Silicon Valley Bank collapsed last month (Picture: Tony Webster)
When the CEO of a multibillion dollar bank personally rings round clients to tell them their money’s safe, it’s a safe bet that the opposite is true.
Silicon Valley Bank (SVB) was valued at £35 billion, with assets worth more than £200 billion, a year ago. By 9 March, SVB boss Greg Becker was reduced to frantic phone calls. By the following day, the bank was worthless. It was the second biggest banking collapse in US history, surpassed only by Washington Mutual during the financial crash of 2007-08.
The Signature Bank failed soon after in the third largest collapse. Panic spread to Europe as Swiss bank Credit Suisse was taken over by rival UBS to stave off collapse. Only this week, it revealed that it haemorrhaged over £55 billion in the first three months running up to the banking run.
What do these banking collapses say about the state of global capitalism? Just how vulnerable is it now to a serious economic crisis? And will we see further banking collapses?
To get some sort of handle on these questions, we have to delve deeper than what’s going on in the financial markets. We have to enter, as Marx put it, “the hidden abode of production” and look at how the capitalist system works to help us understand the specifics of the current crisis.
Capitalism is characterised by two fundamental divisions or contradictions. The first is between capital and labour. Capitalists own and/or control what Karl Marx called the “means of production”. They are the tools and raw materials that go into creating something, whether it’s Amazon warehouses, oil rigs and drilling equipment or call centres and telephones.
The working class are obliged to sell their “labour power”, their ability to work, in order to make a living. If you read a mainstream economics textbook, you’ll be told that profits are the “reward” capitalists get for taking risks and making smart investment decisions. In reality, as we saw during the pandemic and strike wave, it’s the labour of working class people that produces profit and keeps the system going.
Workers don’t get the full value of what they create back in wages, a gap Marx referred to as “surplus value”. This is the basis for profits, which capitalists get their hands on through this process of “exploitation”. But bosses don’t exploit workers simply to fund their appetite for vulgar superyachts.
The second division is within the capitalist class, a band of warring brothers who constantly try to gain an advantage over one another. Competition drives forward capitalism and has led to a system of “production for production’s sake, accumulation for accumulation sake”. It means firms have to plough back the profits they make into more efficient methods of production to get or stay ahead of their competitors. Raising the productivity of labour, making more things, more cheaply than their rivals, is one of the central ways capitalists try to do it.
This makes capitalism much more dynamic compared to previous modes of production such as feudalism. But it is also what plunges the system back into perennial crises. That’s because the very process of driving up productivity by investing more and more on technology forces down the overall rate of profit.
Capitalist production brings “living labour” and “dead labour” together. The first is workers’ labour, the second is the labour that went into the raw materials and machinery used. It’s “living labour” that adds new value to the final product while “dead labour” only passes on existing value.
When capitalists plough investments into new technology, it can help to undercut competitors while others try to catch up. But it will force up the ratio of dead labour to living labour. And, because only living labour creates new value, it has a negative impact on the overall rate of profit. It means there is a tendency for the rate of profit to fall under capitalism. And this crisis of profitability is the underlying cause of the financial crisis of 2007-08 and capitalism’s sluggishness since.
The role of the financial sector
The financial sector is vital for the dynamism of the system. Capitalists don’t just rely on their own profits to plough back as investments. Imagine you’re a capitalist who needs to expand production but doesn’t have the money readily available to advance the investment. It means you have to borrow it. This could be from another capitalist with money to lend, but banks and financial institutions behave as intermediaries. Firms and people with money they don’t need to use immediately deposit it, while others who need money can take out loans.
Finance allows the channelling of money into productive investment, but the growing chains of credit and debt leaves the system open to crisis. As Marx wrote, “Banking and credit become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle.”
Capitalism creates huge chains of credit and debt across the world economy as banks and other institutions borrow and lend. These transactions are predicated on continued capital accumulation and profit maximisation. But there is no guarantee that profits will be realised in another sector, or that debts won’t be recalled due to crises elsewhere in the system.
As Marx writes, “The chain of payment obligations at specific dates is broken in a hundred places, and this is still further intensified by an accompanying breakdown of the credit system. All this therefore leads to violent and acute crises, sudden forcible devaluations, an actual stagnation and disruption in the reproduction process, and hence to an actual decline in reproduction.”
What triggered the bank runs?
At least three of the US banks that collapsed in March were known as “crypto-friendly”. Some might think it was simply a consequence of the deflation of the cryptocurrency bubble that began in May of last year. The best-known cryptocurrency Bitcoin, for example, is now trading at just over a third of its peak value of $65,000 in 2021.
However, the four US banks and Credit Suisse in Europe were not brought down by the deflation of the crypto bubble. The reason for their demise were the much higher interest rates in recent months—which were also responsible for pricking the crypto bubble.
