy government debt that will pay back $10,000 in five years. Let's call this "$10,000-par of Treasury notes", and call that a 5%/ann interest rate for simplicity. (Normally, government debt pays off a bit every month and then a large amount at the end, but that's just the same thing as having a portfolio of single-payout (or "zero coupon") notes with different sizes and maturity dates, and the single-payout notes are easier to think about, so I'm going to use them here.) We're going to assume for this entire post that government debt never defaults and everyone knows that and assumes it never defaults.
  • The thing you hope will happen is for every depositor to leave their money for five years, at which point you'll repay them $95 each and keep $500—which is needed to run the bank.
  • Instead, the next week, one customer withdraws their deposit; the bank sells $100-par of T-notes for $75, and gives them $75 back. No problem.
  • A second customer withdraws their deposit; oops, the best price the bank can get for $100-par of T-notes, right now after it just sold a bit, is $74. Problem.
  • But next week, let's say, it would
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Three Modest Proposals, Instead of Divesting...
harvard, modest proposals, divestment, wall street ate ross's soul, finance, environmentalism

The modest proposal comes after a bit of serious economics, because, well, you have to eat your vegetables before you get any dessert.

Also: Global warming is real and anthropocentric; we're going to need to stop it; we're going to need to stop using fossil fuels. If you don't believe these things, then I'm not going to try to convince you here. If you do believe these things, and also think that I'm wrong here, I'd be really, really, glad to hear it.

All of that said, the majority of this post is either intended as satire or double-satire; the only thing that I'll admit to honestly believing is that no one, not even Divest, is above a little tongue-in-cheek mockery.

Also, despite my use of the narrative first person, I am in no way involved with the Divest movement, at Harvard or elsewhere, except that sometimes I give them unsolicited financial advice.

Recently, Milo King, on Gains From Trade, asks: What is the economic impact of divestment? A few years ago, and seemingly unrelatedly, the HPR came to the same conclusion, namely:

Because the stock market is efficient, selling off stock for reasons unrelated to that company's profitability will cause more amoral investors to step in and kindly take your depressed-price shares, reaping the spread for themselves. No long-term depression of prices, no pain felt by Exxon et al., and now the shareholder voting those shares has worse morals than you did. Oops.

Consider, for example, the widely-acclaimed divestment from South Africa, in protest of apartheid...

Despite the prominence and publicity of the boycott and the multitude of divesting companies, the financial markets' valuations of targeted companies or even

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