Silicon Valley Bank's collapse not a one off

At the beginning of every banking crisis, the pundits say that it has been contained, that there will be no more failures. But this is never true. The stresses and imbalances that caused that bank to fail are being felt by most banks in the system. As investors and the public start to fear for their deposits and their shares, a crisis of confidence is *added* to the underlying problems. Banks become cautious about lending to each other --- and the interbank market is critical --- and cautious about lending to companies and individuals. Credit starts to contract. Every company, every individual, every country who/which is under stress find the capital markets closed to it, or finds borrowing prohibitively expensive.  And the drying up of credit causes more failures, more bankruptcies, more losses of bank capital, in a doom loop broken only by interest rate cuts and floods of "printed" money from central banks.

This article is from The Guardian

It has been a year since the Federal Reserve started to raise interest rates and banks are starting to fall over in the US. Anybody who thinks Silicon Valley Bank was a one-off is deluding themselves. Financial crises have occurred on average once a decade over the past half century so the one unfolding now is if anything overdue.

The reckoning has been delayed because since 2008 banks have been operating in a world of ultra-low interest rates and periodic injections of electronic cash from central banks. Originally seen as a temporary expedient in the highly stressed conditions after the collapse of Lehman Brothers, cheap and plentiful money became a constant prop for the markets.

Over the years, there was debate about what would happen were central banks to raise interest rates and to suck the money they had created out of the financial system. Now we know.

The action deemed necessary to rein in inflation has deflated housing bubbles, sent share prices plunging and left banks nursing big losses on their holdings of government bonds.

The Bank of England was quicker out of the blocks than the Fed. Threadneedle Street began raising rates in December 2021 and has now raised them 10 times in a row. The European Central Bank waited until July last year before making the decision to increase borrowing costs for the first time in a decade, and went ahead with an increase last week despite news that the banking malaise had spread across the Atlantic to Credit Suisse.

Ignore the fact that the US, UK and eurozone economies have all held up better than was expected in the immediate aftermath of the energy price shock caused by Russia’s invasion of Ukraine. It takes time for changes in monetary policy – the decisions central banks make on interest rates and bond-buying or selling – to have an impact.

As Dhaval Joshi of BCA Research pointed out last week there are three classic signs that a recession is coming in the US: a downturn in the housing market, bank failures, and rising unemployment. Housebuilding is down by 20% in the past year, which means the first has already happened. The problems at SVB and other US regional banks suggest the second condition is now being met. The third harbinger of a US recession is a rise in the US unemployment rate of 0.5 percentage points. So far it is up by 0.2 points.

“Banks tend to fail just before recessions begin,” Joshi says. “Ahead of the recession that began in December 2007, no US bank failed in 2005 or 2006. The first three bank failures happened in February, September, and October of 2007, just before the recession onset.


“Fast forward, and no US bank failed in 2021 or 2022. The first bank failures of this cycle – Silicon Valley Bank and Signature Bank – have just happened. If history is any guide, the start of bank failures presages an economic recession that is more imminent than many people anticipate.”

The Fed and the Bank of England meet to make interest-rate decisions this week and the financial markets think that in both cases the choice is between no change and a 0.25 point increase. Frankly, it should be a no-brainer. Given the lags involved, even a cut in interest rates would be too late to prevent output from falling in the coming months, but against a backdrop of falling inflation, plunging global commodity prices and evidence of mounting financial distress any further tightening of policy would be foolish.

Central banks seem to think there is no problem in achieving price stability while maintaining financial stability. Good luck with that. The Fed, the ECB and the Bank of England have tightened policy aggressively and things are starting to break.

It wasn’t always thus. There was a marked absence of banking crises in the 25 [actually nearer 28] years after the second world war, a period when banks were much more tightly regulated than they are today, and played a more peripheral economic role. Reforms put in place after the Great Depression, including capital controls and the US separation of retail and investment banking were designed to ensure governments could pursue their economic objectives without fear that they would be blown off course by runs on their currencies or turmoil in the markets.

Over the past 50 years, the financial sector has been liberalised and grown much bigger. Regulation and supervision has been tightened since the global financial crisis but with only limited effect. SVB was supposed to be a small bank that could operate with less stringent regulation than a bank deemed to be “systemically important”. Yet when it came to the crunch, all the depositors of SVB were protected, making the distinction between a systemic and non-systemic bank somewhat academic. The financial system as a whole is both inherently fragile and too big to fail.

There is not the remotest possibility of a return to the curbs on banks that were in place during the 1950s and 1960s. Desirable though that would be, there is no political appetite for taking on an immensely powerful financial sector. But that, as has become evident in the past 15 years, has its costs.

One is that economies dominated by the financial sector only really deliver for the better off: the owners of property and shares. A second is that the financial markets have become hooked on the stimulus that has been provided by central banks. A third is that the crises endemic to the system become much more likely when – as now – that stimulus is removed. Which means that eventually more stimulus will be provided, the markets will boom, and the seeds of the next crash will be sown.

