Money Down the Drain
News of Silicon Valley Bank’s recent failure has been difficult to miss. Unless you’ve been paying close attention though, you may not be aware of NY-based Signature Bank’s demise on the heels of SVB. Both banks were heavily vested in the tech sector. Their collapse represents the second- and third-largest bank collapses in U.S. history and has sent ripples through global financial markets.
Government regulators have seized SVB assets and assured customers that deposits are guaranteed, even beyond FDIC standards, to ease fears, while, at the same time, have sought to forestall bank runs at other institutions. Likewise, the Securities and Exchange Commission (SEC) and the U.S. Justice Department have opened investigations into the two failures, suggesting there is keen interest at high levels of government to determine what and/or who contributed to the insolvency.
By all accounts, it seems a series of actions and reactions led to the fateful consequences. After receiving a lot of cash from tech startups during the pandemic, SVB locked in billions of dollars in long-term federal securities. The hedge proved a bad decision in light of the Federal Reserve’s recent raising of interest rates to curb inflation. When SVB converted some of the securities to higher-yielding short-term securities recently, it booked a loss. That, coupled with investors’ fears about SVB’s vulnerability amid modest yields, caused alarms to be raised about the bank’s position. As depositors, led by venture capitalists, began large withdrawals, solvency concerns led to an old-fashioned bank run and the end of SVB’s operations.
Against this landscape, the Federal Reserve Board is scheduled to meet next week and, with inflation still hovering at 6 percent, is poised to raise interest rates once more. Though some now see the rapid pace of rate hikes as a culprit in the two bank failures. It’s anyone’s guess whether the Fed will push pause, at least until it meets again in late spring. Financial market jitters are persisting and many regional banks have seen shares plummet well into double digits.
In the wake of these losses, should you be worried about your money on deposit? Likely not. Should you be worried about the U.S. economy in general? Official sources say no to both these questions, but skepticism persists. The Biden Administration wants citizens to believe the problem is isolated and under control, and that U.S. taxpayers will share no burden in the loss. Of that claim I am unconvinced, but there’s still a larger picture to consider.
I posted an article by scholar Michael Lind earlier that took a deep dive in the political influence on America’s present economy – one marked by neoliberalism and its trademark element of privatization. A late 20th-century economic philosophy, it is characterized by reduced government influence, deregulated capital markets, minimal trade barriers and limited price controls. Its chief policy advocates were Ronald Reagan and Margaret Thatcher.
After the financial markets collapsed in 2008, tougher banking regulations were enacted by the Dodd-Frank act. Some of those oversights were relaxed in the Trump era, and arguably contributed to this crisis.
The neoliberal economic programs of modern politics have led the financial industry to seek rapid gains without proper regard for long term risks – and consumers are too often the ultimate losers. Many of those policies have been preserved for the benefit of corporate-level stakeholders, or gone unaddressed as a result of partisan polarization at the federal level. The need for change in the way the government does business has come. The time is now for the ASP to raise its voice for families about these economic policy failures and the political gridlock that caused them.