By STAVROS MAVROUDEAS*
The specter of crisis looms once again over capitalist economies
On March 10, 2023, the Silicon Valley Bank (SVB), headquartered in California, became the largest bank to fail since the 2008 financial crisis. It was the 16th largest commercial bank in the US at one time. He specializes in transactions with technology and healthcare companies, and particularly in investments in start-ups.
the bankruptcy of Silicon Valley Bank it was triggered by significant losses on corporate bonds to which it had borrowed. In order to reduce losses, the Silicon Valley Bank bought US government bonds. However, the Fed's policy of raising interest rates has lowered the market value of these bonds. O Silicon Valley Bank then it was in a corner. He tried to cover his losses with a capital increase, but that caused panic among California's top tech companies that kept their cash in the Silicon Valley Bank.
The result was that, instead of raising capital, the Silicon Valley Bank faced a typical bank run. Shares of it collapsed, dragging those of other banks down. Trading in its stock was halted and efforts to raise capital or find a buyer failed, prompting the US Federal Deposit Insurance Corporation (FDIC) to take over. The latter is an independent government agency that insures bank deposits and supervises financial institutions. It will liquidate the bank's assets to repay its customers, including depositors and creditors.
The bankruptcy of Silicon Valley Bank it is not an isolated incident. It was preceded by another crack in the financial system in the sinful sector of cryptocurrencies. Cryptocurrency bank Silvergate went bankrupt after prices and trading of bitcoin and other cryptocurrencies collapsed (on 03/08/2023). Furthermore, the collapse of Silicon Valley Bank was quickly followed (on 12/3/2023) by the closing of the Signature Bank, a cryptocurrency industry lender.
During the following days, several other financial institutions surfaced as “toxic” (ie, in danger of failing); being the Credit Suisse the most prominent of them. In all cases, there were concerted efforts to come up with plans to save them. The crucial point in all these cases is not that bailout plans were worked out, but that they were faced with a high frequency of failures or near failures in a limited period of time.
Another crucial point is that the specific mechanisms of each case differ: from financing startups (in the case of Silicon Valley Bank) to cryptocurrencies (in the case of Silvergate) and to companies in a more traditional way (in the case of Credit Suisse). All of this points to a general malaise and not to specific isolated cases – as some mainstream commentators initially tried to argue.
Fears of a domino effect
These events caused fears in all the major political-economic decision-making centers of the capitalist system. They predicted the triggering of a chain (domino) of bankruptcies. Their reactions, as usual, are a combination of the fearful ostrich and the alertness of the terrified.
The European Union and the United Kingdom were quick to say they were little affected by the events. At the same time, however, the English branch of the Silicon Valley Bank it is literally being sold for peanuts.
On the contrary, the US activated a series of available tools (overt and covert) to neutralize the domino danger. In addition to reassuring statements and influencing public sentiment, the Treasury Department, the FDIC and the Fed announced a new Bank Financing Program (BTFP), which provides loans for up to one year to institutional institutions against bonds and certain other collateral.
Collateral will be taken at face value rather than market prices, avoiding forced sales in response to bankruptcy fears. In addition, the deposits of the two failing banks (including those above the institutional limit of USD 250.000) were guaranteed. In addition, regulators are discussing the introduction of new tests and requirements for bank solvency.
These moves aim to avoid panic in international money and capital markets after bankruptcies. A general panic would cause an uncontrolled avalanche and possibly an accident. Capitalist decision-making centers have enough experience – conditions and time permitting – to avoid such avalanches. But what they fail to resolve is the deepest contradictions in the system that give rise to them.
The litmus test of profitability
Within the dominant (vulgar) economic theory of the decision centers of the ruling classes, bankruptcies already foment already raging controversies. Two are the main foci of these controversies. First, social liberal views blame Donald Trump's deregulation of the financial system (the withdrawal of the Dodd-Frank Act in 2018), which loosened supervision over banks. They maintain that, with more financial regulation, bankruptcies would be avoided. Second, proponents of looser monetary policy (backed by panicked private markets) argue that rapid interest rate increases stifle business and require a more drastic stance.
