Tag Archives: Silicon Valley Bank

How Covid lockdowns primed the current financial crisis

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By Christian Parenti

Source: The Grayzone

The lockdowns and the stimulus required to keep the economy alive helped drive inflation. Then the Fed jacked up interest rates. And all hell broke loose.

On Friday March 10th, 2023, Silicon Valley Bank (SVB) died of Covid. Alright, it’s a little more complicated than that, but Covid lockdowns followed by massive government stimulus were a critical – and massively under-acknowledged – factor in propelling the bank’s demise.

At the heart of the crisis is the gigantic pile of low-interest debt that was issued during the height of the pandemic. While private-sector pandemic-era debt like corporate bonds also soared, US government debt like Treasury bonds piled up.

In a nutshell, during the pandemic the government issued enormous amounts of extremely low interest government debt — about $4.2 trillion of it. But now interest rates, including on government debt, are higher than they have been in 15 years and investors are dumping their old low-interest debt. As they dump, the resale price of the old debt goes down. The more it declines, the more investors want to dump. And thus, a panic is born. 

To understand the problem fully, the question of US government debt has to be put into its larger context, which is: the pandemic response as a whole.

When news of the Covid virus first broke in December 2019, the 2 Year Treasury bond was being offered at 1.64% interest; the 10 year was at about 1.80%, and the resale value of such bonds on secondary markets was strong. Then, in March 2020, as Covid cases and deaths spiked, the US began to shutter its economy with panicked lockdowns that were supposed to “flatten the curve” or slow the spread of the virus and thus protect the hospitals. But Covid was politicized and the lockdowns were extended.  

As the lockdowns dragged on, the US economy began to collapse, shrinking at a record-shattering annualized rate of 31.4% during the second quarter of fiscal year 2020.

To avoid total economic devastation, the federal government began massive debt-financed spending. In March 2020, Trump signed into law the $2.2 trillion economic stimulus bill the CARES Act, or Coronavirus Aid, Relief, and Economic Security. Then, in March 2021, Biden signed the American Rescue Plan Act which contained $1.9 trillion more in Covid relief. Finally, in April 2021, another trillion or so of Covid relief arrived in the Consolidated Appropriations Act. 

Thanks to these laws, every industry and most people received public money. There was increased and extended unemployment payments, as well as the so-called “stimmy checks” or stimulus payments to everyone earning under $75,000 a year (about half the population). The Paycheck Protection Program spent almost a trillion dollars. The Provider Relief Fund doled out $178 billion to the healthcare system. 

All this debt spending kept millions of people in their homes, and helped feed, employ, and care for millions more. The measures allowed hundreds of thousands of businesses to stay afloat even as many thousands of others went under. The impact of the spending on Americans’ well-being was generally positive. For a moment, the US child poverty rate was cut in half, falling to 5.2%. 

But the economically destructive lockdowns were not necessary and did not work. Covid fanatics maintain that the lockdowns were unavoidable because the virus is so deadly. That, however, is uninformed. Last year I explained in detail how the Lockdown Left got the Covid crisis wrong. Not a single critic has challenged any of the facts I presented so there is little point in rehashing them all here. 

Those who advocated an alternative to ham-fisted lockdowns, like the authors of the Great Barrington Declaration, which called for “focused protection” of vulnerable groups like the elderly, were viciously targeted in a reputation destruction campaign covertly orchestrated by former NIH director Francis Collins and de facto Covid czar Anthony Fauci. Never mind that the document’s authors were three eminently qualified scientists: Sunetra Gupta, professor of Theoretical Epidemiology at Oxford University; Jay Bhattacharya, professor of medicine at Stanford; and Martin Kulldorff, formerly a professor of medicine and biostatistics at Harvard. They were portrayed as far-right cranks who were almost eager to see millions die. But now, they have been vindicated.

Ultimately, the federal government spent $4.2 trillion propping up the economy that it was simultaneously choking to death with lockdowns. These two contradictory pressures laid the groundwork for the recent bank failures. Government mandated lockdowns hit the economy like a body blow. Factories closed, small businesses went under, ports and logistic hubs reduced operations, and about 2 million mostly older workers simply resigned. But at the same time, the federal government injected vast amounts of purchasing power into the economy, thus boosting consumption.

These two, contradictory government moves imposed almost unbearable pressure on supply chains. As shortages mounted, prices began to surge. Put simply: lockdowns plus stimulus equaled inflation.

