China gains from a US banking crisis

DRAGON GAINING: WHEN THE WESTERN FINANCIAL SYSTEM IS SUFFERING FROM SELF-INFLICTED IMPAIRMENT, THE IMAGERY OF PUTIN AND JINPING EMBRACING EACH OTHER IN THE KREMLIN SAYS IT ALL

NO TWO CRISES are alike. That is true of recent financial upheavals-the Asian financial crisis of the late 1990s, the dot-com crisis of 2000, and the global financial crisis of 2008-09. It is also the case with crises sparked by geostrategic shocks, such as wars, pestilence, famine, and pandemics.

Today, we are witnessing a potentially lethal interplay between these two sources of upheaval: a financial crisis, reflected in the failure of Silicon Valley Bank, and a geostrategic crisis, reflected in the deepening cold war between the United States and China. While the origins of each crisis are different, in one sense it doesn't really matter: The outcome of their interaction is likely to be greater than the sum of the parts.

The failure of SVB is symptomatic of a far bigger problem: a US financial system that is woefully unprepared for the return of inflation and the concomitant normalisation of monetary policy. SVB risk managers were in deep denial of such an outcome, and the bank was brought down by sharp losses on its unhedged $124 billion bond portfolio, triggering a classic bank run by fearful depositors.

Depositors, even the hotshots of America's startup culture, can hardly be blamed for not doing the due diligence on complex financial institutions they entrust with their assets. That task falls to the Federal Reserve, which, sadly, blew it again. Starting with reckless monetary accommodation that perpetuated a dangerous string of asset bubbles-from dot-com and housing to credit and long-duration assets and continuing with the misdiagnosis of post-Covid inflation as "transitory," the Fed has now made a supervisory error of monumental proportions: It fixated on large banks and overlooked smaller regional banks like SVB, Signature, and First Republic, where accidents were waiting to happen.