1). “Professor Richard Wolff: Silicon Valley Bank Bailout Crisis NOT Definitely Contained”, March 15, 2023, Jordan Chariton interviews Professor Richard Wolff about the Silicon Valley Bank bailout and on potential financial contagion affecting the rest of the U.S. banking system, duration of video 30:38, Status Coup, at < https://www.youtube.com/watch?v=hzybtBZKei4 Note: This is a Youtube Video of an interview. There is no transcript, no text available
2). “Alternative Visions - From Silicon Valley Bank to Larger Banking Crisis?”, March 17, 2023, Jack Rasmus, duration of podcast 58:50, Alternative Visions, Podbeam,, at https://alternativevisions.podbean.com/e/alternative-visions-from-silicon-valley-bank-to-larger-banking-crisis/>
Note: This is a podcast of a regular weekly radio show featuring the commentary of Jack Rasmus. There is no transcript nor any text available. However, Item 3 is a text article posted by Dr. Rasmus. It is very closely related to, but not identical to, the radio show podcast.
3). “Banking Crisis 2023: Deep Origins and Future Directions”, March 20, 2023, Jack Rasmus, Jack Rasmus Predicting the Global Economic Crisis, at < https://jackrasmus.com/ >
4A). “Why 3 US banks collapsed in 1 week: Economist Michael Hudson explains”, March 14, 2023, Ben Norton interviews Economist Michael Hudson. Hudson analyzes the collapse of Silicon Valley Bank, Silvergate, and Signature Bank, explaining the similarities to the 2008 financial crash, Geopolitical Economy, at < https://www.youtube.com/watch?v=uvm9qrXhqf8 >
4B). “Why 3 US banks collapsed in 1 week: Economist Michael Hudson explains”, Transcript of Interview, March 15, 2023, Ben Norton interviews Economist Michael Hudson. Hudson analyzes the collapse of Silicon Valley Bank, Silvergate, and Signature Bank, explaining the similarities to the 2008 financial crash, Geopolitical Economy, at https://geopoliticaleconomy.com/2023/03/14/us-banks-collapsed-economist-michael-hudson/>
~~ recommended by dmorista ~~
Introduction by dmorista: Here I present commentary, video, audio, and textual, about the real story surrounding the 3 recent American Bank collapses and the European Bank collapse,and the fact that a number of weaker banks in the U.S. and Europe could succumb to bank runs and other financial weakness in the coming days. These recent events, and their antecedents, are discussed and interpreted by three eminent Left Leaning American Economists (Richard Wolff, Jack Rasmus, and Michael Hudson). Capitalism, as Richard Wolff frequently points out, is an unstable system with crises and panics occurring every 4 to 7 years. However, once a century or so there is a massive crisis tied in with profound changes in the Global Capitalist Hierarchy. The last such an acute super-massive crisis of Capitalism took place beginning in 1929 and extending through the 1930s, this is / was known as the “Great Depression”. The changes and developments in Capitalism, during the longer period of the first half of the 20th Century, also saw several related events including; the 3 great peasant revolutions (in Mexico, Russia, and China); the two World Wars (viewed by World Systems Theorists and one Hegemonic War with an uneasy and only partial truce for 20 years between the two most acute outbreaks of military struggles); the rise of Fascist and other harsh authoritarian regimes in Europe and Japan; and, happily for the U.S., the New Deal reforms pushed by an active and highly organized working class and an unusual reformist President.
The Post WW 2 Global Socioeconomic and Political Order, and the institutions that administered it, were established at various meetings including those at Bretton Woods in the wake of WW 2. These arrangements are clearly showing signs of breaking down. The question that arises, and that is to some degree addressed by these authors here and elsewhere, is whether this current Financial Crisis in the U.S. and Europe is a current-day analogue to the Great Depression. The Corporate Controlled Media is busy trying to allay the fears of the population that these 3 bank collapses, and the extraordinary measures taken by President Joe Biden and the Fed herald such a transformational set of changes. BIden and the Fed took actions to shield big depositors in Silicon Valley Bank (SVB), {who had accounts that far exceeded the $250,000 that FDIC insurance covers} from losses in the SVB collapse. Rasmus noted that “ … of the roughly $174B in deposits at the bank, more than $151B involved more than $250K.” Biden and the Fed made sure that the accounts in SVB and Signature Bank that exceeded $250,000 would be fully reimbursed and made immune to the losses incurred by the general taxpayer, the despised “little people”.
An issue, that is little discussed, is the huge size of the Global Derivatives Markets. Derivatives are gambles taken by investors, mostly major Finance Capitalists and their institutions, on changes in prices of a wide variety of assets. Currently the Global Derivatives Markets have around $1.3 Quadrillion at play (perhaps near half again as much or even double that, once the effects of the latest rounds of inflation are figured in).. This is well over 1,000 times the size of the actual economies of all the nations on Earth. American and European Banks and Financial institutions are major players here, but also Finance Capitalists from other parts of the world too.
The U.S. Government is, according to one report spending $151 billion to bail out the large account holders at SVB, and another $70 billion to bail out the large account holders at Signature Bank (that was a hotbed of largely right-wing Libertarian Crypto-Currency investors). That $221 billion is just part of the overall sum of $300 billion “created” by the Fed to stabilize the banking system—and bail out Silicon Valley Bank’s and Signature Bank’s uninsured depositors. That $300 billion the can be added to the approximately $115 billion for U.S. weapons given to the Fascist Coup Government in Ukraine, those four items alone total $415 billion; spent on ruling class operatives and projects just in the last year, much of it, 72,3% to be precise, in the past 2 weeks.
Yet no money can ever be found to address the problems and challenges of working people. Compare this largesse for the banks to just a very few of the social debacles we see inside the U.S, “ … Jackson, Mississippi has gone without reliable drinking water since September 2022.”, (and Flint, Michigan still has water supply problems after the disaster there 9 years ago that caused permanent harm to thousands of children). “32-states are set to cut food stamps drastically this month, creating what experts call a ‘hunger cliff’, impacting over 30 million people. Some could see monthly food assistance fall from USD 281 to USD 23. This comes at a time when groceries were 11.3% higher in January than they were a year prior …. Tech companies like Uber and Lyft successfully upheld legislation in California that keeps gig workers’ wages down to as low as USD 6.20 an hour. Over one in four U.S. adults have rotting teeth, disproportionately Black people, people with low incomes, and those with less than a high school education. … More than half of the people in the U.S. from ages 16 to 74 read below a sixth-grade reading level,” (Emphases added) {See “Yes, the U.S. gov’t did bailout the banks. What would a people’s bailout look like?”, March 17, 2023, MROnline, at <https://mronline.org/2023/03/17/yes-the-u-s-govt-did-bailout-the-banks-what-would-a-peoples-bailout-look-like/ >, Originally published on March 15, 2023, Peoples Dispatch, at <https://peoplesdispatch.org/2023/03/15/yes-the-us-govt-did-bailout-the-banks-what-would-a-peoples-bailout-look-like/ >}
