Advertisement
Silicon Valley Bank (SVB)
OpinionComment
Andy Xie
Andy Xie

Opinion | With Silicon Valley Bank bailout, an unrepentant US is spending its way out of trouble again

  • Expect more banking and bond fund blow-ups with the US reluctant to stop the endemic moral hazard in its financial system, preferring to lean on the dollar
  • As spooked central banks ease up on monetary tightening, inflation will only rise higher and last longer

Reading Time:4 minutes
Why you can trust SCMP
9
A security guard looks out as customers line up at Silicon Valley Bank’s headquarters in Santa Clara, California, on March 13. Photo: AFP
Andy Xie

When commercial banks fail, spooked central bankers slow down the normalisation of monetary policy. This gives the liquidity overhang more time to turn into inflation, entrenching expectations. Interest rates may be lower in the short term as a result of banking crises – but they will be higher in the long run.

Advertisement
The failure of Silicon Valley Bank (SVB) is just the latest example of the financial excess. After the 2008 global financial crisis, the US Federal Reserve added US$4 trillion in quantitative easing, then added roughly the same again during the pandemic. All this money did not immediately lead to inflation – it stayed in the financial system, making it bloated and dangerous.

The causes of SVB’s failure are similar to those behind the recent pension funds crisis in Britain. The bank put short-term deposits into long-term bonds, and the so-called duration mismatch led to losses as interest rates rose.

This raises the question of how bank deposits should be guaranteed. SVB’s corporate clients were risk takers. Bailing them out is like rescuing the people who gave money to rogue traders in 2008. It shows the lack of progress in financial supervision since then.

In 2008, the financial system threatened to take down the whole economy and was made whole again despite the speculative losses. When the corporate depositors in SVB said they may not be able to pay employee wages, politicians buckled. There are so many hidden moral hazards in the modern financial system that it is stacked against middle-class savers and taxpayers.
Advertisement
Rich people can profit from it by taking excessive risks and, if it all falls apart, they can pass the bill to the little guys. As a result of financial deregulation in the 1990s, billionaires have been created left, right and centre while ordinary people have become poorer as the bill for each disaster was passed on through diluting money and/or raising taxes.
Advertisement