Jack Rasmus is one of the writers who makes it worthwhile to check out CounterPunch. He had a good article recently about the collapses of Silicon Valley Bank and Credit Suisse. Here it is: Banking Crisis 2023: Deep Origins and Future Directions - CounterPunch.org
It’s more than a week since the collapse of the Silicon Valley Bank, the 16th largest bank in the US at the time of its collapse and reportedly a source of funding for half of all the tech start ups in the US.
It’s now become clear the more general banking crisis that has emerged is not due simply to a rogue, mismanaged bank that over-extended itself during the recent tech boom and then somehow mysteriously imploded in just 72 hours, March 7-9, until seized by the FDIC on the morning of March 10, 2023.
Deeper, more systemic forces are at play—in the case of both the SVB collapse and the now spreading contagion to US regional banks as well as to European banks. The SVB is just the tip of the current financial instability iceberg. In Europe the focus is the now collapsed big Credit Suisse bank announced today, March 19, by Switzerland’s central bank. The problem is thus now not just US regional bank centric, but is rapidly becoming global systemic.
Indeed. The creativity and resiliency with which the oligarchs and their servants stretch-out the increasingly precarious life of global capitalism is impressive in a nauseating sort of way. Having trillions and trillions of dollars, media control over a brainwashed, stupid population, and massive abilities to commit violence on anyone who disagrees with them makes their job somewhat easier.
If only they used all that brain-power to create a just, viable society, rather than eke-out a few more years of psychopathic profit-gouging.
When discussing causation of a financial institution collapse it is necessary to distinguish between precipitating causes, enabling causes, and fundamental causes.
Clearly the Fed’s historically rapid rise in interest rates since March 2022 has played a key role in precipitating the crisis. And SVB’s management in recent years clearly engaged in classic mismanagement of its assets, so that mismanagement has enabled its eventual collapse.
But at a more fundamental, deeper level the SVB collapse—and the now spreading contagion—is a reflection of the speculative investing boom that occurred in the tech industry over the last decade, especially after 2019. That tech boom was fueled in large part by the Federal Reserve’s massive liquidity injections into the US banking system since 2009—which accelerated further from September 2019 to February 2022. Massive, excess liquidity injections by the Fed since the fall of 2019 drove corporate borrowing rates to zero (and below zero in real terms), thus fueling much of the tech over-investment bubble.
Overlaid on that longer term fundamental cause of excess liquidity driving borrowing rates to zero, the Fed then precipitated the crisis by abruptly reversing its decade-long free money policy by raising interest rates in 2022 at the fastest pace in its history and shutting off that free money spigot.
This here is the insanity of our oligarchic overlords. The inflation issue is the result of supply-chain disruptions caused by the COVID-19 pandemic. By "supply-chain disruptions" I'm of course referring to the dispersion of production created by capitalist "globalization" of production. Which required so much stuff that used to be produced by unionized labour in North America to Mexico and China and India and South-East Asia. And of course, the supply-chain disruptions were exacerbated by already established neo-liberal reforms such as in the trucking industry. (Where truck drivers who were only paid for the time they were actually transporting something from one place to another elected not to spend unpaid hours waiting in line at the unloading docks in Los Angeles and San Francisco, thus creating delays in unloading.)
The basic mechanics of financial institution instability typically occurs as follows: a bank becomes more ‘fragile’ (i.e. is prone to a financial instability) when it either takes on excessive debt, or structures that debt poorly, and then experiences either a sharp decline in its cash flow required to service that debt (i.e. to pay principal and interest due) or experiences a loss of prior cash (or near cash) on hand with which to service that debt. SVB fell into that chasm, into which many other regional US banks have now been sliding into as well. The Fed created the chasm. SVB management simply decided to dance along the edge of that financial cliff, until it slipped and fell into the hole.
In the specific case of SVB, it took on too much asset liability, poorly structured its long term debt, then suffered a severe decline in cash on hand as depositors and investors withdrew their money from the bank.
Here’s a statistic worth noting: SVB’s total asset base by 2019 was approximately $50 billion. That accelerated to more than $200 billion by year end 2022. How did that happen? For one thing, the tech boom produced massive financial gains for investors and managers (and even employees) in the tech sector. SVB in California was the ‘place to be’ to deposit those gains. It was a favorite locale for the highly concentrated Venture Capitalist industry located in California in which to deposit funds earmarked for the tech start ups the VCs were funding. Capital gains by rich tech managers and ‘founding employees’ who just cashed in their IPO stock awards also found their way to SVB.
Just think about all that money going into the hands of a relatively tiny group of people. How much of it came from revenue from building and selling genuine goods and services and how much of it was from the trillions sloshing around in the financial markets?
