Author Archives: theusernamewhichismine

Kenshi: A better game than Rimworld

Like I said in a previous post, I like Kenshi a lot more than Rimworld. The two aren’t actually that comparable, the title is just a dig at a friend of mine who called Rimworld “a better Kenshi.”

Kenshi is a brilliant mix of fantasy RPG, post-apocalyptic survival, and real time strategy. The game is also dipped in a more fantastical flavor that makes it a lot more novel than the scores of Fallout-lite clones where we fight through ruined 1st world cities. Instead, this is a world where wandering ronin have sword battles with skeletal robots, where 20-foot-tall “beak things” fight giant gorillas, and where a death-cult race of Foglanders capture and eat anyone who wanders into their domain. There’s a lot to love here and I’m glad the setting isn’t generic like so many others.

As an aside, I love the implication that this world has had multiple apocolypses. Nobody knows who built the skeletons or where they came from, as well as a number of other giant mechanical monstrosities that litter the world (like an orbital death-laser). In turn there are a number of libraries scattered throughout the world. They apparently come from the “second empire” and post-date the skeletons, but by game start they have all been abandoned and mostly destroyed. What few that remain are poured over by wandering tech hunters to regain their lost knowledge. This wasn’t a simple apocolypse that destroyed this world, it was a long-multistage affair, and it gives you a lot to think about as you wander across the wastelands.

And wander you shall because that’s the primary gameplay loop of Kenshi: running around and trying to not die. But the game lets you keep and train up a party of a few dozen dudes to do that with, and it can all get really fun. Putting your guys on different jobs, sneaking around if necessary, building up a team, this is where the fun of Kenshi is. And the part where it gets a bit Rimworldy is that you can eventually create a base of operations and have all your murder-hobos do manual labor like they were Rimworlders. Unlike Rimworld, the game doesn’t give you progressively harder challenges but gives you the hardest possible challenges pretty much all at once. If you want to settle down anywhere you’d best be ready for a war.

But having a war is also fun because the gameplay isn’t about numbers. You can have 100 guys, and you’ll still get wrecked by a single gate guard. That’s because during combat, the game takes a martial-arts movie approach of having all allies and enemies pair up for one-on-one combat. And if there’s 100 guys and 1 master, the 100 guys will patiently wait for their turn to attack, while the master will have such powerful swings that he can destroy 5 enemies with a single slice.

So the game is still enticing you to build up a squad and survive, but it’s not about tricking the AI into giving you easier challenges, but rather about building up the skills of your group until you can take on any challenge. When you finally train up some random schmuck to the point that they can solo and entire squad of Paladins, you really feel a sense of accomplishment.

Sorry, this post was a bit scatterbrained, but I really just wanted to gush about Kenshi. I hope there’s a sequel some time soon.

AI art is fun

I don’t have much to say on the AI art public debate yet, other than to say it feels overly vitriolic. But I can definitely say that AI art has been fun to make. I’d love to have the time to put some of these together into a 1-off RPG campaign, but I don’t know when I’d have the time. I’d also like to use some time to learn how I can use an AI art program on my own computer and train it against specific images I want, rather than relying on the web-browser based programs that are trained on a whole host of unnecessary data. 

But that’s for another time. For now, AI art is fun to toy around with, and dream of what could be very soon. 

Understanding why I don’t like Mana in EU4

So this is a big topic that I’ve thought about a lot but I’m going to break it down into little pieces to try to get something written on paper.

I don’t like the introduction of Mana in EU4. If you’ve played EU4, you know this is a well-worn topic, but for the others, here goes.

In EU4, most every action in the game will cost one of 3 resources. These resources are called “monarch points” but the community calls them “mana.” Your admin mana mostly deals with stability and integrating conquered provinces into your realm. Diplo mana mostly deals with peace treaties, trade, and the navy. Military mana mostly deals with the military and rebels. The problems with this system start right off the bat with how one imaginary resource is performing multiple completely unrelated tasks. Why will signing a big peace treaty prevent me from hiring a new admiral? And furthermore, why do most actions happen instantly once I save up enough mana, shouldn’t technology be something you research over time? Instead here you just save up your mana and at the click of a button all your soldiers are better.

