Financial markets have been rattled by the collapse of Silicon Valley Bank and Signature Bank this week, forcing public and private financial institutions to step in to prevent the spread of contagion. Meanwhile, inflation remains elevated, making the decision to raise rates – and by how much – even tougher for central banks to navigate. On the geopolitical front, China is undergoing a large restructuring of its government, centralizing its authority in an attempt to fight off both domestic and international challenges to its economy. In Europe, the continuation of Russia’s war in Ukraine has solidified Russia’s descent into totalitarianism.

Silicon Valley Bank and Signature Bank Collapse

Banking Turmoil: What We Know

Vivian Giang, The New York Times

Silicon Valley Bank collapse forces rethink on interest rates and hits bank stocks

Katie Martin, George Steer & Kate Duguid, Financial Times

Both Silicon Valley Bank (SVB) and Signature Bank have collapsed in the largest bank failure since the financial crisis of 2008. SVB services nearly half of the country’s venture-capital technology and life-science companies, and its clientele ranges across 2,500 venture capital firms, while Signature Bank’s primary customers are law firms and real estate companies. Fed rate hikes tell part of the story of SVB’s collapse; however, other factors such as dwindling opportunities for tech start-ups and the bank’s large number of uninsured depositors have led clients in recent months to withdraw their deposits in response to turbulence in the economy. As withdrawals mounted, SVB was forced to sell investments at a steep discount, further damaging the bank’s overall health. The ensuing bank run on SVB triggered panic in depositors at Signature Bank, the majority of whose clientele had more than $250,000 deposited, as a flood of withdrawals hammered the bank. Additionally, crypto deposits in Signature Bank proved unhelpful to the bank’s financial health. Other banks in both the US and Europe have likewise suffered, with US banks suffering the brunt of losses.

In response, financial regulators in the US have stepped in to stymie financial contagion from expanding throughout the system. The FDIC has taken action by taking over SVB and also invoking a “system risk exception,” which allows the government to pay back uninsured depositors to prevent dire consequences for the economy or financial instability. The Fed has also put together a rescue package for the bank. Investor reaction to the moves include reversed expectations regarding future rate hikes and updated forecasts include a pause, or even a slight easing, this month when the Fed meets March 21 – 22. Still, some analysts have argued that the market is responding too hastily in pricing in a halt to Fed monetary tightening, arguing that inflation has yet to be reined in. 

Russia’s Descent

From Pushkin to Putin: Russian Literature’s Imperial Ideology

Volodymyr Yermolenko, Foreign Policy

What the Fall of Empires Tells Us About the Ukraine War

Anatol Lieven, Foreign Policy

Staring Down the Black Hole of Russia’s Future

Anastasia Edel, Foreign Policy

The war in Ukraine can be seen as a bookend to Russia’s imperial history. The Russian state has existed in some form or another for hundreds of years, from the Russian Empire to the Soviet Union. For all this time, imperialism has been integral to Russia’s understanding of itself. Under the rule of the tsars, Russia saw itself as a protector and civilizer of its conquered periphery – the Caucuses, Ukraine, Siberia. Under the Soviet Union, the state fancied itself the protector and liberator of much of Europe from the Nazi menace. When the Soviet empire dissolved, the post-Soviet states that emerged were in the shapes of the various republics the Soviets had constructed to control their subjects, but the core of the empire, Russia, inherited the lion’s share of Soviet power.

The future of that Russia, the expansive state that has stretched across Eurasia for centuries, is clouded. Whatever progress towards democratization in the post-Soviet years has been long lost due to missteps from both Russia’s revanchist tendencies and the West’s exclusionary attitude towards Moscow. The war in Ukraine has accelerated Russia’s descent into totalitarianism. Putin has created a culture of fear among Russia’s influential to dissuade challenges to his rule, and he feeds the Russian people non-stop propaganda. The country has experienced near-unprecedented brain drain, robbing it of future innovation. Any Russian victory will result in a Russian state made of warlords and despots, where force is used with impunity. Russian defeat, on the other hand, will be catastrophic to its own people. Unfortunately, that may be the only way to ever light the torch of freedom in eternal Russia.

Recession Risk Looms Large as Bond Markets Price in Steeper Rate Hikes Globally

Garfield Reynolds & Michelle Jamrisko, Bloomberg

Read the full article

The bond market’s hope for imminent interest-rate cuts has been dashed as central banks around the world struggle to put a damper on inflation. The rising prices, which have constituted the worst surge of inflation since the dreadful 1970s, have been particularly difficult for central banks to handle. The hot US job market, China’s reopening, and Europe’s mild winter all contribute to this inflationary pressure. Major central banks have made hawkish statements due to the release of data indicating inflation is not slowing down as much as had been wished. This stresses markets, which have begun to recalculate where they believe central banks will begin cutting rates. Many emerging economies, which have to balance seeking healthy growth with fighting inflation, have been put in a bind over the continuing rate hikes. Major central banks still have more to do, and it’s uncertain how much economic damage will have to be done before they stop. 

Chinese Centralization and Future Prospects

Why China Is Tightening Its Oversight of Banking and Tech

Keith Bradsher & Chang Che, The New York Times

What Wall Street Gets Wrong About Xi Jinping’s New Money Men

Tom Orlik & Tom Hancock, Bloomberg

New changes made by the Chinese Communist party are set to make an impact on the future development of China. The party’s recent changes point towards a centralization of the Chinese state, which may, contrary to many expectations, serve China well. Overhauls include the centralization of authority under Xi Jinping and his political allies; the strengthening of the China Banking and Insurance Regulatory Commission, which has been renamed the State Administration of Financial Supervision; a streamlining of funding and high-tech development under the Ministry of Science and Technology; and the centralization of data under the National Data Bureau.

Centralization of the political system may afford China the opportunity to push through much-needed reforms to tackle some of the country’s most pressing issues, such as declining demographics, cost of living, etc., while creating a pro-business environment under Xi ally Li Qiang, who is viewed as relatively liberal and pragmatic. Streamlining funding in the Ministry of Science and Technology is aimed at reducing reliance on Western imports of highly advanced semiconductors, which has become more difficult in the wake of import bans from the US, Japan, and the Netherlands on highly advanced chips. State Administration of Financial Supervision Reforms and centralization in the regulatory sector are aimed at stopping China’s slow-moving housing crash, which represents a serious risk to the Chinese economy, while also seeking to rein in China’s myriad of small banks that regularly engage in very risky lending and represent nearly half of the banking market. Finally, data centralization and commodification serve to expand central control over Chinese data for the purpose of extracting the maximum degree of value from it. Should these reforms prove successful in navigating the serious problems ahead for China domestically and the country pursues reduced tensions with the West and Western investors politically and through a strong, liberalized business environment, the potential exists to maintain an upside growth of 5% or higher until 2030.