The modern credit/debt-based economy ended in 2008. That was the year that Lehman Brothers collapsed, signifying the seriousness of the financial crisis that was gripping the planet. Banks across the country had bet on the obviously incorrect idea that home prices would continue to rise forever, allowing holders of subprime mortgages to refinance their debt indefinitely. In turn, the banks placed these mortgages into complex packages to sell back and forth between each other. When home prices began to fall, the financial system collapsed under the weight of bad loans masquerading as safe investments.
Or that’s perhaps what should have happened. Instead, the Federal Reserve slashed interest rates to the bone and pumped trillions of dollars into the financial system in a euphemistic program called “quantitative easing.” The zombie economy limped on, and while there was a raft of new regulations to keep banks in line, the same fundamental weaknesses persisted. They were exposed again with the coronavirus shutdowns. Everyone, from individuals to corporations, was so over-leveraged that within two weeks Congress had to pass a trillion-dollar rescue package to help companies make payroll and keep Americans from losing everything.
Again, the money infusion propped up the financial system. Again, the underlying weaknesses remained. And again, we find ourselves on the precipice of a new crisis.
The sudden collapse of Silicon Valley Bank (SVB) has once again revealed that banks (and the financial system in general) have overextended themselves on bad bets. This time, banks like SVB engaged in the typical financial shenanigans under the assumption that interest rates would remain low. As rates have risen over the last year, depositors at the bank withdrew money, culminating in a run of withdrawals that collapsed the bank. Three other banks have failed since SVB, and Credit Suisse was acquired by UBS. To prevent a wider crisis, central banks have turned to the usual trick of quantitative easing. In fact, banks borrowed over $300 billion from the Fed last week – far above the $3 billion to $4 billion that banks usually borrow.
In baseball, this would be the third strike. Our financial system has demonstrated time and again that it can’t withstand any kind of shock or emergency. That’s because it’s not just one bank or a couple of banks that are engaged in risky behavior. No, it’s the vast majority of financial institutions that are continuing to gamble on impossible financial outcomes.
It’s not that Google or any other large tech company is in danger of missing payroll. They’re just in danger of not fulfilling their investor’s unrealistic expectations.
The reality of all systems is that there is an ebb and flow. There are boom times and there are bust times. But our economists and politicians have sold the general public on the myth of continual growth.
Listen to any politician and they define economic success as “steady, sustainable growth.” But nothing grows forever. The growth fallacy is the underpinning of the continual crises the economy has faced since the dot-com bubble burst in 2001. It explains the massive layoffs we’ve seen in the tech industry over the last year – companies are expected to always show year-over-year growth even though such assumptions defy the most basic common sense.
As a result, companies shed jobs like snakes shed their skins. It’s not that Google or any other large tech company is in danger of missing payroll. They’re just in danger of not fulfilling their investor’s unrealistic expectations.
And so, despite the claims that the financial system is fundamentally stable (the same claims we heard before 2007, by the way), anyone with eyes can see the top of the financial tower teetering. After acquiring Credit Suisse, UBS’s debt was downgraded to negative by Moody’s. What happens if UBS suffers the same fate? The warning signs are everywhere, suggesting that we are only at the beginning of this latest crisis, and even if we dodge this bullet we’re almost certain to “growth mindset” ourselves into another crisis sooner rather than later.