Inflation has risen across many advanced capitalist economies to levels last experienced in the 1970s and early 1980s. The principal weapon to combat inflation being used by central banks in general, and the US Federal Reserve, in particular, is raising interest rates.
SVB had tied up much of its investments in three to five year “bonds”. These are basically IOUs issued by the government to fund its debt, which it pays interest on until they’re repaid in three to five years’ time. They had been paying more than the interest rates on short-term government bonds, when rates set by the Federal Reserve were very low.
These investments should have been safe as houses. But once the Fed raised short term rates, the value of SVB’s bonds plummeted as no-one would buy them rather than short term bonds now that the longer-term ones were paying lower interest rates than short term ones. This meant that, if SVB sold their bonds to meet the withdrawal of deposits, it would produce huge losses for the bank. And that’s if it could sell them at all—as suddenly the market for longer term bonds had become extremely illiquid. In other words, no-one actually wanted to buy them.
US president Joe Biden and treasury secretary Janet Yellen rushed to confirm that the banking system was basically sound. Most importantly, they said all depositors would be guaranteed their money back if they wanted it, even those exceeding the $250,000 legally guaranteed by the US Federal Deposit Insurance Corporation. And the Fed also made billions of dollars available to other banks experiencing difficulties.
Christine Lagarde, head of the European Central Bank, made similar reassuring noises across the Atlantic. The Swiss authorities tried to calm the markets over the Credit Suisse collapse, rapidly arranging its takeover by UBS who received government guarantees over its bad debts.
Such state support and state reassurances seem to have restored some calm in the financial markets for now. But the spate of bank collapses is the fragile tip of an iceberg in increasingly warm waters. JP Morgan chief executive Jamie Dymon warned of a hurricane heading for the US and other economies because of rising interest rates as long ago as last June. In a recent letter to JP Morgan shareholders, he writes the current crisis is not over yet “and even when it is behind us, there will be repercussions from it for years to come.”
Globalisation, low profits and crisis
To understand why Dymon might be right, we need to look back over the last 40 years of capitalist globalisation and the relatively weak growth. The world financial system has seen very considerable deregulation in the same period.
There have been two significant consequences of the combination of globalisation and low rates of profit in the productive sector. The first is the large growth in government, corporate and personal debt worldwide, all of which are now much higher proportionately than in the last great bout of inflation in the 1970s and early 1980s. The second is the explosion of increasingly complex and arcane forms of financial speculation.
After the last big financial crisis and bank bailouts in 2007-08, governments turned to austerity. Central banks tried to stimulate economic growth. They did this through ultra-low interest rates and “Quantitative Easing”, essentially the printing of vast amounts of money.
Monetarists, a free market school of economics, predicted this combination would cause commodity price inflation—the price of goods in shops. They were wrong. But it did produce asset price inflation—the value of property and stocks and shares. The rich became much richer as a result whilst the rest of us suffered austerity.
However—again contrary to right wing ideology—making the rich much richer produced only anaemic growth in the real economy. The major economies in fact seemed headed back toward recession as the Covid lockdowns struck. The lockdown of the major economies saw a further big boost to money printing, making the rich even richer. But this time there was also increased government spending to stop an even greater and longer lasting collapse in production.
The problem of inflation
When lockdown eased off, four factors kicked in to mess up the production of goods and precipitate inflation. Firstly, there was the dislocation produced by the pandemic with shipping in the wrong place and other supply chain problems. On top of that, there was and indeed still is the relative “tightness” of the labour market— a lack of workers because of illness and the Great Resignation and Retirement.
Secondly, there was the Russian invasion of Ukraine and the grinding proxy war between the US and Russia. This had multiple inflationary impacts. Russia and Ukraine accounted for some 30 percent of grain traded in world markets and these supplies were disrupted.
The supply of Russian gas, which the European Union had become particularly dependent on, was reduced. Western states made strategic decisions to switch sources to liquid gas from the US. Russia was also a significant oil producer and exporter, and oil prices shot up as a consequence of the war. And there was also disruption to the supply of rare earth elements from Ukraine, which are vital in the production of semiconductors.
Thirdly, the climate crisis has had a big impact on the production of foodstuffs. Grain prices had already seen a sharp spike before Covid lockdown after Canadian grain production was hit by severe drought. Other foodstuffs have suffered since as a result of “exceptional” climate conditions.
Finally, years of low investment in the productive sector made production much more vulnerable to the shocks caused by pandemic, war and climate crisis. There has been a lot of hype about the growing flexibility in production. In reality, it has proved much less flexible than anticipated in the face of significant shifts in demand— changes in consumption spending after Covid and lockdown.
