The current turmoil in the financial sphere is only the latest chapter in the late capitalist systemic crisis.
Tomasz Konicz, 17.06.2023. Originally published on konicz.info on 03/20/2023
Here’s to a new one? The collapse of the IT industry’s house bank, California’s Silicon Valley Bank (SVB), seems at first glance to herald a new financial crisis, bringing back memories of the collapse of the transatlantic housing bubble in 2007-09. With Silvergate Capital, a financial institution specializing in cryptocurrencies, having recently gone into liquidation, and Signature Bank also stumbling, the entire financial system is threatened with a conflagration that can only be averted by a massive intervention by U.S. policymakers – who have had plenty of experience in crisis management over the past few decades.
This banking crisis initially seemed to affect mainly financial institutions with ties to the IT industry. SVB specialized in financing startups in the Californian tech industry. The bank ran into trouble after accumulating $1.8 billion in losses on the sale of securities. After an emergency round of capital raising failed and the bank became effectively insolvent, the Department of Financial Protection and Innovation (DFPI) took control of the financial institution. The crypto bank Silvergate Capital, which also financed new tech companies, is also in liquidation.
In their initial public reactions, U.S. President Joe Biden and Treasury Secretary Janet Yellen went to great lengths to clearly distinguish the current crisis measures from Washington’s approach after the housing bubble burst in 2008. In a television interview, Yellen categorically ruled out a government bailout of troubled banks similar to the infamous bailouts during the 2008 financial crisis. The banking system is truly safe and resilient, the Treasury secretary said, citing the financial market reforms and additional regulations put in place in response to the 2008 financial crisis – even though the Trump administration had rolled back some of them.
President Biden gave a speech assuring U.S. citizens that they could rely on their financial system because all bank customers would have access to their savings. In the United States, the FDIC protects deposits of up to $250,000, but Biden announced that he would protect all bank deposits in unlimited amounts and guarantee their payment. In this way, Washington apparently wants to prevent a banking storm. The U.S. president promised that taxpayers would not incur any costs as a result of these crisis measures, since the Deposit Insurance Fund, into which the financial institutions pay, would be responsible for this. On the other hand, investors who had invested capital in the affected financial institutions had taken a risk and would now have to bear their losses. The U.S. president also said the management of the banks that went into liquidation should be fired.
However, Washington’s concrete crisis measures are nowhere near as populist as the U.S. president promised in his speech. Washington needs to throw some kind of lifeline to the faltering banking sector in order to avoid an uncontrollable escalation like the one that followed the bankruptcy of Lehman Brothers in 2008, which resulted in a “freeze” of the financial sphere (interbank lending came to a virtual standstill because financial market players no longer trusted each other).
The lifeline that crisis policy is throwing to the shattered late-capitalist financial sector this time bears the sonorous name Bank Term Funding Program (BTFP). In essence, it is a lending program of the U.S. Federal Reserve, which, even in the face of manifest market turbulence, will quickly provide banks with emergency loans against collateral in order to prevent defaults and liquidity shortages in the financial sector. Banks will be able to pledge government bonds in particular, but also mortgage-backed securities, as collateral. The trick to the whole thing is that the securities are to serve as collateral at their face value, not at their current market value. Normally, banks have to put up their securities as collateral at market value if they want to get additional liquidity from the central bank. The central bank is thus effectively overriding the typical market mechanism in order to stabilize the shattered financial sector. In addition, banks can take advantage of the central bank’s crisis program known as the discount window, where bonds can be deposited as collateral for loans without the usual haircuts.
Like stocks, government bonds trade at a market value that may differ from their face value at issuance. Changes in interest rates and the market value of government bonds are inversely proportional. When interest rates fall, bond prices rise. The reverse is true when interest rates rise, causing bond prices to fall. And this is logical: Bonds issued in a low interest rate period lose market value because of their lower interest rate in a high interest rate period. And it is precisely this period of high interest rates, initiated by central banks to fight inflation, that has led to a massive decline in the value of government bonds.
Deviations between the face value and market value of government bonds are not a problem as long as they do not have to be sold prematurely. After all, government bonds are usually used as a safe haven for low-interest, long-term investments. It only becomes a problem if banks have to sell these securities prematurely during a period of high interest rates due to a lack of liquidity. This was precisely the case for SVB, which operates in Silicon Valley, where many companies in particular are suffering from the Fed’s high interest rate policy and have to draw on their deposits more often than average. It was thus emergency sales of U.S. government bonds that led to SVB’s bankruptcy. Rumors of liquidity problems at the IT bank then triggered a run on the bank, with customers withdrawing $42 billion in a single day.