These 4 videos / articles cover a great deal of territory. However anybody who wishes to read or listen to more on this important issue can go to a wide variety of sources including: “Ellen Brown: The Looming Quadrillion Dollar Derivatives Tsunami’, March 12, 2023, Ellen Brown, Scheer Post, at <https://scheerpost.com/2023/03/12/ellen-brown-the-looming-quadrillion-dollar-derivatives-tsunami/>, and/or: “Michael Hudson: Why the US banking system is breaking up”, March 12, 2023, Michael Hudson, Geopolitical Economy, at <https://geopoliticaleconomy.com/2023/03/12/michael-hudson-why-the-us-banking-system-is-breaking-up/>, and/or: “Michael Hudson: Why the US bank crisis is not over”, March 13, 2023, Michael Hudson, Geopolitical Economy, at < https://geopoliticaleconomy.com/2023/03/13/michael-hudson-us-bank-crisis/ >, and/or: look around in Jack Rasmus website at < https://jackrasmus.com/ > he addressed these issues in, “SVB Crash: A Banking System Crisis or ‘One Off’ Event?”, March 18, 2023, Jack Rasmus, Alternative Visions, at <https://alternativevisions.podbean.com/e/alternative-visions-from-silicon-valley-bank-to-larger-banking-crisis/>. Also he discussed these issues in TWO OTHER SHORT RADIO INTERVIEWS (15 min.), ON THE TOPIC, (Critical Hour Radio Show: 3-17-23) <https://drive.google.com/file/d/15IF8bty0U3KPMEl2nfDhRwQEa7frappt/view>, and: (Political Misfits Radio Show: 3-15-23) <https://sputniknews.com/20230316/us-drone-in-black-sea-credit-suisse-stock-drops-meta-layoffs-1108435142.html>. Rasmus also posted some other material about the bank collapses starting on March 10th and continuing on March 13 and March 14. This https://www.youtube.com/watch?v=n8aaIq8Aa4wis all available on his website, Jack Rasmus Predicting the Global Economic Crisis, at < https://jackrasmus.com/ >. Richard Wolff has discussed the banking crisis on several venues as well these include. “Richard Wolff on the Collapsing Banks”, March 14, 2023, Mitch Jesserich interviews Richard Wolff, Letters and Politics, at < https://www.youtube.com/watch?v=JBrTMEOC2WE >, “Wolff Responds: Why Did Silicon Valley Bank Collapse?”, March 15, 2023, RichardDWolff, at < https://www.youtube.com/watch?v=n8aaIq8Aa4w >. There is the fine ongoing commentary in Wall Street on Parade at < https://wallstreetonparade.com/ >. There is a series of excellent comments on twitter by the post-Keynesian economist Daniela Gabor. This is available at <https://twitter.com/DanielaGabor/status/1635167154042716161?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1635167154042716161%7Ctwgr%5E6834b32f78511fedb98260df36dc8b14de4fb98e%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fgeopoliticaleconomy.com%2F2023%2F03%2F14%2Fus-banks-collapsed-economist-michael-hudson%2F
1). “Professor Richard Wolff: Silicon Valley Bank Bailout Crisis NOT Definitely Contained”, March 15, 2023, Jordan Chariton interviews Professor Richard Wolff about the Silicon Valley Bank bailout and on potential financial contagion affecting the rest of the U.S. banking system, duration of video 30:38, Status Coup, at < https://www.youtube.com/watch?v=hzybtBZKei4 >
Note: This is a Youtube Video of an interview. There is no transcript, no text available
2). “Alternative Visions - From Silicon Valley Bank to Larger Banking Crisis?”, March 17, 2023, Jack Rasmus, duration of podcast 58:50, Alternative Visions, Podbeam, at <https://alternativevisions.podbean.com/e/alternative-visions-from-silicon-valley-bank-to-larger-banking-crisis/>
Note: This is a podcast of a regular weekly radio show featuring the commentary of Jack Rasmus. There is no transcript nor any text available. However, Item 3 is a text article posted by Dr. Rasmus. It is very closely related to, but not identical to, the radio show podcast.
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3). “Banking Crisis 2023: Deep Origins and Future Directions”, March 20, 2023, Jack Rasmus, Jack Rasmus Predicting the Global Economic Crisis, at < https://jackrasmus.com/ >
Banking Crisis 2023: Deep Origins and Future Directions, March 20, 2023
By Dr. Jack Rasmus Copyright 2023
It’s been 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.
What then are the systemic forces responsible for the SVB collapse and now spreading instability to US regional banks and European banks?
Causation: Precipitating, Enabling, and Fundamental
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.
Before examining the Fed’s contributions and role in the current crisis in more detail, a review of what actually happened at SVB (and now is happening at other regional banks and in European banks) is perhaps instructive, revealing the dynamics of bank instability today at the bank level itself.
We might therefore ask: what then were the processes behind SVB’s collapse? What actually happened at SVB? And is that same Fed-induced processes now at work in other banks behind the scenes—eventually to be revealed in coming weeks with further subsequent depositors’ bank withdrawals, collapsing bank stock prices, rising credit default swap costs insuring against possible bank failure, and more US announcements to try to stem the contagion? To what extent is the collapse this weekend of the giant European bank, Credit Suisse, also influenced by events of the week prior in the US banking system?
Most important, what are the possible scenarios for continuing US and European banking instability in the coming weeks.
The SVB Collapse ‘Template’
In general terms, here’s how banks typically fail:
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. And then there was Covid!
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.
Tech companies went even further. As result of the Fed’s $4T liquidity injection during the Covid crisis, the zero interest rates created by that liquidity made it possible for tech companies to issue their own corporate bonds at a record pace. For example, Apple Corp., had a cash hoard on hand of $252 billion. But it issued its own corporate bonds anyway to take advantage of the near zero interest rates made possible by the Fed’s $4T injection during Covid, from March 2020 through February 2022.
Countless millionaires were made and the ranks of billionaire tech investors billowed as well. The tech bubble—fueled both directly and indirectly by the Fed’s zero rate policy—expanded. Many of those investors riding the wave—whether VCs, tech start ups, tech CEOs, and even founding tech employees—funneled their money capital into SVB the celebrity tech bank of choice in silicon valley.
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.
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.
SVB management tried to rectify its bond deflation and now higher borrowing costs by selling off some of its own bonds in order to raise money capital to offset its deflating assets. But with bond prices continuing to fall (as Fed continued to accelerate its rate hikes), it was like ‘catching a knife’, as the saying goes. SVB lost nearly $2B on its attempted bond sale. Moody’s and investors took further note.
Now desperate, in the days immediately leading up to its collapse SVB management arranged with Goldman Sachs bank to sell more of its stock. But that act really grabbed the attention of its VCs, investors and depositors. During the week before its collapse, the VCs reportedly started telling their start ups with money deposited at SVB to get their money out and move it elsewhere. As VCs and tech companies started withdrawals, the word quickly got out in the silicon valley tech community and general depositors began withdrawing their cash as well. Given how fast the events were occurring, SVB didn’t have time to obtain a bridge loan. Or to sell some of its better assets to raise cash. Or find a partner to buy in or even acquire it. The rapidity of events is a characteristic of today’s bank runs that wasn’t a factor as much even back in 2008.
All this happened at near financial ‘lightspeed’, made possible by (ironically) technology. In bank runs in the past, depositors typically ran down to the bank before its doors opened the next day once rumors spread. But today they don’t. They simply get on their smart phone and enact a wire transfer to another bank—at least until the bank shuts down its servers.
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.
But, as previously noted, the FDIC guaranteed only $250k per investor and depositor. And of the roughly $174B in deposits at the bank, more than $151B involved more than $250K.
Regional US Banks Contagion
The processes that led to SVB’s crash a week ago continue to exist throughout US tech and the US banking system—especially in the smaller regional banks and in particular in those regionals serving the tech industry.
Caught between the Fed’s fundamental, long term and shorter term contributions to the current crisis, SVB’s CEO and senior team mismanaged their bank’s assets—i.e. enabled its collapse. But the Fed’s policies made that mismanagement possible, and indeed likely. And not just at SVB but throughout the regional banking sector.
Another institution, Signature Bank in NY, failed just days before the SVB’s collapse. Other banks approached failure last week and remain on the brink in this week two of the emerging crisis.
Most notable perhaps is the First Republic Bank of San Francisco, also exposed to the tech sector. It’s stock price plummeted 80% during the last two weeks as it was the next target for withdrawals. To try to stem the collapse of First Republic, a consortium of the six big US commercial banks (JPMorgan, Wells, Citi, BofA, Goldman Sachs and Morgan Stanley), arranged by the Fed and US Treasury, pledged by phone to put $30 billion into first Republic. The following day after the announcement of the $30 billion, however, another $89B in withdrawals from First Republic occurred. Clearly, $30B was not near enough. It is unlike the big six will up their ante. The Fed will have to throw more into the pot to save First Republic from SVB’s fate.