The unrealistic game-y-ness is the origin of the (originally derogatory) term “mana,” as the system makes your king seem like a wizard casting spells rather than a monarch ruling the country. “I was casting a spell to summon a general, but now I can’t cast cannon spells!” <- I spent my military mana on generals and now can’t afford technology. Diplo mana is the worst by far with how game-y and spell-like it is. Peace treaties, trade powers, naval leaders, espionage ideas, diplo is just the dumping ground for anything and everything that doesn’t neatly fit into either admin or military.

Another big downside with the mana is how it is earned. Every country gets 3 points of each, but the lion’s share of your mana will come from your ruler, who can add up to 6 points in each category. You can also get up to 3 points of each type from advisors, but in the base EU4 game half or more of your country’s total mana comes solely from their king. This brings EU4 back into the “Great Man” theory of history, in that the country of your ruler doesn’t matter a bit. It is your ruler himself who is solely responsible for researching tech, maintaining stability, summoning generals, reducing war exhaustion, and everything else. There are a lot of questions about why some countries succeed and others fail. EU4’s answer is that successful countries just had a powerful wizard as ruler who generated enough mana to research all the tech.

And in a way it’s downright racist to present history this way. Countries don’t just succeed because of their ruler, European rulers weren’t smarter than their counterparts in the rest of the world, making every single action a country takes or can take come down to how much mana their ruler generates just makes it seem like you read Edward Gibbon once and then slept through all your history classes.

This isn’t just ahistorical but it’s bad gameplay too. You don’t have any control over who you get as ruler, so your game will largely be determined by how lucky you get with this. Making pretty much every action a player can take come down to the luck of how much mana they can afford (because of how good of a ruler they got) is just bad gameplay design. Oddly enough it’s pretty clear Paradox even agrees with me, because while they haven’t abandoned mana in EU4, they did mostly abandon it in Imperator:Rome, and in EU4 they have added a number of systems to address the luck-based irregularity of mana.

Pretty much every DLC Paradox puts out mostly revolves around new ways to let the player generate mana. Getting advisors up to level 5, estates, razing enemy territory as a horde, disinheriting bad rulers or heirs, it’s clear that Paradox knows that the mana system is unfun and too luck based. So every DLC lets players pay for the privilege of ignoring it more and more. But it’s too much work to change EU4 now, and Johan is too stubborn to admit that he’s wrong, so mana is going to see out the remainder of Paradox’s EU4. Fans should hope they see the light and remove it for EU5.

Not feeling good, but hope to have a post tomorrow

As the title says. Work is stressful when you’re not sure if you’re looking in the right direction. We have a lot of seemingly contradictory data coming in from our experiments, but those contradictions are hopefully pushing us in the direction of new science. Just how the shape of proteins relates to their disease states is still new ground, and I’m proud to be working in it. But it’s a difficult field to get data in.

I sometimes look back and wish I could have worked in an earlier time. You look at say Gregor Mendel’s pea plants and you think that that would have been a scientific endeavor you could do easily. Or discovering new elements in the 19th century when all you needed was an atomic mass and the mass ratios of an oxygen and fluorine salt. I think back and that research seems so much easier, since high school kids replicate some of those experiments today.

But I know it isn’t so simple. It’s easy to replicate those things first because we know what we’re looking for, and second because our technology is so much better. Finding the structure of benzene is a classic case, students learn how to draw benzene very early on in an organic chemistry class, but its structure confounded the best and brightest for decades in the 19th century. They didn’t have the accuracy of scales we do, the easy access to light-based detection methods, or nuclear based detection methods, hell they didn’t even have a theory of protons and neutrons. They knew Carbon and Hydrogen existed, but they weren’t in any way sure how to fit those onto a periodic table yet, and weren’t certain there wasn’t some new element hiding around in Benzene. Putting together an experiment to prove the structure of benzene, using only 19th century knowledge and 19th century technology, is a lot harder than it sounds, and me wishing I could have worked on that discovery instead of my current one is “grass-is-greener-ism.”

