This is Fascism, SVB Bailout Edition



Photograph Source: SWinxy – CC BY-SA 4.0

The very public failure of SVB (Silicon Valley Bank) is raising concerns of a renewed wave of bank failures that threatens Western economies. The subtext is residual fear that the earlier (mid-2000’s) bank crisis was never adequately addressed. The very bankers who sank the banking system back then were handed trillions in public largesse to cover their losses, but the system of Wall Street provision of credit to fuel capitalism was never reconsidered. As then Treasury Secretary Timothy Geithner put it, ‘the US doesn’t do nationalization (of banks).’

Part of the political calculus behind the earlier bailouts was the role of Wall Street in support of American imperialism. Neoliberalism was claimed in a constructive way to be ‘war by other means’ because it transferred wealth from the economic periphery to the center without a shot being fired. Trade was to replace warfare went the theory. That the US has been the most capitalist and the most militaristic nation in the world over the last century has done little to discredit this theory amongst true believers. These true believers now run the US.

Following decades of misleading ‘free market’ rhetoric in the US, the Biden administration is currently basing its economic policies in economic warfare with China and Russia, not ‘free’ trade. In fact, the CIA and the MIC were always in the background softening-up reluctant capitalists with cluster bombs and white-phosphorous. Current American logic likely has the Chinese state’s use of state banks to allocate credit as equivalent to the American practice of handing trillions in bailouts to the American bankers that blew up the Western world in 2008.

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Graph: the Obama administration’s serial bailouts for Wall Street saved the large banks that caused the crisis while sacrificing small and mid-sized banks that didn’t. The cluster of US Bank failures 2008 – 2011 was a direct result of Wall Street malfeasance in the run-up to the crisis. This bi-furcation in the way that banks were treated both left, and reflected the interests of, the large, predatory, banks that were left in charge of the US economy. Source: FDIC.

The collapse and near instantaneous Federal bailout of uninsured depositors at SVB (Silicon Valley Bank) by the Biden administration provides insight into the ongoing role of technology, finance, and the MIC in American governance. Rhetoric around ‘saving the (banking) system’ is the local truth hidden within the larger problem of the failing neoliberal order. The ‘system’ being saved is directly or indirectly tied to American forever wars, environmental decline, a predatory and extractive economic system, and rising political repression.

So, on the one hand, there was a bank (SVB) whose liabilities exceeded its (the bank’s) value that needed to be resolved. On the other hand, there were questions of the role of the banking ‘system’ economically, as well as the broader role of Wall Street, in American imperialism. Prior to 2008 – 2009 there was a long history of bank crises, as well as a set of rules for determining which banks were viable and which weren’t. In 2009, the Obama administration threw this history, and the rules that had previously led to successful resolution of bank crises, in the trash.

Whether SVB’s woes will turn into a larger bank panic is unknown at present. Regardless, and to a point first raised by Krystal Ball, Joe Biden’s decision to bail out uninsured depositors implicitly guarantees all uninsured deposits held by US banks. The alternative was to seize (put into FDIC receivership) SVB and sell its assets to cover insured and uninsured deposits without a bailout. Uninsured depositors would have received 85 – 95 cents on the dollar in that scenario. In fact, this recovery effort is now underway following the Federal bailout.

In other words, without a bailout, the insured depositors in SVB would have gotten all of their money back and uninsured depositors would have received about 90 cents / dollar. This seems like a small price to pay to instill basic due diligence in financial dealings. But those who would have paid the small price are 1) connected through the power of Big Tech and 2) the future ‘innovators’ and ‘disruptors’ that the American state is counting on to surveil and control the rest of the world. While there is context, it is hardly incidental that American liberals are the most vocal proponents of Federal spying, censorship, and political repression in the present.

Joe Biden’s effort to pre-empt bank contagion risk begs the question of how such risk is even possible after the 2008 – 2009 bailouts? In fact, financial economist Hyman Minsky answered this question so long ago that his work was regularly referenced in the crisis of the late 2000’s. Competition amongst banks and bankers to make loans leads to deteriorating credit quality to the point where creditors begin to default, at which point trust in ‘the system’ implodes and a bank panic sets in. This cycle has played out often enough to give credence to Minsky’s theories.

Minsky wasn’t a Marxist critic of capitalism. He was a financial economist who looked at banking and reported what he found. So, while Marx covered similar territory via his theory of ‘fictitious capital,’ adequate regulation of finance would solve Minsky’s credit conundrum, at least in theory. In fact, following the Obama administration’s delivery of several trillion dollars of free money to Wall Street bankers following the 2008 – 2009 crisis, the Federal Reserve and Treasury Department did everything in their power to start another credit cycle.

