Markus Lehner
On 8 March, Silicon Valley Bank (SVB) announced that it would raise $2 billion through a capital increase to offset losses in its assets. After it became known that the bank had invested more than half of its assets in long-term government bonds that had lost massive value, panic broke out among account holders. The 16th largest US bank, which was an important service provider for many clients in the technology sector, had massive deposits above the government guarantee of $250,000. Each of them wanted to secure their assets as quickly as possible. Within just 40 hours, 42 billion US dollars disappeared from the bank’s books – a high-tech version of the “bank run” via Twitter and online transfers, which within just a few hours had wiped out a quarter of the bank’s total assets. Already on 10 March, the US financial regulator declared the bank insolvent.
Spread of the Banking Crisis
Initially, this seemed like a local event that could be attributed to management errors at a single bank. But it quickly became clear that other banks in the USA were also beginning to falter. Those with cryptocurrency transfer operations were particularly affected, as were some mid-sized ones that had similar asset problems to SVB, such as First Republic. This quickly translated into further capital outflows and falling stock prices for bank shares. Within just one week of the SVB failure, US banks lost $229 billion in market value (-17%). Despite this, political leaders in the US and the EU were proclaiming that it was nothing like 2008, and that the regulations put in place after the crisis would work and everything would quickly unwind.
Then came bad news from the Paradeplatz in Zurich, the headquarters of one of Switzerland’s two big banks, Credit Suisse (CS). In view of its poor earnings situation in which it suffered four consecutive quarters of losses, it too sought to hedge its bets by increasing its capital in the face of the shocks in the banking sector. On 15 March, however, it became known that one of the main investors in the bank from Saudi Arabia was not prepared to stand by it. Capital was promptly withdrawn from the bank in large quantities.
Not even the regulators’ pledge to stand by the bank and the provision of a $54 billion loan by the central bank could calm the situation. An imminent bankruptcy of CS could no longer have been contained by the financial authorities as was the case with the SVB.
CS is one of the 30 major global banks classified as “too big to fail” – i.e. one that is linked to so many companies and other major banks by mutual liabilities that its collapse would lead to a systemic crash like that of 2008 after the fall of Lehman Brothers. Within just four days, therefore, the federal government and the Swiss National Bank brokered an emergency takeover by the other major Swiss bank, UBS. A merger that would otherwise have taken years of preparation was carried out in a few days in such a way that there was no time left for a collapse of CS and the investors could be reassured for the time being. The shifting of the problem to UBS, which now has to cope with the gigantic risks of CS against its will, shows the nervousness that prevailed at the control centres of big capital. In an already tense global situation following the pandemic crisis, the war in Ukraine, the escalating tensions with China, the continuing inflation and the consequences of the climate crisis and the associated energy crisis, another shock to the world economy comparable to that in 2008 could prove devastating.
Governments and central banks insist that the current situation is different from that of 2008. Then, the crisis was caused by the total loss of private debts securitised in securities and the lack of equity capital protection, especially at investment banks. Since then, regulations have been introduced (Basel III) that would prevent such products and such risky capital/risk ratios in the banking business. This current crisis, they argue, is one caused by individual failures; steps backwards in regulations, for example under Trump; or isolated cases in which banks and businesses did not react quickly enough to the central banks’ hiking of interest rates. In other words, factors that can quickly be brought under control through appropriate measures by the financial authorities and the central banks.
Reasons for the Current Crisis
In his analyses of the crises of 1847 and 1857, Marx noted that each financial crisis always appears to have its own dynamics and distinctive features from the last, but that each are ultimately due to the same problems in the real accumulation of capital. So let us first look at the reasons for the current crisis in its immediate form, in order to then come to the connections with the general trend of the crisis.
After the 2008 financial crisis, central banks pursued quantitative easing (QE), a policy of “cheap money” through low interest rates, purchases of bonds and other securities, and through expansion of low-interest government bonds. Nonetheless, throughout the 2010s, banks could neither kick-start their faltering lending businesses nor sustain the growth of Western economies beyond historically very low levels.
In general, this meant that a bank’s deposits and capital were offset by a mix of “super stable” government bonds, real estate loans (secured by rebounding real estate prices) and loans in other areas. Whilst they also had more high risk loans, especially into the “zombie companies” propped up by the government’s monetary policy, they generally considered that these were more than hedged by the higher proportion of “safe assets”.
With the coronavirus crisis, the supply chain and capacity failures, the further increased levels of government debt and the enormously increasing inflation, central banks began to turn away from QE and towards a policy of “Quantitative Tightening” (QT) since 2022. Bond purchases were stopped, interest rates for central bank loans were gradually increased and the issuance of government bonds was again linked to interest income. This caused borrowing costs to rise again, and property prices began to fall. Crucially, given that the “value” of a bond security is calculated by discounting the redemption amount at the prevailing interest rate, bond prices, and particularly those of long-term government bonds, are also falling.