Another good one for any discussion: we often laugh at those silly medievals who believed the sun goes around the earth. I mean, even some Greek philosophers proposed it, but alas the medievals were just too closed-minded, right? But actually the geocentric theory did seem to be parsimonious for a good long while. Here’s a fun thought experiment: how would you prove geocentricism using only what you could find in the 10th century? No telescope, no pictures from orbit, just observations of the sky. If you know your astronomy you know there are certain irregularities with the orbits of planets as viewed from earth, and that is a good argument against geocentricism. Yet it was also noted that there is no perception of movement when one is standing on the earth, and that was taken as an argument against heliocentricism. It wasn’t until Galileo’s theory of relative motion that a cogent counter-argument was put in place, and so if you want to prove heliocentricism in the 10th century you’d also have to do the hard work of demonstrating relativity like Galileo did. Copernicus’s model of heliocentricism is often seen as revolutionary, but it still had endless epicycles needed to explain it, more even than geocentricism, making it not that much better than Ptolemy’s geocentricism, so if you want to argue for heliocentricism by attacking epicycles you’d also need to do the hard math that Kepler did in establishing how orbits can be calculated based on ellipses. It really isn’t as easy a problem as it sounds.

So yeah, work is hard but I guess it’s always been hard. We think all the easy discoveries have been made, but those discoveries were made when they were hard to make.

Imperator: Rome, a laundry list of grievances

I said in my last post that I could give a laundry list of grievances for why I didn’t like most of the game. So here they are in no particular order.

The Republic mechanics are terrible, offering no real long term strategy and consequences. You either set up your Republic well in the first few years, in which case you spend the entire game with zero problems, or you stumble early and can never recover, and you might as well just restart. If you get the factions on your side, they’ll stay happy forever. But if they hate you, then every new election sinks your country lower and lower into anarchy and you can’t do anything about it. We can make jokes about how this is accurate for a democracy, but the problem is that it isn’t fun. There’s no actual haggling or politics in a republic, no real interesting choices. You can easily ensure that your favored factions retain all their power and influence and ignore the other faction, and from then on the republic just doesn’t matter, you’re basically an elected king.

The mechanics for levying soldiers are too gamey in many respects. The game does a good job of realizing that for ancient Rome, military service was the job of citizens, not just everybody. Because of that the game only lets you levy a full compliment of troops out of pops that are your correct culture. In all other territories without your pops, you simply get 4 cohorts of light chaff. However you get those 4 cohorts no matter how many (or FEW) pops reside in your new territory. So conquering a new territory with just 1 pop in it expands your army more than conquering the remainder of your home territory containing 100 pops.

Why does founding cities require mana to begin with? And why is there a limit on the number of mercenaries you can raise? These two things together just mean that by mid game, there’s nothing to spend your money on. I quit my games with 1000s of denarii in the bank because I just couldn’t spend them, having already build all the buildings I wanted, being unable to found more cities due to the mana restriction, and being unable to raise new mercenaries because you have a hard-cap to the number of companies you can raise regardless of your size. This is a game that has made money absolutely useless outside of the first 10 years of the game.

Speaking of useless money, the AI plays the same way. Every single tiny tribe in Europe is sitting on a Consul’s ransom of gold and the moment you go to war with them they’ll raise their maximum allowance of mercenaries against you. This means that expanding into 5 Gaulic tribes ends up being more painful than fighting large empires such as Egypt or Carthage because those 5 Gaulic tribes actually end up with more armies to use. It’s nonsense and it just shows that this game is balanced horribly, since both the player and the AIs can’t find anything to spend their money on.

You set up trade routes by importing goods from a foreign province. Then when that province gets conquered, you have to restart the trade route manually even though the new owners will still accept the trade. Just let the route have continuity unless the new owners would forbid it, stop giving me pointless busy work.

Trade in general is underwhelming. There are a tiny number of nice capital bonuses (stone, for the early game) and then a whole lot of boni so minor you won’t even notice.

Every civ feels exactly the same. Defenders of this game will wrongly claim that the Roman classical period just isn’t popular (ignoring Rome: Total War), and will likewise claim that there isn’t enough history to put in any real flavor. That’s just nonsense, the game is just bad at flavor. Playing as the King of Armenia shouldn’t feel identical to playing as the Consul of Rome.

Let’s go further with the above point: base-game EU4 actually felt very different depending on where you started. You could play inside the HRE with Austria or Brandenburg, which gave you lots of bonuses but also limited your expansion and forced you to comply with HRE laws. You could play as an HRE neighbor like Poland or France, in which case your expansion into the HRE was limited but the small states within it were unlikely to hurt you. Or you could play somewhere far away from the HRE like the Ottoman Empire or Muscovy. Your expansion was unconstrained, but being next to high-tech neighbors does help you boost your tech, and so you might find yourself falling behind on tech due to lack of HRE-neighboring bonus. Finally you could ignore Europe and go colonizing with Portugal or Spain. In this case you played the colonial game instead. All those types of games did feel very different from one another, and they were all played in the same game-map covered by Imperator: Rome. And that was base-game EU4, no expansions or patches which brought Japanese Shogunates, Chinese Tian-zi’s, or native American confederations. Just straight out of the box EU4 in Europe.

