By Dr. Soma Marla
Recent collapse of Silicon Valley Bank (SVB) has further led to the fall of Signature bank, Credit Suisse and now a major European German Credit Douche bank. This banking crisis has resulted from US Treasury’s recent interest rate hike. Cracks are appearing in US banking system amidst fears of a possible financial contagion across the world, reminding of Lehman brothers economic meltdown in 2008. Soon the implications will soon be felt in Indian economy also.
Present banking crisis is caused by stock piling of unproductive liquid finance capital (from excessive printing of currency violating financial norms) during the last decade.
US Federal system lowered the interest rates to near zero and people deposited this excess money in small and midsize banks such as Silicon Valley bank. Consequently, deposits in American banks increased from 13 trillion to 18 trillion dollars. With low levels of manufacturing activity in absence of productive lenders the small and midsized banks started increasingly financing start-ups, cryptocurrency and purchasing. Banks invested the surplus to purchase large volumes of US Federal Security Bonds.
A government bond is a debt security issued by a government to support government spending and obligations. In February, to contain soaring high inflation US Federal Reserve hiked the interest rates. And this decreased the value of Bonds. The market value of the bonds held by SVB fell as interest rates rose (it was estimated that bonds lost 1 billion dollar for every 25-basis point or 0.25 percentage point) rise in the Federal funds rate, which has now been lifted by around 450 basis points. This collapse in its asset base led to 42 billion dollar run on the bank, resulting in collapse of SVB, Signature, SussieCrdit and other banks worldwide.
There is an organic bond between Federal bonds and their financial investments in US war industry. Of late Federal bonds are increasingly invested in US war games such as ongoing Ukraine war.
Present bursting of Tech bubble, fall of Startups and using Federal bonds to support billions in ongoing Ukraine war led to the current banking crisis. In society, wealth is created from capital investment in productive areas such as manufacturing but not on war industry, speculation or share markets, which are unproductive and have no use value in society.
Subsequently, US Federal system has hiked the interest rates to contain high levels of inflation witnessed currently in US economy. Consequently, the bond value declined and wealth of small and midsized banks shrunk enormously. Fearing possible collapse of banks, depositors rushed to withdraw their money. Despite President Biden’s assurance that government would provide security to their deposits, the crisis further deepened and now alarmingly spreading to European banks.
RBI, India’s investment in US treasury securities surged by a net 9.2 billion dollar in August to 221.2 billion dollar, as per latest data.
In an environment of panic and risk aversion, foreign investors would look for safer avenues. This will have important implications for FDIs, as they would flee Indian stock markets to large western banks. As a consequence of possible FDI outflows, our rupee would further fall. Looking for safer avenues, rich people are buying gold and as demand soars, the price of gold goes up in Indian markets.
With fears of looming recession in American economy, our exports are likely to fall drastically. During COVID pandemic, exports have rescued our economy. But now the situation is likely to worsen with US entering a long period of recession. Any further hike in interest rates in USA would eventually lead to high inflation. Eventually inflation would certainly be exported to countries it trades with. So this would aggravate our inflation from current 6.5 percent, which is well above the RBI’s four percent target.
Our economy has barely recovered from affects of COVID pandemic and our medium term outlook appears weak. Our private investment is weak, exports are declining and domestic demand is further plummeting. The shockwaves of American banking crisis would further create financial crisis in developing countries, including India.
Present banking crisis is the continuation of 2008 Lehman brothers economic meltdown. Measures taken by the capitalist class and the state to try to restrain the crisis at one point, mysteriously would resurface with even more violently at another place.
This clearly demonstrates the negative effects of unproductive finance capital. Diversion of public budget to ongoing war games by NATO countries and American imperialism in Ukraine is making life of common people more miserable.
Massive demonstrations of workers witnessed in France and UK (strikes by rail and health workers) are nothing but resistance against intensifying assault on welfare of working class. Common people and workers are forced to pay for the existential crisis of Capitalism today.
To recover from current banking crisis, Imperialism should heed to the voice of peace echoed by millions around the world. The war must be stopped in Russia-Ukraine and Taiwan coast. (IPA Service)