This was referred to at the time as ‘kicking the can down the road,’ a reference to the temporary nature of the reforms amidst the historical guarantee that the next crisis was in the process of being created. The 2016 election of Donald Trump should have indicated a disconnect between what American elites believed about the state of Western economies and their actual states. Tech and finance have been on Federally sponsored methamphetamine- drips as state-sponsored industries that keep profits private, while socializing their losses. While liberals call this ‘lemon socialism,’ most Americans believe from being told so for the last century that it is plain old socialism.

In 2018 the Trump administration, in response to lobbying from connected bankers, signed legislation reducing the regulation of mid-sized banks, the category into which SVB fit. Left unstated in most accounts is that former Representative Barney Frank— the ‘Frank’ in the Dodd-Frank legislation of 2010, lobbied Congress to undermine his own legislation. Mr. Frank had left Congress to act as a Director of Signature Bank, which recently met a fate similar to SVB on misguided ‘bets’ on cryptocurrency.

The point is being made by defenders of the recent bailouts that SVB rendered itself insolvent while putting bank assets into ‘safe’ investments. In fact, the long-dated treasury bonds it reportedly held rise or fall in value inversely to changes in interest rates. While this may seem technical to readers, managing interest rate risk is one of the most basic functions of managing a bank. Was SVB management gambling on the direction of interest rates with a ‘bet’ large enough to sink the bank, this is evidence of both gross incompetence and regulatory failure.

If memory serves, Yves Smith described SVB as acting as a ‘merchant bank’ serving the technology industry, a reference to the regulatory distinction made in the bank reforms of the Great Depression between insured deposit-holding banks and the investment banks commonly known as Wall Street. Readers may recall the rapid conversion around 2009 of Wall Street investment banks into deposit-holding institutions to render them eligible for Federal bailouts. It is quite ominous if Wall Street has been recreated within ordinary insured deposit-holding institutions.

The case of SVB differs in important ways from the 2008 – 2009 bailouts. Joe Biden apparently understood that it was politically infeasible to bail out SVB stock and bond holders— as Obama / Biden did in 2008 – 2009, so it was apparently acceptable for SVB management to pay out large bonuses and sell its bank stock holdings in the days and weeks prior to entering Federal receivership. Like the AIG bonuses paid to the crooks who wrote financial insurance contracts without funding them, SVB can explain the bonuses without legitimating them. That SVB management screwed up a ‘duration’ (interest rate) bet suggests rank incompetence.

As should be evident, these serial ‘system’ bailouts don’t save the system, they create a new one. SVB arose in the aftermath of the 2008 – 2009 bank bailouts, at which time Big Tech was viewed by the Obama administration as an imperial prong. Behind the neoliberal rhetoric of ‘free markets’ is American imperialism, the unity of state with corporate objectives to project ‘American’ power around the world. This worked domestically as long as the New Deal provided a few facts and the appearance of economic unity through ‘nation.’

That accommodation— where working people fought and died for national objectives as long as the bounty from doing so was equitably distributed, disappeared when US imperialism was (once again) turned inward in the late 1970s. Passage of NAFTA (1994), and China being granted full privileges in the WTO (World Trade Organization, 2001), created a new proletariat in the US. Then George W. Bush lied (2003) this new proletariat into killing and dying in Iraq to boost the value of Dick Cheney’s stock options, followed by Barack Obama’s Wall Street bailouts that were inexcusably corrupt by historical standards.

This may read as unduly judgmental absent knowledge of the history of bank crises. The problem from history with ‘saving’ corrupt bankers is that they corrupt the credit allocation function of Western capitalism through fraud and self-dealing. As was the practice with investment banks, SVB reportedly strong-armed the companies it had merchant banking relationships with to hold their deposits at SVB. Assurances from banking industry apologists that SVB management will spend the rest of its life in litigation imagine that the US prosecutes bankers. Not in recent history.

This brief run-down of banking industry travails is an analog to the 1970s television show ‘Lifestyles of the Rich and Famous.’ The question of how actual human beings who weren’t born into the bailout-receiving class are getting by isn’t being asked. In fact, the economic metrics by which the US measures itself are showing signs of age. While running the interest rate desk at Goldman Sachs and working the cash register at Walgreens are both jobs, one pays more than a living wage and the other pays quite a bit less. So, counting ‘jobs’ is less than informative in a world where working doesn’t always pay.

