Asia Times - March 13, 2023
In SVB collapse, Asia sees 1997 all over again
Silicon Valley Bank panic now sweeping global markets suggests more destabilizing financial events are likely around the corner
By WILLIAM PESEK
To understand the Silicon Valley Bank (SVB) collapse spooking markets, look no further than events in Jakarta.
The Indonesian rupiah’s 3.2% drop since February 1 demonstrates how quickly Asia has resigned itself to the fact that the US Federal Reserve isn’t done tightening. Another batch of too-strong-for-Fed-comfort US employment figures in February only increased the risk.
Episodes of extreme dollar strength tend to hit Southeast Asia particularly hard. And while Indonesia’s financial system is far healthier than it was amid the Asian financial crisis 25 years ago, vulnerabilities abound. Not surprisingly, the region’s dollar-centric economies tend to see another potential 1997-like crisis around every corner.
Case in point: the Fed’s most aggressive tightening cycle since the mid-1990s, an episode that still haunts leaders from Jakarta to Tokyo. As the Fed doubled short-term rates in just 12 months between 1994 and 1995, the collateral damage really started to rack up.
Victims included Mexico, which plunged into the peso’s “tequila crisis.” Orange County, California veered into bankruptcy. Wall Street securities giant Kidder, Peabody & Co went extinct. Then the most spectacular pileup of all: Asia.
As the dollar skyrocketed, currency pegs became impossible to defend in Bangkok, Jakarta and Seoul. Fallout from the barrage of devaluations paved the way for the late 1997 collapse of the 100-year-old Yamaichi Securities, one of Japan’s fabled big-four brokerages.
Yamaichi’s demise panicked officials in Washington. Both the US Treasury Department and the International Monetary Fund worried not that Japan was too big to fail. They worried it was too big to save.
China, too. In 1997 and 1998, US officials all but begged Beijing not to devalue the yuan. That, they feared, would spark a new wave of competitive currency devaluations and drag Malaysia and the Philippines, two nations that hadn’t devalued, into the fray.
All this explains why the SVB collapse is triggering Asia’s post-traumatic stress disorder over Fed austerity from the late 1990s. That PTSD was on display back in 2013 amid the Fed “taper tantrum.” Back then, Morgan Stanley included India and Indonesia in its “Fragile Five” list of economies on the brink along with Brazil, South Africa and Turkey.
At the time, Bank of America strategist Michael Hartnett warned of a “repeat of the 1994 moment.” Then-Goldman Sachs CEO Lloyd Blankfein admitted that “I worry now as I look out of the corner of my eye to the 1994 period.”
This is the minefield that Fed Chairman Jerome Powell is struggling to navigate.
“Hence the canary-in-the-coal-mine fear, which has caused US bank stocks to plunge more than 15% in a week and market volatility to surge,” says analyst Tan Kai Xian at Gavekal Research.
“These travails were only reinforced by Powell’s Congressional testimony last week, amounting to a ‘whatever it takes’ declaration to crush inflation, even if that means upping the pace of rate hikes and putting people out of work.”
Over the weekend, US Treasury Secretary Janet Yellen, the Powell-led Fed and the Federal Deposit Insurance Corporation unveiled steps to contain the fallout from Silicon Valley Bank’s collapse.
With all SVB depositors being paid back in full, averting a potential collapse of the US financial system, it now falls to Powell’s team to devise a way forward. And preferably one that won’t send markets from Indonesia to Japan reeling.
The “action dramatically reduces the risk of further contagion,” says analyst Thomas Simons at Jefferies. It’s heartening, too, that SVB’s mistakes in managing its balance sheet are seen as “highly idiosyncratic” to analysts at Morgan Stanley, reducing risks of broader US financial contagion.
Erik Nielsen, economic adviser at UniCredit Bank, calls SVB “a rather special case of poor balance-sheet management, holding massive amounts of long-duration bonds funded by short-term liabilities.”
Economist Paul Ashworth at Capital Economics notes that “rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age. But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
Indeed, the underlying problem is that the Fed is trying to tame inflation with tools that won’t get the job done. Much of this inflation is better addressed with supply-side reforms that President Joe Biden and Congress have been slow to implement. Anyone who thought driving the US into a controlled recession might work just had a brutal wake-up call from California.
“While the Fed wants tighter financial conditions to restrain aggregate demand, they don’t want that to occur in a non-linear fashion that can quickly spiral out of control,” says economist Michael Feroli at JPMorgan Chase & Co. “If they indeed have used the right tool to address financial contagion risks – time will tell – then they can also use the right tool to continue to address inflation risks: higher interest rates.”