Following SVBs collapse, the Fed and the US Treasury also announced a new Bank Bailout Facility, the first such since 2008, funded by $25B by the government. Reportedly the facility planned to make available to banks a new kind of loan from the government, issued ‘at par’ as they say (which means the value of the money would not deflate).
The Fed also simultaneously announced it would open it’s ‘discount window’, where banks can borrow cheaply short term in an emergency. During the first week no less than $165 billion was borrowed by the regional banks from the discount window and the $25B new facility.
The question remains, however, whether the Fed next week will continue to raise interest rates which can only exacerbate depositors and investors’ fears about their regional banks’ stability and likely accelerate withdrawals.
But the Fed is between ‘a rock and hard place’ of its own making. If it doesn’t continue to raise rates it undermines its legitimacy and claims it will raise them until inflation is under control, which means moving decisively lower toward the Fed’s official 2% inflation target. But if it does raise rates, the move could exacerbate withdrawals and regional banks’ stability. Which then will it choose: inflation or banking stability. This writer is willing to bet bank stability comes first, inflation second (and employment and recession a distant third if at all).
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.
It was already clear that even the rapid hike in rates of nearly 5% by the Fed in 2022-23 hasn’t had much impact on slowing prices. From a peak of 8.5% or so in the consumer price index, prices have abated only to around 6%. Most of the current inflation is supply side driven and not demand driven and even the Fed has admitted it can’t do anything about supply forces driving up prices.
This writer has also been predicting for more than a year—and since 2017 in the book, ‘Central Bankers at the End of Their Ropes’—that in this the third decade of the 21st century the Fed can’t raise interest rates much above 5% (and certainly not 6%) without precipitating significant financial market instability.
The Fed and US Treasury will almost certainly have to up their bailout measures in the coming week should more regional US banks weaken. That weakening may be revealed in further bank stock price declines, in rising withdrawals from the banks, or in a sharp further increase in the cost of insuring investors in the event of a bank failure by means of credit default swaps securities.
And in its latest announcement this past Sunday, March 19, 2023, the Fed has said it will immediately provide currency swaps with other central banks in Europe and Japan to enable dollar liquidity injections into offshore banks. Central banks are now fearful the bank runs and instability may well spread from regional US banks to weak banks abroad.
Credit Suisse Bank Implodes: Which EU Banks Are Next?
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.
The ‘deal’ arranged by the Swiss national bank forcing CS to merge with UBS involved an unprecedented action: instead of shareholders losing all their equity and bondholders getting to recover some of their losses by the bank’s sale of remaining assets, as typically occur when a bank or a corporation collapses, the opposite has happened in the CS-UBS deal. The holders of CS junk (AT1) bonds worth $17B will now be wiped out and receive nothing—while shareholders of CS will receive a partial bailout of $3.3B.
The fallout of restoring some shareholders while bond holders are wiped out may result in subsequent serious financial consequences. That ‘inverted’ capital bailout—i.e. shareholders first and nada for bondholders—has never happened before. Bondholders in Europe will now worry and take action, perhaps provoking financial instability in bond markets. Contagion at the big banks may be contained by the CS-UBS deal (emphasize ‘may’), while contagion in the Europe bond markets may now escalated and exacerbate.
The Swiss National Bank is also providing UBS with a $100B loan and Swiss government another $9B guarantee to UBS. In exchange for the $109B UBS pays only $3.3B for CS. Why then is another $100B loan being given to UBS if it’s paying only $3.3B? Does the Swiss Central bank know something about UBS’s liquidity and potential instability it’s not saying?
Another curious element of the CS-UBS ‘deal’ is the $3.3B UBS is paying for CS is almost exactly the same amount that CS stockholders are getting reimbursed in the deal. Could it be that the $3.3B for shareholders will go to the main stockholders and senior managers of CS, a kind of legal ‘bribe’ to get them to go along with the forced merger? Or is $3.3B for $3.3B just a coincidence?
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.
A Few Conclusions and Predictions
The collapse of SVB and other regional banks in the US represents a classic run on commercial banks not seen since the 1930s. Some argue it’s not a bank run but of course it is. When depositors withdraw half or more of a bank’s available cash assets and the bank cannot raise immediate additional cash to cover withdrawal demands—that’s a bank run!
The process is also classic in its dynamics: the bank over-extends making risky lending and loads up on long-term assets that can’t be quickly converted to cash. General economic conditions result in a reduction of cash inflow. It can’t raise cash to cover debt servicing. Its financial securities on hand deflate, exacerbating further its ability to service debt and satisfy withdrawals. It can’t obtain roll over loans or financing from other banks or lenders. Its lenders won’t restructure its current debt. And it can’t get another partner to invest in it or buy it. The only option at that point is bankruptcy or government takeover and the distribution of its remaining assets to bondholders and stockholders get wiped out. (Except as noted in the case of CS-UBS where the bailout is reversed).
It’s almost inevitable now that further contagion will result from both the US regional banks’ crisis and the Credit Suisse affair in Europe. Bank regulators, central banks, and governments will scurry around to provide liquidity and bail out funding to try to convince investors and shareholders and depositors that the banks are ‘safe’. This means raising the funding of the special ‘bank facilities’ created by the Fed and other banks. Making the ‘discount window’ borrowing terms even below market costs. Providing currency swaps among banks. And for depositors, quickly raising the FDIC $250,000 guarantee to at least $400K or even $500K.
The central banks and regulators have moved at a record pace to construct their bailouts. But depositors and investors still can move more quickly given current communication technology. And fear moves even faster across capitalist financial markets in the 21st century.
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.
The Fed and central banks’ solution to periodic banking instability in the short run is the problem creating that same instability in the longer run.
But some capitalists get incredibly rich and richer in the process. So the excess liquidity shell game is allowed to continue. The political elites make sure the central banks’ goose keeps laying the free money golden eggs.
The latest scene in that play has is now being acted out. Subsequent commentary and analysis by yours truly will thus continue.
Dr. Jack Rasmus
March 20, 2023
Dr. Rasmus is author of the books, ‘Central Bankers at the End of Their Ropes’, Clarity Press, 2017 and ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, 2020. Follow his commentary on the emerging banking crisis on his blog, https://jackrasmus.com; on twitter daily @drjackrasmus; and his weekly radio show, Alternative Visions on the Progressive Radio Network every Friday at 2pm eastern and at https://alternativevisions.podbean.com.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx4A). “Why 3 US banks collapsed in 1 week: Economist Michael Hudson explains”, March 14, 2023, Ben Norton interviews Economist Michael Hudson. Hudson analyzes the collapse of Silicon Valley Bank, Silvergate, and Signature Bank, explaining the similarities to the 2008 financial crash, Geopolitical Economy, at < https://www.youtube.com/watch?v=uvm9qrXhqf8 >
4B). “Why 3 US banks collapsed in 1 week: Economist Michael Hudson explains”, Transcript of Interview, March 15, 2023, Ben Norton interviews Economist Michael Hudson. Hudson analyzes the collapse of Silicon Valley Bank, Silvergate, and Signature Bank, explaining the similarities to the 2008 financial crash,
Geopolitical Economy, at <>https://geopoliticaleconomy.com/2023/03/14/us-banks-collapsed-economist-michael-hudson/
Economist Michael Hudson analyzes the collapse of Silicon Valley Bank, Silvergate, and Signature Bank, explaining the similarities to the 2008 financial crash.
In this discussion with Geopolitical Economy Report editor Ben Norton, Hudson also addresses the US government bailout (which it isn’t calling a bailout), the role of the Federal Reserve and Treasury, the factor of cryptocurrency, and the danger of derivatives.
Video
Podcast
Transcript:
BEN NORTON: Hi everyone, I’m Ben Norton. I have the pleasure of being joined by someone I think is one of the most important economists in the world, Michael Hudson.
And I should say that we should wish Professor Hudson a happy birthday. Today is March 14th. It’s his birthday, and he turns 84 today. How do you feel Michael?
MICHAEL HUDSON: Just like I feel every other day. I usually feel energetic on my birthday because I’m always working on a new chapter and I tend to write a lot around this period each year.
