The Collapse of some American Banks
Within the first two weeks of last March, three banks of the USA went insolvent. The first to fall was the Silver Gate Bank of California on March 8. They themselves announced that the bank was being dissolved and they will return the deposited money of the customers.
Two days later, the Silicon Valley Bank fell. It tumbled in a rather classical way, like the old insolvent banks. Most of their big depositors were Indian Start-up companies who dumped their investment money earned in America in this bank. All of a sudden, on March 10, a rumour went round that the Silicon Valley Bank was going to fall. The anxious start-up companies rushed to withdraw their deposits. Now, no bank can have enough reserve for returning the whole of its depositors? money. So, if the majority of the depositors withdraw their money, obviously, the bank will become insolvent. It was the same case with the Silicon Valley Bank.
Two days after it, the Signature Bank became insolvent. It may be mentioned that the Silicon Valley Bank and the Signature Bank were respectively the second and the third biggest bank in American history to become insolvent. It is well known that the biggest bank failure in American history occurred in 2008 which triggered the worldwide 2008-09 economic crisis. That is why many apprehended that this time too, the fallout would be a new crisis as it happened earlier or something even bigger than that. Though it has not turned that way yet, the probability is still there. Many like the ex-Reserve Bank governor Raghuram Rajan has expressed their anticipation about more banks going insolvent in near future.
There is an immediate reason behind the fall of these banks. The central bank of the USA, the Fed Bank has started to increase the rate of interest to check inflation after a long period with low interest rates. As a result, those banks which invested in government bonds, encountered heavy loss. If they could keep their bonds till the time of maturity, this would not have happened. But once new governmental bonds are becoming available at higher interest rates, nobody would be interested to buy the old ones, which become devaluated. As a result those who are compelled to sell the old bonds they suffer loss. Such was the case with those banks. Due to rise in interest rates they faced losses on trying to sell old bonds.
But the question remains, why do these banks only go bankrupt when interest rates increased for all? We may find the answer if we understand why these banks had been compelled to sell their bonds in spite of facing loss.
Among these three banks, Silver Gate Bank and Signature Bank mainly dealt in crypto currency. Crypto currency is a model example of the speculative trading. It is not used largely for buying and selling of commodities till now. But the price of crypto currency varies according to its supply in the market. Therefore, crypto currency is used for keeping money deposits and for piling them up further through speculation. Though the prices of all crypto currency were on the rise during its initial years, it has been falling in the last few years. With some crypto currencies going downhill, the deposits in them lying with Silver Gate Bank and Signature Bank just evaporated. These banks were thus compelled to sell governmental bonds. But the Federal Bank?s decision to increase the interest rates made things worse for them by decreasing the price of these bonds, and, they went bankrupt.
More interesting is the tale of the collapse of the Silicon Valley Bank, which had close relations with the Indian start-up companies. We all more or less know how these companies are usually run. Though the valuations of most of the start-up companies amount in crores of rupees, nearly all of them suffer losses. Actually, the common method of their business is that they expend the incoming investments to expand their business, no matter if they suffer loss. This is called ?burning of cash? in the language of the start-up economics. The more a company grows, by displaying it, its valuation can be increased. Venture capitalists, most of which are Americans, pour cash in these start-ups to raise their valuation in the hope that one day, when these companies will be enlisted in the share market, they can make huge profit by shifting the liability of loss along with that of high valuation on the ordinary investors. No doubt, there is the probability of failure. But who cares? When they gamble based on speculation they do it not with their own money but with public money deposited in Pension Funds or the like! One may find a parallel in the Indian context where the government itself allows the public money at its disposal - accumulated through Provident Fund or Mutual Fund deposits ? to be engaged in speculative trading in the share market. During the Corona period, when the various central banks began to pump cash into the monetary system to rejuvenate the economy, the financial investment agencies began to invest heavily in the start-ups. The start-up companies put this money into the Silicon Valley Bank, which in turn lent it to the venture capitalists. Thus, the money went round in a circle: venture capitalists > the start-ups > Silicon Valley Bank> venture capitalists. In the process, Silicon Valley?s capital swelled up. Recently, investments in the start-ups began to wane. Naturally, the deposits in the Silicon Valley Bank also started to diminish. They tried to make it up by selling the old bonds in spite of loss. The last nail in the coffin was hammered by the raising of the interest rates by the Fed Bank. With the price of the bonds plummeting, an alarm spread among the depositors that the bank was approaching insolvency. As they all rushed to withdraw their money, the bank actually got ruined all of a sudden.
It is not clear whether the collapse of these three banks will lead to an economic crisis like 2008, but one thing is clear, that is, modern capitalist economy rests on speculation. In the era of globalization, the imperialist capital has augmented their profit hugely by intensifying their exploitation of the proletariat and other working people in the oppressed countries. But such extreme exploitation of the masses has also contributed to shrinking of the markets. Now suitable sectors are scarce for them where they can invest profitably. The enormous amount of funds at their disposal is therefore placed in the financial market where the rate of profit can be increased through speculation. This is resulting in recurrent crises in the world economy. At this very juncture, the IT companies are continuing to downsize. The IT workers are falling victim to the two-pronged crisis in the sector ? drop in the IT business and the increasing use of Artificial Intelligence.
Those who perceived capitalism as the only feasible road to human progress at the time of the collapse of the Socialist countries are proven wrong by such incessant crises of world capitalism. But the absence of proletarian struggle at present provides ample opportunity to imperialism-capitalism to manage one way or the other, though poorly, but successfully. We must note that in this they will remain successful until the proletariat, the section facing the brunt of this exploitation stands up and uproot capitalism itself.
8 April, 2023
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