In the part of the US that I inhabit, the Northeast, middle and lower tier house prices have doubled and tripled over the last three years. They have continued to rise despite interest rate increases by the Federal Reserve that historically would have tamped house prices down. Beginning around 2010, Wall Street banks began using nearly free Federal bailout funds to buy the houses then being foreclosed on by their mortgage divisions. Since the mid-2010’s ‘portfolio buyers’ for Wall Street and AIRBNB have bid up house prices beyond the reach of the locals who are their ‘natural’ buyers.

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Graph: few readers likely understand how profoundly allowing Wall Street to buy homes has screwed ordinary Americans. Pandemic lore had it that the geographic freedom of remote work led to a mass exodus from cities in search of cheaper and easier locales. In fact, AIRBNB purchases alone explain most of the rise in house prices. And coincident with Wall Street ownership of single-family houses has been a rise in rents as alternatives to renting have become unaffordable. Source:

The policy choices that followed the 2008 financial crisis and Great Recession— a decade of the Federal Reserve keeping interest rates below their ‘natural’ or ‘market’ rates through what is called financial repression, created a ‘search for yield’ that led those hoping to invest the new money being created by the Fed (through its support for financial asset prices) to take ever larger risks to find it. The ‘everything bubble’ was the result. Financial asset and house prices exploded higher to surpass what just a decade ago was understood to be the largest and most destructive financial bubble in modern history.

To understand the problem, the Wall Street and ‘portfolio’ buyers of the homes that people need to live in are working from different economics. The Wall Street buyers are looking at thirty-year discounted cash-flow models while ordinary citizens are limited to the amount of credit their incomes are deemed by mortgage lenders to support. A $100,000 house to working people may be worth $250,000 using a discounted cash-flow model. The result: Wall Street (including AIRBNB listers) has bought most of the available housing stock that has been for sale in recent years.

However, the difference in risk of borrowing $250K to buy a house versus $100k is immense when multiplied by the quantity of houses sold in recent years. The capitalist theory that something is worth what someone will pay for it leaves pricing power out of consideration. Wall Street buyers get an ‘inside’ interest rate that is usually very far below that paid by ordinary borrowers despite the regular implosion of Wall Street via bank crises. Absent geographic or sectoral concentration amongst ordinary homebuyers, only Wall Street is subject to the systemic risk that is the target of Federal bailouts.

The point is that facilitating the purchase of critical infrastructure— and housing is critical infrastructure, by Wall Street is predatory, short-sighted, and systemically de-stabilizing. Permitting unlicensed hotels (AIRBNB), unlicensed taxis (Uber), and the systematic refusal to collect state and local taxes for online purchases (Amazon), reflects a contrived and wholly nonsensical ‘individualist’ ethos of capitalism where individuals born into the bailed-out class effectively govern the US. This is the political context in which Joe Biden bailed out corrupt and / or incompetent bank managers and corporate depositors at SVB.

Political architecture where a small group of politicians, oligarchs, and corporate executives erase the lines between corporate and state interests to use state resources for their own benefit while treating the populace as rubes and marks deserving of being preyed upon 1) reasonably well describes the US at present and 2) fits the definition of Italian fascism as state corporatism. Add in unhinged militarism motivated by imperialist objectives and ‘liberal democracy’ looks and feels like fascism to those on its receiving end.

It is clear that this view of the architecture isn’t widely shared, with most Americans relying on the imagined choice that voting for duopoly party candidates provides. Missing from that view is the proletarianization of the US that has taken place over the last five decades, with the exception being the PMC (Professional-Managerial Class), which manages state and corporate affairs for the rich. The genesis of the PMC in service to power has it parroting the logic of the rich in exchange for privileges that the remaining 85% of the population doesn’t receive.

SVB, like SBF (Sam Bankman Fried) of crypto infamy before it, is a weathervane helpful for reading the direction of the prevailing winds, but not a whole lot more. The system that produced it is coming unglued, with mass Covid deaths far out of proportion to the size of the population, failing healthcare and banking systems, a proxy war underway that risks nuclear annihilation, and a government that sees its role as working with corporations to loot the world. Underestimate the risk of truly horrific outcomes at your own peril.

Last, on a personal note, I, and most of the people I know, are so angry about this state of affairs that I don’t see how existing political unions hold. The people running the country never cared much about us, but unity in ‘nation’ led to a sense of shared interests that disappeared with the neoliberal turn. As I’ve written before, revolutionaries don’t make revolutions, existing power does. While I’m not holding my breath, if the current political leadership doesn’t lead to a revolution, revolution isn’t possible.

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