Viral Bank Runs Are Just Meme Stocks in Reverse
Spin it right round
Virality is fostering strange dynamics in the world of finance
Pointing the finger just at venture capital for banking runs is misguided
Greed, technology and fight-or-flight behavior are factors for these issues
The meme stock craze was a flashpoint; SVB is just the latest
It seems that many have forgotten just how quickly the speed of technology can topple things in this day and age. The phrase “the bigger they are, the harder they fall” may be more apt now, this era of what should be called viral bank runs.
What’s wrong with customers wanting a bank to operate properly and not do irresponsible things? Banks are supposed to be stewards of capital, safeguarding it. SVB wasn’t managing risk properly, leading it to report a loss on its capital.
This sparked the first-ever viral banking run, and the second largest-bank failure in U.S. history.
Venture capitalists rely on institutions like Silicon Valley Bank (SVB) in order to do business. SVB’s bank run was based on business people fearing the inability to, you know, do business.
Fear led to a cascade of bank runs and consolidation in almost a lightning-quick series of events. At least when considering the sloth-like pace of the banking.
A Dilemma Unwrapped
Molly White is a thought-provoking writer. Her website, Web3 is Going Just Great, is a sarcastic chronicle for the foibles in the crypto world. She’s encouraging healthy debate about what’s bad in blockchain, and the community needs that.
“The Venture Capitalists Dilemma” is a recent post from White’s newsletter. It is a foray into what’s happened with SVB’s viral bank run and the involvement of venture capital. The argument is that libertarian, free market VCs are perfectly fine turning around on a dime when it’s personally advantageous.
Basically, it’s this idea of the “prisoner’s dilemma”. Betrayal for individual gain or cooperation for mutual benefit is the definition of prisoner’s dilemma. However, it’s arguable that blaming a subset of the population, venture capitalists, as the focus on this problem is misguided.
The true problem is the mixture of greed and technology enabling super-fast panicked decision making by the masses. And we’ve already seen this dynamic before, with 2021’s meme stock craze.
Bank Street Bets
It’s hard to not see this viral bank run phenomenon much differently than the Wall Street Bets craze. You know - the subreddit that led the retail investor craze back mid-pandemic? It led to huge run-ups in stocks that made no fundamental sense.
No one was, for example, going to movie theaters during pandemic lockdowns. But the AMC movie chain’s stock jumped like crazy. Led by a CEO who later decided to purchase equity in a gold mine that later struck coal, AMC played its hand magnificently.
Now, with movie theaters open and blockbusters playing, AMC is behaving like it did before the madness: Like a regular stock. And I suspect, despite the doom-saying, that this is what we’re going to experience post-viral bank runs. A congressional investigation, a couple of policy tweaks, lessons learned and back to normalcy.
But we’re certainly witnessing a new dynamic in play, one that now seems repeatable. If 2021’s meme stock craze was a singular moment, so has been 2023’s cascading viral bank runs. The “stonks” virality was replaced this time with utter insta-hysteria over a bank reporting a loss on its balance sheet.
Other cascading-type of events in the future are to come. Crypto and artificial intelligence are surely ripe sectors for it. Because we’ve entered into a new era. One where the combination of technology, greed and FOMO are a recipe for things to move very quickly, with decisiveness outweighing careful consideration.
