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Mainstream, VOL 61 No 14, April 1, 2023

American Banking Crisis and Role of Finance Capital | Soma Marla

Saturday 1 April 2023, by Soma S. Marla


Recent collapse of Silicon Valley Bank (SVB), has further led to the fall of the Signature bank, Credit Suisse and now a major European German Credit Douche bank. This banking crisis resulted from US Treasury’s recent interest rate hike. Cracks are appearing in US banking as fears of a possible financial contagion across the world, reminding 2008 Lehman brothers economic meltdown. It’s implications will soon be felt in Indian economy.

The present banking crisis is caused by stockpiling 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 mid size banks such as Silicon Valley bank. Consequently, deposits in American banks increased from $ 13 trillion to 18 trillion. With low levels of manufacturing activity in absence of productive lenders the small and mid sized 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 Reweave 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 (estimated that bonds lost $1 billion 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 the $42 billion run on the bank, resulting in the collapse of SVB, Signature, Susie Credit and other banks worldwide.

There is an organic bond between Federal bonds and their financial investments in the US war industry. Of late Federal bonds are increasingly invested in US war games such as the ongoing Ukraine war. Present bursting of the 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 invested in productive areas such as manufacturing but not on war industry, speculation or share markets, which are unproductive with no use value in society. US Federal system has hiked the interest rates to contain high levels of inflation witnessed currently in US economy. Eventually, the bond value declined and the wealth of small and mid-sized 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 depend and now alarmingly spreading to European banks.

 Implications to Indian Economy

  • RBI, India’s investment in US treasury securities surged by a net $9.2 billion in August to $221.2 billion, (ETIG. Data, TOI, 24th August, 2022). 
  • 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 are buying Gold. As demand for soars the price of gold shot 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. However, 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 imflation. And inflation would certainly is imported to countries it trades with. So this would aggravate our inflation from current 6.5 %, that is well above the RBI’s 4 % target. Our economy has barely recovered from effects of the COVID pandemic and our medium-term outlook appears weak. Our private investment is weak (despite Madam Nirmala Sitaraman’s never-ending financial incentives dolled private investments are yet to pick up), exports are declining and domestic demand is further plummeting. The shockwaves of the American banking crisis would further create a financial crisis in developing countries, including India.

The present banking crisis is the continuation of 2008 Lehman brothers economic meltdown. Measures were taken by the capitalist class and its state to try to bail out the crisis at one point but mysteriously would resurface even more violently at other places. This clearly demonstrates the negative affects of unproductive finance capital. The diversion of the public budget to ongoing war games by NATO countries and American imperialism to war in Ukraine is making life of common people more miserable.  Massive worker demonstrations witnessed in France, UK (strikes by Rail and health workers) are nothing but resistance against intensifying assault on the welfare of the working class. Common people and workers are forced to pay for the existential crisis of Capitalism today.

To alleviate from current banking crisis, Imperialism should heed the voice of peace and immediately stop war games in Russia-the Ukraine war and Taiwan coast.

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