Consider just one of the most important bottlenecks in the whole economy. During lockdown, many commercial driving license schools were closed. This helped create a shortage of about 80,000 truckers. If trucks do not roll supplies run low and prices go up.

At first, the official line on inflation – parroted by the Lockdown Left – maintained that inflation was “transitory.” But it was not. Inflation peaked at 9.1% in June 2022 while wage growth lagged at about 5%. In April 2020 during the worst of the lockdown, the Federal Reserve’s Federal Funds Rate sank to 0.5%. By February 2022, it had only risen to 0.8%.  

Meanwhile, inflation was surging. By February 2022, inflation had reached 7.9%. Only then did the Fed, in an effort to tamp down prices, begin raising interest rates at the fastest pace rate in its history. The federal Funds rate was around 4.57% when SVB went under. Perhaps a massive wave of taxation could have soaked up enough liquidity to have helped cool prices, but that was a political impossibility. The more politically palatable response in Washington was for the Federal Reserve to raise interest rates. 

Herein lies the problem. During the height of the lockdowns, banks bought up enormous amounts of government debt. As the Wall Street Journal put it: “U.S. banks are suffering the aftereffects of a Covid-era deposit boom that left them awash in cash that they needed to put to work. Domestic deposits at federally insured banks rose 38% from the end of 2019 to the end of 2021, FDIC data show. Over the same period, total loans rose 7%, leaving many institutions with large amounts of cash to deploy in securities as interest rates were near record lows.” Awash in deposits with not enough demand for loans, the banks bought US government securities. Their purchases surged 53% between 2019 and the end of 2021, to a total of $4.58 trillion, according to Fed data reported by the Wall Street Journal.

Because so much debt was being issued, it carried super-low interest rates. For example, on July 27, 2020, the 10 Year Treasury was offered at an annual interest rate of only 0.55%. This is fine if you are the borrower of money, but if you are the lender (that is to say, a bank giving the federal government money in exchange for a Treasury bond), it means your income stream will be reduced to a mere trickle. If inflation rises, it essentially disappears. 

As the yield on new government debt reached toward 5% and inflation hung stubbornly at around 6.4%, all of that old, low-interest, pandemic-era debt started to look like garbage and banks began unloading it. The more that banks dumped old debt, the less value that debt had on resale markets. The lower its resale value, the more the banks wanted to dump it. SVB lost almost $2 billion selling off Government securities. And when they announced the loss, their stock price plunged by 60%. 

At the same time, many of SVB’s clients were withdrawing money. This was in part because rising interest rates made borrowing new money more expensive and thus incentivized the use of savings in day-to-day business operations. Also, higher inflation and higher interest rates made low-earning bank deposits less attractive and compelled depositors to redeploy their surplus capital towards higher-earning investments. So, just as SVB needed cash, deposits were evaporating.

By the end of the week of March 10, the four biggest banks in the United States had lost $51 billion because of their panicked dumping of pandemic-era debt. Right after SVB was taken under government control, state regulators closed the New York-based Signature Bank. Before the weekend was over the Federal Reserve announced the creation of a new lending facility that would ensure that “banks have the ability to meet the needs of all their depositors.” Furthermore, the Fed said it was “prepared to address any liquidity pressures that may arise.”

It would seem that the federal government is ready to execute another de facto partial nationalization of US banking, just as they did in 2008 via emergency “cash injections” and then the Troubled Assets Relief Program (TARP). In this current crisis, banks can avoid losses on their low-interest debt if they do not sell it before its maturity. For that to happen, the banks need money. The Fed has said it will pour enormous amounts of money into the banks while all of the relevant officials have proclaimed that the banking system will somehow pay for this. All of this will almost certainly mean even more government debt will be issued. 

Already, interest payments on the federal debt are one of the largest single items in the US budget – set to reach $400 billion this year. That is almost half as much as the grotesquely overdeveloped military budget. By comparison, federal spending on housing is only $78 billion.

Shoring up the banking system is necessary because if it collapses, the whole economy goes with it. At least in the short term, Americans are hostages of the US financial system. But government intervention without any new regulations and taxes upon the financial sector will likely mean more inflation and a bigger financial bubble. By refusing to properly tax the top 1%, the federal government also commits itself to more austerity for the many and more welfare for the rich, because rising government debt means a rising portion of our taxes must go toward interest payments. 