The Federal Reserve in March 2020 pumped $4 trillion into the banking system in the US. It was theoretically to prevent another bank crisis, as in 2008-09. Except there was no bank crisis. It was a pre-bank bailout that never happened. It was a preventive bank bailout that was never needed. But the $4T went out into the banking system anyway.
That Fed $4T followed a prior Fed liquidity injection of $1 to $1.5T that occurred in September 2019 to bail out the ‘repo’ bond market. So more than $5T flowed into the economy in 2019-2020.
The tech sector was booming already, fueled in part by the Trump administration’s 2017 $4.5T tax cut for investors and businesses. That tax cut had fueled the Fortune 500 corporations distributing $3.5T in stock buybacks and dividend payouts to their shareholders during the three years, 2017-19 alone. One can only imagine how much more was distributed to shareholders by the 5000 largest US corporations as well.
Massive amounts of money capital thus flowed into financial asset markets, especially into the then booming tech and tech start up sector.
Trillions and trillions! Public services were slashed decades ago and continue to deteriorate. The USA's infrastructure (roads, bridges, etc.) has been said for decades to be crumbling. Ordinary people continue to fall behind as wages stagnate and debt increases. Meanwhile these fucking loser "investors" continue to get fresh injections of trillions of dollars via fiscal and monetary policy.
The bank’s deposit base surged from the $50 billion to more than $200 billion by end of 2022. And not all of that was depositors’ or investors’ inflow. SVB also borrowed heavily from the Fed taking up the latter’s long term Treasury bonds that were virtually cost free given the zero rates of interest. About $150B of SVB’s asset base was depositors money. And more than 90% of that $150B was individual deposits in excess of the $250,000 limit guaranteed by the FDIC in the event of a bank failure.
So lots of deposits on hand at SVB but most of the $200 billion asset base locked into long term treasuries and other bonds. In other words, a poorly structured financial portfolio. Should a crisis emerge, and depositors and investors started leaving, the bank could not give them their deposits since they were locked up in long term bonds. A classic long term asset vs short term cash structure. That was a serious financial mismanagement problem ‘enabled’ by SVB management.
Idiots.
Then the Fed started raising rates in March 2022. Because rate hikes result in corresponding bond price deflation, SVB’s balance sheet quickly fell into the red. The corporate rating agency, Moody’s warned of a rating cut for SVB. The bank’s stock price began to fall. Investors and the bank’s savvy depositor base made note.
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To sum up: the SVB ‘template’ is a classic bank run event. The bank had over-invested and poorly structured its assets into mostly long term securities. As the broader tech bubble in general began to implode in late 2022, investors and depositors got nervous about the bank’s exposure to long term securities and the likely slow down of cash flow into the bank by VCs and wealthy tech sector individuals. Like the tech sector in general, the bank’s stock price also began to fall which further exacerbated the loss of potential cash on hand. Bad and failed moves by SVB management to raise capital, more warnings by Moody’s, and the VCs communicating to their start ups with deposits in SVB to exit quickly consequently resulted in an accelerating outflow of deposits needed for the bank to continue servicing its debts. The FDIC stepped in to save what was left of depositors funds.
It's a kind of justice that these rich assholes got burned by the Federal Reserve's anti-worker monetary policy. It has been capitalist greed and fraud (as well as Biden-Blinken's blinkered proxy-war in Ukraine) that produced the bulk of the inflation. But it was only when workers facing the inflationary pressures on their long-stagnant wages finally decided that enough was enough and began seriously fighting for pay increases that the Fed decided to act. And it acted in the usual brain-dead, sledgehammer way of rapidly raising interest rates to crush the economy and destroy workers' bargaining power. But raising interest rates exposed the incompetence and fragility of the financial sector as well as the overall weakness of the economy in general.
I'll skip ahead to Rasmus's discussion of Credit Suisse's collapse. I've been copying and pasting so much. But the whole article should be read.
As regional banks shudder and weaken in the US, in Europe the giant Credit Suisse bank (CS) crashed this weekend. Over the weekend banks, central banks and their government regulators have been gathering to try to figure out how to stem the crisis in confidence in their banking systems. In Europe the focus has been Credit Suisse, which was forced to merger with the second large Swiss bank, UBS. The arrangement of that merger may just precipitate further financial market instability in Europe. Already two other unmentioned EU banks are reportedly in trouble.
...
Bottom line, in Europe the stability of the $275B bank junk bond market is now a question. So too are the stability of the rumored two other major EU banks. To backstop both these potential instabilities is why the Fed and other EU central banks now agreeing to a dollar currency swap.
