WORLD WORLDWIDE ITALY News Journal Update - (en) Italy, FAI-Galatea: Banks on the brink of collapse? Origins, nature and trajectory of the crisis (ca, de, it, pt, tr)[machine translation]

 Critical introductory note ---- The interview we present was made by Specter to

Michael Roberts, a Marxist economist, regarding the latest events related to the
Silicon Valley Bank between lack of liquidity and, more generally, the weakness
of the banking system international. The banking institution, since it existed,
has always been fundamental for the current capitalist economy and, more
generally, for the state system in force through loans and the circulation of
monetary liquidity. Various anarchist thinkers and revolutionaries (from Proudhon
to de Santillan) have tried to transform the bank into an instrument of social
and non-speculative aid, managing it on a cooperative and collective level. The
problem that arises with such a vision is how this instrument must somehow relate
to a market based on a capitalist production and distribution model. As a result,
accumulation, speculation and exploitation are always around the corner. If this
is the limit that anarchist thinkers and revolutionaries have encountered in the
historical periods they have lived through (whether they were in times of peace
and/or war), the solution proposed by Roberts is even more limiting and "utopian"
than they are: the state control of banks. The State, according to Roberts, can
be understood as a sort of public entity controlled by a democratic community
which, in turn, will regulate the lending financial institution, avoiding
speculative banking activities and collectively distributing the earnings fairly.
On a real and practical level, however, the regulation would be carried out by a
violent, top-down and strongly classist institution such as the State, leaving
the concept of lending and monetary circulation unchanged de facto - which, in
turn, will have to comply with the internal and external market trends and,
therefore, to a production and distribution or exchange model based on exploitation.

Using an instrument of financial capitalist derivation such as the bank and
moreover regulated or controlled by a State, can never lead to a form of
liberation of the individual from the chains of oppression and exploitation in
force. In a historic moment such as today's, made up of crises, state repressions
and increasingly marked protests at an international level, it is necessary to
rethink clearly and radically alternative horizontal social and production,
management and distribution models, free from violent, classist and coercive.

Translation from the original "Banks on the Brink? The Origins, Nature, and
Trajectory of the Crisis"

The banking sector has been hit by a series of bankruptcies, government bailouts
and takeovers. The crisis of these banks has sent the stock markets of the whole
world into a tailspin. What caused all this? Is it a passing crisis? What impact
will it have on the real economy? Specter's Ashley Smith interviews Michael
Roberts, asking him these and other questions about finance capital and global
capitalism today.

Michael Roberts is the author of "The Long Depression: Marxism and the Global
Crisis of Capitalism" (Haymarket 2016) and, with Guglielmo Carchedi, of
"Capitalism in the 21st Century" (Pluto 2022). He regularly writes commentary and
analysis on his blog, The Next Recession.

What were the immediate causes of this string of bank failures?

The immediate cause of recent bank failures, as always, was the loss of
liquidity. What do we mean by this? Depositors at Silicon Valley Bank (SVB),
First Republic, and also cryptocurrency bank Signature started withdrawing their
cash, and these banks lacked the liquidity to meet the depositors' demands.

Why? For two basic reasons. First, much of the cash deposited at these banks had
been reinvested in assets that have lost massively in value over the past year or
so. Second, many of these banks' depositors, especially small companies, found
that they were no longer making a profit or receiving additional funding from
investors, but still needed to pay bills and staff. So, they started withdrawing
cash instead of hoarding it.

Why have bank assets lost value? The cause is to be found in the increase in
interest rates in the financial sector, induced by the actions of the Federal
Reserve which raised the key rate abruptly and rapidly, presumably to control
inflation. How does it work?

To make money, banks offer depositors 2% interest a year on their deposits. They
must cover this interest by making loans to customers at a higher rate, or by
investing depositors' cash in other assets that pay a higher interest rate. Banks
can achieve this higher rate by buying financial assets that pay more interest or
that can be sold at a profit (but may be riskier), such as corporate bonds,
mortgages or stocks.

Banks can buy bonds, which are safer because banks get their full repayment when
the bond matures - say five years. In addition, each year the bank receives a 2%
higher fixed interest rate - than its depositors receive. He gets a higher rate,
therefore, because he cannot get his money back immediately but has to wait -
even for years.