This system of crisis-prone, hyper-financialized capitalism seems ever more like a junkie. If it doesn’t get its regular fix of public sector help, it will simply collapse and die. 

Even if the federal government can stanch the current crisis, the pandemic debt story is global and very likely to cause trouble for some time to come. As a 2021 report by the World Bank put it: “The debt buildup during the pandemic-induced global recession of 2020 was the largest in several decades. This was true for all types of debt—total, government, and private debt; and advanced-economy and EMDE [emerging market and developing economy] debt; external and domestic debt. In 2020, total global debt reached 263 percent of GDP and global government debt 99 percent of GDP, their highest levels in half a century.” 

The US intelligentsia and its media elites are finally beginning to reckon with the impact of misguided and authoritarian lockdowns on student learning and the psychological and physical health of millions. But in all the discussion of the current bank runs, the pivotal role of lockdowns in priming the crisis remains overlooked.

Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun

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A worker, middle, tells customers that the Silicon Valley Bank headquarters is closed on Friday, March 10, 2023, in Santa Clara, California. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation. (Justin Sullivan/Getty Images/TNS)

By Brandon Smith

Source: Alt-Market.us

There has been an avalanche of information and numerous theories circulating the past few days about the fate of a bank in California know as SVB (Silicon Valley Bank). SVB was the 16th largest bank in the US until it abruptly failed and went into insolvency on March 10th. The impetus for the collapse of the bank is tied to a $2 billion liquidity loss on bond sales which caused the institution’s stock value to plummet over 60%, triggering a bank run by customers fearful of losing some or most of their deposits.

There are many fine articles out there covering the details of the SVB situation, but what I want to talk about more is the root of it all. The bank’s shortfalls are not really the cause of the crisis, they are a symptom of a wider liquidity drought that I predicted here at Alt-Market months ago, including the timing of the event.

First, though, let’s discuss the core issue, which is fiscal tightening and the Federal Reserve. In my article ‘The Fed’s Catch-22 Taper Is A Weapon, Not A Policy Error’, published in December of 2021, I noted that the Fed was on a clear path towards tightening into economic weakness, very similar to what they did in the early 1980s during the stagflation era and also somewhat similar to what they did at the onset of the Great Depression. Former Fed Chairman Ben Bernanke even openly admitted that the Fed caused the depression to spiral out of control due to their tightening policies.

In that same article I discussed the “yield curve” being a red flag for an incoming crisis:

“…The central bank is the largest investor in US bonds. If the Fed raises interest rates into weakness and tapers asset purchases, then we may see a repeat of 2018 when the yield curve started to flatten. This means that short term treasury bonds will end up with the same yield as long term bonds and investment in long term bonds will fall.”

As of this past week the yield curve has been inverted, signaling a potential liquidity crunch. Both Jerome Powell (Fed Charman) and Janet Yellen (Treasury Secretary) have indicated that tightening policies will continue and that reducing inflation to 2% is the goal. Given the many trillions of dollars the Fed has pumped into the financial system in the past decade as well as the overall weakness of general economy, it would not take much QT to crush credit markets and by extension stock markets.

As I also noted in 2021:

“We are now at that stage again where price inflation tied to money printing is clashing with the stock market’s complete reliance on stimulus to stay afloat. There are some that continue to claim the Fed will never sacrifice the markets by tapering. I say the Fed does not actually care, it is only waiting for the right time to pull the plug on the US economy.”

But is that time now?  I expanded on this analysis in my article ‘Major Economic Contraction Coming In 2023 – Followed By Even More Inflation’, published in December of 2022. I noted that:

“This is the situation we are currently in today as 2022 comes to a close. The Fed is in the midst of a rather aggressive rate hike program in a “fight” against the stagflationary crisis that they created through years of fiat stimulus measures. The problem is that the higher interest rates are not bringing prices down, nor are they really slowing stock market speculation. Easy money has been too entrenched for far too long, which means a hard landing is the most likely scenario.”

