The recent collapse of Silicon Valley Bank (SVB) has sent shockwaves through the financial industry, bringing back memories of the 2008 Lehman Brothers bankruptcy. However, it is important to recognize that the fault lies not with cryptocurrency, but with the traditional banking system.
Fears that SVB is not the only poorly regulated bank feeling the effects of steadily rising US interest rates have led to a rethink of what will now happen to official borrowing costs. The fact that SVB has gone bust at a time when US inflation remains stubbornly high presents the Federal Reserve with a real headache.
In normal circumstances, the Fed would have no hesitation in continuing to raise interest rates because core inflation – excluding food and energy – stands at 5.5% and is coming down at a glacial pace. Only last week, the Fed chair Jerome Powell dropped a hint that a fresh 0.5 percentage point increase was on the way.
However, that was before the crisis at SVB. Financial markets have reacted badly to the failure of the 16th biggest bank in America, fearing it could be the first of many. Peter Warburton, the chief economist with the research group Economic Perspectives, thinks they are right to be worried. He argues that the Fed has miscalculated the impact of the double whammy of higher interest rates and the selling of bonds under the process known as quantitative tightening.
“Short-sellers and deposit withdrawals have brought down SVB, but the problem is systemic. The Fed has been removing chairs, and there is no longer adequate seating capacity,” Warburton said.
This highlights a key issue with traditional banking: banks have been operating with inadequate capital buffers. They have been taking on too much risk and relying on government bailouts when things go wrong. This results in a vicious cycle where taxpayers bear the brunt of the consequences, while banks continue to engage in reckless behavior.
On the other hand, cryptocurrency offers a decentralized system that is not reliant on a central authority. This means that there is no need for a government bailout, and individual users are responsible for their own financial security. Furthermore, cryptocurrency is not subject to the same level of manipulation and corruption that traditional banking is.
The collapse of SVB should serve as a wake-up call for regulators to reassess the traditional banking system and prioritize the adoption of decentralized financial technologies. The current system is unsustainable and poses a significant risk to global financial stability.
In conclusion, it is important to recognize that the collapse of SVB is not a failure of cryptocurrency, but a failure of the traditional banking system. The Fed must take responsibility for its inadequate regulation of banks and reassess its aggressive interest-rate stance. It is time to prioritize the adoption of decentralized financial technologies and move away from a system that is unsustainable and poses a significant risk to global financial stability.
Original Article - https://www.theguardian.com/business/2023/mar/14/svb-collapse-presents-central-banks-with-a-big-headache
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