In a global center of technology and innovation, it seems ironic to see bank customers looking at their phones while lining up at a brick-and-mortar building so they can touch their money. Again, we’re reminded of a powerful truth: Personal finance is more personal than financial.
Ordinarily, we probably wouldn’t write about this. Like what if it was Hollows Bank of Arkansas? But this is Silicon Valley. For most of our readers it’s a local story and a hot topic. Our intent is to provide a broad contextual overview. It covers bank failures, financial crises, and managing your personal finances through it all.
Bank failures are a feature, not a bug, of capitalism. In the US, they began with the Panic of 1819, just forty-three years after the Declaration of Independence was signed. Since 2001, there have been 563 failures. There will surely be more.
The FDIC (Federal Deposit Insurance Corporation) was created in 1933. Since then, no depositor has lost a dime in the failure of any FDIC-insured institution. None. Relax. You don’t need to touch your money or do anything with it.
Failures and financial crises have a mix of root causes. Speculation, overuse of credit, greed, weak regulation, mistrust, and mass psychology. Like coffee, each crisis has a unique blend and flavor.
Failures happen in the middle and toward the end of periods of stressful economic conditions. They are an effect rather than a cause of economic stress.
The Panic of 1819 was largely the effect of the end of the War of 1812. The first bank failure and deep effects of the Great Depression didn’t happen until years after the stock market crash of 1929. The Lehman Collapse of 2008 was the effect of years of ill-conceived lending practices.
Unfortunately,
the larger economic challenges are more widely painful. Recessions. Lost jobs. Missed
mortgage payments. Business failures. Urgent, sometimes panicky sales of
assets. This lasts longer than expected or hoped for. New rules and
regulations, like the creation of the FDIC in 1933 and Dodd-Frank in 2010, are
put in place to prevent repeat future disruptions. There'll be new rules in the wake of this event.
Are the failures a call to “get more conservative” with your financial life?
Our Five-Year Rule is a core practice. It means to keep a Reserve of assets-- cash, CDs, and bond funds-- outside of the stock market to cover five years of possible withdrawal needs. It’s your self-insurance against a personal cash flow crisis. This is the “conservative” part of your financial plan. If you have it, there’s never a need to “get conservative.” If you don’t have it, there may be difficult choices ahead.
We’re here to have conversations that are drama-free and indifferent to media coverage. We’ll talk about building a robust, all-weather financial strategy. It will address the same objectives as Silicon Valley Bank: matching current assets with future needs. But in our case, we’re more interested meeting those future needs with low anxiety rather than pushing the boundaries of risk.
James Cosgrove,
CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Twitter@JimCos542
Evidence-based. Rules-driven. Policy-focused.
