The Illusion of America’s System

By Sanjeev Oak

The United States, often regarded as the savior of the world, has revealed its hollowness during the collapse of Silicon Valley Bank—a debacle that exposed the fragility of its much-touted financial system. The global economy witnessed the cracks in America’s banking sector, marking a repeat of the 2008 financial crisis. Here’s an analysis of the situation.

A Double Standard in Criticism

The Hindenburg Research report, which criticized India’s leading Adani Group, triggered a global response. American media and economists were quick to amplify the report, targeting the Adani Group and even Indian Prime Minister Narendra Modi. They questioned the stability of India’s largest bank, the State Bank of India, and predicted the downfall of LIC. This narrative caused Adani Group’s shares to plummet temporarily, but they rebounded once the facts emerged.

Meanwhile, America’s 16th largest bank, Silicon Valley Bank (SVB), was on the brink of collapse, alongside Signature and Silvergate banks. Despite warning signs since November last year, the American media and analysts largely ignored the brewing crisis. Today, SVB has failed, and other banks’ shares are plummeting. The question remains: Why did this financial crisis occur, and who is responsible?

Ripple Effects of the Russia-Ukraine War

The Russia-Ukraine war ushered in a global economic slowdown. While India recovered swiftly, the U.S. and Europe continued to struggle. The Bank of England even warned that this year’s recession in these regions could surpass the severity of the 1972 downturn. Rising fuel prices, exacerbated by sanctions on Russia, further strained these economies.

In the U.S., inflation soared, prompting the Federal Reserve to aggressively hike interest rates to curb it. This policy diverted investments to safer Federal Reserve bonds, draining funds from other sectors. This withdrawal of liquidity hit U.S. banks hard, with Silicon Valley Bank being one of the most prominent casualties.

Blame Game and Policy Missteps

Democratic Senator Elizabeth Warren directly blamed Federal Reserve Chair Jerome Powell for the crisis, citing his policies as a significant factor in SVB’s collapse. Powell’s measures, Warren argued, prioritized financial institutions at the expense of their fundamental responsibilities toward clients and the public.

The fallout was stark. Bank shares nosedived, and calls grew for the Federal Reserve to lower interest rates to prevent further collapses. Ratings agency Moody’s downgraded its outlook on the U.S. banking system from “stable” to “negative,” adding to the sector’s woes.

Investor Panic and Government Apathy

Despite assurances from President Joe Biden, investor confidence remained shaken. Stocks of not only U.S. banks but also European financial institutions took a hit, with Credit Suisse and First Republic Bank recording sharp intraday declines. The lack of decisive action or a bailout package from the Biden administration has left the banking sector in a precarious state.

Regulators like the Federal Deposit Insurance Corporation (FDIC) have invited bids for taking over struggling banks, but as of now, no concrete resolutions have been announced. The situation underscores the vulnerability of America’s financial system, once thought invincible.

A Stark Contrast with Indian Banking

The collapse of SVB and other banks highlights the comparative strength of India’s banking system. Unlike the entirely private banking setup in the U.S., India’s banks have proven resilient, bolstered by reforms such as the Jan Dhan-Aadhaar-Mobile (JAM) trinity introduced under Prime Minister Modi’s leadership. Indian banks are now facilitating international transactions in rupees, further expanding their global reach.

This crisis is a reminder that America’s self-proclaimed role as the world’s “Big Brother” does not align with its internal vulnerabilities. The U.S. banking system’s private nature and lack of robust oversight have been laid bare. In contrast, Indian banks, backed by government safeguards, continue to showcase their reliability and security on the global stage.

A Wake-Up Call for the U.S.

The Silicon Valley Bank debacle and its ripple effects serve as a wake-up call for the U.S. As more banks teeter on the edge of collapse, the need for structural reforms in America’s financial system has become glaringly evident. The illusion of an invulnerable system has shattered, leaving the world questioning the sustainability of the American economic model.