BEN NORTON: And Michael is extremely prolific. He has so many books. And today we’re going to be talking about a lot of topics that he addressed in one of his classic books, which is Killing The Host. And talking about how the financial sector is parasitic for the real economy.
Today we’re going to be talking about the banking crisis that we see unfolding in the United States.
This March, three banks have collapsed in the span of one week.
It started at first with a California-based cryptocurrency-focused bank, Silvergate, which collapsed on March 8th, and then two days later Silicon Valley Bank (SVB) went down as well. It went down in the largest-ever bank run.
And that was the second biggest ever to fail in US history. And it was also the largest bank to crash since 2008.
Silicon Valley Bank had $209 billion in assets, compared to the largest-ever bank failure which was Washington Mutual, which had $307 billion in assets, and that was in 2008.
Professor Hudson has been writing about this. He already has two articles that he published. The first is “Why the US banking system is breaking up.”
So Michael, let’s just start with your basic argument of why you think these banks have been crashing — first Silvergate, then Silicon Valley Bank, and why you think they’re crashing, and what the response of the Federal Reserve (Fed) has been.
MICHAEL HUDSON: Well in order to understand why they’re crashing, you have to compare it to what happened in 2008 and 2009.
This crash is much more serious.
In 2008 and 2009, Washington Mutual collapsed because it was a crooked bank. It was writing fraudulent mortgages, junk loan mortgages. It should have been allowed to go under because of the fraud.
The basic subprime fraud and collapse was widespread fraud throughout the whole financial system. Citibank was one of the worst offenders. Countrywide, Bank of America.
These were individual banks that could have been allowed to go under and the mortgages could have done what President Obama had promised to do.
The mortgages could have been written down to the realistic market values that would have cost about as much to service as paying your monthly rent. And you just would have got the crooks out of the system.
My colleague Bill Black at the University of Missouri at Kansas City described all this in The Best Way to Rob a Bank Is to Own One.
So the problem then under the Obama administration — he made an about-face and reversed everything that he had promised his voters.
He had promised to write down the loans, to keep the subprime mortgage people in their houses, but to write down the loans to the fair value and undo the fraud.
What happened instead was, as soon as he took office, he invited the bankers to the White House and said, “I’m the only guy standing between you and the mob with the pitchforks.”
[By] “the mob with the pitchforks,” he meant mainly Black and Hispanic buyers, mortgagees, who were the main victims of the subprime fraud.
He bailed out the banks and directed the Fed to undertake fifteen years of quantitative easing (QE). And what that was, was the Fed said, “Well the mortgages are worth less than —the value of the property doesn’t suffice to cover all of the bank deposits, because the banks have made bad mortgages.”
“How do we save the banks that have misrepresented the value of what they have?”
“We’re going to slash interest rates to zero. We’re going to spur the largest asset-price inflation in history.”
“We’re going to put nine trillion dollars supporting bank credit — flooding the market with credit — so that instead of real estate prices going back to an affordable level, we can make them even more unaffordable.”
“And that will make the banks much richer. It’ll make the 1% in the financial sector much richer. It’ll make the landlords much richer. We’re going to do that.”
So they spurred — by lowering the interest rates, they created the biggest bond-market boom in American history. From high interest rates in 2008 all the way down to almost zero.
So the result of course was an inflation in stock prices, an inflation of bond prices.
And the result was widening inequality for Americans, because most stocks and bonds are owned by the wealthiest 10%, not by the bottom 90%.
So if you were one of the 10% of the population that owned stocks and bonds, your wealth is going way up.
If you were a part of the 90%, your wages were not going up, and in fact your living standards were being squeezed — not only by the inflation, but by the fact that more and more of your income had to go to paying rent and interest to the FIRE sector — [Finance, Insurance, and Real Estate].
Well finally, a year ago, the Federal Reserve said, “Well there is a problem. Now that COVID is over, wages are beginning to rise.”
“We’ve got to have two million Americans thrown out of work in order to lower wages so that the companies can make larger profits, to pay higher stock prices.”
“Because if we don’t cause unemployment, if we don’t lower the wage levels for America, then profit levels will go down and stock prices will go back down, and our job at the Fed is to increase stock prices, increase bond prices, and increase real estate prices.”
So finally they began to raise [interest] rates to — as they put it — “curb inflation.”
When they say “inflation,” what they mean is “rising wages.”
And even though wages have gone up, they have not gone up as much as consumer prices have gone up.
And the consumer prices have gone up, not because of wage pressures, but for two reasons.
One — the sanctions against Russia have sharply increased the price of energy, because Russian oil can’t be sold to the West anymore, and Russian agriculture can’t be sold to the West anymore.
[Two] — the Democratic party has followed the Republican party in deregulating monopolies. Every monopolized sector of the economy has been raising its prices without its costs going up at all.
And they raise the prices because, they say, “Well, we’re raising them because we expect inflation to go up.”
Well that’s a euphemism for saying, “We’re raising them because we can, and we can make more money by raising them.”
So the prices have gone up, but the Fed is using this as an excuse to try to create unemployment.
Well, what has happened is that, by solving the problem of wages rising, they’ve also created a problem that spilled over into the financial sector. Because what they’ve done is reverse the whole asset-price inflation from 2009 to just last year, [2022].
That’s almost a 13-year, steady asset-price inflation.
By raising the interest rates, all of a sudden they’ve put downward pressure on the bonds. So the bonds that went way up in price when interest rates were falling, now go down in price, because if you have a higher-yielding bond available, the price of your low-yielding bond falls, so that it works out to yield exactly the same.
Also there’s been a withdrawal of money from the banks in the last year, for obvious reasons.
The banks are the most monopolized sector of the American economy. Despite the fact that interest rates were going up, despite the fact that banks were making much more money on their loans, they were paying depositors only 0.2 percent.
And, imagine — if you are a fairly well-to-do person, and you have a retirement income, or a pension plan, or if you’ve just saved a few hundred thousand dollars, you can take your money out of the bank, where you’re getting almost no interest at 0.2 percent, and you can buy a two-year treasury note that yields 4 percent or 4.5 percent.
So bank deposits were being drained by people saying, “I’m going to put my money in safe government securities.”
Many people also were selling stocks because they thought the stock market was as high as it could go, and they bought government bonds.
Well what happened then is that all of a sudden, the banks — especially Silicon Valley Bank — found themselves in a squeeze.
And here’s what happened.
Silicon Valley Bank and banks throughout the country were flooded by deposits ever since the 2020 COVID crisis.
And that’s because people were not borrowing to invest very much. Corporations were not borrowing.
What they were doing was building up their cash.
[SVB’s] deposits were growing very very rapidly, and it was only paying 0.2 percent on the deposits — how is it going to make a profit?
Well it tried to squeeze out every little bit of profit that it could by buying long-term government bonds.
The longer term the bond is, the higher the interest rate is.
And even the long-term government bonds were only yielding let’s say 1.5 percent, maybe 1.75 percent.
They took the deposits that they were paying 0.2 percent on and lent them out at 1.5, 1.75 percent.
And they were getting — it’s called arbitrage — the difference between what they had to pay for their deposits and what they were able to make by investing them.
Well here’s the problem. As the Federal Reserve raised interest rates, that meant the value of these long-term bonds — the market price — steadily fell.
Well most people who saw this coming — every CEO that I know sold out of stocks, sold out of long-term government bonds.
When the Federal Reserve head said that he was going to raise interest rates, that means you don’t want to hold a long-term bond.
You want to keep your money as close to cash as possible. You want to keep it in three-month Treasury bills. That’s very liquid. Because short term treasury bills, money market funds — you don’t lose any capital value in that at all.
But the Silicon Valley Bank thought — well they were still after every little bit of extra they can get, and they held onto their long-term bonds that were plunging in price.
Well, what you had was a miniature of what was happening for the entire American banking system.
I have a chart on that, on the market value of the securities that banks hold:
Now, when Banks report to the Federal Reserve, that’s exactly it. When they report — this shows the actual market value.