All these factors mean that banks have to recalculate the value of their assets, in the case of bond values quite obviously (some falling as much as 20 percent), but also due to other factors such as the higher probability of default on corporate loans in view of increased insolvency risks and on real estate loans caused by the falling income from the real estate business. In fact, however, most banks behaved as if they would continue to operate in an environment of growing liquidity and continued their investment policies almost unchanged, one reason why the turn to QT had little effect on inflationary activity. To show the scale of the problem, here are the concrete figures on the balance sheet of the US banking sector:
US bank customers’ deposits of 19 trillion US dollars and equity of 2 trillion are offset as assets (according to nominal calculation) by 3.4 trillion in cash, 6 trillion in government bonds and real estate loans and 11 trillion in other loans (still supplemented by about 3 trillion in other assets or liabilities on both sides). The loss in value of the bonds alone means that the value of the bonds when sold is 620 billion less than their nominal value – which immediately becomes effective in the event of a bank run that exceeds the cash reserves through emergency sales of bonds. A study by financial scientists at the University of Southern California (quoted by The Economist, 18 March) concludes that the valuation of US bank assets actually needs to be adjusted downwards by 2 trillion. That is, in the event of a bank run, the equity cover of US banks would be virtually wiped out once the assets are liquidated. In contrast to the tenor of the general reassurance, The Economist therefore rightly states: “time to fix the system – again”. The SVB crash has therefore made it obvious that the banks’ QE-era business model must now lead to an adjustment of their assets, which immediately requires a review of existing debt as well as the risks of future lending. So, belatedly, the “tightening of money” is also setting in for the banks. In fact, the crisis of 2023 is therefore more reminiscent of the one that took place in the first half of the 1980s after the radical turnaround in interest rates by the Reagan administration (“Volcker shock”).
Misleading Explanations and their Causes
But the severity of the crisis cannot be explained by the events of 2008. The basis of the repeated banking crises in capitalism, as Marx showed, is found in the dual nature of the commodity as both a use-value and an exchange value, that is, both a product and a bearer of market value, and thus the necessity that their unity be established again and again in the metamorphosis of the money-commodity cycle. This is accompanied by the detachment of real value, grounded in actual labour processes, from the value form, the various price expressions of everything that can possibly take the form of a commodity.
This separation of the value form from actual production of value, which is particularly apparent with interest-bearing capital, nonetheless has to bear some relation to the commodity-money circuit in the long run. But, whilst the rate of profit in these industries is only understandable in long-term averages, the rapid fluctuations in prices on futures exchanges appear as daily or even hourly values around which economic events seem to revolve, an inversion of their actual relation which itself creates crises.
This abstract tendency towards financial market crisis gets its general form from the following connection: fundamentally, the dynamics of capital accumulation are determined by the tendency of the average rate of profit to fall and the associated compulsion to constantly expand the utilisation of capital – a movement that in the long run leads to over-accumulation (excess capacities, collapsing demand, investment decline …). This tendency, in turn, is counteracted by the seemingly independent constant growth of all possible forms of interest-bearing capital, which seem to continue to make capital utilisation possible, even if the real profits can no longer support it. Value form and value pretend to decouple completely, and accumulation can continue as long as “lenders” can be found. But as soon as one actor gambles away the “credit” in important places and this spreads domino-like to other areas, the house of cards begins to collapse. While in 2008 it was the fall in real estate prices and with it the collapse of subprime securities, paradoxically in 2023 it is the loss in value of the reportedly safe government bond securities that led to a value adjustment of bank assets. But whatever the immediate trigger of a financial crisis, the point is that the delaying of a crisis rooted in the real economy by the financial markets must ultimately lead to a correction, but that in doing so becomes the amplifier of the crisis in the real economy.
The Impact of the Banking Crisis
First of all, we need to look at the immediate measures that governments and central banks have taken to contain the banking crisis. In the case of the SVB and similar banks, the US central bank first increased the deposit insurance above the usual $250,000 – the money speculated by the SVB was thus refunded to the depositors via tax payments. In addition, the US central bank set up a programme for the affected banks (Bank Term Funding Program), through which they can replace the loss in value of the government bonds up to the nominal value with a loan. The latter is limited to one year and is thus intended to give US banks the opportunity to adapt to the high interest rate environment in a transitional period. Nevertheless, this means that while these banks can adjust their assets, they will get additional interest charges that will have an overall impact on their ability to lend. While this measure will lead to the rescue of many banks – it will contribute to intensifying the problems of the already difficult financing of new investments (higher lending rates, more restrictive credit conditions). This will add to the significant decline in investment activity in the US private sector already seen in recent quarters. Similar programmes are to be expected in the EU and the UK and will therefore exacerbate the stagnation trend there as well.
