Named the consequences of the collapse of American banks: “the United States will be poorer”

The split in the political life of the United States was not yet the most terrible event for America. The collapse of two major banks, SVB and Signature, has Biden balancing on what steps to take to stabilize the economy without losing political points. Of course, federal regulators and the Treasury, at a moment of general tension, began to assure citizens that there was no systemic risk for the banking system as a whole. And if it does not exist, then it is not worth expecting a repetition of the 2008 crisis.

But after Friday’s SVB crash, the US government filed for bankruptcy of a second bank (also closely linked to the tech industry), Signature. According to a joint statement by the heads of the US Treasury Department, the Federal Reserve System (FRS) and the Federal Deposit Insurance Corporation, Signature Bank was closed due to “a similar exclusion of systemic risk.” The Fed said it would create a new Bank Term Facility to offer depository institutions loans for up to one year backed by US Treasury securities and other assets to help banks. However, this, as it turned out, can only be beautiful words. For context, it is worth evaluating the actual figures.

Bloomberg notes that SVB has positioned itself as a one-stop-shop for tech visionaries – more than just a bank, a financial partner for loans, currency management and even personal mortgages. Some found his tactics of bundling client services aggressive, but the results were satisfactory. In doing so, Bloomberg emphasizes, there is a huge risk of a “single point of failure” that could jeopardize the sprawling financial ecosystem that supports America’s big ideas.

This is a wake-up call for regulators after being largely inactive as the shadow banking system swelled in the aftermath of the global financial crisis. Private equity firms have invested more than $6 trillion in the US economy in the 10 years to 2021 and have employed more than 11.7 million Americans. Venture capital money has more than quadrupled from 2007 to 2021 to about $1 trillion, and venture capital-backed companies employ 3.8 million people, up 960% since 1990.

Michael Moritz of U.S. venture capital firm Sequoia Capital, despite the hopeful statements of the federal authorities, in a Sunday article in the Financial Times expressed convinced pessimism, comparing the loss of SVB to “a death in the family”: “The fate of thousands of small technology companies and the viability of the start-up economy will again be in the hands of strangers. And the US will get poorer.”

The Washington Post also warns about the same, recalling that the assistance announced by federal regulators to depositors of two bankrupt banks will come from a special fund that is paid by US banks. Ultimately, it turns out that the fund is supported by the Treasury Department and, therefore, the American taxpayers. Critics of using the fund to bail out big savers argue that it would set a worrying precedent. This could lead to a backlash reminiscent of the fury directed at the government’s bailout of Wall Street during the 2008 financial crisis.

Independent politician and Vermont Senator Bernie Sanders said: “Now is not the time for American taxpayers to bail out Silicon Valley Bank. If there is a Silicon Valley bank bailout, it must be 100% funded by Wall Street and major financial institutions. We cannot continue on the path of more socialism for the rich and rigid individualism for everyone else.”

The Washington Post blames the federal authorities’ decision on their inability to find another bank to buy SVB’s leftovers. Politicians were pressured by prominent figures in Silicon Valley, including some political campaign sponsors, as well as entrepreneurs, which led to a quick and, according to experts, ineffective decision. The New York Times suggested that other US banks could follow SVB and Signature.

Craft Ventures general partner David Sachs said on the All-In podcast that it’s not big tech companies that are at risk, but smaller ones: “This could be very devastating to the startup economy and the entire US economy.”

But let’s also remember that, as CNN emphasizes, a political game with accusations has already flared up in this situation. This is a clear sign that a dysfunctional and polarized Washington and the political system can deal with a truly threatening financial crisis. Some Republicans accused Biden of unleashing multi-trillion dollar spending that caused high inflation and forced the Federal Reserve to pursue a high interest rate strategy, leaving some banks more vulnerable. Others have lashed out at the federal government for failing to prevent the SVB from collapsing, rekindling a long-standing feud over the government’s role in the economy.

Conservative Fox News published an article under the eloquent headline “The Biden administration’s response to the collapse of the Silicon Valley bank is the ‘greatest form of corporate nepotism’.” These are the words of Republican Senator Tim Scott on Sunday Night in America. According to the politician, regulators apparently “fell asleep at the wheel” and did not take timely action to prevent the SVB from collapsing.

The senator expressed concern about the Biden administration’s decision to insure all deposits, including those that exceed the $250,000 limit, which he believes will lead to “corporate nepotism” and send a negative signal to the market: “This means that the most sophisticated investors will now be protected by the federal government. This is problematic. This is a very negative statement for the market and is something we will have to contend with over the next few days.”

Donald Trump did not remain silent, taking advantage of the moment to “trick” the Democrats: “Based on what is happening with our economy, Joe Biden will become the Herbert Hoover of the modern era. We will have a Great Depression, much worse than in 1929. As proof, the banks have already begun to fail.”

The American media argue that the financial crisis will be an opportunity for the Republicans and will seriously hit the Democrats, who have already survived numerous crises. The federal debate highlights that Biden is, as CNN puts it, stuck in the economy. If the Fed pauses its rate strategy, inflation, which hits voters and politically corrodes the president, could get worse. But if the Fed insists, the risk that its actions will hurt the economy as a whole and lead to a sharp increase in unemployment may increase.

In fairness, it is worth considering calmer statements, although there are not so many of them. White House Office of Management and Budget Director Shalanda Young insists that the US banking system as a whole has become “more resilient”: “It has a stronger foundation than it did before the 2008 financial crisis. This is largely due to the reforms carried out.”

Some see it as a whole new opportunity. For example, Madrona Venture Group Managing Director Scott Jacobson stated: “It would be better for the ecosystem if half a dozen banks partnered with technology entrepreneurs and early-stage investors. Now there is an opportunity to fill the hole with others. Many would be happy.”

But Fox News correspondent Liz Peake and former partner at major Wall Street firm Wertheim & Company sums it up badly: “None of this bodes well for stock prices, economic growth, or wealth creation. Will President Biden still claim that his economic plan is working?