If banks valued their assets just what they were worth on the market, they would have plunged just like you see at the bottom there.
But banks don’t have to do that. Banks are allowed to represent their assets according to the book value that they paid for them.
So Silicon Valley Bank, and other banks throughout the system, have been carrying all their long-term mortgage loans, packaged mortgaged, government bonds, at the price they paid for them — not the declining market price.
They figured — “Well, we can ride this out and hold it to maturity in twenty-five years as long as nobody in the next twenty-five years actually withdraws their money from the bank.”
It’s only when bank customers and depositors pull their money out that they decide that, “Wait a minute. Now in order to raise the cash to pay the depositors for the money they’re taking out, we have to sell these bonds and mortgages that we’ve bought. And we have to sell them at a loss.”
And so the bank began to sell the bonds and the packaged mortgages at a huge loss. And they were losing capital.
Well as it happens, Silicon Valley Bank isn’t a normal bank. A normal bank you think of as having mom and pop depositors, individuals, wage earners.
But almost all the deposits — I think over eighty percent of the deposits at Silicon Valley Bank — were by companies. Mainly high-tech companies that were sponsored by private capital — special purpose private capital acquisitions.
And they began to talk amongst each other, and some of them decided, “Well it looks to me like the bank’s being squeezed. Let’s pull our deposits out of the small bank and put them in a big bank like Chase Manhattan or Citibank or any of the big banks that the government says are too big to fail.”
So you know that their money will be safe there. So there was a run on deposits.
So the the problem that Silicon Valley Bank and other banks have is not that they’d made bad loans. It’s not that they had committed any fraud. It’s not that the US government couldn’t pay the bills. It’s not that the mortgagers couldn’t pay the bills.
It was that the market price of these good loans to solvent entities had gone down and left the bank illiquid.
Well, that is what is squeezing the entire financial sector right now.
So just as the quantitative easing was flooding the economy with enough credit to inflate asset prices for real estate, stocks and bonds — the tightening of credit lowered the asset prices for bonds certainly, for real estate too.
For some reason the stock market has not followed through. And people say, “Well, there is an informal government Plunge Protection Team (PPT) that’s artificially keeping the stock market high, but how long can it really be kept high?”
Nobody really knows.
So the problem is that the 2009 crisis wasn’t a systemic crisis, but now, the rising interest rates have created a systemic crisis because the Federal Reserve, by saving the banks’ balance sheets by inflating the prices for capital assets, by saving the wealthiest 10% of the economy from losing any of their money — by solving that problem they’ve boxed themselves into a corner.
They cannot let interest rates rise without making the entire economy look like Silicon Valley Bank. Because that’s the problem. The assets the banks hold are stuck.
Now a number of people have said, “Well why didn’t the banks — if they couldn’t cover their deposits — why didn’t they do what banks did in 2009?”
And in 2009 the banks — Citibank, Chase Manhattan, all the big banks — went to the Federal Reserve and they did repo deals.
They would pledge their securities and the Fed would lend them money against their securities.
This wasn’t a creation of money.
None of this quantitative easing appeared as an increase in the money supply. It was all done by balance sheet manipulation. The banks were able to go to the Fed.
Or instead of selling the bonds, people said, “Why couldn’t Silicon Valley Bank simply borrow short-term money? You want to pay out the depositors? Okay, borrow the money, pay the four percent, but don’t sell — you know, it’s not going to last very long. Once the Fed sees how systemic the problem is, they’ll certainly turn out to be cowards and roll back the interest rates to what they were.”
But there’s a problem. If the the repo market — in other words, the “repo market” is the “repossession market” — it’s the market that banks go to if they want to borrow from larger banks. You want to borrow overnight credit. You want to borrow from the Federal Reserve.
But if you borrow in the repo market, the bankruptcy law was changed in order to protect these sort of non-bank lenders, and it was changed so that if a bank makes a currency swap — if it says, “I’m going to give you a billion dollars worth of packaged the government bonds and you’ll give me a loan” — if the bank then goes under and becomes insolvent, as Silicon Valley did, the bonds that it pledged for repo are not available to be grabbed by the bank itself to make the depositors whole.
The repo banks — the large banks — are made whole.
Because Congress said, “We have a choice. Either we can make the economy rich or we can make the banking sector rich. Who gives us our campaign contributors? The banks.”
“To hell with the economy. We’re going to make sure the banks don’t lose the money, and that the 1% that own the banks don’t lose money. We’d rather the voters lose the money because that’s how democracy works in America.”
So the result is that the — there was a lot of pressure against SVB trying to protect itself in the way that banks were able to do back in 2009. All they did was sell the existing securities they had in order to pay the depositors before they were closed down on Friday afternoon — before closing hours — and that led them to the problem today, before President Biden decided to bail them out and then blatantly lied to the public by claiming it’s not a bailout.
How can it not be a bailout? He bailed out every single uninsured depositor because they were his constituency. Silicon Valley is a Democratic Party stronghold, as most of California is.
There’s no way that Biden and the Democratic Party was going to let any wealthy person in Silicon Valley lose a penny of their deposits, because it knows that it’s going to get huge campaign contributions in gratitude for the 2024 election.
So the result is that of course they bailed out the banks and President Biden weaseled his way out of things by saying, “Well, we didn’t bail out the bank stockholders; we only bailed out the billions of dollars of depositors.”
BEN NORTON: It’s very revealing to see how the financial press treated Silicon Valley Bank.
In fact, just before — on the eve of it imploding — Forbes described SVB as one of “America’s Best Banks” in 2023. And that was for 5 years straight, praising this bank.
And I think it’s important to go look at SVB’s website and to see how it portrayed itself, what it was boasting of.
If you go to the Silicon Valley Bank website, they boast that 88% of “Forbes’ 2020 Next Billion-Dollar Startups” are SVB clients. “Around 50% of all US venture capital-backed tech and life science companies bank with SVB.”
And in fact, just before it imploded, 56% of the loans that SVB had made were to venture capital firms and private equity firms.
And if you go down on their website, they boast “up to 4.5% annual percentage yield on deposits,” which is incredible. I mean most banks offer 0.2% yield.
SVB wrote on their website, “Help make your money last longer with our startup money market account. Like with the savings account you’ll earn up to 4.5% annual percentage yield on deposits.”
MICHAEL HUDSON: “Up to.” I could say, why don’t they say “Up to 50% a year.” — anything you want.
I think in this case they were factoring capital gains into it — that means asset-price gains — this wasn’t an income yield so much. It was an overall yield, making the depositors part of the mutual speculation.
But the depositors — we know that eighty percent were people like Peter Thiel. They were large private-capital firms.
And one of the problems is, if you have a lot of well-connected rich people who are the major depositors that they’re talking to in this case, they talk to each other.
And when they see that there’s no way that the bank can pay anywhere near 4.5% anymore, they jump ship.
And that’s exactly what happened. They talked to each other and there was a run on the bank.
Now, most people think of a run on the bank as being “the madness of crowds.”
This wasn’t the madness of crowds. The crowd was not mad. The bank may have been mad, but the crowd was perfectly rational.
They said, “Look, I think the free lunch is over. Let’s pull our money out. What we want now is not to hope and pray for a 4.5% return — let’s just move for safety.”
If you have a billion dollars, you’re more concerned with keeping that billion dollars safe than actually making an income on it. And I think that’s what happened.
And when you say “up to” — yeah, that’s funny language.
BEN NORTON: And Michael, I know you’re friends with Pam Martens and Russ Martens over at WallStreetOnParade.com that always do great reporting.
MICHAEL HUDSON: They’ve done a wonderful job of following all of this. They say, if there’s anyone who shouldn’t be bailed out, it’s the wealthy billionaire depositors of that bank.
BEN NORTON: Yeah, they described Silicon Valley Bank as a “Wall Street IPO pipeline in drag as a federally insured bank.”
And I just want to read what they wrote here which really summarizes it very well: “SVB was a financial institution deployed to facilitate the goals of powerful venture capital and private equity operators by financing tech and pharmaceutical startups until they could raise millions or billions of dollars in a Wall Street Initial Public Offering (IPO).”