The safest bonds to buy are government bonds, because Uncle Sam (probably) won't
default on repaying the bond after five years. The SVB executives therefore
thought they were being very cautious when buying government bonds. But here's
the rub. If you buy a government bond for $1,000 that "matures" in five years
(i.e. you get your entire investment back in five years) and pays interest of,
say, 4% a year, then depositor customers get only 2% per year; if so, as a bank,
you are making money.

But if the Federal Reserve raises the interest rate by 1 percent, the banks have
to raise deposit rates accordingly, or else they lose customers. The bank's
profit is reduced. But even worse, the price of the existing $1,000 bond on the
secondary bond market (which is like the used car market) goes down. Why?
Because, although your government bond still pays 4% a year, the interest
differential between your bond and that of cash or other short-term assets has
narrowed.

If you have to sell your stock on the secondary market, a potential buyer won't
be willing to pay $1,000 for your stock, only $900. This is because the buyer, by
paying only $900 and getting 4% interest, can have a yield of 4/900 or 4.4%,
making it cheaper to buy. SVB had a load of bonds purchased "at par" ($1,000) but
of lower value in the secondary market ($900). It had "unrealized losses" on its
books.

But what does it matter if he doesn't have to sell them? SVB could wait for the
bonds to mature, and then get all the money back plus interest in five years. But
here's the second part of the problem for SVB. As the Fed hiked rates and the
economy slowed (heading into recession), particularly in the tech start-up sector
in which SVB specialized, its clients were losing profits and thus forced to burn
more cash and reduce their deposits with SVB.

Ultimately SVB did not have sufficient liquidity to meet the withdrawals;
instead, he had a lot of bonds that hadn't matured. When this became apparent to
depositors, those not covered by state deposit insurance (anything over $250,000)
panicked and a run on the bank ensued. This became evident when the SVB announced
it would have to sell a large part of its stock to cover withdrawals. The losses
appeared to be so great that no one would inject new money into the bank and the
SVB filed for bankruptcy.

The lack of liquidity then turned into insolvency, as always happens. How many
small businesses have found that if they could only get a little more from their
bank or an investor, they could overcome their cash shortage and stay in
business? Instead, if they don't receive other aid, they have to fall back.
That's what happened to SVB, Signature, the cryptocurrency depository bank, and
now First Republic, a bank for midsize businesses and the wealthy in New York.

What did the US and other states do to stop the financial crisis? Will this work
to prevent more bank failures and calm the stock markets work?

The government, the Fed and the big banks have done two things. First, they
offered funds to meet depositors' demand for cash. While cash deposits over
$250,000 in the US are not covered by the government, the government has waived
this limit and said it will cover all deposits as an emergency measure.

Second, the Fed set up a special lending facility called the Bank Term Funding
Program, whereby banks can borrow for one year, using the bonds as equity
collateral to raise liquidity and meet depositor withdrawals . . That way, they
don't have to sell their bonds at below par. These measures aim to stop the
banking "panic". But of course they don't solve the underlying problems facing
the banks due to rising interest rates and declining profits for the companies
that use these banks.

Some argue that SVB and the other banks are small and rather specialized. Thus,
they do not reflect larger systemic issues. But this is to be questioned. First,
SVB was not a small bank, not even a technology-focused one: it was the
16th-largest bank in the United States, and its fall was the second-largest
collapse in US financial history. Furthermore, a recent report from the Federal
Deposit Insurance Corporation shows that SVB is not alone in having huge
"unrealized losses" on its books. The total of all banks is currently $620
billion, or 2.7% of US GDP. This would be a potential blow to banks or the
economy if these losses become a reality.

In fact, 10% of banks have greater unrecognized losses than the SVB. SVB was not
even the worst capitalized bank, with 10% of banks having a lower capitalization
than SVB. A recent study found that the market value of banking system assets is
$2 trillion lower than the book value of assets, which takes into account
held-to-maturity loan portfolios.

Market-valued bank assets have declined by an average of 10% for all banks, with
the bottom 5th percentile recording a 20% decline. Worse, if the Fed continues to
hike interest rates, bond prices will fall further, and unrealized losses will
mount as more banks face a shortage of liquidity.