The mini-panic on global markets suggests many aren’t buying the SVB-is-an-isolated-case argument. That has economists at Barclays Plc thinking the Fed rate that had been widely expected later this month is now on hold.
“It raises risks of broader distress within the banking system that could make the FOMC (Federal Open Market Committee) reluctant to return to 50bp hikes in March,” they wrote. “Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs.”
Goldman Sachs economist Jan Hatzius agrees. “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,” he says. More likely, the Fed will do smaller 25 basis point hikes in May, June and July, boosting rates as high as 5.5%.
Yet the fallout from SVB could further stymie America’s innovative animal spirits in ways that leave the world’s biggest economy even less productive and nimble.
“It certainly is going to have very substantial consequences for Silicon Valley — and for the economy of the whole venture sector, which has been dynamic — unless the government is able to assure that this situation is worked through,” former Treasury Secretary Lawrence Summers told Bloomberg.
It’s already having substantial consequences for Asian markets trying to read the Washington policy tea leaves. The 1990s vibe emanating from Fed headquarters in Washington is becoming harder and harder for dollar bulls to dismiss.
The more upward pressure there is on the US currency, the less capital that flows to Indonesia and other Southeast Asian economies that need investment to finance giant infrastructure projects.
Continued tight Fed policies pose their own risks to Xi Jinping’s China, just as the Communist Party leader is beginning his third term. Rising US rates put China’s vital export engine at risk and add to the strains facing highly indebted mainland property developers struggling to avoid default.
Fed overtightening is also a direct threat to the roughly $1 trillion of Chinese state wealth parked in US government debt.
The yen’s dwindling value, thanks to a strong dollar, is a crisis in slow motion for Prime Minister Fumio Kishida and outgoing Bank of Japan Governor Haruhiko Kuroda. Asia’s No 2 economy is importing increasing waves of inflation via food and energy markets.
For governments in Bangkok, Jakarta, Manila and Putrajaya, currencies under downward pressure make US debt harder to service. That also raises the costs of food and other vital items.
Recently, says economist Jonathan Fortun at the Institute of International Finance, “we see clouds forming on the horizon. A renewed hawkish Federal Reserve sentiment is spilling over into some emerging markets, causing short-dated receivers to struggle as interest-rate expectations are pushed further back in time. Monetary policy uncertainty may boost demand for dollar protection, as the relationship between EM currency and US interest-rate volatility continues to strengthen.”
For now, few think the SVB debacle will trigger a 2008-like global financial meltdown. But the speed with which Asian officials have swung from guarded optimism over the US financial system to worrying about another 1997 is its own economic indicator for the year ahead. And not a good one.
World Socialist Website – March 14, 2023
The bailout of Silicon Valley Bank and the historic crisis of capitalism
By Nick Beams
The collapse of Silicon Valley Bank (SVB)—the second largest bank failure in nominal terms in US history—and the ongoing turbulence in the banking system, raising the prospect of more failures, is another expression of the historic crisis of US and global capitalism.
This deepening rot and decay constitute the underlying driving force of two interconnected developments in US and world politics: the rapid escalation towards a third world war and the ongoing and intensifying assault on the working class in the US and internationally as the ruling classes seek to make it pay for the existential crisis of their outmoded and reactionary private profit system.
The commitment by the Biden administration to do “whatever is needed” to protect the money and wealth of financial investors, speculators and the wealthy has again laid bare the real nature of capitalist governments as the executive committee for managing the affairs of the ruling financial oligarchy.
There is no money for the vital health, education and other social needs of the working class now being battered by the worst inflation in more than four decades, but billions, trillions, can be found overnight to defend the wealth of the financial oligarchy.
At the same time, no expense is being spared in the development of the means necessary for the prosecution of war—the US-NATO war in Ukraine, the goal of which is the breakup and dismemberment of Russia and the war drive against China, which the US regards as its chief global rival.
There is a deep-seated and organic connection between the SVB debacle and the possibility of an implosion of the financial system and the war drive.
The continuous eruption of financial crises, despite all the claims of the regulators and financial authorities that lessons have been learned and safety measures put in place, is an expression of the historic decline of the economic power of US imperialism which it seeks to resolve through military means.
The prescient analysis of Leon Trotsky made in 1928 springs to mind. He noted that the aggressive character of US imperialism would emerge more openly, more nakedly vicious under conditions of its historic decline than in the conditions of its rise, bloody and violent as that was.
The demise of SVB and the shock waves it is sending through the financial system, the full consequences of which have yet to be seen, is another expression of the essential dynamic, one could say a law of motion, of US capitalism now in operation.
Tracing out the developments of the past 50 years, this dynamic comes clearly into view: Measures taken by the ruling class and its state to try to stave off or alleviate a crisis at one point only create the conditions for its eruption, in even more violent form, at another.