You mentioned, Michael, that the US Treasury Secretary Janet Yellen claimed that the US government is not going to bail out the depositors — these private equity firms and such and startups at SVB — but in reality only $250,000 of their deposits were actually federally insured, but we were seeing that actually the US government is ensuring that all of their deposits, including above $250,000, is going to be paid to them.
So essentially, what the Federal Reserve — backed by the Treasury with the $25 billion war chest in supporting this operation — what they’re essentially saying is that deposit insurance on commercial banks in the United States, including ones with very high interest interest-bearing deposits — it’s basically infinity.
There is no limit on federally insured accounts. It’s no longer actually $250,000 — which only incentivizes other firms in the future to deposit their earnings into very risky banks that offer very high interest rates they can’t pay out, because they know that the US government will bail them out.
MICHAEL HUDSON: Well Janet Yellen also said that Ukraine was going to win the war with Russia. Sort of the reincarnation of Pinocchio.
You’re never going to have a Federal Reserve head say that there’s going to be a problem.
Bankers are not allowed to tell the truth.
That’s why — one of the worst things that can happen to a banker is if they get COVID. Because when you get COVID sometimes, you’re not able to lie quickly, and it’s a surefire way of losing the job.
That’s part of it. But there’s another reason.
If you have a banker be aware of the systemic risk that I just explained — the risk that is for the whole economy if it ever tries to go back to normal, which it can’t again without causing a crisis — then you’re disqualified for the job. Or you’re called overqualified.
In order to be a bank examiner or a bank regulator, you have to believe that every problem can be kicked down the road. That there are automatic stabilizers and the market is going to solve everything thanks to the magic of the marketplace.
And if you don’t believe that, you’re a blackballed and are never going to be promoted.
So the last person you’re ever going to want to explain anything, whether it’s Alan Greenspan or his successors, is the head of the Federal Reserve.
BEN NORTON: Michael, I want to talk about the scheme that the Federal Reserve has created in order to bail out Silicon Valley Bank and its clients without calling it a bailout.
I’m going to look at a very good Twitter thread that was done by the post-Keynesian economist Daniela Gabor.
She’s tweeted that she has spent fifteen years researching central banks collateral, and she has never heard a single central banker contest the common wisdom that there should be “haircuts.”
Instead, what we see is the Fed is paying par value.
So the Fed has this program called the Bank Term Funding Program, and essentially it’s giving extremely favorable loans to Silicon Valley Bank and other banks, which are essentially government subsidies.
And instead of using as collateral the Treasury securities and other assets that are owned by Silicon Valley Bank — or at least that were — instead of using their market value, the Federal Reserve is using the value at par — the face value that was printed on the Treasury securities that are held by SVB and other banks that need to be bailed out.
So essentially what they’re saying is that, only average working people are subject to the discipline of the market.
But banks — they don’t actually have to go along with market value for their securities.
They can be bailed out by using as collateral the values of what they originally bought the security at before the Fed raised interest rates and the price of those bonds decreased.
So in short what it is, is socialism for the rich for big corporations and for the commercial banks, and capitalism for everyone else.
Daniela Gabor said she’s never seen this in fifteen years of research. Have you ever seen something like this?
MICHAEL HUDSON: Well this is what I said at the very beginning of our discussion today.
I said, the banks are able to carry their assets at the price they purchased them. That was called the “book value” — not the “current market value.”
For years, in the 1960s and 1970s, if you had banks or a corporation carrying real estate at book value, people were looking over these balance sheets saying, “Aha, they’re going to value their real estate at what they bought it for in the 1950s and now it’s tripled in value. Let’s raid that corporation and take it over, break it up, and sell the real estate.”
That was how money was made in the 1960s and 1970s and even more in the 1980s.
But that’s when asset prices are going up.
But when you mark to “purchase price” — “book value” — instead of the “market value,” you’re going to have this disparity. That’s exactly the problem.
And you’re quite right about the double standard that the government has.
Look at the double standard with the student loan debtors. They are unable to pay their student loans without making a big sacrifice. But Biden has made sure that they’re not going to be bailed out because he’s the man who sponsored the bankruptcy bill saying that student loans are not subject to bankruptcy laws to be written down.
Every other kind of asset, if you go bankrupt, can be written down to the current market failure for what you owe. But not student loans.
They are kept sacrosanct.
There’s a diametric opposite economic philosophy when it comes to what wage earners and consumers owe, and what the financial and real estate sector owes.
The Biden Administration and the Republicans say that no billionaire should lose a single penny. No bank or real estate company should owe anything. We will guarantee that bailout — they are risk-free.
We’ve transferred all of the risk onto the voters who put us in power, because we say that, “Maybe you’ll be a billionaire someday. You don’t want to hurt them, do you?” or whatever their politicking is.
So this double standard is what is squeezing the economy now. By not permitting the financial sector from taking a penny loss, somebody has to lose. And the losers are the non-financial economy — the real economy of production and consumption.
BEN NORTON: Michael, another factor in this is crypto. While all of this is happening, it’s also in the wake of a disastrous collapse in big parts of the cryptocurrency industry.
You yourself have always been very skeptical and have criticized this crypto industry and you can talk about that — I mean I’ve done many interviews with you over the years. Going back on the record people can see that you were proven right about this.
Of course Silicon Valley Bank as its name suggests is definitely involved in the tech sector and Silicon Valley.
But before SVB collapsed we saw Silvergate collapse, and Silvergate was very heavily invested — or at least many of its depositors were companies invested in crypto.
And then on March 12th there was another bank that went down which — unlike SVB and Silvergate, which were in California — the third bank to go down was Signature Bank which is based in New York City. And thirty percent — almost one-third of Signature Bank’s deposits were cryptocurrency businesses.
So maybe you can talk about crypto’s role in all of this. And of course this comes at a time when Sam Bankman-Fried — the fraudster who ran the FDX exchange — he was exposed to the world for committing literal fraud, and losing billions of dollars really overnight.
MICHAEL HUDSON: Well the whole mythology and fantasy of crypto has been burst, especially with Bankman-Fried.
Crypto was supposed to be — they called it peer-to-peer lending. The peer-to-peer lending was, the person who bought the crypto took money out of the bank and paid for crypto with a bank transfer fee — was one peer.
Who’s the other peer? The other peer was Bankman-Fried, and he could do whatever he wanted with his money.
The crypto cover story was, “Well, we know that the economy’s messed up and we don’t like big government and we don’t like the bank, so here’s an alternative to the banks, putting your money in that bank and putting your money, depending on government fiat currencies.”
So people would put their money into crypto, thinking, this is something different from the banks. And yet it turns out — what did the crypto companies do?
If you get a billion dollars of inflow by people who want an alternative, what are you going to do with a billion dollars?
Well Bankman-Fried simply bought luxury real estate and gave money to the Democratic Part and a few Republicans for campaign contributions to buy influence.
But most of the crypto was put in Silvergate Bank or other banks, or government securities. I mean, where else are you going to put a billion dollars inflow?
You get a bank transfer from a bank. It goes into your bank account — you have to have a bank account somewhere to hold it. And what do you do?
The money that goes into crypto ends up in the very banks or the government securities that crypto’s supposed to be an escape from.
So all that crypto is, is a disguised bank or a mutual fund that has its money in banks and government securities.
Except it has secrecy, so that if you’re a criminal or a tax evader or a crook and you don’t want the government to know what you have, you’re willing to give a premium.
Just like the cocaine cartel who will pay ten percent or twenty percent for money laundering.
Crypto was a vast money laundering operation wrapped in an idealization — a fantasy — that it was an alternative to banks and government money, when of course the backing for the crypto was banks and government money.
Obviously when people begin to realize this, and saying, “Wait a minute, who is running the cryptocurrency that we’re holding? We don’t know what it is.” Because it’s crypto — that’s why it’s called crypto. And it can’t be regulated, because the government can’t know what’s in it or who’s paying what, because it’s crypto.