NOTHING in Imperator:Rome feels different or unique in this way. Nothing has its own unique flavor or game-play benefits. There’s just no reason to ever play a second game after you’ve played your first. And I think that’s why this game failed.

Boy, Imperator Rome isn’t that good

I had no desire to play the new Paradox game Imperator:Rome, but when I received it for free from a friend last Christmas, I thought I might as well respect the gift and give it a go. Besides, they say the game was changed significantly since its mana-infested launch and I thought I might as well give it a go.

It’s not great.

To start with the good, Imperator: Rome does try to have unique concepts. You can play as unsettled tribes, for instance. This allows you to move your people around the map and claim vast tracks of territory, as well as assimilate large numbers of people into your migratory horde.

You can also play as a settled tribe and reform into a Roman-style republic or a kingdom. This is done OK but it does feel mostly like a less-fleshed out version of Vicky 2 or base-game EU4’s Westernization mechanic. It’s just kind of there.

And there’s republics with their own factions and influence. Whatever.

I could give a laundry list of grievances as to why none of these mechanics really entertain me. But the biggest problems with Imperator are much much bigger: there’s nothing to do outside war, and war is boring.

Let’s start with the first, Paradox plays motte-and-bailey with what exactly they are. They proudly coined “Grand Strategy” as the term to market themselves, and push their games as a way to play historical simulators or alternative history. Yet when pressed about the bad history or lack of strategy their games include, Johan, a high ranking Paradox dev who loves to fight and troll on social media, will exclaim that these are wargames, that war is the point and it’s what they focus on. So the fact that Imperator isn’t fun when you aren’t at war is both a damning indictment of Paradox’s claim yet also gets deflected by people like Johan.

With that said, peace is boring in Imperator. You’re supposed to use this time to manage your empire, convert conquered peoples to your religion and culture so they stop being so mad that their parents were killed, and building up your forces and treasure through buildings. This is all done terribly. Converting people is a waiting game that is supposed to be influenced by governor actions, yet those governor actions run on mana, the same currency you need to start wars, change laws, or doing any of the other things in the game. When a governor dies or gets replaced, their replacement undoes all the settings you put in, forcing you to spend yet more mana to fix them. By locking the converting and enforcing (with things like harsh treatment or local autonomy) behind mana, you encourage the player to just not interact with this function at all, lest they waste their precious mana and have none left over for war, the closest thing this game has to fun.

What’s worst is that this system doesn’t have to be here, previous Paradox game Victoria 2 had a genuinely better system with national foci (plural for focus). You only had a few national foci at any time, so for a large empire you had to move them around to get the best effect. And there were always things you wanted to do with your foci, encourage clergy to get more research and literacy, encourage craftsmen and capitalists to get more industry, encourage soldiers to prepare for or sustain a war. You had to make interesting trade-offs between your long-term and short term national interests, and weather what you needed in the near future was a more literate populace or a wealthier one or what have you. And if the national focus system (which DIDN’T use mana!) was just ported straight to Imperator, it would be much better.

But it isn’t. So being in peace costs mana, a scarce resource. And in turn this means peace is boring.

So war, that’s fine right? Well recent design decisions at Paradox have turned war into a boring slog. I wonder if they got taken over by secret pacifists who want to teach us all about the banality of war by making a wargame boring during war.

At some point a few key decisions were reached at Paradox interactive. Now I want to preface by saying that Johan and his social-media trolling ilk will fervently deny this, they denied for years the most obvious Paradox designs such as AIs not taking attrition in many circumstance. It’s very dumb that Paradox lies about their own design decisions, and lying to your customers is just one reason I have zero sympathy for them or desire to give them money ever again. But anyway these design decisions make war a boring slog that isn’t really worth it.

