OPINION - Bank bailouts and market turmoil – welcome to the end of cheap money

 (Ben Turner)
(Ben Turner)

Everything was better in the past. Football peaked in the late-1990s, music in the early-2000s. For you, the decade may differ but the pervading sense remains that culture reaches its zenith between the age of 10 and 16.

But then came the long 2010s – roughly early 2009 to late 2022 – also known as the era of zero, or near-zero, interest rates. It wasn’t necessarily a time of plenty – in the UK there was austerity, low growth and idle productivity.

But a decade of easy money fuelled a house price boom and the rise of loss-making, shareholder-subsidised businesses such as food delivery and car-hailing apps. The sort of things that made us feel richer amid a decade of stagnation.

The sudden rise in interest rates, brought on by stubbornly high inflation following the Covid-19 pandemic and exacerbated by Russia’s invasion of Ukraine, put an end to all that. Some of the consequences were predictable – more expensive mortgages. But others less so. As Warren Buffet once said: “Only when the tide goes out do you discover who’s been swimming naked.”

One dramatic example of the end of cheap money was the collapse of Silicon Valley Bank (SVB). During Covid, tech startups with plenty of cash in hand put their money in SVB, whose deposits surged to $189bn.

Tech businesses are often loss-making and therefore burn through a lot of cash in their early years. Consequently, SVB invested in lots of safe assets such US government bonds and mortgage-backed securities. This was sensible in the era of easy money. But as rates surged, bond prices fell, which translated to heavy losses for the bank.

SVB told investors it would have to sell billions in assets at a loss and sought to raise capital. Instead of reassuring the market, this precipitated a bank run. Without immediate action in the US and UK, tech firms with SVB deposits said they would be unable to pay bills or make payroll within days.

SVB was saved but the risk of contagion lingered. Today, it was the turn of Credit Suisse. Swiss authorities launched an emergency 50bn franc (£45bn) rescue of the bank, Europe’s 16th largest. This intervention followed a tumultuous week in the markets, wiping billions of pounds off the value of UK banks. Shares in London did rally today after news of the multi-billion pound rescue, but scrutiny will surely turn elsewhere.

This does not make a banking crisis on the scale of 2008 inevitable. UK financial institutions are in a markedly different place today. Defences have been shored up, liquidity rules tightened and rigorous stress tests put in place. Meanwhile, governments and central banks have learned the need to go big and act fast when it comes to providing liquidity to troubled institutions.

But it is yet another shock the UK and global economy could do without. Questions this sparks include: 1) does this make it less likely that interest rates will go higher? The European Central Bank, undeterred, raised its rate by 50 basis points today. 2) does this make the much-heralded US soft landing (bringing inflation down without precipitating a recession) virtually impossible?

Ultimately, with rates rising around the world, the tide has very much gone out and the scantily clad amongst us are already causing havoc.

Elsewhere in the paper, the Pentagon has released video footage of the moment a Russian jet hit a spy drone over the Black Sea. In the comment pages, economist and former central banker Tony Yates calls yesterday’s Budget competent, but fears it may not be enough considering the UK’s economic challenges. While Sarfraz Manzoor assumed a middle-aged club night would be awful – but managed to surprise himself.

And finally, are you the one always lumbered with arranging gifts, calling relatives and making dinner reservations in your family? Forget the middle child curse, it’s all about eldest sibling syndrome.

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