If you asked any economist why a poor family with an unrepayable mountain of high-interest debt shouldn’t be offered debt cancellation, they would respond with two words: moral hazard.
This is a term used in economics and finance to describe the changes that take place in an economic agent’s behaviour when they are insulated from the consequences of their actions. My favourite example comes from the TV show Friends when Joey has the gang repeatedly hit him over the head with a baseball bat once he has taken out health insurance.
To return to our case, the economist might argue that if the family knew they would always be bailed out when things got tough, then what would stop them from piling up unsustainable debts for the sake of it? And why should their bank—or, for that matter, the taxpayer—backstop this family’s reckless spending?
This has always been a powerful argument against debt cancellation, not because it’s generally correct or appropriate—it’s hard to argue that student loan forgiveness is bad because it would encourage more people to get an education—but because it appeals to people’s sense of fairness. ‘I worked hard and paid off my debts, so why should these people have theirs written off?’
There are plenty of reasons to reject this argument from ‘fairness’. It is, for example, hardly fair that people on low incomes are forced into taking out high-interest payday loans because their rents have been jacked up by their landlord and their boss refuses to give them a pay increase.
But by far the most significant problem with the argument from moral hazard is that, in real life, it’s only ever used against the working class.
American capitalists have been insured against the consequences of their actions for decades now. Those in charge of the largest and most powerful corporations and financial institutions know that, whatever happens, the state will step in to save them if things get tough.
Far from shrinking the state, neoliberal politicians have simply shifted who benefits from the state’s largesse. They have cut social welfare and replaced it with corporate welfare. They have slashed public services provision and paid outsourcing companies unimaginable sums to provide these services instead. They have heaped unpayable debts on students and working people and provided massive bailouts to shareholders and executives.
In short, they have created a climate of unaccountability that has encouraged the kind of reckless greed that gives us financial crises.
This trend began before the financial crisis. When the 1987 stock market crash hit, the Federal Reserve made billions of dollars worth of ‘repurchase agreements’ with US investment banks. These ‘repos’—as they were called—functioned as short-term loans to tide the banks over when cash was tight. Once again, the banks were bailed out thanks to the generosity of the US state.
Alan Greenspan was the head of the Federal Reserve at the time, and the move was referred to as the ‘Greenspan put’. A ‘put option’ is a trade that functions a bit like insurance—it’s a one-way bet in which the buyer has the right, but no obligation, to sell a security back to the owner at a particular price. Greenspan was effectively signalling to the banks that they had a free insurance policy backstopped by the most powerful state in the world.
But it gets worse. During a financial crisis, asset prices tend to fall as many actors sell their assets at any price in a desperate bid to access cash. So when the state steps in to provide these actors with loans, they’re able to exploit the chaos to buy up valuable assets at artificially low prices—a bit like a corporate landlord buying cheap property after a financial crisis with a loan from the state.
The banks weren’t only being insured against the risks they were taking; they were being rewarded for them.
Fast forward to the early 2000s, and is it any wonder that the big US investment banks had started to take unimaginable risks with other peoples’ money, knowing that the state would be there to step in when things got tough?
The bailouts and mergers organised and funded by the US state in the wake of 2008 created some of the most powerful mega-banks on the planet. Financial executives reaped the rewards of this market power for years to come in the form of extraordinarily high profits, even as wages in the rest of the economy stagnated.
And the Fed’s decision to slash interest rates and pump the financial system full of newly-minted dollars in a desperate bid to push up asset prices made the rich even richer. Working people, meanwhile, were still paying over the odds for loans in a financial system that had become so concentrated that the big banks were effectively able to charge customers whatever interest rates they liked.
This low-interest rate environment also paved the way for the post-crisis tech bubble, and, eventually, the crypto bubble. Cheap borrowing allowed unprofitable tech companies to survive much longer than they should have. And investors’ desperate search for returns in a low interest rate environment made even the most insane crypto Ponzi scheme look like a good bet.
Insuring the Rich
It was only when interest rates started to rise that these bubbles began to burst. One institution that got caught up in the mess was Silicon Valley Bank.
