Thinking about “Drowning in Deposits”

So, I read Dylan Riley’s provocative piece ‘Drowning in Deposits; it has a lot going on. What begins as an argument that the failure of Silicon Valley Bank owed mostly to overcapacity and the tendency of the rate of profit to fall under capitalism ends with an argument that the left should reject industrial policy since any attempts by the state to engineer private sector outcomes will result in future crises of overcapacity, and lock the government into ever more phases of bailing out private firms. There’s a lot of elements, but I wanted to use this forum to share some thoughts about financial instability, climate finance, and Bidenomics writ large.

I can appreciate Riley’s frustration with failures of the private sector – here, explicitly SVB and tech firms in general – to bring about productive change in the realm of climate change. I’ve gradually come around to the notion that low interest rates in the past decade or so have had ambiguous consequences, among them the growth of the US’s tech industry, which has created some monstrous corporate entities like Facebook and Uber, that have helped foster political instability through plenty of nefarious means and undermine labor markets by bolstering the gig economy respectively. But I think Riley has the order wrong; if he believes that tech firms have done nothing productive, and the banks have likewise failed to ‘invest in’ (I think he means ‘lend to’) private ventures, he should have looked further back to 2008 and 2010. In the slack economy of the 2010s, post-2008 Global Financial Crisis, the US government with the Obama Administration’s leadership failed to support households while it bailed out large banks; these moves fostered low demand, which in turn discouraged firms from rebuilding their productive capacity in the decade that followed. When the state stepped up its support for households in 2020 and 2021, and the private sector was caught flat-footed, inflation (which I still believe to be transitory, though for a longer period than I’d hoped) followed. This provided the foundation for aggressive (and misguided, in my opinion) rate hikes by the Fed in the past year. If we want to lay blame on the state for current financial turbulence in markets for Treasuries, we should cast our gaze back to a state failure to support households and, maybe, real sector firms back in 2010, rather than fixating on the recent past.

Riley argues that recent financial instability as exemplified by SVB reveals overcapacity, which has resulted from low interest rates, and that this has indirectly contributed to rising rates on US government debt. Riley’s focus on overcapacity centers on the notion that SVB’s preferred asset was US treasuries, rather than lending. Yet, while it constituted a relatively small share of its business, SVB was investing in climate transition; SVB had lent billions of dollars to climate related ventures, and provided more than 60% of funding for solar financing in the US, as well as to the construction of low-income housing, both worthy aims by any metric. If we care about climate change, and the IPCC has plenty of ammunition for why we should, and we should move as soon as possible, it’s not clear to me how SVB can be construed as finance failing to contribute to that effort, which is another argument that Riley emphasizes throughout the piece. And since the collapse of SVB, the question of what will happen for these ventures is open: will other banks step in to claim the mantel of premier lenders for facilitating carbon transition?

To Riley’s point that “neither the Biden administration, nor the neo-Kautskyites, have a credible answer to the structural logic of capitalism,” since a successful outcome of massive state push to increase industrial capacity would inevitably create a global bubble in green tech, first of all, we should be so lucky! I’m not sure how Riley supposes progressives or the state will force firms to start producing low-cost daycare, solar panels, and more; a cursory read of US history reveals that moments of the best successes for labor have occurred when the state and business have worked together. As Yakov Feygin noted, the closest the US government has come to direct management of production in its history has been through industrial policy with a wide scope. We should argue about whether the terms of those agreements have been ideal – whether the state should take more credit for its contributions (I agree with Marianna Mazzucato on this) or how the state should tax benefactors from its industrial policies are important debates – and critique how our government motivates firms to contribute to the public good; to do either requires left attention to industrial policy, if we would have future efforts better than prior ones.

In any event, the financial instability gyrations triggered by bank runs seems to have fizzled after some big central banks set their phasers on stun to curb panics in major financial arenas. A few takeaways for me include:

1. The value of regulation and oversight: hearings in congress about the state of SVB’s balance sheets reveal that recent deregulatory measures played some significant role in bringing SVB to its point of failure, so maybe paying attention to the details is worthwhile.
2. Leadership at the Fed’s persistent and destructive push to raise rates, in tandem with its sclerotic computer admin, helped destabilize banks and firms more than overcapacity in the green tech space.
3. Jim Crotty noted often that Marxian tendencies toward crisis could begin or be exacerbated by lack of capital and liquidity crises; his work uniting Keynesian and Minskian thought with Marx emphasized the importance of the financial machinery that Riley dismisses. The crisis at SVB originated in both rapidly communicated panic and mounting uncertainty as the Fed raised rates; if depositors want a safe place to park their money, why not create a public banking system with checking accounts for households and firms [these exist in Germany]? And if we want to prioritize ‘good investment’ in climate transition and care work and rebuilding bridges and so on, how about creating some public infrastructure and capital lending banks [again, you see these in Germany]?

As I see it, the left’s job is to continue to lobby for both the industrial side and the care side of the equation; I’d be delighted for a combination of incentives for the private sector as well as subsidization of childcare. As for seizing the commanding heights… while you don’t get any of the reforms (or revolutions) you don’t attempt, Joe Manchin has demonstrated a lot of leverage, to say nothing of Republicans in Congress. That anti-neoliberal tendency in the Democratic party ought to be nourished, and if progressives that have made their way into the upper echelons of the administration and leftists protesting on the outside maintain pressure for better versions of this, how could that be a bad thing? Even Robert Brenner sees it as a step forward.