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Brownstone Institute

Where Is Occupy Silicon Valley?

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From the Brownstone Institute

BY Craig PirrongCRAIG PIRRONG

Bank failures tend to come in waves, and we are experiencing at least a mini-wave now.

Banks fail for three basic reasons: 1. Credit transformation: deterioration in borrower creditworthiness, usually due to an adverse economic shock (e.g., a real estate bust). 2. Maturity transformation: borrowing short, lending long, and then getting hammered when interest rates rise. 3. Liquidity transformation combined with an exogenous liquidity shock, a la Diamond-Dybvig, where idiosyncratic depositor needs for cash lead to withdrawals that exceed liquid assets and therefore trigger fire sales of illiquid assets.

The two most notable failures of late–Silicon Valley Bank and Silvergate–are examples of 2 and 3 respectively.

In some respects, SVB is the most astounding. Not because a bank failed in the old-fashioned way, but because it was funded primarily by the deposits of supposed financial sophisticates–and because of the disgusting policy response of the Treasury and the Fed.

SVB took in oodles of cash, especially in the past couple of years. The cashcade was so immense that SVB could not find enough traditional banking business (loans) to soak it up, so they bought lots of Treasuries. And long duration Treasuries to boot.

And then Powell and the Fed applied the boot, jacking up rates. Bonds have cratered in the last year, and took SVB’s balance sheet with it.

Again, an old story. And hardly a harbinger of systemic risk–unless such reckless maturity mismatches are systemic.

SVB was the Banker to the Silicon Valley Stars, notably VCs and tech firms. These firms are the ones that deposited immense sums in exchange for a pittance of return. Case in point, Roku, put almost $500 million–yes, you read that right, 9 figures led with a 5–into SVB!!!

I mean: what the eff? Was the Treasurer a moron? For who other than a moron would hold that much in cash in a single institution? (Roku claims its devices “make your home a smarter.” Maybe they should have hired a smarter treasurer and CFO, or replaced them with one of its devices). Hell, why is a company holding that much in cash period?

A few of these alleged masters of the universe (like Palantir) saw the writing on the wall and yanked their deposits: deposits fell by a quarter on Friday alone, sealing the bank’s doom. Those who were slow to run howled to the high heavens over the weekend that if there was not a bailout there would be a holocaust in the tech sector.

Even though the systemic risk posed by SVB’s failure is nil (or if not, then every bank is systemically important), the Treasury Department and the Fed responded to these howls and guaranteed all the deposits–even though the FDIC’s formal deposit insurance limit is $250,000. You know, .05 percent of Roku’s deposit.

When evaluating this, one cannot ignore the reality that the Democratic Party is completely beholden to Silicon Valley. This is beyond scandalous.

Occupy Silicon Valley, anyone?

Treasury Secretary Janet Yellen insulted our intelligence by assuring us this is not a bailout. Well, it’s not a taxpayer bailout, strictly speaking, because the Treasury is not providing the backstop. Instead, it is being funded by a “special assessment” on solvent banks. Which are owned and funded by people who also pay taxes. And such an “assessment” is a tax in everything but name–because it is a contribution by private entities compelled by the government.

The policy implications of this are disastrous. The whole problem with such bailouts is moral hazard. What is to stop banks from engaging in such reckless behavior as SVB did if they can obtain seemingly unlimited funding from those who know that they will be bailed out if things go pear-shaped?

And the regulatory failure here demonstrates that bank regulation–despite the supposed “reforms” of Frankendodd–can’t even catch or constrain the oldest bet-the-bank strategy in the book. Free banking–no deposit insurance, no bailing out of depositors–couldn’t do worse, and would likely do better.

No, the failure of SVB is not the scandal here. The scandal is the political response to it. This reveals yet again how captured the government is. This time not by Wall Street, but by tech companies and oligarchs that are currently the primary source of Democratic political funding.