I continued:

“In the early 2000s the Fed had been engaged in artificially low interest rates which inflated the housing and derivatives bubble. In 2004, they shifted into a tightening process. Rates in 2004 were at 1% and by 2006 they rose to over 5%. This is when cracks began to appear in the credit structure, with 4.5% – 5.5% being the magic cutoff point before debt became too expensive for the system to continue the charade. By 2007/2008 the nation witnessed an exponential implosion of credit…”

Finally, I made my prediction for March/April of 2023:

“Since nothing was actually fixed by the Fed back then, I will continue to use the 5% funds rate as a marker for when we will see another major contraction…The 1% excise tax added on top of a 5% Fed funds rate creates a 6% millstone on any money borrowed to finance future buybacks. This cost is going to be far too high and buybacks will falter. Meaning, stock markets will also stop, and drop. It will likely take two or three months before the tax and the rate hikes create a visible effect on markets. This would put our time frame for contraction around March or April of 2023.”

We are now in the middle of March and it appears that the first signs of liquidity crisis are bubbling to the surface with the insolvency of SVB and the shuttering of another institution in New York called Signature Bank.

Everything is tied back to liquidity. With higher rates, banks are hard-pressed to borrow from the Fed and companies are hard-pressed to borrow from banks. This means companies that were hiding financial weakness and exposure to bad investments using easy credit no longer have that option. They won’t be able to artificially support operations that are not profitable, they will have to abandon stock buybacks that make their shares appear valuable and they will have to initiate mass layoffs in order to protect their bottom line.

SVB is not quite Bear Stearns, but it is likely a canary in the coal mine, telling us what is about to happen on a wider scale. Many of their depositors were founded in venture capital fueled by easy credit, not to mention all the ESG related companies dependent on woke loans. That money is gone – It’s dead. Those businesses are quietly but quickly crumbling which also conjured a black hole for deposits within SVB. It’s a terribly destructive cycle. Surely, there are numerous other banks in the US in the same exact position.

I believe this is just the beginning of a liquidity and credit crisis that will combine with overt inflation to produce perhaps the biggest economic crash America has ever seen. SVB’s failure may not be THE initiator, only one among many. I suspect that in this scenario larger US banks may avoid the kind of credit crash that we saw with Bear Stearns and Lehman Brothers in 2008. But, contagion could still strike multiple mid-sized banks and the effects could be similar in a short period of time.

With all the news flooding the wire on SVB it’s easy to forget that all of this boils down to a single vital issue: The Fed’s stimulus measures created an economy utterly addicted to easy and cheap liquidity. Now, they have taken that easy money away. In light of the SVB crash, will the central bank reverse course on tightening, or will they continue forward and risk contagion?

For now, Janet Yellen and the Fed have implemented a limited backstop and a guarantee on deposits at SVB and Signature. This will theoretically prevent a “haircut” on depositor accounts and lure retail investors with dreams of endless stimulus.  It is a half-measure, though – Central bankers have to at least look like they are trying. 

SVB’s assets sit at around $200 billion and Signature’s assets are around $100 billion, but what about interbank exposure and what about the wider implications?  How many banks are barely scraping by to meet their liquidity obligations, and how many companies have evaporating deposits?  The backstop will do nothing to prevent a major contagion.

There are many financial tricks that might slow the pace of a credit crash, but not by much.  And, here’s the kicker – Unlike in 2008, the Fed has created a situation in which there is no escape. If they do pivot and return to systemic bailouts, stagflation will skyrocket even more. If they don’t use QE, then banks crash, companies crash and even bonds become untenable, which puts the world reserve status of the Dollar under threat. What does that lead to? More stagflation. In either case, rapidly rising prices on most necessities will be the consequence.

How long will this process take? It all depends on how the Fed responds. They might be able to drag the crash out for a few months with various stop-gaps. If they go back to stimulus then the banks will be saved along with equities (for a while) but rising inflation will suffocate consumers in the span of a year and companies will still falter. My gut tells me that they will rely on contained interventions but will not reverse rate hikes as many analysts seem to expect.

The Fed will goose markets up at times using jawboning and false hopes of a return to aggressive QE or near-zero rates, but ultimately the trend of credit markets and stocks will be steady and downward.  Like a brush fire in a wind storm, once the flames are sparked there is no way to put things back the way they were.  If their goal was in fact a liquidity crunch, well, mission accomplished.  They have created that exact scenario.  Read my articles linked above to understand why they might do this deliberately.

In the meantime, it appears that my predictions on timing are correct so far. We will have to wait and see what happens in the coming weeks. I will keep readers apprised of events as new details unfold.  The situation is rapidly evolving.