Recent headlines were dominated by the failures of some large banks, both in the US and abroad. Many commentators have suggested that these banks were poorly managed, or that the Federal Reserve’s rapid interest rate increase is to blame. While these factors certainly contributed, the reality is that all modern banks have much deeper problem. They only hold on to a small amount of the funds they promise clients they always have on demand. This is the magic of fractional reserve banking. In this episode of Breaking Bad Advice, Isaac and Joel discuss the foundational problem with fractional reserve banking, the role it played in leading to a chaotic run on Silicon Valley Bank (SVB), and what this means for the banking system and the economy going forward. Is the crisis over? Or has it just begun?