A couple of weeks ago the Silvergate story looked juicy, but SVB has put it in the shade. Silvergate also grew dramatically, but on the back of crypto rather than SV tech. It became the main banker for many crypto firms and entrepreneurs. The crypto meltdown did not affect Silvergate directly, but it did crush its depositors, the aforesaid crypto firms and entrepreneurs. They withdrew a lot of funding, and an old-fashioned liquidity mismatch did it in.

In traditional banks, deposit funding is “sticky.” Banks that rely on wholesale funding (“hot money”) are more vulnerable to runs. Silvergate’s funding was not traditional sticky deposit funding, nor was it hot money per se. It was money that was pretty cool as long as crypto was cool, and became hot once crypto melted down.

A run started, but the run was precipitated by a liquidity shock. Simple story, really.

Silvergate’s failure was not a scandal. SVB’s failure per se was not a scandal (except to the extent that our vaunted banking regulators failed to prevent the most prosaic type of failure).

Again–the scandal is the politically tainted response that will have baleful consequences in the future, as the response virtually guarantees that there will be more SVBs in the future.

Author

  • Craig Pirrong

    Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

After 15 years as a TV reporter with Global and CBC and as news director of RDTV in Red Deer, Duane set out on his own 2008 as a visual storyteller. During this period, he became fascinated with a burgeoning online world and how it could better serve local communities. This fascination led to Todayville, launched in 2016.

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Brownstone Institute

The Plan: Lock You Down for 130 Days

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From the Brownstone Institute

BY Jayanta BhattacharyaJAYANTA BHATTACHARYA

What if the coronavirus pandemic was not a once-in-a-century event but the beginning of a new era of regular deadly respiratory viral pandemics? The Biden administration is already planning for this future. Last year, it unveiled a national strategy to develop pharmaceutical firms’ capacity to create vaccines within 130 days of a pandemic emergency declaration.

The Biden plan enshrines former president Donald Trump‘s Operation Warp Speed as the model response for the next century of pandemics. Left unsaid is that, for the new pandemic plan to work as envisioned, it will require us to conduct dangerous gain-of-function research. It will also require cutting corners in the evaluation of the safety and efficacy of novel vaccines. And while the studies are underway, politicians will face tremendous pressure to impose draconian lockdowns to keep the population “safe.”

In the case of COVID-19 vaccines, it took about a year for governments to deploy the jab at scale after scientists sequenced the virus. Scientists identified a vaccine target—fragments of the spike protein that the virus uses to access cells—by early January 2020, even before the WHO declared a worldwide pandemic.

This rapid response was only possible because some scientists already knew much about the novel virus. Despite heavy regulations limiting the work, the US National Institutes of Health had funded collaborations between the EcoHealth Alliance and the Wuhan Institute of Virology. They collected bat viruses from the wild, enhanced their function to study their potential, and designed vaccines before the viruses infected humans.

While there is controversy over whether this gain-of-function work is responsible for the COVID pandemic, there is no question this research is potentially dangerous. Even cautious scientists sometimes accidentally leak hazardous, highly infectious viruses into the surrounding community. In December 2021, for instance, the virus that causes COVID-19 accidentally leaked out of a laboratory in Taiwan, where scientists were researching the virus.

A promising vaccine target would be needed immediately after a disease outbreak for the Biden pandemic plan to work. For that to be possible, there will need to be permanent support for research enhancing the capacity of viruses to infect and kill humans. The possibility of a deadly laboratory leak will hang over humanity into perpetuity.

Furthermore, before any mass vaccination campaign, pharmaceutical firms must test the vaccines for safety. High-quality randomized, controlled studies are needed to make sure the vaccine works.

In 1954, Jonas Salk’s group tested the vaccine in a million children before the polio mass vaccination campaign that effectively defanged the threat of polio to American children. Physicians need the results of these studies to provide accurate information to patients.

Operation Warp Speed cut red tape so that vaccine manufacturers could conduct these studies rapidly. The randomized trials cut some corners. For instance, the Pfizer and Moderna trials did not enroll enough people to determine whether the COVID vaccines reduce all-cause mortality.