The Californian IT bank was just the weakest link in an unstable financial sector, as many financial institutions are in a similar predicament. They hold huge amounts of government bonds on their balance sheets, which are rapidly losing value as central banks fight inflation. How big is the problem? According to the Financial Times, the potential losses on bonds that could result from the growing discrepancy between face value and market value are currently around $600 billion in the U.S. alone.
Meanwhile, other crisis candidates are emerging, such as the U.S. bank First Republic, which had to be stabilized by several major banks with a $30 billion liquidity injection. At the same time, U.S. banks made massive use of the Federal Reserve’s emergency lending programs. The Fed pumped $152 billion into the financial sector through its discount window in one week, far surpassing the previous weekly record of $111 billion, set shortly after the collapse of investment bank Lehman Brothers in 2008. By comparison, in the week before the Silicon Valley bank failure, U.S. financial firms borrowed only $4.58 billion through the Fed’s discount window.
The massive losses in the value of bank shares in recent days are thus merely an expression of accumulated crisis potential, which is leading to a corresponding flight of capital. Moreover, the imminent bankruptcy of Credit Suisse shows that this latent crisis potential is not limited to the U.S. The ailing Swiss bank’s shares have plummeted and it is suffering from a massive outflow of capital, forcing it to ask the Swiss central bank for a “sign of support.” Switzerland’s currency guardians did not let themselves be left out: 50 billion francs are being pumped into the ailing financial institution to stabilize it for the time being. In a sense, the noble Swiss bank was also an ailing financial institution that had already run into rough waters some time ago in the wake of a series of scandals and dealings that were nothing short of criminal.
Thus, there seems to be an important difference between the current turmoil and the crisis surge of 2007-09. The great wave of transatlantic real estate speculation was accompanied by the mass issuance of dubious subprime mortgage securitizations, which proved toxic after the bubble burst in 2007 and endangered the global financial system. This time, it is bland, supposedly risk-free government bonds that are threatening to be the downfall of the banks involved. These securities are not being bought for speculative purposes, as was the case with the mortgages bundled into “securities” during the housing bubble, but as collateral – especially in uncertain times.
And yet: This most recent “financial quake” is actually just the latest chapter in a long-running, systemic crisis process, in which latent and manifest stages alternate. The sharp decline in the value of government bonds is simply due to the fact that many of these securities were issued during a prolonged period of very low interest rates. With brief interruptions, the global financial system has been in a historically unique period of zero interest rates since the bursting of the real estate bubbles in the U.S. and the EU in 2008. With this “cheap money” policy and the extensive purchasing of junk securities, the aforementioned “toxic” mortgage securitizations, the central banks have stabilized the financial sphere.
Central banks have thus become the toxic waste dumps of the global financial system, as evidenced by their bloated balance sheets. In recent years, the ECB and the Fed have bought trillions of dollars worth of securities, effectively printing money. This “liquidity” of the central banks led to the formation of a corresponding liquidity bubble, which stabilized the global economy and fueled the boom in the financial sphere, which in its overheated final phase led to absurdities like the swarm speculation in meme stocks like Gamestop. The crisis policy used to combat the consequences of the real estate bubble thus laid the foundation for the speculative dynamics to come.
In addition, central banks have increasingly bought up government bonds simply to finance the deficits of the states – especially in the U.S. and the eurozone. Government bonds form the backbone of the financial sphere, and the “market” for them is gigantic, as the states have had to take on more and more debt in the past bouts of crisis in order to keep the late capitalist world system from collapsing through economic stimulus programs and other crisis measures. The U.S Treasury market alone, which has been in crisis for months, and which, according to the Financial Times, is suffering from a latent lack of liquidity (in other words: nobody wants to buy them), includes securities with a nominal value of about $23.5 trillion (that’s 23,500 billion!). The currently looming crisis surge is thus much more dangerous than it appears, because the foundation of the world financial system, the markets for sovereign debt of the core states, has become brittle. (For more details, see: “Mountains of Debt on the Move”).
And that’s really the point: There is no fundamental difference in terms of economic impact between the dubious mortgage securitizations from the era of great transatlantic real estate speculation and the stodgy government securities that are now causing problems for the financial sector. Whether the private sector borrows subprime mortgages to stimulate the construction industry and fuel the economy, or whether governments borrow to keep the great “economy” alive through their stimulus programs and investments, it is all the same in this respect. In both cases, demand is created in the here and now, with the loan representing an anticipation of future capital valorization. The mortgagee has to pay off his mortgage, including interest, just as the government has to service its bonds through tax revenues. When this no longer seems realistic, speculative bubbles burst, the corresponding mountains of debt threaten to collapse – and financial crises ensue.
