The Collapse of Silicon Valley Bank—“The Canary in the Coal Mine”

Mar 20, 2023

On March 9, bank stocks dropped sharply after big depositors rushed to pull their holdings from an important regional bank, called Silicon Valley Bank, in California. The bank had trouble covering the withdrawals, causing it to collapse. A couple of days later, Signature Bank in New York, another important regional bank, went into a death spiral for similar reasons.

In order to try to calm financial markets and big depositors, on March 12, the U.S. Treasury, the FDIC and Federal Reserve hurriedly put together a bailout. But by then, the crisis had already spread to Europe. There were big withdrawals from Credit Suisse, the second biggest bank in Switzerland and one of the most important banks in the world. A complete collapse was staved off, at least temporarily, only after the Swiss National Bank provided Credit Suisse with a massive 54-billion-dollar emergency loan. A day later, the biggest U.S. banks raced to inject 30 billion dollars into another regional bank, First Republic Bank based in San Francisco, in order to try to prevent it from going up in smoke.

Stupendous Growth of Debt

Even top financiers admit that this banking crisis is only getting started. The collapse of Silicon Valley Bank could just be the start of a “slow rolling crisis” in the U.S. financial system with “more seizures and shutdowns coming,” said Larry Fink, the chief executive of BlackRock, the world’s largest asset manager. Ray Dalio, the recently retired founder of Bridgewater, the world’s largest hedge fund, called the bank failures, “a canary in the coal mine.”

Behind this panic is a financial system that is increasingly riddled with debt—debt that, taken together, is much, much bigger than the entire world economy. Over the last couple of weeks there have been plenty of economists and other supposed experts blaming the growth of this debt on the easy money policy of the U.S. Federal Reserve, as well as central banks in other countries. And certainly, for more than a decade following the financial crash and Great Recession of 2008, the Federal Reserve pushed interest rates down to practically zero, and kept them there—at least for the big financial institutions. The idea was that with markets practically frozen, banks would be encouraged to lend money to businesses and consumers, priming the pump for both greater consumption and investment.

But that is not what happened. Instead, employers squeezed out their profits by slashing payrolls in every way they could. So, both consumption and capital investment stagnated and declined. Instead, almost all that debt went to speculation. Companies borrowed billions in order to push up the price of their own stock and increase dividend payments to their richest stockholders. Companies bought each other up in financial operations that loaded the new company with outlandish levels of debt, which was paid for by cutting employment and investment. So, stock markets and other speculative markets, including real estate, shot up—which attracted more money, which pushed up prices ever higher. There were plenty of new financial operations set up just to bet on the ups and downs of other speculative markets.

The entire financial sector became so addicted to this rapid growth of almost free debt, that every time Fed officials even began to talk about cutting back how much debt the Fed had created, financial markets panicked and dropped like a rock. So, the Fed continued what began as an emergency lending program for more than ten years. For the six biggest banks in the U.S., profits were stupendous. Over the last 10 years, profits totaled over a trillion dollars, making banking the most profitable sectors in the entire U.S. economy!

What About Regulation?

Democratic politicians and government officials have also called for more regulation as a way of reducing the danger of all this debt. But what they ignore is that tens of trillions of dollars in debt have been stashed away in the unregulated parts of the financial system, amongst all different kinds of investment funds, private lenders, private equity companies and hedge funds.

Much of this debt is in the form of very complicated speculative instruments called derivatives. These derivatives are a kind of debt bomb. During a downturn these derivatives blow up, with the losses spreading practically at the speed of light—which is what happened during the subprime banking crisis of 2008. How much of these derivatives are out there is not even known by governments and official regulators, because many of these funds operate out of countries where the governments do not demand much in the way of financial reports.

The gigantic size of this debt, along with the fact that so much is secretly held and used, is exactly why the losses at a couple of medium-sized regional banks set off a much wider panic. It shows the lack of confidence that most financiers, speculators, and bankers have in their own system.

In fact, this is not just the beginning of a financial crisis, but a more general economic crisis—a true disaster that the big financiers will try to make the working class pay for in full.