These are myopic disputes that close their eyes to the insurmountable fundamental contradictions of capitalism. Marxist political economy rightly places at the center of these capitalist problems the downward trend in long-term profitability that haunts the very DNA of capitalism. This position is again confirmed in today's bankruptcies. Contrary to frivolous theories of financialization, the financial system never cut its umbilical cord with capitalist profitability.
An important part of interest (revenues from the financial sector) comes from surplus value (and, therefore, from a deduction from companies' profits). Thus, once again – contrary to “financialist” naivety – the drop in profitability causes financial failures. Interestingly, in the current situation it takes the form of a very dangerous duo: falling profits and falling corporate asset prices due to rising interest rates. This configuration vertically increases the danger of an imminent recession.
The beginning of the 2008st century is already marked by the increasing occurrence of capitalist crises. After the 19 crisis (with its double fall), the health and economic crisis of COVID-XNUMX followed. Both were associated with a serious decline in capitalist profitability. After the pandemic crisis, profitability recovered quickly when the economy restarted. But the recovery did not fully cover the losses of the crisis.
Furthermore, it quickly stumbled again into overaccumulation of capital (ie, the existence of a large proportion of capitalist enterprises that are unviable under current conditions). This was compounded by the specific contours of the contemporary eruption of inflation that raised production costs. So even traditional entities (eg JP Morgan) estimate that profitability is back on the decline.
As mentioned above, inflation further complicates the situation. Anemic capitalist growth produced real (and not merely monetary) causes for price increases. These were exacerbated by the systematic increase in corporate profit margins through moderate price increases (ie earnings inflation). But this trick quickly became uncontrollable, due to the intensification of imperialist conflicts and the inability to further increase the exploitation of labor. The former fragment production chains and increase costs.
The rise of “zombie companies” (companies that cannot cover debt service costs from current earnings over an extended period) is a telltale sign of this situation. Contrary to previous statements by the mainstream[I] this share of total companies is on the rise.
What is also worrying is the fact that – contrary to the beliefs of the mainstream – these “zombie companies” do not disappear quickly, but manage to survive despite their precarious condition. The prevalence of “zombie companies” increased after the global crisis of 1974-5. What made them more durable in recent years was the persistence of low interest rates. Unconventional monetary policy (i.e. quantitative easing (QE)), breathed more life into these companies that otherwise would have been buried for too long. The current bout of inflation puts its existence at risk as central banks raise interest rates.
Capital faces more complications in the current situation. The emergence of a tight labor market (at least for several sectors of the economy) implies that capital cannot easily reinvigorate the increased exploitation of labor (the rate of surplus value) as a counterforce to the decline in the rate of profit. “Big resignation” (fewer people working, i.e. a smaller workforce) and “quiet layoffs” (i.e. workers seeking shorter work hours) mean that – under current working conditions and pay – the Capital cannot easily employ methods of extracting relative and absolute surplus value. This condition is expressed in chronically low productivity.
The riddle of capital politics
Thus, the system faces the duet of low profitability and high inflation.
It seems that – at least currently – the main centers of capitalist political-economic decision prioritize the fight against inflation. Therefore, interest rates rise. But this further worsens the profitability of companies. In such a situation, the financial sector is much more vulnerable. It depends on the profitability of productive companies, which is falling.
The system is stressed, due to years of expansive operations based on fictitious capital (which depend on credit expansion). At the same time, your assets are depreciating due to rising interest rates. Furthermore, perverse phenomena appear; such as the inverted yield curve (an unusual state in which long-term debt instruments yield less than short-term ones). This combination leads the banks most exposed to bankruptcy.
Capitalist political-economic decision-making centers probably expect the pace of bankruptcies to be low and spread out over time. Thus, they could face each one separately and without the process resulting in a domino of breaks.
However, history has shown that capitalism is not an easily controllable system, even by its most experienced managers. The current surge in financial failures is just the tip of the iceberg. The deep structural contradictions of the capitalist system – fundamentally expressed in the drop in profitability – were under the surface. And the capitalist system seems increasingly incapable of solving them. He became unable to accept the massive destruction of surplus capital.
*Stavros Mavroudeas Professor at the Department of Social Policy at Pantheon University in Greece.
Translation: Eleutério FS Prado.
Note
[I] For example, a company offering https://www.federalreserve.gov/econres/notes/feds-notes/us-zombie-firms-how-many-and-how-consequential-20210730.html
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