First up is the changes to shattered retreat (SR). I first encountered SR in CK2 and here’s how it is supposed to work. In base-game CK2 and other Paradox games, a defeated army or navy will simply move one province away to rest and heal. But the victorious army is now standing on the province where the battle happened, and there’s no difficulty in them walking to the defeated army and starting an immediate fight. Since the defeated army just lost and is now smaller, it will likely lose again, retreating further and further battle after battle until it’s completely wiped out. This often turned wars into basically 1-battle affairs, where whoever won the first battle would win the entire war as the defeated army had no way to rest, recuperate, and respond.

SR is supposed to fix this as a defeated army marches away and cannot be engaged by anyone until it reaches a point several provinces away. If you chase after it, you’ll find you cannot engage it until it reaches its destination. What’s more, it slowly regains some of its moral as it marches, so when you finally do engage it it will be stronger than what you may expect. This is supposed to allow defeated armies to get back into the fight and mean that the whole war isn’t decided by a single battle. The problem here is that it’s too easy to abuse this mechanics and the AI always does so. If a battle seems like it’s even slightly going the wrong way, the AI will retreat across their territory. You fight it again and it retreats again. Battles have become almost bloodless affairs in Imperator where only a small fraction are lost in any fight. Gone are the days of Darius when a single defeat from Alexander forced him to raise an entirely new army, instead a single army can fight dozens of battles, be defeated in every single one, and the soldiers and generals will never desert, quit, or get cut down as they flee like what usually happened in a Roman-era battle. In fact another small change enforces this: when an army retreated from battle in prior games, the army against it got a few free hits in before it left. This was to mimic the actual circumstances of retreating troops being cut down, but this mechanic is gone.

What the above all does is turn Imperator into whack-a-mole. You have to chase down enemy armies constantly and it just isn’t fun.

A second SR change is the omniscient AI. The AI knows at every moment where all of your troops are. This means there’s no reason to ever be strategic, no reason to ever have forces in multiple places to cover multiple avenues. The AI always knows exactly how many troops you have and where, and isn’t shy about walking half-way across the world to siege down an undefended province. So if you don’t play whack-a-mole with them the AI can walk past any obstacle to annoy your backlines, and will do so even while their capital city is being razed to the ground by your forces. The AI’s armies and soldiers apparently don’t care about the dying of their families back home, but your own empire can get severe penalties from being sieged down from behind. And if you DO send an army towards them, the moment you click the map the AI is instantly alerted that an army is coming their way, even if they have no way of knowing your army is on the move. They will then scuttle back to where they came from. So you either play whack-a-mole or you just ignore them, because you can’t trap them, fight them, or do any of the strategy you’d expect from a strategy game.

Finally, the AI has decided it will never EVER engage unless it thinks it has overwelming odds of victory. This turns them into little McClellans who will retreat from every fight and completely refuse to even engage you if you’re strong enough. I’ve genuinely had wars where I never fought the enemy because they decided I was too powerful and just ran their armies away. Again I guess they don’t care about protecting their homes and families.

All this together turns war into a boring slog. If you are weaker than the AI, you want to get a local concentration of forces and defeat AI armies one by one. But they know your every movement and whether they will win a battle and they always retreat, so this tactic turns into my least favorite game of whack-a-mole ever. And if you are stronger, you want to find their forces, defeat them, and start the siege. You skip steps 1 and 2 because since you are stronger the AI never engages.

It’s just a terrible game overall.

Socialism Betrayed: Racist Great Man theory of history strikes again

There was some mid historian who once said: “The history of modern Europe can be defined by 3 men: Napoleon, Lenin, and Hitler.” This plithy remark sums up much about the “great man” theory of history.

For those who don’t know, the great man theory believes that history is moved not by economic or societal or any large scale forces, but by the actions of individuals, the “great men” (almost never women). This theory opines that it was Napoleon, whose conquests spread republicanism throughout Europe and whose terrorizing of European monarchs lead to the Concert of Europe, it was this Napoleon who defined the course of the 19th century. And in just the same way, Lenin and Hitler in their own ways defined the course of the 20th century, pulling Europe in their directions of communism or fascism, remaking the modern world through their life and death. NATO and the Warsaw pact, whose presence defined Europe for half a century, came about because of Hitler. And Leninist communism, which defined the ideological struggle between East and West, came about obviously due to Lenin.