Some of the measures taken in connection with the CS crisis were even more radical. In the takeover by UBS, not only was CS sold off far below market value (for a purchase price of $3.2 billion for a bank that still had a market value of over $100 billion at the time of the last financial crisis), but large state guarantees were also provided to cover the risks. Almost $10 billion was promised by the Swiss government for the immediate defaults to be feared and another $100 billion for longer-term risks. While the Swiss taxpayers are being asked to pay, the investors in CS were also asked to contribute: the bank’s Tier 1 bonds (a special form of convertible bonds) were not transferred to UBS with the equity capital, so that some premium investors (e.g. from Saudi Arabia) lost a total of about $17 billion. All in all, however, UBS+ has created a monster bank whose balance sheet total is about twice the size of Switzerland’s gross national product. So if UBS were to fail, as it did once before in 2008, the “rescue of the global markets” could unlikely be shouldered by Switzerland alone. Even if the collapse of a major bank has thus been prevented for the time being, UBS will have a hard time working through the problems and will be busy for a long time with the herculean tasks of such a major merger (e.g. in the entire IT infrastructure). In any case, with CS, one of the important investment banks for restructuring and major investment projects in Europe and the USA has been eliminated or only partially replaced by UBS+. The CS crisis management is thus not only exacerbating the debt problems, but will also have negative consequences for the financing of investments.
Whatever happens with the banking crisis (the risks in the so-called shadow banking sector cannot yet be assessed), the crisis management will in any case reinforce the already existing tendencies towards stagnation. Even if a synchronised recession in the EU and the USA may not materialise this year, growth rates below one per cent are catastrophic for the realisation of capital. With the banking crisis, weak investment demand will now be followed by a wave of bankruptcies resulting from “risk adjustments” and “write-offs” in the context of bank stabilisation. With inflation stubbornly hovering around 5-10%, this development is combining to create chronic stagflation. Falling real wage incomes, austerity programmes, threatened job losses in bankrupt companies, etc. will have an increasingly severe impact on the living and working conditions of the mass of wage earners – and must lead to an intensification of defensive struggles!
The Solution?
Neoliberal journals such as The Economist or the Financial Times are arguing about the right way to deal with the renewed banking crisis. The latter fears that the new bailouts will create a “moral hazard”, a reinforcement of misbehaviour in the financial markets, and tends to believe that the crisis should finally be allowed to run its course in order to force the “bad” financial players out of the market. The Economist is more inclined to trust the “regulators” and believes that while extremes such as the SVB or CS must indeed be “punished”, the effects must then be contained by the action of the regulators. It is claimed that each crisis can produce more effective regulations, and that the system could thus come out of the turmoil stronger. Liberal economists such as Joseph E. Stiglitz, on the other hand, see the problem that certain financial market players circumvent every regulation and repeatedly upset the balance of the entire system. He therefore calls for further “scientific” control over banking business and its risk management, whereby, for example, the mistakes in the valuation of current bank assets in the USA could have been avoided.
Obviously, all these approaches are misguided in that they pin the problem on the “irrationality” of individual financial actors and the more or less regulation of financial markets. In fact, the origin of the crisis does not lie in the financial markets. They are only one element and symptom of the overall crisis of capital utilisation and can only be brought under control there. A left answer to this is given, for example, by Michael Roberts in his blog post “Bank Busts and Regulation”, where he raises the question of the nationalisation of the banking sector. He develops a model of “democratic control” of the banks and their financing operations, as well as their embedding in a national economic development plan.
As much as bank nationalisation is naturally at the centre of a programme of action in the context of the overall capitalist crisis, this demand cannot be posed in isolation from the question of the overall struggle against the system that created this crisis. A state banking system within the framework of “self-management” was attempted in, for example, the former Yugoslavia where it led to a de facto economic dictatorship of banks, which were ultimately able to undermine all levels of workplace self-management and “democracy” through lending, and itself led to more financial crises.
Workers’ control over a state-owned banking sector cannot ultimately constitute a permanent state, but can only provide a lever on the way to overcoming capitalism itself. This struggle must therefore be developed with that for the socialisation of all central sectors of production and for a democratically determined plan in the framework of which banks would then be mere intermediaries for the overall social account. Only then is it guaranteed that the independence of the value form from the actual sectors producing use-value will not again become their dictatorship over human beings and that the mediation of social need and productive capacities will be established from conscious human cooperation and communication. Such a qualitatively different form of socialisation requires the destruction of the old state power and the establishment of a new, democratic state power – in short, a proletarian revolution.