Silicon Valley Bank was one of the US’s largest state-chartered banks, which, as the name suggests, took deposits mainly from America’s many growing tech companies. While it was founded in the 1980s, it grew explosively during the 1990s and post-crash tech bubbles (both of which were facilitated by the low interest rate environment created by the Fed). When the 2008 crisis hit, SVB received a bailout through the Troubled Assets Relief Program.
Over the course of the next decade, SVB began to shift its business model. Rather than lending directly to tech startups, it started to lend to venture capital and private equity firms that specialised in investing in those startups. So, when the pandemic and subsequent recession started to hit investors’ returns—particularly in tech—the bank was in trouble.
To make matters worse, SVB had taken some bad decisions with the money lent to it by its depositors (depositors are technically a bank’s creditors). The bank had invested significant sums in government bonds, even as it became clear that interest rates were about to rise. This wasn’t particularly wise because when interest rates rise, old government bonds that pay less interest lose their value.
All this might not have been enough to cause a crisis were it not for the stupidity of a couple of the banks’ major depositors. In a shared WhatsApp group, some of the bank’s customers started to express concerns about its solvency, leading many to withdraw their cash.
SVB’s tech bro depositors created overnight the kind of herd-like behaviour that usually leads to a bank run over the course of weeks or even months. The events surrounding the collapse are so hard to believe that some have speculated it was a deliberate attempt to bring the bank down—though this seems unlikely.
Enter, once again, the US state, which stepped in at the eleventh hour to protect American capitalism.
To be fair, being a licenced bank in the US means you benefit from state-provided deposit insurance. Any deposits up to $250,000 are protected by the government if a bank goes under. If it weren’t for deposit insurance, the financial system could not function in the way it does today—bank runs would be far more common occurrences, and the whole system would be very unstable.
But the US government has agreed to protect everyone with deposits in SVB—even those worth billions of dollars.
The Fed has lots of good reasons to do this. Many of SVB’s depositors are big tech companies or major investors in big tech companies. If the bank goes down, these companies could fail, leading to significant job losses.
The Fed also has to worry about contagion to the rest of the financial sector. Without the Fed’s intervention there was every chance that SVB’s collapse could have led to a financial crisis. There are already signs that panic is starting to spread around the US—and indeed the global—economy as investors worry about the wider implications of interest rate rises.
Markets and State
One thing you won’t hear policymakers crowing about over the next few weeks is moral hazard. SVB’s collapse provides a particularly stark—and often funny—illustration of the fact that there are no libertarians during a bank run. Many of those calling for bailouts are tech bro libertarians who have been railing against ‘big government’ for decades. But the tech sector’s disdain for ‘big government’ has always been utterly absurd.
SVB’s collapse provides a wonderful illustration of the public-private partnership that lies at the heart of modern financial capitalism. Here is a bank that grew rapidly as the result of a tech bubble inflated in part by the Federal Reserve, before being bailed out by the government during the financial crisis of 2008, only to exhibit astonishing growth thanks to the tech-boom also induced by the Fed, before investing so much cash in US government debt that its depositors had to be bailed out again when interest rates rose.
The events of the last few days also reveal a much deeper truth. States and markets are not separate spheres of power, the former the realm of bureaucratic centralized planning and the latter the realm of free market competition. In fact, states and capitalists are often powerful allies in a game that they have designed to ensure that only they can win.
The state is, as Marxist theorists from Gramsci to Poulantzas have observed, a ‘social relation’, much like capital itself. Outcomes within state institutions reflect the balance of power within society as a whole.
During the post-war years, workers and bosses in the global North would battle within state institutions as intensely as they battled outside them. The advent of neoliberalism did not reduce the role of the state in the economy, it simply made the state impenetrable for workers, while leaving it wide open to the influence of capital.
The idea that the right believes in a ‘small state’ provides ideological cover for an assault on working people during the good times, before being thrown aside as soon as it is capital itself that is under threat. Never let a right-winger tell you that they believe in a ‘small state’ again.