Watch for Europe bank stock prices to fall noticeably in coming weeks. They’ve already fallen 15% in the past week. (US regional banks stock prices have fallen 22%). More bank stock price decline will now occur. Withdrawals will move from weaker to stronger banks. CDS insurance contracts will rise in cost. As unstable as this picture may be, certain segments of the Europe bond market may fare even worse in the week ahead.
Europe's economy has been a house of cards since the 2008 financial crisis. Yanis Varoufakis has provided a highly detailed, extensive description of the bizarre bureaucratic/corporate-capitalist anti-human, self-sabotaging policies pursued mainly by EU functionaries and German bankers and corporations.
I thought Rasmus's predictions were impressive especially since the Fed Chair did exactly what Rasmus said would happen:
But ultimately the problem of the instability lies with the Fed and other central banks that have fueled the tech and other industry bubbles in recent decades—and especially since March 2020—with their massive liquidity injections. Not much has changed since 2008-10. The Fed never ‘recalled’ the $4T in excess liquidity it injected into the banking system to bail out the banks (and shadow banks, insurance companies, auto companies, etc.) in 2008-10. Nor did the ECB from 2010-14. That money injection flowed mostly into financial asset markets, or abroad, fueling financial price bubbles and making big tech and financial speculators incredibly rich in the process—a process that resulted in a weak, below historic averages, real GDP recovery after 2010. Following that weak real economic recovery, the dynamics of financial crisis resumed. The Fed attempted briefly to retrieve some of the liquidity in 2016-17 but was slapped down by Trump and returned to a free money regime. Fiscal policy then joined the process after 2017 with the Trump $4.5T in tax cuts for investors and businesses. Both the tax cuts and Fed largesse resulted in more than $3.5T in stock buybacks and dividend payouts to investors in the F500 US corporations alone! More liquidity. More tax cuts. More flowing into financing the tech bubble and financial asset inflation in stocks, bonds, derivatives, forex and other asset markets.
Then the Fed and other central banks tried pulled out the free money rug and raised rates to try to check accelerating inflation. Its results in that regard were poor. Inflation continued but the rate hikes began to fracture the banking system just as the tech boom itself began contracting. Tech centric regional banks began to implode.
The Fed, FDIC and US Treasury may yet ‘contain’ the contagion and stabilize the creaking US and global banking system in the short run by throwing more record amounts of liquidity and free money into the black hole of financial asset deflation and collapsing banks.
But that ‘short term’ solution is the ultimate source of the longer term problem and crisis: excess liquidity in 21st century capitalist now for decades has largely flowed into financial asset markets making financial speculation even more profitable—all the while the real economy struggles and stumbles along.
Oh. The part that he predicted was earlier in the article. Here it is:
The most likely event is the Fed will raise rates just a 0.25% one more time in March next week, and give ‘forward guidance’ it won’t raise rates further should the bank situation not stabilize. Also highly likely is the Fed will announce a hold on its ‘Quantitative Tightening’ so-called policy by which it recalls some of the $8T plus liquidity it formerly injected into the economy. QT has the effect of raising long term rates, which the Fed cannot afford until stability returns to the banking sector. Even longer term, this writer predicts the Fed will try to reconcile its contradiction of ‘reducing inflation by rate hikes with halting rate hikes to stabilize the banks’ by raising its current 2% inflation target to 3% or more later this year.
We are destroying the planet's ability to support life. We are playing with nuclear war like demented child-kings. The economy is in the hands of incompetent, selfish sociopaths who despise the majority of humanity. How long can it last?
6 comments:
Yeah, I read that article, it was a good one. I follow Counterpunch but I don't read as many of the articles as I used to because after all these years, fewer of them are telling me anything I don't already know. The headlines are all something like "Rich people do something corrupt" "American foreign policy bosses do something stupidly pugnacious" "Regulatory agencies display once more that they are captured" "union-bashing is bad" yadda yadda.
On a slight tangent, that comment you made about their trillions of dollars and control of the media and violence making the rich's task easier--it really does. I've noticed that this fact leads to a particular failure of analysis in parts of the left: Giving the plutocrats too much credit. There's this tendency to imagine that the big bosses always have a fiendishly clever master plan, and that's why they always win. But they don't. Most of them aren't that bright, even, and even the ones who are good at something, it's often a very bounded domain (like Elon Musk, who I think is actually pretty good at running a car company, but is clearly shit poor at many other things). The thing is, they don't have to be. All that money, all that control of media and PR and armed men, is such a massive force multiplier; the contest against them is not an equal one like a game of chess. So they get to win much of the time even if they're playing fairly incompetently.