This great man theory has been attacked by much better historians than I, but I want to focus right now on how it completely invalidates the role of any individual in society except the Great Man himself. Napoleon without an army to command and a state to lead is nothing, and yet his soldiers, his bureaucrats, and the entire nation he inherited are meaningless in the great man theory of history. And the revolutions which toppled the monarchy and allowed Napoleon to begin his rise were not the actions of solitary great men, but a great mass movement of the French people as a whole. It is likely that even if Napoleon had never existed, the conflict between revolutionary republicanism and monarchism which defined much of his legacy would still have happened. And if Lenin had not existed, the conflict between capitalism and communism would likely still have been present.

I’m reading “Socialism Betrayed” by Roger Keeran and Thomas Kenny and it’s startling how in the very first pages of the book, they define their thesis that the great man theory is true and the people of society do not matter.

The collapse of the Soviet Union did not occur because of an internal economic crisis or popular uprising. It occurred because of the reforms initiated at the top by the Communist Party of the Soviet Union (CPSU) and its General Secretary Mikhail Gorbachev

Socialism Betrayed

Really?! It didn’t happen because of nationalist movements among the subjugated peoples of the USSR, like the Estonians, Latvians and Lithuanians? It didn’t happen because of mass movements which defined the collapse of every other Warsaw Pact nation in Europe? It didn’t happen because of the well-documented shortages and flailing USSR economy propped up almost entirely by oil and gas money? How easy it is to do history when you can define your villain and ignore all context!

I can already tell that this book will be dumb. Real dumb. Probably as bad as “The End of Growth” for how much it will ignore the facts to suit and opinion. Why are all the dumbest books I read the anti-capitalist ones?

Don’t put all your money into bonds, a message for SVB

So remember a while ago I wrote a post about how you should diversify your investing, not just put all your money into bonds? I just realized that if SVB had listened to me they wouldn’t have been in this mess. I talked about how rising interest rates make old bonds worth less than you payed for them, and how you’d take a loss if you needed to sell them in a hurry. That’s exactly what caused SVB’s collapse, they were sitting on assets (bonds) that had lost tons of value due to rising interest rates. That triggered fears of insolvency which triggered a bank run.

If anyone knows a dumb bank that needs to hire a smart guy like me to do risk assessment, I’m always looking for a new job. Just email theusernamewhichismine@gmail.com.

It’s not a bailout unless it comes from the bailout region of DC

America is bailing out the banks again, but like Josh Barro writes, we don’t want to say we are. When the government hands billions of dollars to Silicon Valley hedge funds by guaranteeing their deposits, it makes us wonder why they can’t hand billions of dollars to those of us struggling with inflation. Maybe they can guarantee our rents? But this totally isn’t a bailout, just ask Biden.

For those who don’t know what I’m talking about, Silicon Valley Bank (SVB) was a bank holding deposits from hedge-fund backed startups and using them to make very risky plays. Those risks cased them to crash and burned due to rising interest rates. So the government had to bail them out, but it doesn’t want to call it a bailout.

So why isn’t this bailout really a bailout? Well, only the depositors will be getting all their money back, the bond and equity holders of SVB will be getting little to nothing. This has led some to even applaud this bailout as being re-distributive: money is going from the wealthy to the poor.

Let’s get one thing straight, this is a bailout of the rich. Depositors are ALREADY guaranteed to get their money back p to $250,000. The FDIC already made sure anyone with less than $250,000 in the bank got their money back. But what about the poor hedge funds and VCs with millions, even billions of dollars locked in the bank? Well normally they would get back $250,000, but it’s not fair that rich people lose money so that’s what this bailout is supposed to cover.

The wealthy depositors will be made whole at the expense of bond and equity holders of course. But that’s just moving money from the rich, politically connected people to the rich, not-so-connected, it’s classic graft of making sure your boys get the best from the government.

More to the point, the money may not come from the government per se but it is coming from the people, or at least the people with bank accounts. FDIC is the insurance that is paid by every bank account, and it in turn pays to cover all bank accounts up to 250,000 dollars should their be a bank run. The fact that the FDIC will now be covering more, potentially up to billions in dollars, means that money has to come from somewhere. It will come from all the other people with FDIC ensured bank accounts, all the people with a few hundred or thousand dollars in the bank.

The FDIC isn’t a line item you’ll see in your bank statement, it’s an invisible insurance policy to most people. But make no mistake it is paid by the account holders. If FDIC insurance did not exist, the bank would give you a higher interest rate on your savings account because they wouldn’t need to pay insurance on your bank account. Instead, interest on deposits is likely to be lower than expected as the FDIC will have to drawn on the insurance premiums from every small account in order to cover the billions of dollars they’ve pledged to rich hedge fund managers. Poor people with small bank accounts will be made tangibly more poor in order to ensure hedge funds get all their money back.

