The 2008 subprime crisis seems to be coming back to haunt traditional banking markets. Banks are once again facing bankruptcies and stock prices are plummeting. Monetary policies are under severe strain and the situation remains extremely critical. We are immersed in the heart of an unstable and uncertain period for the world of finance, where the survival of certain financial institutions is at stake.
The 2008 subprime crisis: the roots of a fragile banking system
From the 2008 subprime mortgage crisis, the traditional financial system was badly shaken, resulting in the cascading bankruptcy of many banks. However, the bankruptcy of the banking system had been foreseeable since the end of the 2008 crisis.
Indeed, the 2008 subprime crisis revealed the extent of the structural deficits accumulated since the 1970s, the famous “70s oil shocks”. Instead of acknowledging this reality, States have preferred to save the banks by injecting massive amounts of liquidity into the financial system.
This policy had the effect of artificially keeping a weakened financial system afloat, while accentuating economic and financial imbalances. Deficits thus continued to accumulate until they reached unrecoverable levels in 2008.
The question that then arises is: how were these deficits financed?
The bankruptcy of the bank: consequence of a disastrous decision!
The current financial crisis is the result of a series of disastrous decisions taken by central banks, which caused the collapse of the financial system. The repeated bankruptcies of large banks in the United States and Europe are only the visible consequences of these economic choices.
In an effort to keep the financial system afloat, central banks opted for a first strategy of increasing the assets on their balance sheets. To do this, they bought surplus production from emerging countries on credit, in order to finance the lifestyle of Americans. However, this policy led to a massive accumulation of debt, making banks vulnerable to economic shocks.
The second means was to lower the interest rates of bond securities. This policy was intended to make the debt sustainable, otherwise the interest would have quickly become unpayable. However, this drop in interest rates had the side effect of creating a real estate bubble and causing a gigantic transfer of wealth from the middle class to the richest. As demonstrated by the report from Oxfam. Unfortunately, the COVID-19 pandemic has only accelerated a process of economic crisis which had already been running since mid-2019 in the United States.
The mismanagement of the crisis has led to the current collapse of the financial system, with the cascading bankruptcy of many banks. In short, the monetary policy pursued by central banks has created economic and financial instability which has led to the current crisis.
The domino effect of bank failures: an inevitable contagion
There 2008 financial crisis was a stark reminder of how bank failures can trigger a chain of events that quickly spreads through the global financial system. Today, as we enter a new period of economic uncertainty, this fear is again present.
But this time, the threat could be greater, as it is linked to major banks, including Silvergate and Silicon Valley Bank. SVB is known for funding some of the most famous names in Silicon Valley, such as Apple, Cisco, Yahoo, Space X, Twitter, etc. But what led to his downfall?
During the COVID-19 pandemic, tech companies have grown exponentially, accumulating significant amounts of cash. The SVB, which provides financial services to companies in Silicon Valley, has seen its deposits increase considerably thanks to these excess cash. The bank then decided to invest all this cash in long-term bonds at low interest rates.
Unfortunately, inflation came on quickly, causing US and European bond markets to plummet. The SVB, unable to cope with this crisis, eventually went bankrupt and was forced to sell $21 billion of bonds in the market at a 20% discount, suffering a loss of $1.8 billion.
On March 10, 2023, the declaration of bankruptcy of Silicon Valley Bank had significant repercussions for the entire global financial system.
A global contagion
The financial crisis currently unfolding before our eyes is a real threat to the global banking system. Nearly 190 banks are in a precarious situation, and 186 are even on the verge of implosion. Which raises the question of whether these institutions will be able to survive a large-scale financial contagion.
The Silicon Valley Bank debacle was the trigger for the crisis, resulting in a colossal loss of $52 billion for the four largest US banks. The crisis has since spread to other banks and caused major losses for investors, including ETF Invesco KBW Bank, which lost almost 30% in just a few days.
This contagion spread rapidly, affecting system-wide banks such as Credit Suisse, BNP Paribas, Societe Generale and Deutsche Bank, all of which suffered significant declines in their stock market value. Although the Fed promised to inject 300 billion to save the failing system, that was not enough to reassure investors.
The vertiginous fall of Credit Suisse, which saw the markets bet on a probability of default of 47%, was one of the most striking events of the crisis. However, the authorities took drastic measures to avoid the worst. The Swiss central bank injected 50 billion Swiss francs, UBS bought Credit Suisse for 3 billion Swiss francs, and the government offered a guarantee of 9 billion francs.
Despite these measures, the situation remains fragile and the crisis is not yet behind us.
Bitcoin: a bulwark against the crisis!
March 13, 2023 will certainly remain etched in the annals of world economic history, especially for investors in banking and finance. Indeed, US stock markets are collapsing under the weight of losses accumulated by banks and financial companies. Shares of some of them have fallen by as much as 60%, leaving desperate investors and traders in a cold sweat.
This is reminiscent of the 2008 financial crisis, which had disastrous economic consequences across the world. It is also this crisis that inspired the creation of Bitcoin by Satoshi Nakamoto, with the aim of offering an alternative to traditional financial systems which had failed in their mission to protect the interests of citizens.
In any case, Satoshi’s invention seems to have finally found its raison d’être. If his initial goal was to save the world from another banking crisis, it seems that day has finally arrived!
Although Bitcoin is not yet the universal panacea for investors, it is growing in popularity and adoption. Individuals and businesses are beginning to see it as a convenient method of payment, and governments are even accepting it as legal tender.
No one knows yet if Satoshi’s invention will succeed in replacing traditional financial systems, but one thing is certain: the Bitcoin revolution is underway and it has only just begun.
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