The sudden collapse of U.S.-based Silicon Valley Bank has recently triggered panic in the financial markets. Even though President Joe Biden spoke about the matter, it had little effect, and on March 13, several U.S. bank stocks were suspended, leaving many countries jittery. Experts believe this crisis is a result of a dual failure of the U.S. government’s monetary and technological policies, which have backfired. The Federal Reserve’s aggressive monetary policy and the abusive technological dominance of the U.S. government are the main reasons behind this.
On March 10, the California Department of Financial Protection and Innovation legally took over SVB and appointed the Federal Deposit Insurance Corporation as SVB’s receiver given that is was illiquid and insolvent. This is the largest U.S. bank closure since September 2008.
Experts attribute the root cause of the bankruptcy crisis to the fact the Federal Reserve has disregarded financial stability, adopted an aggressive monetary policy and aggressively raised interest rates. During the era of low interest rates, SVB invested substantial funds in U.S. Treasury bonds and other assets. As the Fed sharply raised interest rates several times in succession, the market price of SVB’s bond holdings and other assets continued to fall. As the bank hurried to restructure its portfolio, the disclosure of losses triggered a panic among depositors, leading to a run on the bank and, in the end, a complete collapse with withdrawal requests of $42 billion in a single day.
Zhang Yansheng, chief researcher at the China Center for International Economic Exchanges, observes that in response to the COVID-19 pandemic, the Fed used a combination of zero interest rates plus quantitative easing as monetary policy tools to stimulate the economy and flood it with liquidity. This meant more money in the hands of individuals and businesses that flowed to banks. SVB made investments that were reasonable in a time of low interest rates. After the “flooding” caused high inflation, the Fed switched to a policy of aggressive rate hikes. SVB struggled to cope and was left facing bankruptcy.
U.S. Treasury Secretary Janet Yellen recently admitted that “a central issue of the bankruptcy was the continued rate rise hikes by the U.S. Federal Reserve.”* Zhang Yansheng says that if the Fed ignores financial stability and insists on raising rates, some smaller and medium-sized banks may have issues, one by one, in the future. This will create systemic problems, dragging down the bigger banks and jeopardizing the financial stability of the United States.
The SVB crisis has another, less-mentioned cause. America’s anti-globalization policies of “decoupling and disconnecting” are backfiring on its own technology sector. Since beginning of the year, more than 400 technology companies in the United States have laid off more than 110,000 employees among them as technology companies have started to tighten their belts. Coupled with this, the United States has imposed major science and technology sanctions and embargoes as well as stronger export controls and strict investment reviews. U.S. policy has deprived the country’s tech industry of its largest market and a strong supply chain, exacerbating its future prospects. The bankruptcy of SVB, a bank serving Silicon Valley start-ups, was due to the volatility of the bond market but was also attributable to financial pressures caused by the downturn in U.S. technology companies.
Ma Wei, an assistant researcher at the Institute of American Studies at the Chinese Academy of Social Sciences, believes that certain technology policies have had a huge impact on the operations of U.S. tech companies. Many companies have had to cut back business with China, the world’s largest market. Underlying the current SVB crisis is actually a funding and operational crisis for technology companies.
Ding Yifan, a researcher at the World Development Institute of the Development Research Center of the State Council has said that it is even more ironic that technology sanctions will harm the interests of Chinese companies but will not be fatal; by contrast U.S. companies can suffer a killer blow. China is the largest consumer market for chips, so if you don’t sell to China, who will you sell to? It’s definitely a case of shooting yourself in the foot.
This sudden crisis revealed not only the financial risks caused by an aggressive monetary policy, but also the risk of a declining technology sector given the policy of decoupling and disconnecting supply chains.
It is an astonishing matter to go bankrupt overnight. Founded in 1983, SVB was witness to a glorious moment in American technological innovation for 40 years. Now that the bank has collapsed, one can only wonder if the Silicon Valley miracle can continue to thrive in the face of America’s domination of technology? Is the fate of Silicon Valley Bank a sign of Silicon Valley’s future?
*Editor’s note: Although accurately translated, this remark could not be independently verified.
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