Consciousness of Sheep
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Following the collapse of Silicon Valley Bank and the bailout of Credit Suisse last week, apologists have taken to the airwaves to claim that we should not cast blame on the central bankers. There is a superficial case that can be made here, insofar as the management of SVB seems to have made schoolboy errors in (failing to) protect its balance sheet against interest rate rises which pretty much everyone else could see coming. As Shivaram Rajgopal at Forbes explains, “SVB has been arguably functionally bankrupt since July 31, 2022…”
Primary responsibility must rest with the SVB executives, who took their eye off the ball. Not least, because as Rupert Darwall at Real Clear Energy points out:
“The now-failed bank checked all the ESG boxes. Forty-five percent of its board directors were women. Its Community Reinvestment Act plan was accorded an outstanding accolade. Nine pages of its ESG report are taken up with its World Economic Forum (WEF) Stakeholder Capitalism Metrics…
“Sensitivity about the purported economic threat posed by climate change seems to have been inversely correlated with awareness of the changing financial climate caused by inflation and rising interest rates and the havoc that might wreak on its balance sheet and liquidity.”
As the government of Sri Lanka discovered to its cost last year, death by ESG scoring is likely to be a common aspect of the coming crash – with those organisations which swapped straightforward shareholder profits for the false promises of technocratic stakeholder capitalism being the first to fail. Stopping at the primary responsibility of corporate managers though, is akin to blaming everything that kicked off in August 1914 on a single Serbian teenager, Gavrilo Princip. In reality, it took the actions and misjudgements of imperial governments across Europe to turn a single terrorist outrage into a world war which consumed some 13 million lives. In similar fashion, it took economists and central bankers across the Western system to create the conditions which allowed SVB both to act in the irresponsible way that it did, and to collapse unceremoniously when those same central bankers chose to raise interest rates at the fastest speed in history.
If they were being honest, the central bankers would admit that the collapse of SVB – or at least of banks such as SVB was precisely the intended consequence of rate rises. After all, there is a core similarity with the way the central bankers brought down Bear Stearns and Lehman Brothers in 2008:
- An oil shock caused prices to increase across the economy
- The central bankers misinterpreted the price increases as monetary inflation
- The central bankers began raising interest rates in an attempt to cut the currency supply to the economy in the belief that the ensuing economic crash would force prices down
- By 2007, the central bankers had been so spectacularly successful that the economy was in freefall, with previously safe assets – such as the now infamous sub-prime mortgages – being rendered worthless
- Banks ceased trusting the stated value of each other’s assets and so ceased lending, causing the entire system to collapse
- The most vulnerable banks collapsed, leaving all of the others holding onto increasingly worthless “assets.”
The only differences today are the cause of the supply-side shock – lockdowns and self-destructive economic sanctions – and the fact that central banks have spent the past 15 years setting the stage for an even bigger collapse as a result of quantitative easing and near zero percent interest rates which inflated asset bubbles all over the place. Indeed, on paper at least, banks like SVB, because of their focus on real-world – or at least tech world – investment, were supposed to provide something of an antidote to the unproductive rent-seeking encouraged by the central banks.
Arguably then, the central bankers are complicit in the unfolding banking crisis on three grounds:
- As the banking regulator, they have failed to spot or rectify mismanagement
- As the de facto monetary policymakers, they have created the crisis by raising rates far too rapidly
- And, also as the de facto policymakers, they created the conditions which left the wider economy so vulnerable to supply-side shocks in the first place.
As happened in the wake of the 2008 crash – although this time around it will be the King rather than the Queen of England who will demand to know why nobody saw it coming – the central bankers and economists will bow their heads, shuffle their feet and mumble something about black swans. And once again they should be exposed as liars! Because plenty of people did see it coming. Indeed, the entire western monetary and economic policy over the last 15 years has been a catastrophe waiting to happen. And even on a shorter timescale, the synchronised inversion of yield curves across the western economies has been telling anyone prepared to listen that something very, very big is going to break – in this respect, SVB and Credit Suisse are merely the early warning signs – and that – for very unpleasant reasons – we are more likely to end 2023 with deflation and negative interest rates than with the promised “soft landing.”
As I lamented in my latest book:
“One might, perhaps, have wished that the Queen of England still possessed some residual feudal power which might have allowed her to have the whole cabal of central bankers and economists carted off to the Tower of London, with at least some of their number being beheaded for their sins. But the supreme irony of 2008 and its aftermath was that not only did they – with the exception of a few Icelandic bankers – escape punishment, but they were put back in charge to oversee the recovery.”
The fact that central bankers and economists are energy-blind, and that even today most are clueless as to where currency comes from might provide some kind of get-out-of-jail card were it not for the fact that in the wake of 2008, they did nothing to disabuse the wider public of the notion that they somehow knew what they were doing. Indeed, given the complexity of the modern global economy, they might even have confessed that it is impossible for anyone to be in charge. But having taken the six and seven figure salaries that go with the job, this time around, we simply must hold them to account. As the old saying has it: “Fool us once, shame on you. Fool us twice, shame on us.”
As you made it to the end…
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