We are pleased to publish this original article by Serena Sojic-Borne – a community organizer in New Orleans and member of Freedom Road Socialist Organization – about the economics and geopolitics of the banking crisis.
Serena locates the origins of this crisis in overproduction in the US technology sector, along with the risk-taking behavior inherent to venture capital. She further explores the link between the situation of the US technology sector and the escalating US-led New Cold War on China. In contrast to the chaos and declining innovation of the tech industry in the US, China is “successfully regulating larger firms and taking advantage of smaller start-ups to fuel technological growth for the socialist state”. The only response the US has is, contrary to all its free market rhetoric, to resort to protectionism. The article cites former chair of the National Security Commission on Artificial Intelligence Jon Bateman recommending that Washington “institute controls in technology areas where China seems close to securing unique, strategically significant, and long-lasting advantages.” This provides important context to, for example, the attempts to ban TikTok.
Hence Cold War attacks on China are, to a significant degree, an expression of a capitalist system that’s running out of steam.
Less than one month before Silicon Valley Bank collapsed, the Chinese Foreign Ministry released “US Hegemony and its Perils,” a report outlining the strategies of US imperialism. Technological monopoly, important among them, now exposes its contradictions. The recent banking panic reflected just how much American capitalism threatens its own technological growth, and the lengths the US will go to salvage it.
SVB relied on the tech industry. During the height of the pandemic, tech boomed as it provided for work and education going remote. The bank’s main depositors came from this sector. As firms rushed to corner their share of the expanding market, SVB scrambled to make new deposits profitable. Lending money wasn’t easy, because the industry rolled in revenue faster than it could re-absorb it. So the bank invested in held-to-maturity securities, such as long-term bonds. The longest-term bonds yielded the best interest rates of the time, even though these rates are unprofitably low today.
The writing was on the wall when the tech industry reached a point of overproduction and reversal in 2021, months before the Fed’s aggressive interest rate hikes began. Big companies laid off workers and small ones closed down. SVB’s loans failed and its deposits started declining. Higher rates only lit the match, and burned up the value of bank’s low interest assets. Silvergate and Signature suffered similar fates because of their similar reliance on a tech-related expansion in cryptocurrency.
Some commentators say this is the story of an interest rate crunch, and blame SVB for failing to diversify its assets. Others recognize the difficulty of doing so when lending opportunities were scarce, and will still blame SVB for being too reliant on one economic sector.
But they forget that, even in good times, tech start-ups have trouble opening accounts with big, diversified banks. They need venture capitalists willing to gamble on a competitive market, where firms require large investments before they become profitable. A bank that serves these capitalists and drives industrial growth has to be specialized, as well as willing to immerse itself in volatile markets. In other words, it has to be as risky as the tech sector that it relies on.
Bigger banks, without shouldering these risks themselves, skim the cream by buying out winners. While established financiers came out of this panic attempting to look like the adults in the room, they have always relied on their junior counterparts as laboratories for future investments.
Now, the Biden administration is trying to protect Wall Street from unaccounted risks while salvaging the tech industry. This is why it offered SVB a “systemic risk exemption”—to save its start-up and venture capitalist depositors, as well as to prop up the financial system.
Here, the US is making a clear statement of its priorities. By comparison, it offered too little, too late to the majority-Black depositors of the failed Freedom National Bank in 1990. But SVB, Signature, and Silvergate are critical to American capitalism because tech is one of its most profitable avenues of growth. Although IT accounts for only 6% of the country’s business loans, the information services sector took up the largest share of GDP growth from 2000 to 2020.
That said, the government is only prepared to rescue bank and business profits. Tech workers, who’ve faced mass layoffs and union-busting for the past year, do not get a share of the preferential treatment.
The contradictions of US tech will have their sharpest long-term consequences in its New Cold War. In a 2021 National Public Radio interview, CIA Director William Burns declared technology to be “the main arena for competition and rivalry with China.”
Many in US policy circles are increasingly distrustful of big tech companies like Facebook, Google, and Microsoft. The Heritage Foundation accused them of “collaboration” with the Chinese Communist Party. These voices express preference for fostering the deteriorated start-up economy, which is more likely to experience technological innovations. Meanwhile, Beijing is successfully regulating larger firms and taking advantage of smaller start-ups to fuel technological growth for the socialist state. The resulting anxiety about US technological hegemony is the backdrop for this month’s financial rescue. Banks like SVB, by acting as intermediaries between Wall Street and tech start-ups, have been one of the few cards the US has left in the game.
One year ago, former chair of the National Security Commission on Artificial Intelligence Jon Bateman recommended that “restrictions should be used to buy time. Washington should institute controls in technology areas where China seems close to securing unique, strategically significant, and long-lasting advantages.” Recent attempts to ban TikTok, on top of committee hearings on China-US technological competition, prove that the US has not dropped any of its hostilities.
If anything has caused American technological hegemony to “lose time,” it’s the tech sector’s overproduction and its financial backers’ corresponding failures. US insecurities increase the risk of anti-China escalations to salvage a rickety capitalist system.