In August 1971, in response to the decline of the position of American capitalism vis-à-vis its rivals, US president Nixon withdrew the gold backing from the US dollar, ending the postwar monetary system.
One of the consequences of this decision, taken to shore up the position of the US, was to fuel the growth of financial speculation which increasingly characterised the modus operandi of US capitalism throughout the 1980s as whole swaths of industry that had formed the foundation of the postwar boom were laid to waste.
In October 1987, the developing crisis these measures produced erupted in the form of a Wall Street crash, still the largest single one-day fall in history at more than 22 percent.
The guarantee by the US Federal Reserve chairman Alan Greenspan in response to this crisis—what became known as the Greenspan put—that the Fed would prop up the financial markets led to an expanding orgy of speculation over the next two decades, leading to the eruption of the US and global financial crisis of 2008.
The Fed and the US government then organized a bailout for the banks running into hundreds of billions of dollars as the unemployment rate rose to double digits, working class families lost their homes and workplace conditions worsened, not least through the spread of two-tier wage systems organised by the Obama administration with the collaboration of the trade unions.
In the wake of the crisis, the Fed began its program of quantitative easing, the pumping of trillions of dollars into the financial system via the purchase of Treasury bonds and mortgage-backed securities. Instead of ending the rampant speculation that precipitated the 2008 crash, the central bank, the chief financial arm of the capitalist state, further fuelled it.
This meant that when the COVID-19 pandemic struck in early 2020, the Trump administration, supported by the Democrats, refused to institute the necessary public health measures, fearing they would collapse the speculative bubble.
Instead, the Fed pumped in still more money after the financial freeze of March 2020 when, for a number of days, there was no market for US government debt, supposedly the safest financial asset in the world, thus fuelling even more speculation and financial parasitism.
But this operation had consequences in the real economy. The refusal to eliminate COVID, the injection of $4 trillion into the financial system, rampant speculation and profit gouging by major commodity traders and giant food corporations, together with the military offensive against Russia in Ukraine, combined to set off the highest rate of inflation in four decades.
Fearing the consequences of a wages upsurge by the working class—the nemesis of the financial system—the Fed then changed course and started the steepest rate hikes since the early 1980s to try to crush it.
Now these measures have created the conditions for a new financial crisis, as can be seen in the collapse of SVB. Like so many other banks and financial corporations, SVB, which has been closely involved with the high-tech sector in California, gorged on the cheap money provided by the Fed in 2020 and 2021.
It had so much cash on hand that it had to place large portions of it in Treasury bonds and mortgage-backed securities, supposedly ultra-safe assets.
With the turn by the Fed to a higher interest rate regime, supposedly to fight inflation, but in reality aimed at suppressing the working class if necessary through recession, the situation turned sharply.
The market value of the bonds held by SVB fell as interest rates rose such that it has been estimated that its bonds lost $1 billion for every 25-basis point (0.25 percentage points) rise in the Federal funds rate which has now been lifted by around 450 basis points.
This collapse in its asset base led to the $42 billion run on the bank, resulting in its collapse.
The circumstances of SVB are not replicated everywhere. But all areas of the financial system, the dominant force in the capitalist economy, have become so dependent on the inflow of cheap money that they are now being heavily impacted by interest rate hikes, the effects of which have only started to make themselves felt.
What are the consequences? They flow from the very nature of finance capital itself.
At first sight it appears to be able to conjure up ever greater amounts of money out of money itself.
But this appearance-form masks a deeper reality. Finance capital does not create additional or new value. In the final analysis, it is a claim on the surplus value extracted from the working class in the process of capitalist production.
Thus, while it continually seeks to escape to a realm where money begets more money, finance capital always strives to intensify the exploitation of the working class, above all in time of crisis, as the experience of 2008 so graphically demonstrated.
At the same time, driven by the deepening economic and social crisis, at home the government and the capitalist state must make the working class pay for war by massive cuts in social spending.
In every crisis, the two main classes of society align themselves and more and more directly on their fundamental material interests. The program of the ruling class will develop accordingly: rescue operations for the financial oligarchy combined with war and social counterrevolution.
The working class is likewise driven onto a collision course with the entire apparatus of the capitalist system. However, for that struggle to be successful, no matter how deep the crisis of the ruling class and its system, the working class must be politically armed with a clear program and perspective: the conquest of political power and the construction of a socialist economy.
And above all, it must have at its head a revolutionary party. The collapse of SVB and the deepening crisis of capitalism it expresses is therefore a clarion call for the construction of the International Committee and its sections in the US and internationally.
https://www.wsws.org/en/articles/2023/03/14/fufo-m14.html?pk_campaign=newsletter&pk_kwd=wsws
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