The Banking Crisis, Failure of the Capitalist Regime, Besieges All the Sanctuaries of Finance

Introduction

The collapse of Silicon Valley Bank (SVB) is the latest episode of the broader capitalist crisis developing in the United States following the Covid-19 pandemic. Increased consumer spending, caused by the $4 trillion of Covid-19 stimulus, has driven inflation since 2021. In 2022, after the Russian invasion of Ukraine, it got even worse as the price of oil and other commodities skyrocketed. In the war between the classes, the solution for the capitalists was to raise interest rates: the Silicon Valley Bank was the expected and accepted victim for the maintenance of the labor-capital ratio, necessary to feed its insatiable thirst for accumulating more and more profits.

Labor and inflation

In the booming economy of 2021, after years of rising labor demand, as businesses reopened after the Covid-19 lockdown, capitalists could not find a sufficient reserve army to meet the increased demand for labour. Conversely, years of intensified expulsions of immigrant workers and hundreds of thousands of proletarians who died from Covid-19, resulted in a massive labor shortage: everywhere on the external windows of the companies “workers wanted” signs were read while the bourgeois complained that “nobody wanted to work anymore”.

Throughout the following year, capitalists’ anxiety about increasing the bargaining power of workers in the face of these conditions grew. The bourgeois press became concerned about the “great resignations” when workers began to flee in large numbers from jobs with indecent wages or working conditions. At the same time, in 2022, new unionization campaigns at Amazon and Starbucks have raised fears of a resurgence of the union movement.

To get jobs back on track and prevent hyperinflation, which could have had dire consequences for the economy as a whole, the Federal Reserve launched a maneuver similar to the one it used in the 1970 OPEC crisis to attack the bargaining power of workers and at the same time contain inflation. By raising interest rates, thus making it harder for businesses to borrow, the Fed hoped to slow economic growth. As businesses downsized or closed, resulting in mass layoffs, the reserve army of labor would grow larger, thus driving down wages by putting more workers in competition for fewer jobs, thus reducing their power in the sale of their work. The plan is aimed at preserving profits while deflating the economy enough to avoid a hyperinflationary spiral.

Tech Industry

The tech industry hit an all-time high in 2021 with revenues from Amazon, Apple, Google, Microsoft and Facebook reaching $1.2 trillion as a boom in tech “start-ups” broke all records. But the Fed’s announcement of interest rate hikes in the spring of 2022 led to a sharp decline, and the industry lost billions of dollars on the stock exchange in a matter of days. Today what the bourgeois press calls the “white-collar crisis” is in full swing. The technology sector is hardest hit, with more than 120,000 layoffs last year and 148,000 in recent months. Similarly across the industry there has been a return to more oppressive management styles, aimed at getting the maximum profit out of each worker, under a return to a ’revenue per employee’ model. Capital injection into innovative companies in the last three months of this year is about a third of that of last year in the same period, falling from $151 billion to just $56.3 billion: even for start-up capitalists, praised as “founders” by the press, it is increasingly difficult to find funding.

SVB collapse

These factors played a role in the collapse of Silicon Valley Bank, the financial center for the tech industry and its economy. The SVB had benefited from growth in the tech sector in 2021, holding $189.2 billion in deposits, $89 billion more than a year earlier, and tripling its share price since 2018. When the Federal Reserve announced plans to raise rates last spring, trouble began for Silicon Valley Bank. As interest rates soared, startups began pulling more money out of their accounts to meet rising expenses as venture capital investments stalled. The bank, taking advantage of low interest rates, had invested 75% of its assets in long-dated government bonds, which are more profitable in times of low interest rates, whereas banks of its size usually invest only 6%. As the withdrawals continued throughout the year, the bank was forced to devise a plan to obtain enough liquidity to cover the withdrawals. When the bank admitted that it needed to raise fresh capital to cover the drawdowns, which would have required the sale of most of its bonds at a $1.8 billion loss, it triggered the crisis of confidence that led to the massive bank run, with withdrawals of over 42 billion in a single day, which led to the failure of the bank.

On a global scale

With central banks raising interest rates since the start of 2021, everyone was expecting a recession. How did it go? In industrial production in recent months we have seen not only a sharp slowdown in the United States, Poland and elsewhere, but above all a recession in the United Kingdom, Korea, Japan, Germany, Italy, Belgium and France. Not to mention China, which is hit hard in real estate and car manufacturing. The recession hits Asian countries and the UK more than continental Europe. This recession corresponds to a general slowdown in consumption linked to high inflation in the prices of raw materials, energy and agricultural products. However, the large international groups are doing very well. Energy producers and distributors have made unprecedented profits over the past two years. But large industrial groups, especially in the automotive sector, have also made huge excess profits by raising prices, especially by refocusing on luxury or high-end products. And with them, some big banks, such as BNP for example. For large industrial groups, raising interest rates is not so harmful at the moment, as high inflation causes real interest rates to be negative or very low.

The situation is different for small businesses, and in particular for start-ups; it is becoming more difficult for them to obtain loans and a number of them find themselves in difficulty or even bankrupt. The risk that arises with the increase in interest rates is therefore the multiplication of unpaid debts, which in turn, if their mass increases too much, can only lead to bank failures. Initially, the increase in interest rates is favorable to the banks: not only can they lend at higher rates, but it also increases the remuneration of deposits in central banks. However, as we see, this increase in interest rates is double-edged: on the one hand, it leads to a devaluation of previously purchased bonds, now with a much lower yield, to the point that today a gigantic mass of bonds worth several trillions, which are part of the monetary reserves of banks and financial organizations, such as insurance companies, pension funds, etc., depreciate between 20 and 30%! As long as the financial institution does not need to sell these bonds to obtain liquidity, the loss in value remains purely virtual, because these bonds will be repaid at their purchase value at maturity. However, the situation is very different if the financial institution, needing liquidity, is forced to sell part of it; the sale therefore takes place at market value, with heavy losses. This is what happened to SVB, Credit Suisse and several US regional banks. And now Deutsche Bank itself is under threat. Furthermore, rising delinquencies are forcing banks to raise cash. In response to this danger, the FED, together with the central banks of Great Britain, Japan, Canada and the ECB, has decided to provide dollars to commercial banks, which in turn will be able to lend them to large companies. In times of crisis, the dollar remains the safe haven currency and its demand explodes. On the foreign exchange market, the demand for dollars is around 450 billion, but at the height of the crisis in 2020 the demand suddenly rose to 5,000 billion. In financial terms we are dealing with a house of cards, or more precisely with a gigantic “Pyramid of Ponzi”. Everything holds up as long as capital continues to accumulate in production. But if the recession comes, if the sale of products stops, if unpaid debts explode, the whole pyramid ends up collapsing if the crisis explodes. Everything will depend on the strength of the recession in China, the United States and Europe in the coming years.