Not only that, there is a definite moral hazard with bailout out the rich in this manner. When a bank goes under, there is supposed to be a protocol of who gets what. Depositors up to 250,000 dollars will be covered by FDIC no matter what, everything else including bond holders, equity holders, and large depositors is fair game depending on the results of the bankruptcy.

Instead, it is know going to be assumed that depositors will always be bailed out at the expense of bond holders. People who want to make low interest money have a few options: they can give it to the bank and get interest, or they can buy a bond and get the coupon. They know that if their money is large, both of these carry risks. The deposit and interest are only covered up the 250,000 while bonds can be defaulted on or banks can go bankrupt. However now, the calculus changes. Deposits will always be bailed out by the FDIC at the expense of bonds, meaning that they are now much safer and bonds are much riskier. This could even make it worse for some banks as they will find they cannot raise money through bonds as easy as they used to. Who will buy your bond if a high-yield savings account gives roughly the same interest rate and is guaranteed zero risk by the FDIC no matter how much money you put in?

So this is a bailout that isn’t a bailout, it gives money to the rich at the expense of the poor.

Quick Post: WTF happened with Silicon Valley Bank

So I’m really only making this post so I can link to it in another post, but while there have been plenty of explainers going around about what happened with Silicon Valley Bank (SVB) I wanted to get all the facts as I know them in one place.

Basically, Silicon Valley Bank had a bank run and needed a bailout. Why?

When you deposit your money into a bank, the bank pays you interest on the money. You are giving what is essentially a loan to the bank, and they in turn use that money to give loans to other people. The assumption is that the interest they get on their loans is more than the interest they pay you for your money, so the bank can always stay profitable.

Banks have their best relationships with the people who deposit money into them, so those tend to be the ones they reach out to and offer loans. Whatever bank you deposit your paycheck into is likely going to be the one that offers you a car or a house loan. But SVB was taking deposits from Tech startups and Silicon Valley hedge funds. Those guys don’t need or want loans. They raise money through equity, not loans. So while lots of deposits flowed into SVB, far fewer loans flowed out.

So how could SVB make money without loans? They bought bonds instead. Government bonds are just a loan you give to the government after all, and SVB thought that using their deposits to buy bonds was a surefire strategy because the government will never default. Remember that banks don’t ever just sit on loads of cash, they have to sell assets if they want “liquidity” (finance speak for cash). But if depositors want their money back, SVB can just sell bonds and give them cash, while if depositors hand them more money, SVB will use that money to buy government bonds.

But then inflation came, and brought with it interest rates. We’ve discussed before about how when interest rates rise, the price of an old bond falls. If you bought a bond paying 0.25% and interest rates have gone up to 5%, no one will buy your bond without a heavy discount. So 3 years ago a tech startup deposited $100 dollars into SVB, and SVB bought 100$ worth of bonds. Now the startup wants its money back but the 100$ bond SVB has bought has given them almost no interest (0.25%!) and has collapsed in price. When SVB sells its bond, it gets back WAY less than 100$.

So when interest rates rose, SVB’s bonds were all worth a lot less, but they were obligated to sell them to pay back their depositors. That would be fine if only a few depositors wanted their money, SVB can take a loss and make back the difference with profit elsewhere. But if ALL their depositors want their money back, SVB cannot cover.

And the depositors did want their money back. Startups backed by hedge funds get piles of money by selling stock, IPO’ing, and selling equity. Then they handed that money to SVB. Stock prices collapsed in part due to rising interest rates, the flow of cheap money stopped. Because of that, startups needed to take their money back out of SVB to keep the lights on. Money was flowing out but nothing was flowing in.

So SVB had a massive interest rates risk on both sides of its balance sheet. Interest rates decreased the amount of money going in (by tanking the stock market and making IPOs and share selling less common) while also decreasing the value of the assets SVB held (by making their government bonds worth less). Add onto that that inflation increased the amount of money flowing out (since startups needed to pay more for everything) and SVB was primed for a bank run. Depositors realized SVB didn’t have enough cash to cover everyone’s deposits, and so they all rushed to take all their money out before it collapsed.

And so collapse it did, and the government handed it a bailout. I’ll write more about that tomorrow.