Clicking on the chart produces a clearer image

 

The GFC permanently reduced OECD growth

The GFC (Global Financial Crisis) in 2008 permanently reduced the OECD (Organisation for Economic Co-operation and Development) trend growth rate.  Normally, after a deep recession, there is a rebound back to the previous trend line and growth continues along that trend line.  But this didn't happen after 2008.  Even taking the trend from the low point, trend growth has been just 1.8% per annum, compared with 2.8% from 1980 to 2007.   Excluding the Covid crash, trend growth was 2.2%.

And I think there is a high likelihood of deep recession in 2023, as Central Banks tighten to fight inflation, reducing trend growth even more.

Make no mistake: the GFC occurred because banking regulation was loosened.  One of the tenets of Neo-liberalism is that banks can regulate themselves, that they can be trusted to be sensible.  The GFC conclusively proved that this is false.  The fall in growth in developed countries has been a key factor in the rise of semi-fascist populist movements in the US, the UK and Europe.  And that fall in growth is due to an economic/social/political philosophy which promised higher growth and "trickle down" and instead has delivered lower growth, worse inequality, and grave danger to our democracies.

Saying and doing

Two reports show how companies are talking big about how they care about climate change and that they are "committed" to dealing with it.  Meanwhile, behind the scenes, they continue to support global warming.

From DeSmogBlog:

A new report by a British think tank estimates that since the 2015 Paris Agreement, the world’s five largest listed oil and gas companies spent more than $1 billion lobbying to prevent climate change regulations while also running public relations campaigns aimed at maintaining public support for climate action.

Combined, the companies spend roughly $200 million a year pushing to delay or alter climate and energy rules, particularly in the U.S. — while spending $195 million a year “on branding campaigns that suggest they support an ambitious climate agenda,” according to InfluenceMap, a UK-based non-profit that researches how corporations influence climate policy.

InfluenceMap cites as an example ExxonMobil’s heavily-touted algae-biofuels research, which the oil giant says “offers some of the greatest promise for next-generation biofuels” with significant climate benefits and has made it the focus of its “The Tiny Organism” ad campaign.

InfluenceMap notes that “detailed disclosures from the company show its goal of 10,000 barrels of bio-fuel a day would equate to only 0.2 percent of its current refinery capacity.”

Oil industry spending on Facebook and Instagram ads leading up to the 2018 U.S. midterm elections.

From EcoWatch:

A report published Wednesday names the banks that have played the biggest recent role in funding fossil fuel projects, finding that since 2016, immediately following the Paris agreement's adoption, 33 global banks have poured $1.9 trillion into financing climate-changing projects worldwide.


The top four banks that invested most heavily in fossil fuel projects are all based in the U.S., and include JPMorgan Chase, Wells Fargo, Citi and Bank of America. Royal Bank of Canada, Barclays in Europe, Japan's MUFG, TD Bank, Scotiabank and Mizuho make up the remainder of the top 10. 

This report comes as March has already brought deadly weather to places such as the American Midwest, where historic flooding has left four dead and farm losses could reach $1 billion, and Mozambique, where Tropical Cyclone Idai has devastated the East African country and President Filipe Nyusi estimated that more than a thousand people are likely dead.

Both disasters have been linked to climate change. "Increased flooding is one of the clearest signals of a changing climate," said 350.org co-founder Bill McKibben in a statement published by ThinkProgress, adding that flooded Nebraska's "current trauma is part of everyone's future."

Nebraska flooding

Politicians, companies, billionaires have started talking the talk, because it's obvious to everyone that global warming is happening and will be catastrophic, and that ordinary people are afraid and concerned.  But they are not walking the walk. 

 Time to call them out.  We have just 30 years to get to zero emissions.  To reach that goal, emissions must fall by 9% per annum, compound.  In fact, last year they went up.  We are losing the fight.

The Burdens of Capitalism

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” 

The Rothschild brothers of London writing to associates in New York, 1863.

Dr Gloom

Nouriel Roubini, who correctly forecast the GFC, more or less alone amongst his econorat colleagues(apart from a among others Gerard Minack at Morgan Stanley and yours truly), gives a deeply gloomy and reasonably convincing interview pointing towards a very bad 2013.  A double dip in the US, probable war with Iran, a slow-motion trainwreck in Europe speeding up, and an absence of government weapons to stop the economic and fiscal crisis.  He points out that the banks haven't changed, as evidenced by the Barclays Libor scandal.  And they haven't in respect of their behaviour, but they are far better capitalised now than then.  Some lessons have been learned.  Personally, I think the banks' proprietary trading should be split from the traditional banking business of borrowing short and lending long.  That's risky enough itself.  Add corrupt trading desks manned (and it's usually manned not womanned) by testosterone-high bullies interested only in short-term wins, still too low genuine capital (long term debt is NOT capital) and you have a toxic mix which will blow up again one day.  Maybe not in 2013, though.