China is quietly revelling in the US’ latest financial crisis
- The string of bank collapses in the US due to a lack of Fed supervision feeds directly into Beijing’s narrative that American power is in irreversible decline
No two crises are alike. That is true of recent financial upheavals – the Asian financial crisis of the late 1990s, the dot-com crisis of 2000, and the global financial crisis of 2008-09. It is also the case with crises sparked by geostrategic shocks, such as wars, pestilence, famine, and pandemics.
The failure of SVB is symptomatic of a far bigger problem: a US financial system that is woefully unprepared for the return of inflation and the concomitant normalisation of monetary policy. SVB risk managers were in deep denial about such an outcome, and the bank was brought down by sharp losses on its unhedged US$124 billion bond portfolio, triggering a classic bank run by fearful depositors.
Depositors can hardly be blamed for not doing the due diligence on complex financial institutions they entrust with their assets. That task falls to the Federal Reserve, which, sadly, blew it again.
This is particularly disheartening in the aftermath of the post-2008 implementation of a new supervisory regime. “What if” stress tests for banks quickly became the gold standard for minimising the risk of financial contagion.
Over time, however, stress tests became an exercise in mindless repetition. Big banks built ample cushions of financial capital that all but ruled out systemic failure in the event of a major recessionary shock. A string of Treasury secretaries, Fed chairs, bank CEOs, and even presidents were unanimous in boasting of a US financial system that was in excellent shape.
We should have seen the latest twist coming, because the stress test suffered a major flaw: it had turned into an asymmetrical risk-assessment exercise, examining the performance of large systemically important banks in the event of a hypothetical recession. The Fed staff modelled simulated impacts of sharp declines in global GDP, soaring unemployment, and plunging asset markets – shocks that were presumed to be accompanied by renewed disinflation and falling interest rates.
But, buried in terse language near the end of the report, the Fed noted that any firm-specific exploratory results wouldn’t be available until June 2023. And there was no indication that such results would be published for smaller regional banks. Too little, too late.
There is an important footnote to China’s view of a declining America. While Mao Zedong alluded to it in broad terms – a US “paper tiger … in the throes of its deathbed struggle” – this argument was fully articulated by Wang Huning in his 1991 book America Against America. Based on Wang’s observations while living in the US, the book was a scathing critique of America’s social, political, and economic decay.
In the end, it pays to ponder Chinese etymology. In Mandarin, wéijī has the dual meaning of danger and opportunity. From SVB to Wang Huning, that’s precisely the point of the increasingly worrisome interplay between another US-made financial shock and a sharply escalating Sino-American cold war. A rising China is taking dead aim at crisis-prone America.