Emergency measures may therefore not be enough. It is currently argued that the
additional liquidity can be financed by bigger and stronger banks that buy out
the weak ones and restore financial stability without affecting working men and
women. This is the market solution where large vultures cannibalise dead carrion:
for example, the UK branch of the SVB was bought by HSBC for £1. In the case of
Credit Suisse (CS), the Swiss authorities are trying to force a takeover by the
largest bank UBS for a price equal to one-fifth of the current market value of CS.

However, if the current crisis becomes systemic, as in 2008, this will not be
enough. Instead, the losses suffered by the banking elite will have to be
socialized through government bailouts, driving up public sector debt (already to
record levels), which will have to be repaid by all of us through higher taxes
and further austerity in spending. and in social services.

Will the Federal Reserve and other central banks continue to raise interest rates
to fight inflation or will they back off to prevent further banking crises?

It seems very likely that central banks will continue to raise interest rates in
their impossible quest to control inflation. They will only stop if another
series of bank collapses occurs. In that case they may be forced to reverse their
monetary tightening policies to save the banking sector.

At the moment, however, they are putting on the brave face and claiming that the
banking system is very "resilient" and in better shape than it was in 2008.
Conversely, a reversal of monetary tightening would be disastrous for central
bank credibility, as it would undermine light these institutions that do not
control the money supply, interest rates or banking.

What are the root causes of today's inflation and financial instability?

Let's take financial instability first. Capitalism is a monetary economy. The
production, at the time of use, is not intended for direct consumption. The
production of goods is intended for sale on a market and exchanged for money.
Money is needed to buy goods.

Money and commodities are not the same thing, so the circulation of money and
commodities is inherently prone to disruption. At any given time, cash holders
cannot decide to purchase goods at current prices and hoard them. Then whoever
sells the goods has to reduce prices or even go bankrupt. Many things can trigger
this breakdown in the exchange of money and commodities, or money for financial
assets such as bonds or stocks - fictitious capital, as Marx called it. And it
can happen suddenly.

But the main cause will be the over-accumulation of capital in the productive
sectors of the economy or, in other words, the decrease in the profitability of
investment and production. Clients of the SVB's technology companies had started
losing profits and were suffering a loss of funding from so-called "venture
capitalists" (investors in start-ups) because investors were seeing declining
profits. Because of this, tech companies have had to reduce their cash deposits.
This destroyed SVB's liquidity and forced it to announce the sale of its bond assets.

In the financial crash of 2008, the liquidity crisis was caused by the housing
market crash, not by the technology one as it is now. Many lenders suffered
severe losses on mortgage bonds, and mortgage bond derivatives multiplied the
effects throughout the financial sector and internationally. But the collapse of
the housing market itself was due to a decline in the profitability of the
productive sectors of the economy starting in 2005-2006, which eventually led to
a real collapse in total profits that also affected the real estate sector.

This time the monetary collapse was triggered by the surge in global inflation
following the end of the COVID pandemic. This has been driven, above all, by the
huge increases in energy and food costs of international supply chains that have
been disrupted during COVID and have never recovered.

Businesses that have reopened have found themselves unable to cope with the
recovery in demand; they have failed to get their ships, containers, ports and
oil rigs working properly again. Food and energy supplies have dried up and
prices have risen, even before the war between Russia and Ukraine escalated the
supply chain collapse of commodities. Beyond food and energy, core inflation has
accelerated due to generally low productivity growth in major economies:
capitalist firms have failed to find enough skilled workers since the COVID
pandemic and have not invested in new production capabilities;

What is clear is that the acceleration of inflation has not been caused by rising
labor costs (ie rising wages); on the contrary, working men and women were (and
are) far behind the inflationary spiral in terms of wage compensation. Instead,
the rising costs of raw materials and their shortages have allowed those
companies with the power to determine the price - such as the large
multinationals - to raise prices and to drive up profit margins to record levels
- in particular companies in the energy and food sector. It has been a
price-profit spiral.