So for instance if you look at the political arena, where the plutocrats really dislike even the centre-left, like the NDP or Bernie Sanders. All right, take Jagmeet Sing, Justin Trudeau, and Pierre Poilievre, and take NDP policies vs Liberal policies vs Conservative policies. Fundamentally, if you just asked people about those policies without telling them what was whose and without any loaded verbiage, most Canadians would support NDP policies more. And Jagmeet Singh is not a particularly strong leader of the NDP, but if you just exposed people to him, Justin and Pierre, he would probably come off best on average. 'Cause, like, Pierre is a total creep and people instinctively dislike him, while Jagmeet is kind of like a better Justin--they're quite similar but Jagmeet is even more so on the upside but a little less on the downside--he's more cheerful, more sunny and friendly, but not quite as vacuous. All else being equal, the NDP would win an election (and the Conservatives would lose badly). Pundits and even centre-left strategists often talk as if the reason this doesn't happen is that the Liberals have cleverer strategists and so forth, like the left(ish) is just consistently never as good at electioneering, but obviously it's just that the left has less money and the media consistently works at making them lose.
For the left to have a chance, at least one of two things have to happen. First possibility is, some stars align and they happen to get a brilliant, visionary, incredibly charismatic leader who forms an impressive organization and creates a left that's just five times as good as anything the centre/right are doing. Once in a while it happens. Hugo Chavez, for instance. If Jeremy Corbyn had been a bit less nice, or had had a ruthless right hand person, and had systematically crushed the New Labor toads who betrayed him, he might have done it.
Second thing is, the system could be in bad shape. The unwillingness of plutocrats to understand the meaning of the word "enough", and indeed the basic structure of capitalism which is really not capable of allowing that word to have meaning, always leads to the proles getting plucked beyond their ability to sustain things. When poverty starts getting worse and infrastructure gets past some level of crumble, even the systems for maintaining systemic control start to erode, leaving more possibilities for change. It's no accident that a lot of the most interesting political developments happen in the third world, particularly Latin America. In some slum in Honduras, nobody's going to pay much attention to the media telling them how good they have it.
When that sort of conditions set in, the establishment's last ditch defence against positive change that takes their stuff back is fascism. So it's no surprise we've been seeing a lot of that stuff around lately.
PLG,
I am with you on the left-wing being repetitive. That was something that I tried to address years ago with this blog. I asked for a game-plan. I said what we have been doing isn't working because things are getting worse. And the few comments I got berated me for my negativity.
Whereas the oligarchs are often shit-heads. The only thing the left really has going for it is the way the oligarchy keeps fucking things up with their insane greed and their inhumanity. But then, as you say, they resort to fascism to maintain their system.
We need a mature, realistic plan. I love Caitlin Johnstone but when she starts rhapsodizing about this magical moment when the scales fall from everyone's eyes and the people rise up as one and blah, blah, blah.
That uprising in Sri Lanka was soon brought under control and the assholes in charge stayed in charge.
I think fundamentally what nearly all left uprisings are missing is some way of making decisions that will have enough of a sense of legitimacy that the movement will follow them, something that can translate into at least a rough and ready approximation of governing in areas they control. Otherwise you can have a massive mob of people with legit grievances, and they can swamp the cities, scare the cops away, make the place ungovernable . . . and then what? They got nuthin'. They hang around and wave signs until they run out of steam and leave. They are not capable of taking over city hall, working up a participatory budget and starting to collect the taxes and run the stuff.
(This isn't universal. The Zapatistas totally knew what they wanted to do, had solid mechanisms in place for continuing to figure it out, and that's why they're still there doing it.)
This is partly because modern radical left wing movements are mostly at least tacitly anarchist. And I mean, I'm sympathetic to anarchism, but it's not capable of defeating modern states because radical decentralization can't muster resources and force the way big centralized things can. But it's a cleft stick--we've seen over and over how centralized leftism ends up with leadership that's effectively a different class with different interests from the rand and file, and that leads to either the leadership getting co-opted Third Way style, or to Soviet style oligarchies that pay lip service to the workers while hosing them. Modern radical activism comes out of a tradition that became disillusioned by all that, and for good reason. But they haven't grappled with the need to somehow muster unified force pointing in one direction.
I do think it's possible to avoid both pitfalls. Especially with modern computer/communication technologies. Existing social networks are of course built by capitalists for whom the last thing they ever want to see is the proles using them to organize and make decisions--but it's fairly clear that if you designed them a bit different, they could work for that. In this connection I'm quite interested in loomio.org, which does a platform designed expressly for decentralized leaderless decision-making.
Thanks for still posting stuff Thwap. Been a long time since I left any comments (prolly not much since stephen herpes was at the helm), but I do try to stay up to date with your posts. The book lists are always a fave.
Trevorus,
Well, ... You're welcome!
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