Economists, interviewed by Sputnik, have warned that the US Treasury is simply "printing money" to bail out banks brought down by its own attempts to tame inflation.
Silicon Valley bank (SVB) collapsed last week after an unprecedented wave of account withdrawals by big depositors exposed a hole in its asset backstop.
As its named implied, the bank served the information technology sector, currently facing an industry-wide slump following a brief boom fueled by the COVID-19 pandemic lockdowns.
Like most banks, SVB invested its clients' deposits in treasury bonds, considered a very safe bet according to conventional wisdom.
But when the US Federal Reserve hiked interest rates in response to the inflationary crisis, brought on by US sanctions on Russia in response to its special operation in Washington's client-state Ukraine, new-issued bonds with correspondingly higher returns became more attractive, reducing the value of banks' existing bonds issued under lower interest rates.
That tipped SVB into negative equity — a fact exposed when a string of multi-million dollar withdrawals forced the bank to sell bonds at below face value.
Since then, New York-based Signature Bank and specialist cryptocurrency sector outfit Silvergate have also gone under. That has led to a crisis on confidence, with shares in other small and mid-sized US banks to tumbling on the markets despite US President Joe Biden's guarantee that depositors — but not investors — will get their money back.
Dirty Hands
Dr. Jacques Rasmus, professor of Economics and Politics at St. Mary's College in California, told Sputnik that the higher the Fed raised interest rates, the less venture capital was available to invest in new start-up companies, leading SVB to "over-invest" such firms using its depositors' money.
"The whole tech industry got in trouble because large part of rate hikes by the Fed. So you follow this tread back far enough and the Fed has dirty hands here," he said.
Rasmus compared SVB to Washington Mutual, the largest savings and loan association in the US until its collapse in the 2008 'Credit Crunch' financial crisis prompted by excessive 'sub-prime' mortgage lending.
"SVB is right behind this, the second biggest banking crash in US history," he said. "And the government's trying to contain it by bailing out all the depositors."
"How are they going to do that? Well, the Treasury is going to give some bonds to the Fed, and the Fed will do its thing here to bail them out. So they're printing money to bail it out," Rasmus explained — stressing that the Treasury is "not going to raise taxes" to pay for it.
But the economist pointed out that Biden's promise to bail out depositors would not help the bank's bond- and stockholders.
"Their stock is collapsing. They're going to go under. It's going to spread, I believe, to what's called bank exchange traded funds, stocks, in other words, of banks in general," Rasmus warned. At "a lot of the small banks, there is going to be people withdrawing their money. So you can bail out the depositors, but it doesn't stop the panic. In fact, it may increase the panic."
Insane Interest Rate Hikes
Robert Hockett, a professor of law and public policy at Cornell University in New York and senior counsel at Westwood Capital, told Sputnik that the "intriguing" difference between the SVB crash and the 2008 banking crisis was that SVBs loan portfolio was "actually quite well-performing."
"There were no delinquencies, there were no write downs. Everything was fin," Hockett stressed. "All of the losses were suffered on the other piece of the portfolio, which was essentially the Fed portfolio."
"In other words, these were Treasury securities, the same things that the Fed itself holds," he added. "And the Fed itself is effectively suffering losses on its portfolio right now for the same reason that SVB portfolio did, namely the insane rate hikes."
Addressing the current "volatility" of banking stocks, Hockett said it was not "inevitable that everything crashes."
But he said it was clear that the financial system needed "backstopping," which "doesn't mean bailing anybody out."
Instead the finance sectors needs to make sure all accounts are insured under its Depositors Investment Fund, with bigger and riskier banks asked to pay higher premiums.
Responding to the Federal Reserve's creation of an emergency credit fund, Hockett said the quasi-independent national bank was in danger of being "too clever by half" by "inventing whole new programs that can take on a kind of semi-permanent status for problems that are not themselves necessarily permanent."
"There are simpler solutions available than just whole new 'facilities', as the Fed always calls them," he said.
Political Issue
Economist, professor and consultant Mark Frost told Sputnik that the Federal Reserve needed to focus on fighting inflation — and not on shoring up shaky banks.
"You can't fight inflation and be concerned about bank runs at the same time," he said. "If you're going to fight inflation, you actually tighten the liquidity of money. You literally push more banks into insolvency."
"That's the whole point of quantitative tightening," Frost underlined. "So just like we can't jump up and down at the exact same moment, the Fed can't practice quantitative tightening and quantitative easing at the same exact time."
But the professor said it had now become a "political issue because the administration's involved in it."
He explained that SVB was not like a commercial main-street bank that lends customers money for a new car or a small business venture, but a specialised tech industry investment outfit.
"Most start-ups fail. And so this bank, Silicon Valley has engaged in incredibly risky business practices," Frost said. "They behave like a mutual fund, and yet they're guaranteed by the government, by the taxpayers, and by the printing presses of the Federal Reserve."
The academic said the SVB bail-out sends a message to investors that "the Fed probably isn't really serious about fighting inflation."
"You're going to see markets in greater disarray and you're going to see more confusion," Frost warned. "Capitalist economies can take volatility all day long. What they can't take is the volatile volatility. That is when things get so weird, you can't even expect how weird they're going to be."