Nonetheless, monetary authorities around the world ignored or denied that the
acceleration of inflation was a supply-side problem (as usually happens in the
capitalist mode of production). Instead, they argued that[inflation]was due to
excessive demand leading to a wage-price spiral. The answer was: raising interest
rates, reversing previous " quantitative easing " (QE) policies with "
quantitative tightening " (QT) and reducing liquidity (cash and cheap credit).
Thus the cost of borrowing for business investment or household mortgage payments
rose sharply and the banking system broke down.

The irony of the situation is that raising rates will continue to have little
direct effect on inflation rates; on the contrary, this policy is squeezing
profits and wages, thereby accelerating the economic crisis - just as happened
under the Volcker Fed regime in the late 1970s and early 1980s, which led to a
deep between 1980 and 1982.

How is this crisis different from the 2008 crisis and the Great Recession? What
restored growth then? And are these means available to capitalists and their
states today?

Capitalist production and investment suffer from regular and recurring slumps. It
is a necessary corrective over time of the tendency to reduce profitability.
Crashes clear dead branches and allow the strongest to conquer the markets of the
weakest, reducing labor costs through increased unemployment and thus laying the
foundations for higher profitability and economic recovery. This process has been
termed "creative destruction".

The Great Recession of 2008-2009 partially achieved this goal, but only
partially. The return on capital in the major economies has remained below the
levels recorded in the late 1990s. This has kept investment in the productive
sectors weak. Companies have depended on cheap or near-zero credit to keep going
- the share of "zombie companies" that survive simply by borrowing more has
reached around 20%. The pandemic crash of 2020 demonstrated that a depressed and
stagnant capitalism has still not recovered - no creative destruction then.

What solutions does the capitalist establishment offer today? And will it work?

The mainstream solution to bank crashes is always the same: better regulation.
Even the most radical mainstream economists, like Joseph Stiglitz, or politicians
like Bernie Sanders or Elizabeth Warren, push for this solution. Yet regulating
an inherently volatile and speculative financial sector doesn't work.

The history of regulation is a history of ignorance, avoidance and lies. Take the
SVB: Regulators failed to notice the interest rate risk the SVB board was running
by buying so many bonds, despite warnings from various sources. And time and time
again banking scandals have surfaced that regulators have missed.

Instead of regulating, major banking and financial institutions need to be made
publicly owned, and they will be democratically managed and controlled by the
workers of these institutions and the economy at large. We need to shut down
speculative investment banks like Goldman Sachs or investment megaliths like
BlackRock. We must put an end to the grotesque salaries and bonuses of bank
executives and investment banking traders.

Banking should be a public service like education or garbage disposal, not a
center for betting the financial casino with our own money. Ah, some say, even if
state-owned banks were limited to collecting deposits and granting loans to
companies for investment and to households for the purchase of basic necessities,
there could still be a flight of depositors.

Yes, it may be. But it is very unlikely if depositors know their money is safe
because the state is behind the bank; the banks no longer speculate and are
managed in a democratic and transparent way. If interest rates rise and
state-owned banks suffer losses on government bonds they hold, those losses would
be shared equally by society and not by working men and women to bail out wealthy
depositors and companies at the expense of the rest of the economy. community.
But public ownership of banks is taboo for all opinions, even socialist ones.

What is the likely trajectory of global capitalism?

The first two decades of this century have shown that capitalism is past its
expiration date. Economic growth slowed and economies suffered two major crashes
(2008-2009 and 2020), including the largest financial crash in history.
Investments in value-creating sectors that could raise incomes and reduce working
hours have not taken place.

Global warming and climate change have not been curbed and we are heading towards
an existential catastrophe. Poverty in the so-called Global South is worsening,
and income and wealth inequality is increasing everywhere. Capitalism is stuck in
a long stagnation or depression.

This situation can only be overcome (and only temporarily) if capital destroys
the living standards of working men and women sufficiently to increase
profitability and restore investment growth. But any attempt to do so could
result in an unprecedented class conflict. So far, therefore, the strategists of
capital have preferred to crawl and not grasp the knot of liquidation and
creative destruction. But there are forces out there who want to do that

https://gruppoanarchicogalatea.noblogs.org/post/2023/04/26/banche-sullorlo-del-baratro-origini-natura-e-traiettoria-della-crisi/
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