The Silicon Valley Bank Failure: Historical Perspectives and Knock-on Risks

Abstract

As if America needed another body blow to its global standing. Symbolically, and possibly in practical reality, the failure of the financial institution of choice for the crown jewel of the US innovation system, Silicon Valley Bank (SVB), could not have come at a worse moment in US history: an economy flashing mixed signals of robustness (labour market) and danger (yield curve inversion and collapsing oil prices); an escalation of what is widely seen as a proxy war with Russia through the downing of a US reconnaissance drone by a Russian military plane at a moment when Russian dictator Vladimir Putin has announced yet another mobilization to prosecute his assault on Ukraine; a diplomatic coup by China in getting Iran and Saudi Arabia to re-open diplomatic relations that were severed following the 2016 attack on the Saudi diplomatic missions in Iran, without the United States in the room; and all this at a moment when China is mounting a full-court press with one manifesto after the other outlining an alternative world order to that which was forged under US tutelage following World War II. This note puts the SVB failure in historical perspective in two regards. First, since monetary policy took over as the instrument of choice for macroeconomic stabilization, the withdrawal of monetary stimulus as economies recovered from recessions routinely triggered financial crises somewhere in the system. The usual response was an emergency easing of monetary policy that paved the way for the final run-up to a cyclical peak and the next recession. Viewing the SVB failure in this historical context, we are in the period of withdrawal of monetary stimulus during the current expansion, albeit uncharacteristically early because of the pandemic-driven disruption to the normal rhythm of expansion and recession, and the SVB failure can be seen as the expected financial crisis – this is in some sense baked into the system. Second, history shows that the United States has rarely missed the opportunity to have a financial system crisis when one presented itself, but also that the resulting litany of financial crises did not prevent the United States from achieving its historic unipolar moment. By the same token, this second perspective suggests that the SVB failure does not by itself portend some historic retreat for the United States – it has been there and done that before. The present danger is that the confluence of geopolitical challenges attaches an unusual amount of political risk to this event. Perceptions are magnified enormously in the age of social media and information warfare and we have not been there and done that in this new technological context. Crises are not a good time to pay great heed to structural concerns such as moral hazard but the perceptions around the longer-term risks have to be managed. Monetary authorities in the west need to nip this crisis in the bud and provide markets and populations the compelling reason for doing so. This note attempts to set out that compelling reason.

Keywords: Silicon Valley Bank, SVB, financial crises, macroeconomic stabilization, geopolitics

JEL Classification: G21, G28