Thoughts on Silicon Valley Bank and Student Loans

Another bank faces collapse and the Federal government is stepping in to protect depositors. Some are blaming deregulation of small and medium sized banks. Some are comparing bailing out the bank to bailing out students for their loans. There is certainly a lot of finger pointing.

We must realize the difference between a depositor in the bank and its shareholders. The shareholders own the bank. Shareholders elect officers. The officers run the bank and the shareholders get a share of the profits. Depositors put money in the bank to hold for access at a later date. Corporations who deposit money in the bank may plan to use the money to pay employee salaries and supplies. Private depositors put money in the bank to access to purchase goods and services.

Depositors should be insured 100%. It shouldn’t matter who the depositor is. Corporate executives and shareholders should be held accountable for their actions. That means shareholders should lose money. Looks like they are according to the latest stock price.

What about regulation? I’m not sure what regulations would have required better accountability. I know it is very difficult for a small business to get a loan. It is easy for a congress person or senator to force the big banks to only work with Ford or General Motors. What about the startups? What about the small entrepreneurs? (Since starting this post yesterday, I learned that my son works for a startup with deposits in SVB.)

Students borrow money to get an education. Why? If they are borrowing money to have a good time for four years, shouldn’t they have to pay it back? If they are borrowing money as an investment in their future, aren’t they like the shareholders in the bank? They are borrowing money hoping for a return on their investment. The main difference is that the shareholders in the bank didn’t borrow the money.

Students also have control over their actions. They are not only the shareholders of their personal enterprise, they are also the executives. Should they be held accountable for their poor decisions? What about the schools? They have already been paid. That leaves us with the banks that provided the loans to the students. Should the banks get paid? What if we made it easier for students to declare bankruptcy against banks?

Any action is likely to make student loans more difficult to get. Evidence is showing that students are rethinking the value of college education. Decades ago, I was talking with a man whose son graduated from college and got a job in Seattle. His son wasn’t making it. His son went to a vocational school and made more money as an appliance repairman working in Bellingham. Successful skills came from a two-year program.

Perhaps the two year degrees and vocational degrees should be free. In my opinion, it would be great for students to graduate with marketable degrees with a free education. Online alternatives can now offer more specialized skills without the cost of a four-year degree.

It is easy to point fingers at failures and say the government should do something. It is much more difficult to find what to do without causing more harm than good. We must have faith in our banks. We must encourage people to take risks by starting new business. We must also allow people to fail and give them a way out that doesn’t crush them for taking those risks. That is why bankruptcy was created. Protecting banks from student loan bankruptcy creates a burden on students who took a risk. There should be consequences. The consequences shouldn’t crush them for life.