Sat, 02 Dec 2023

© Provided by Xinhua

The U.S. Treasury Department said there is no risk to the overall banking system that could spark a repeat of the 2007-2008 financial meltdown.

by Matthew Rusling

WASHINGTON, March 16 (Xinhua) -- With the crash of Silicon Valley Bank (SVB), the question on everyone's mind is whether the problem will spread.

U.S. media, analysts and ordinary Americans are speculating whether there will be a bank run or a major impact on the U.S. economy.

Some analysts believe the SVB collapse is a warning of future troubles.

Desmond Lachman, senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua that as the U.S. Federal Reserve battles inflation with high interest rates, "we will see many other cases of debt default."

Those will "cause tensions in the financial system in general and in the non-bank financial sector in particular," Lachman said.

"The bottom line is that the Fed and Treasury's action after SVB will stop a general bank run. However, it will not stop major problems from appearing in other parts of the financial system," Lachman said.

The U.S. Treasury Department said there is no risk to the overall banking system that could spark a repeat of the 2007-2008 financial meltdown.

The department took emergency action Sunday evening to guarantee the bank customers' deposits. Financial regulators also shuttered Signature Bank, another financial institution they believed could collapse.

Former Director of the National Economic Council of the United States Larry Kudlow said Monday on Fox Business News: "Look, like everyone, I am hoping the problem is contained, but as somebody who reported on two daily shows throughout the financial meltdown of 2008 to 2009, I know how difficult, indeed heartbreaking, a widespread banking meltdown can be, especially for typical families, blue-collar working folks."

"Nobody wants to see another stock market crash or a banking crash. So, like you, I hope this Silicon Valley Bank crisis is contained, but I never liked that word 'contained' because that's what government authorities kept saying throughout 2007 and 2008 and they're saying it again now," said Kudlow, also a financial news broadcast personality.

"They took all those actions. Will this stop the hemorrhaging?" Kudlow said, referring to the government's emergency action. "I honestly don't know."

Indeed, recent days have seen a number of regional bank stocks fall sharply. "That's not good," Kudlow said.

Lachman said: "In the time of easy money, all too many loans were made to un-creditworthy borrowers at low-interest rates. Now that interest rates are rising, we will soon find out who has been swimming naked."

Indeed, many tech startups have had all-too-easy access to funding and loans, despite no prospect of profits for years to come.

Tech firms often operate on the premise of growth over profit. But with the Fed turning off the money spigot, times are tough for tech companies.

Moreover, many tech companies' stocks have traded at dramatically inflated values, creating a bubble that many analysts said was just waiting to pop.

© Provided by Xinhua

Mark James, 41, a salesman outside Washington DC, told Xinhua he had heavily invested in the tech sector over the past five years.

He knew there was a bubble but "got greedy" and ignored it. Now his portfolio is down nearly 50 percent.

The case of SVB will probably just make tech markets worse, he said.

Much of the problem lies with the Fed, experts said.

"By earlier having pursued an overly easy monetary policy, the Fed created both an inflation problem and an asset-price and credit market bubble," Lachman said.

Now that the Fed has been forced to raise interest rates aggressively to deal with inflation, "it risks bursting the asset and credit market bubbles" that were "premised on the assumption that low interest rates would last forever," Lachman said.

Before its crash, SVB was the 16th largest bank in the United States and had been in business for 40 years.

The lender was a subsidiary of SVB Financial Group. In terms of deposits, it was Silicon Valley's largest bank.

The crisis began suddenly when the bank announced the sale of 21 billion U.S. dollars in securities and said it needed to raise 2.25 billion dollars to shore up clients' withdrawal and loan needs.

The news caused the bank's stock to tank and set off a ripple effect of withdrawals from venture capitalists. In one day, the bank's stock took a 60 percent nosedive and drove a global loss in bank stocks of 80 billion dollars.

The crisis is bringing back the ghosts of the 2007-2008 financial crisis, which rocked markets to their core and triggered a massive global recession.

Some analysts say the situation is different this time, as SVB is not nearly as large as the so-called too-big-to-fail financial institutions that tumbled back then. Others take a wait-and-see attitude.

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