May 19, 2024

Understanding the Silicon Valley Bank Collapse

The sudden implosion of the Silicon Valley Bank, or SVB, sent shockwaves after its March 17 bankruptcy filing

In a nine-day series of events, the financial staple of the tech startup scene dating back to 1983 collapsed. SVB is to be held by the Federal Deposit Insurance Corporation (FDIC) and then merged with First Citizens Bank & Trust Co, which is based out of North Carolina. 

The tumultuous event disrupted the banking industry worldwide in a crisis reminiscent of 2008. The fear of a greater banking collapse caused international panic, leading to the collapse of Swiss bank Credit Suisse. It was then acquired by long standing rival UBS over fears that Credit Suisse’s collapse could be disastrous for the global economy. 

As the FDIC moved to guarantee SVB depositors with the $250,000 limit that the institution typically guarantees, some questioned whether a total bailout was imminent. The government was quick to assure that the money for bailing out depositors is not taken from taxpayer money, but instead the full FDIC rescue was funded by payments made by banks. 

The question of why this took place still remains. How did a bank which in days prior held over $100 billion in assets collapse in a little over a week? 

The answer comes from a slightly unexpected source: the Federal Reserve.

The bank invested its billions in assets into a variety of debts held by the U.S. Treasury, as well as mortgage-backed securities. The latter of these investments were largely responsible for the collapse in 2008, as their profitability is dependent on the mortgages they are drawn from. 

This meant that as the Federal Reserve maintained increasing interest rates, the investments were devalued. Additionally, investors suddenly had less capital to deposit into the bank. Some clients even began withdrawing funds over concerns of the bank’s viability. 

The ensuing panic resulted in a bank run of sorts, where depositors scrambled to recover their finances before nothing was left. 

This raises the greater question of why the Federal Reserve was so insistent on higher interest rates.

Officially, the answer is runaway inflation. After the initial shock of the 2020 outbreak of COVID-19, inflation jumped from an average of 1.2% to 4.7% in a year; and by 2022, the yearly average was 8%. This came with a sharp increase in prices in every variety of commercial goods. 

However, this is an incomplete picture. Economists have noted a rise in what is being called “greedflation.” Greedflation is taking advantage of the panic around inflation to raise prices beyond what reasonable adjustments for inflation would be. This was seen in the case of egg prices, which saw sharp increases and a perplexing 718% increase in profitability for the industry.

An additional piece of context that often gets overlooked are comments from Federal Reserve Chair Jerome Powell on the current needs regarding inflation. Powell has cited what he alleges is overpayment of workers resulting from the 2020 stimulus checks, which incurred a power shift in the labor market as the driving force behind inflation. 

Powell does claim to support wage increases, so long as it is “consistent with 2% inflation,” he said in a speech to the Brookings Institute

With this context, it can be understood that the present economic situation, particularly in regards to these recent banking crises, are the consequences of efforts to generate exorbitant rates of profit. From the paycheck to the checkout line, the goal is taking as much money as possible. One can only assume that these policies will continue to disrupt economic function as they continue.

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