So there’s no way of regulating crypto, and needless to say, every mafiosi — every sort of financial crook — finds it’s like taking a candy from a baby. All you have to do is say that we have a an idealistic libertarian answer to socialism.
So crypto was the libertarian answer to socialism. And we’ve seen — I think socialism won that particular fight.
The banks of course — when people were selling the crypto, the cryptocurrency had to draw on its bank account. And when it drew on its bank account, the banks were left without money.
The banks that had to pay the crypto company to pay the crypto seller had to sell their bonds and packaged mortgages and take a capital loss on assets that they were carrying at original book value or purchase price, but that they were only getting the market price for.
So, the whole unraveling of all of this — reality raised its ugly head.
BEN NORTON: Professor Hudson you’ve written in an article about this, which is “Why the US banking system is breaking up.” And then you followed up and you said that “the US bank crisis is not over.” And you warned that it could spread.
And I just want to go over this briefly again just these numbers here.
The biggest bank to ever fail in US history was Washington Mutual and I was in 2008 during the financial crash and it had $307 billion in assets.
The second biggest bank ever to collapse in US history was Silicon Valley Bank with $209 billion in assets. So pretty close to Washington Mutual.
And Signature Bank was the third biggest bank to collapse, which had $118 billion in assets.
So clearly there are parallels to the 2008 crash.
But in your article you also pointed out that there are parallels to the Savings and Loan (S&L) Crisis of the 1980s. So what can we learn from the 1980s S&L crash and also the 2008 crash?
MICHAEL HUDSON: Well I want to first of all challenge what you said about Washington Mutual being the biggest bank to go under.
This is not at all the right way to look at it.
What is important to look at is, what banks were insolvent.
Sheila Bair wrote in her autobiography that there was one bank that was worse than all the others. It was totally insolvent — not only incompetently managed but crooked. That bank was Citibank.
But Citibank was looked over by Obama’s Treasury Secretary Tim Geithner — who had worked with Bob Rubin, who was the protector of Citibank — so the fact is that not only Citibank — Citigroup— but all the big banks — Sheila Bair, who was head of the Federal Deposit Insurance Corporation, said, the banks are insolvent.
She was pressing. She said, “Look, Citibank should go under. Let’s clean it up. Let’s take it under and clean out the crooks.”
And Geithner said, “No, the crooks are us. That’s our game.”
So the key to look at isn’t what banks actually were permitted to go under — the really crooked banks like Washington Mutual — but what banks are insolvent. Citibank and Wells Fargo, she mentioned. These were the banks that had the junk mortgages. Bank of America. The banks were insolvent.
And when I say that the problem is just beginning, it’s just beginning because the problem that the financial sector and the banking sector has today is endemic to finance capitalism.
The charts that I’ve made in Killing The Host and also in The Destiny of Civilization — the financial sector grows by interest-bearing debt, and that’s an exponential system. Any interest rate has a doubling time. Any interest rate goes exponentially.
But the economy doesn’t keep track. It goes on an S-curve, and it goes slower and slower, and then it turns down. That’s the business cycle. And it’s depicted as a kind of sine curve, up and down.
The problem is that the economy can’t keep pace with the ability with the debts that it owes — the ability to pay the exponentially rising debt does not keep pace with this growth of debt.
That makes a collapse inevitable.
This disparity between the growth curves of debt and the growth curve of the economy has been known for 5,000 years. It was already documented in Babylonia in 1800 BC.
We have the textbooks — the mathematical textbooks — that scribes were trained in. Antiquity knew this. Aristotle talked about it.
Everybody knows about this, but it’s not taught as part of the financial curriculum.
The financial sector grows by different mathematical laws then the economy grows in. And that’s what makes it inevitable.
The Savings and Loan Crisis was somewhat different. It is worth mentioning, because much of it was the result of a fraud — again as Bill Black has explained.
But here is the problem in the Savings and Loans and savings banks. I discussed this in the article that you just cited.
The savings banks and S&Ls lent mortgage money, and they would — basically, when I was working in the 1960s, interest rates were going up from about 3.5 percent to 4.5 percent for mortgages.
And the banks would take deposits and they’d pay maybe a 2.5 percent interest and they’d make loans at maybe 3.5 percent for a thirty-year mortgage.
So of all of this sort of happened normally until the late 1970s. And in the late 1970s — because of the Vietnam War — the interest rates steadily rose because the US balance of payments was getting squeezed.
And finally you had inflation because of the war-induced shortages — “Pentagon capitalism” — and so Paul Volcker raised the interest rates to 20 percent.
Well imagine what happened? Even though they came down from 20 percent, after 1980, they were still very high.
Well here’s the situation — the SNL’s were in much the same situation that bank depositors were in the last few years.
You could get a very low rate of interest from the banks or a high rate of interest by putting your money in government securities or corporate bonds or even h(j)unk {Sic} bonds that were paying a lot of money.
So people took the money out of the banks and a bought higher yielding financial securities.
Well the banks were squeezed, because the banks could not pay. When interest rates went up to 6 percent, 7 percent for mortgages — banks couldn’t simply charge their mortgage customers more because the mortgage customer had a thirty-year loan at a fixed rate of interest.
So there was no way the banks could earn enough money to pay the high interest rates that were in the rest of the economy. And as a result they were pushed under, and the commercial banks had a field day.
Sheila bear told me that the banks raped the — she didn’t that used that word — the savings banks.
She said, “They said they were going to provide more money for savings bank depositors, and what they did was empty it all out and just pay themselves higher salaries.”
So there are I think no more savings banks, hardly — no more S&Ls. They were all cannibalized by the large Wall Street Banks emptied out as a result and that transformed the financial structure and the banking structure of the American economy.
Well that transformation, and that squeeze, of getting rid of a whole class of banks is now threatening the smaller banks in the United States, the smaller commercial banks.
Because they’re in the situation of being sort of left behind. In the sense that, if only the largest banks are too big to fail — in other words, they’re such big campaign contributors and they have so many of their ex officials running the Treasury or serving as Treasury officials or going into Congress or buying Congressman — that they’re safe.
And people who have their money in smaller banks — like a Silicon Valley Bank and the others you’ve mentioned — are nowhere near as safe as the Too Big to Fail banks.
And if a bank’s not too big to fail, then it’s small enough to fail, and you really don’t want to keep more than $250,000 there because that’s not insured, and you don’t know how long Biden can get away without bailing out the wealthy depositors and just sticking it to the rest of the economy.
At some point, he just can’t be a crook anymore.
BEN NORTON: Michael, you’ve emphasized that, after the 2008 crash, in addition to bailing out the big banks and all this and the idea of Too Big to Fail — one of the ways that the US had a so-called recovery — although you pointed out it wasn’t really a recovery — is through quantitative easing.
And you can see quantitative easing really is a kind of drug for the economy, where money was so cheap, interest rates were so low — I mean, now that interest rates are rising — the federal funds rate is going up — it makes it more expensive to get money and this bubble that was created by the Fed is is beginning to burst.
And you’ve argued that this is maybe going to push them back toward quantitative easing, although Jerome Powell has insisted that he’s potentially going to continue increasing the federal funds rate.
MICHAEL HUDSON: That was on Friday [March 10] he said that. Yesterday he withdrew. He said, “I’m sorry, I’m sorry. We crashed the banks. Never mind. Never mind. Now that I realized that I’m not only hurting labor, but I’m hurting our constituency, the 1%, of course we’re going to roll it back. We’re not going to — don’t worry 1%, give your money to the party. We’re going to make everything okay for you.”
BEN NORTON: If you look at a graph of asset price inflation, we see that it seems like the economy in the US is at a point where it’s so financialized, and it relies so much on these bubbles, that it doesn’t seem like it can survive without low interest rates and without quantitative easing.
So you’ve argued that this crisis is here to stay. There needs to be fundamental systemic change.
It’s going to either be stagflation, with the continuation of these policies of QE and low interest rates, or it’s going to be economic crisis like we’re seeing now.
MICHAEL HUDSON: This is the corner into which the Fed has painted itself.