The recurring financial crises are thus an expression of a crisis-ridden late capitalist world system that is increasingly running on credit. Since the implementation of neoliberalism in the 1980s, which was only possible in response to the stagflation crisis of the 1970s, global debt has been rising much faster than world economic output. In a sense, capitalism, which is based on the valorization of labor power in commodity production, has become too productive for itself; the system is choking on its productivity, lacking a new accumulation regime in which wage labor could be profitably valorized since the emergence of the IT industry in the 80s. To paraphrase Marx, the productive forces are, as it were, breaking the bonds of the relations of production.
The emergence of a globalized, neoliberal financial market capitalism with a veritable financial bubble economy is thus a systemic reaction to this inner barrier of capital (Robert Kurz), which, through ever increasing competition and rationalization, gets rid of its own substance, value-creating labor in commodity production. The missing demand is to a certain extent generated by credit, which brings with it ever greater instabilities and crises of increasing intensity. In this historical process of indebtedness and crisis, states play an increasingly important role as crisis managers. On the one hand, through the many economic stimulus programs, and on the other hand, through the central banks’ purchases of government bonds and other securities, which stabilized the financial sphere and effectively printed money. The expansionary monetary policy of the central banks allowed the corresponding liquidity bubble to form, in which the liquidity pumped into the markets led to an inflation of securities prices, until finally the inflation bled into the real economy.
The pandemic and the war in Ukraine ultimately acted as external triggers, bursting the liquidity bubble that had been inflated by central banks’ loose monetary policies. The current inflation is thus fed by several sources: in addition to the explosion in energy prices in the wake of the war in Ukraine, the inflationary consequences of the full-blown climate crisis (especially for food), and the supply shortages during the pandemic, the rise in prices is also attributable to the money printing of recent years, which is now manifesting itself in the form of real inflation following the bursting of the Everything Bubble in the financial sphere.
Monetary policy was therefore forced to change course in order to be able to combat inflation. Interest rates were successively raised and, at least in the U.S., bond purchases by the central bank were scaled back. The fact that this policy of tight money, viewed in isolation, has been somewhat successful is evidenced by the latest inflation figures from the U.S., where inflation has now been reduced to six percent – just a few months ago, the United States was still threatened with double-digit inflation. The slightly lower core inflation rate of 5.5 percent, which excludes energy and food prices, also shows that price increases are not only being driven by shocks from the war in Ukraine and the pandemic.
At the same time, however, the fight against inflation has starved the financial sphere of liquidity and made it more difficult to run the deficits that are systemically necessary in late capitalism. To put it bluntly, the system can now no longer simply run on credit (last year, global debt levels actually fell significantly, as reported by the IMF). Thus, a few months after the great monetary policy turnaround to a restrictive monetary policy, the financial sphere is thus again on the verge of a full-blown banking crisis, which only points to the systemically necessary debt compulsion of the hyper-productive late capitalist world system outlined above.
This debt compulsion of crisis-ridden late capitalism can be traced very concretely in the balance sheets of the central banks, which, as explained above, have had to buy up more and more securities and government bonds in order to stabilize the world financial system through this indirect money printing. This was supposed to end with the advent of inflation and the shift in monetary policy to a policy of high interest rates. Indeed, the Fed’s balance sheet has been shrinking rapidly over the past few months as it has stopped buying new bonds and securities. The Fed’s total assets have fallen from a peak of nearly $9 trillion in mid-2022 to $8.3 trillion. But after the banking panic of the past few days, massive amounts of liquidity had to be pumped into the markets again as part of the crisis programs described above, so that the Fed’s balance sheet swelled to more than $8.6 trillion. A few days of crisis were thus enough to revise months of gradual reduction of slowly maturing securities on the central bank balance sheet. The central banks simply cannot escape their function as toxic waste dumps of the late capitalist financial system.
The long-term hopelessness of capitalist crisis management is manifested in this increasingly obvious monetary impasse. It is a veritable crisis trap in which monetary policy finds itself, which in fact can only determine the further path into the inevitable unfolding of the crisis: deflation or inflation? Either inflation is given free rein to stabilize the economy and the financial markets, or the path of deflation is chosen, which would be triggered by a financial market quake – as the Wall Street Journal recently warned.
This aporia of capitalist crisis policy, which only refers to the inner barrier of the capital relation choking on its own productivity, could so far be bridged by the continued construction of global debt towers, which the current inflationary surges now threaten to put an end to. Thus, in the end, politics can only determine the form of the inevitable impending devaluation of value: either via the path of inflation, which would devalue money as a general equivalent of value, or via the path of deflation, in which capital would be devalued in its constant (factories, machines, production sites) and variable aggregate states (wage labor).
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Originally published on konicz.info on 03/20/2023