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Mar. 17, 2023
Since 2008, governments and central banks have been trying to prop up the banks through a combination of socialism for the banks, and austerity for everyone else. The result is what we see today.
Every systemic banking crisis has a trigger that sets it off. In the case of SVB, the reason for its bankruptcy is twofold.
Responding to worried questions raised by many about the ongoing banking crisis that started in the US with the bankruptcy of the Silicon Valley Bank (SVB), and is now affecting Japan and other countries, I can offer the following brief analysis.
The trigger
Every systemic banking crisis has a trigger that sets it off. In the case of SVB, the reason for its bankruptcy is twofold.
In more detail, SVB took two hits at the same time.
In short, at the same time as SVB’s capital base was being reduced, depositors were asking for their deposits back. As soon as the news got out that SVB was late in returning depositors’ funds, a classic bank run began.
The underlying reason why the failure of a medium-sized bank in California created so much angst worldwide is that international capitalism has never been able to get back on its feet after 2008.
In more detail: Central banks (the FED, the ECB, etc.) have one basic tool – the interest rate. When they want to put a brake on economic activity to keep inflation in check, they raise the interest rate, and vice-versa. But, in addition to price stability, central banks have two other goals: the stability of the banking system, and the balancing of liquidity with investment. The interest rate chosen by the central bank is one. That same number (e.g. 3%) must achieve three objectives simultaneously: price stability, banking system stability, and balancing between liquidity and investment.
What could be done as an alternative? The exact opposite: austerity for the banks, with nationalisation of those who cannot survive.
And herein lies the reason why I argue that, after 2008, capitalism cannot recover: There is no longer one interest rate that can achieve all three of these objectives simultaneously. This is the tragedy of central bankers: If they want to tame inflation (at a high enough interest rate), they trigger a banking crisis and, as a result, they are forced to bail out the oligarchs who, despite being bailed out, drive investments below liquidity. If, on the other hand, they impose a lower interest rate to avoid triggering a banking crisis, then inflation gets out of control – with the result that businesses expect interest rates to rise, which discourages them from investing. And so on and so forth.
No, for two reasons. First, the problem for US banks today is not that their assets are junk (e.g. structured derivatives based on red loans) as they were in 2008, but that they own government bonds which they are simply forced to sell at a discount. Second, the Fed bailout announced yesterday is different from the one in 2008 – today it is the banks and depositors who are being bailed out, but not the bank owners-shareholders. These two reasons explain why bank stocks are falling but there is no total collapse of stock markets.
The fact that there is no total collapse of the stock markets does not, of course, mean that the crisis of capitalism – which has been developing continuously since 2008 – is not deepening. It simply does not have the characteristics of an instantaneous, heavy-handed fall.
In 2008, Berlin and Paris were rejoicing that the banking crash was American and did not concern them – or so they thought. Until they realised that Franco-German banks were loaded with the toxic US derivatives that bankrupted Lehman.
Today, Franco-German banks don’t seem to have the same problem – rather, they are being spared due to the antiquated structure of the European economy. What do I mean? Franco-German banks have not lent large amounts to European Big Tech for the simple reason that European Big Tech doesn’t exist – they still lend to car manufacturers and extraction companies. So, I don’t see a European SVB on the horizon.
That doesn’t mean, of course, that European banks are safe. Their own funds are also invested in bonds whose prices have fallen. A large deposit flight will create the same problems here as we are seeing in the US. Such a flight could come from parts of the financial system that one cannot imagine – for example, from the insurance sector (as in Britain last autumn) or from a collapse of the weak Credit Suisse, which has long been suffering.
Since 2008, governments and central banks have been trying to prop up the banks through a combination of socialism for the banks, and austerity for everyone else. The result is what we see today: The metastasis of the crisis from one “organ” of capitalism to another, with the magnitude of the crisis increasing with each such metastasis.
What could be done as an alternative? The exact opposite: austerity for the banks, with nationalisation of those who cannot survive. And socialism for workers – a basic income for all, a return to collective bargaining and, further out, new forms of participatory ownership of high- and low-tech companies. In other words, nothing short of a political revolution.
To those who fear the idea of a political revolution, my message is simple: Prepare to pay the price of the escalating crisis of a capitalism determined to take us all to its grave.
Yanis Varoufakis is a Greek economist and politician. A former academic, he served as the Greek Minister of Finance from January to July 2015 under Prime Minister Alexis Tsipras. He has been Secretary-General of MeRA25, the political party he founded in 2018.
[Top photo: A lock is seen on a gate on the exterior of the U.S. Department of Treasury building as they joined other government financial institutions to bail out Silicon Valley Bank's account holders after it collapsed on March 13, 2023 in Washington, DC. (Photo by Chip Somodevilla/Getty Images)]