Drowning in Deposits

Dylan Riley in Sidecar:

The failure of the Silicon Valley Bank and its knock-on effects such as the bailout of Credit Suisse has elicited the usual flurry of social-psychologizing in the ‘quality press’. On a recent New York Times podcast, the former Treasury official Morgan Ricks reached new heights of pseudo-profundity by claiming that the problem was ‘panic itself’ – and that it could be resolved simply by extending a blanket guarantee to all depositors.

Such an account of the crisis provides no concrete explanation of what happened. The precise causes of the bank’s collapse are, of course, debatable; yet the basic structural context and its main lessons seem clear. SVB, which is supposed to serve what is widely viewed as the most dynamic and innovative sector of the global economy, ‘tech’, had parked a huge quantity of its deposits in low-yield – but supposedly safe – government-backed securities and low-interest bonds. When the Federal Reserve began to raise interest rates, the value of these bonds declined, setting off a classic bank run as depositors scrambled to withdraw their money. Was the panic facilitated by social media or other means of digital communication that encouraged herd behaviour? Who knows, and who cares? The crucial point is that the bank was overwhelmed by the massive growth in deposits from its tech clients – and neither it nor they could find anything worthwhile to invest in.

In short, the SVB collapse is a beautiful, almost paradigmatic, demonstration of the fundamental structural problem of contemporary capitalism: a hyper-competitive system, clogged with excess capacity and savings, with no obvious outlets to soak them up. It must be emphasized that the current vogue for ‘industrial policy’ – quite pronounced in both the Biden and Macron governments inter alia – will do nothing to address this underlying issue.

More here.