Higher interest rates, led by the Fed, can be lethal in this context. So much debt has been incurred and so much investment has been made on the basis of the very low interest rates since 2009. Higher interest rates threaten the very possibility of those debts being paid off.
The rate rises are intended to combat inflation. It’s hoped they’ll squeeze bosses who set prices and wages as well as workers who have mortgages and other debts. But higher interest rates are a particularly ridiculous way of addressing an inflationary crisis rooted in supply chain shocks, not “too much money”.
The problem of combating inflation without a financial collapse
Governments and central banks are walking a tightrope between combating inflation and precipitating a financial crisis even worse than 2008. The Fed is still raising interest rates and seeking to impose higher capital requirements on banks as reserves against loss of confidence. Interbank interest rates—the rates banks now charge each other for their lending to one another—are now much higher than they were before the SVB collapse.
There are now multiple points of vulnerability piling up in the system. US regional banks currently have some $620 billion of losses on their books if they were forced to sell bonds at current prices. Although this is just a notional scale of vulnerability as bond prices would fall even lower if they were forced into a mass fire sale.
And, perhaps more significantly, there has been a huge withdrawal of deposits from regional banks. Most recently estimated at $600 billion, it severely impairs their lending ability. There are also serious concerns about the financial health of the much less regulated “non-bank” financial intermediaries. They now account for some 50 percent of total global financial assets.
The think tank Onward estimated that some 20 percent of companies in Britain are “zombies” last year. And, with tighter bank lending and higher interest rates, their number is likely to have grown even higher and many more will be on the verge of bankruptcy.
Real estate is also in trouble. Blackstone is a “non-bank intermediary” which manages a trillion dollars of investments. It recently tried to interest rich investors in its Real Estate Investment Trust, claiming that property prices will go up as investment in new buildings was bound to decline with the credit squeeze.
But, instead of investing, investors sought to withdraw some $5 billion. Commercial real estate is even more vulnerable with a broad consensus that offices are particularly exposed. Estimates suggest that the market is some 21 percent down from its peak. Bloomberg reports that a $1.5 trillion wall of debt is looming for US commercial properties, due for repayment by the end of 2025.
Another area of vulnerability is US government bonds held by foreign investors. Surprisingly, perhaps, Japanese investors now hold more bonds in value than the Chinese. This is a product of the ultra-low interest rates in Japan over the last decade and a half.
If this were now reversed, US politicians fear that the Japanese appetite for US bonds will dry up. It seems that the new governor of the Japanese central bank may well continue his predecessor’s ultra-low interest regime. Unlike other advanced economies, Japan seems stuck with battling deflation rather than inflation. But, the point remains, that the US remains heavily dependent on maintaining the appetite of foreign investors for its bonds.
Add to all of that the worry that a deadlock in Congress will mean it doesn’t agree on the federal budget, meaning the government will technically run out of money. The chances of this have increased as a result of the unprecedented indictment of Donald Trump by a Democrat district attorney, which has polarised congressional politics even more.
The World Bank says, “The global economy has experienced four waves of debt accumulation over the last fifty years. The first three ended with financial crises in many emerging and developing economies. During the current wave which started in 2010 the increase in debt in these economies has already been larger, faster and more broad-based than in the previous three waves.”
They are just 2.2 percent growth to the end of the decade, which is one third less than the first decade of this millennium. But that is already likely to be far too optimistic.
The World Bank’s gloom is now echoed by the latest projections from the International Monetary Fund (IMF). They are worried about inflation remaining stubbornly high and the increasing “deglobalisation” of the world through growing trade barriers and geopolitical tensions between the US and China.
Can we tame the monstrous power of the financial markets?
Financial markets can seem to exercise a monstrous power. They appear to have the power to screw us when they don’t like the government that we elect. So much for democracy! They also hold us to ransom when things go badly wrong for them with demands for bailouts.
Look at what happened to Tories Liz Truss and Kwasi Kwarteng, when they challenged the economic orthodoxy prevailing in the financial markets from a right wing perspective. They would have hit a Jeremy Corbyn Labour government even harder had he been elected.
However, if the state took control of the banks and other financial intermediaries, then the financial markets could no longer hold us to ransom.
Ultimately the taming of the financial markets means no half measures. If we are to stop these financial and economic crises, we need to break with capitalism and its logic of competitive accumulation and the waste and chaos of the market. Instead, we need a socialist society run based on workers’ control. It would mean an economy that’s democratically-planned to meet social needs of the many, not the profits of the few.
In other words, we need a socialist revolution where working class people take power through ow democratic bodies.
Of course, that’s not around the corner, but we’ve seen the resurgence of working class power and self-activity in the last year. There’s trouble ahead—and they’re asking us to pay the bill. Our job is to make sure they don’t succeed by ensuring the wave of strikes breaks through.
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