That’s because computers are literally everywhere around us. And thanks to advances in technology and manufacturing, the cost of producing semiconductors is so low that we’ve even started turning things like toys and streetlights into computers. But how and where did this familiar new era start?
The History of Computer Science
Today’s infographic comes to us from Computer Science Zone, and it describes the journey of how we got to today’s tech-oriented consumer society. It may surprise you to learn that the humble and abstract groundwork of what we now call computer science goes all the way back to the beginning of the 18th century.
Incredibly, the history of computing goes all the way back to a famous mathematician named Gottfried Wilhem Leibniz. Leibniz, a polymath living in the Holy Roman Empire in an area that is now modern-day Germany, was quite the talent. He independently developed the field of differential and integral calculus, developed his own mechanical calculators, and was a primary advocate of Rationalism. It is arguable, however, that the modern impact of his work mostly stems from his formalization of the binary numerical system in 1703. He even envisioned a machine of the future that could use such a system of logic.
From Vacuums to Moore’s Law
The first computers, such as the IBM 650, used vacuum tube circuit modules for logic circuitry. Used up until the early 1960s, they required vast amounts of electricity, failed often, and required constant inspection for defective tubes. They were also the size of entire rooms. Luckily, transistors were invented and then later integrated into circuits – and 1958 saw the production of the very first functioning integrated circuit by Jack Kilby of Texas Instruments. Shortly after, Gordon Moore of Intel predicted that the number of transistors per integrated circuit would double every year, a prediction now known as “Moore’s Law”. Moore’s Law, which suggests exponential growth, continued for 50 years until it started scratching its upper limits. – Gordon Moore in 2005> It’s now been argued by everyone from The Economist to the CEO of Nvidia that Moore’s Law is over for practical intents and purposes – but that doesn’t mean it’s the end of the road for computer science. In fact, it’s just the opposite.
The Next Computing Era
Computers no longer take up rooms – even very powerful ones now fit in the palm of your hand. They are cheap enough to put in refrigerators, irrigation systems, thermostats, smoke detectors, cars, streetlights, and clothing. They can even be embedded in your skin. The coming computing era will be dominated by artificial intelligence, the IoT, robotics, and unprecedented connectivity. And even if things are advancing at a sub-exponential rate, it will still be an incredible next step in the evolution of computer science.
on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