We’re in the culminating part of the “Obama depression.” This is what Obama set in motion by bailing out the banks and supporting the banks instead of the economy as a whole.
Obama and Geithner and Obama’s cabinet declared war on the economy by the 1%.
And the amazing thing is that the economy doesn’t see how dangerous what he did was, and how consciously he sold out the voters that have put trust in them — to do everything he could to hurt them, because the degree to which he could hurt the economy was the degree to which the 1% or the 10% was able to make a killing.
So this is not the class interest that Marx talked about. It’s not the class interest of employers versus wage earners.
It’s the finance class allied with the real estate and insurance class — the FIRE section — against the economy at large — the real economy of production and consumption.
That is what we’re seeing, and something has to give.
And in every case both the Republicans and the Democrats say, “If something has to give, we’re willing to shrink the economy in order to protect the the financial, insurance, and real estate sector from taking a loss, because that’s where the 10% have it’s assets.”
We’re not in industrial capitalism anymore —we’re in finance capitalism. And the way that finance capitalism works is very different from the dynamics of industrial capitalism as was forecast in the nineteenth century.
BEN NORTON: Michael, as we start to wrap up here I want to ask you about corruption. This is something that you mentioned in your articles analyzing the SVB crash and other banks crashing.
You talk about campaign financing, which you address, but also regulatory capture is I think an important point.
And you wrote that, “To understand this, we should look at who the bank regulators and examiners are. They are vetted by the banks themselves, chosen for their denial that there is any inherent structural problem in our financial system. They are True Believers that financial markets are self-correcting by automatic stabilizers.”
Talk about the concept of regulatory capture and how really it’s just corruption, but we don’t call it that. Because the US acts as if other countries are corrupt but the US isn’t corrupt.
MICHAEL HUDSON: Well the center of this corruption — again my colleague Bill Black has explained this — if you notice, who were the bank regulators over the Silicon Valley Bank and the others?
These banks that have gone under are all regulated by the Federal Home Loan Bank Board. If there’s any bank board that is totally run by the banks that it regulates, it’s the Federal Home Loan Bank Board.
And they look at themselves as “protecting” the banks under their authority. Instead of regulating them, they say, “How can we help you make more money?”
Before that the most corrupt regulator was the [Office of the] Comptroller of the Currency group.
Now, banks have a choice. The banks are able to choose what regulator is going to regulate them.
If you’re a banker and you want to be a crook, you know just who to go to.
“I want to be regulated by the Federal Home Loan Bank Board because I know that they’ll always let me do anything I want.”
“They owe their job to the fact that I can get them fired at any time if they do something that will not let me do whatever I want.”
“If they try to say that what I’m doing is fraudulent, I’ll say, ‘This is socialism! You’re regulating the market! This is market regulation, come on! Theft is part of the market, don’t you get that?’ ”
And the regulator later said, “Oh yes, you’re right — the free market under the libertarian Federal Home Loan Bank Board — fraud is part of the free market. Theft is part of the free market. Anything else is socialism, so of course we’re not socialists..”
Of course you can do whatever you want and as long as you have bank regulators like that who believe that, as Alan Greenspan put it, “Why would a banker ever cheat somebody? If he cheated somebody he wouldn’t have them as customers anymore.”
Well, if you ever have been pickpocketed in Times Square anywhere else in New York, you notice that the pickpocket doesn’t say, “Gee, I better not steal the wallet of this guy because then he’ll never trust me again.”
You’re never going to meet the guy again — it’s a hit and run. And that’s how the financial sector has worked for the last century, and already for the early twentieth century.
There were critics of how banks were structured, and the British critics especially. During World War I the argument came out, “Maybe Germany is going to win the war because they have a much more industrially-organized banking system.” Banks had been industrialized.
But the British banks — and stockbrokers especially — are hit-and-run and just want a quick payout and leave the company emptied out.
Well the way to make money most quickly, if you’re a financier in America, is asset stripping — you borrow money, you buy out a corporation, you load it down with debt, and empty it out, and leave it as a bankrupt shell.
That’s finance capitalism. That is what you’re taught to do in business schools. That’s how the market economy works.
Raid a company, take it over, sell off the wealthy assets, pay yourself a management fee, pay yourself a huge dividend — this is why I think Bed Bath & Beyond is going under. It’s why a whole bunch of companies are going under.
You borrow money, you take over a company, you let the company borrow money, you pay it to yourself as the new owner as a special dividend, and then you leave the company owing a debt with no current income able to cover the debt, and it goes bankrupt. And you say, “Whelp, that’s the market.”
And of course it doesn’t have to be the market. It doesn’t have to be this way, but that’s the way in which the market is structured.
And you’d think that this is the kind of thing that academic economics courses would teach about. But instead of teaching people how to make an alternative to this, and how to avoid this kind of a ripoff economy and smash and grab economy, they show you how to do it.
So, given the way in which public consciousness is taught and the skill of financial lobbyists and telling people that they’re getting rich to borrow more money to buy a house whose price is going to go up and up if only they take on more and more debt.
If people imagine that the economy’s recovering by taking on debt to make housing more expensive and stocks and bonds and hence retirement income more expensive, then you’re living in an inside-out world that turns out to be a nightmare.
BEN NORTON: Well to conclude here, Michael my last question is: Where you think we should be keeping an eye on the US economy? What other financial institutions could be next?
You wrote in your analysis that the Biden administration is simply kicking the can down the road until the 2024 election. That these are fundamental systemic problems and there may very well be more banks that crash in the next weeks, months, years.
So, where should we be looking, and what’s the final word you want to leave us with?
MICHAEL HUDSON: The word is: “derivatives.”
There are $80 trillion of derivatives — that is, bets — casino bets — on whether interest rates will go up or down — whether bond prices will go up or down.
And there’s been a gigantic increase in the volume of bets that banks have made — maybe a hundred times as large as it was back in 2008-2009.
And one of the reasons it could grow so much is, with interest rates of almost zero, people could borrow from the bank and essentially go to the races and make bets on currencies, exchange rates, interest rates.
But now that interest rates are beginning to go up, it costs more to make the bets, and even if you bet right on a derivative — you can put down a penny and buy a $100 bond and bet that this bond is going to go up one penny.
And if it goes up one penny, you’ve doubled your money. But if it goes down one penny then you’ve lost it all.
This is what happens when you have a highly leveraged bet on derivatives or something else.
The derivatives are what everybody’s worried about, because there’s no real accounting for them. We just know that — I think JP Morgan Chase has maybe [$55 trillion] in derivatives.
Ellen Brown has just written a wonderful article on derivatives that’s all over the internet, and she’s a lawyer as well as a bank reformer.
The next big crash is going to be some bank that’s made a wrong bet in derivatives and the wrong bet has just wiped out all the bank capital. What is going to happen then? That’s the —as they say, the next shoe that is going to fall.
BEN NORTON: Well Michael, I want to thank you so much for joining us to explain these important topics.
Not only I’m just for joining us, but for joining us specifically on your birthday. Happy birthday, it’s a real pleasure. Thank you so much for spending your time with us.
I want to invite everyone to go check out Michael’s website at michael-hudson.com.
There you can find links to his articles, to his books, and I will link in the description below to the articles that he’s written specifically about the crash of Silicon Valley Bank and other financial institutions.
Finally what I’ll say is that I will also invite everyone to check out a show that Michael hosts every two weeks with friend of the show Radhika Desai — they have a show together called Geopolitical Economy Hour, and it’s hosted here at Geopolitical Economy Report.
In the description below I will include a link to include a playlist where people can find all of their episodes there explaining the intricacies of economics and geopolitics.
Michael, thank you so much, it’s a real pleasure.
MICHAEL HUDSON: Well I’m glad we discussed this in a timely fashion, because all of this is unfolding so rapidly that who knows what the story will be next week.
BEN NORTON: Absolutely. We always benefit from this very timely analysis from you. Thanks a lot. In this article:banks, crypto, cryptocurrency, Michael Hudson, Signature Bank, Silicon Valley Bank, Silvergate
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