Nor did they determine whether the vaccines stop disease transmission; a few months after the government deployed the vaccines, researchers found protection against infection was partial and short-lived. Each of these cut corners has since created policy controversies and uncertainty that better trials would have avoided. Because of the pressure to produce a vaccine within 130 days, President Biden’s pandemic plan will likely force randomized trials on future vaccines to cut the same corners.

This policy effectively guarantees that lockdowns will return to the US in the event of a new pandemic. Though the lockdowns did not work to protect populations from getting or spreading COVID—after 2.5 years, nearly everyone in the US has had COVID—public health bureaucracies like the CDC have not repudiated the strategy.

Imagine the early days of the next pandemic, with public health and the media fomenting fear of a new pathogen. The impetus to close schools, businesses, churches, beaches, and parks will be irresistible, though the pitch will be “130 days until the vax” rather than “two weeks to flatten the curve.”

When the vaccine finally arrives, the push to mass vaccinate for herd immunity will be enormous, even without evidence from the rushed trials that the vaccine provides long-lasting protection against disease transmission. This happened in 2021 with the COVID vaccine and would happen again amidst the pandemic panic. The government would push the vaccine even on populations at low risk from the novel pathogen. Mandates and discrimination against the unvaccinated would return, along with a fierce movement to resist them. The public’s remaining trust in public health would shatter.

Rather than pursue this foolish policy, the Biden administration should adopt the traditional strategy for managing new respiratory-virus pandemics. This strategy involves quickly identifying high-risk groups and adopting creative strategies to protect them while not throwing the rest of society into panic.

The development of vaccines and treatments should be encouraged, but without imposing an artificial timeline that guarantees corners will be cut in evaluation. And most of all, lockdowns—a disaster for children, the poor, and the working class—should be excised from the public health toolkit forever.

A version of this piece appeared in Newsweek

Author

  • Jayanta Bhattacharya

    Jay Bhattacharya is a physician, epidemiologist and health economist. He is Professor at Stanford Medical School, a Research Associate at the National Bureau of Economics Research, a Senior Fellow at the Stanford Institute for Economic Policy Research, a Faculty Member at the Stanford Freeman Spogli Institute, and a Fellow at the Academy of Science and Freedom. His research focuses on the economics of health care around the world with a particular emphasis on the health and well-being of vulnerable populations. Co-Author of the Great Barrington Declaration.

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Brownstone Institute

The Fraying of the Liberal International Order

Published on

From the Brownstone Institute

BY Ramesh ThakurRAMESH THAKUR

International politics is the struggle for the dominant normative architecture of world order based on the interplay of power, economic weight and ideas for imagining, designing and constructing the good international society. For several years now many analysts have commented on the looming demise of the liberal international order established at the end of the Second World War under US leadership.

Over the last several decades, wealth and power have been shifting inexorably from the West to the East and has produced a rebalancing of the world order. As the centre of gravity of world affairs shifted to the Asia-Pacific with China’s dramatic climb up the ladder of great power status, many uncomfortable questions were raised about the capacity and willingness of Western powers to adapt to a Sinocentric order.

For the first time in centuries, it seemed, the global hegemon would not be Western, would not be a free market economy, would not be liberal democratic, and would not be part of the Anglosphere.

More recently, the Asia-Pacific conceptual framework has been reformulated into the Indo-Pacific as the Indian elephant finally joined the dance. Since 2014 and then again especially after the Russian invasion of Ukraine in February last year, the question of European security, political and economic architecture has reemerged as a frontline topic of discussion.

The return of the Russia question as a geopolitical priority has also been accompanied by the crumbling of almost all the main pillars of the global arms control complex of treaties, agreements, understandings and practices that had underpinned stability and brought predictability to major power relations in the nuclear age.

The AUKUS security pact linking Australia, the UK, and the US in a new security alliance, with the planned development of AUKUS-class nuclear-powered attack submarines, is both a reflection of changed geopolitical realities and, some argue, itself a threat to the global nonproliferation regime and a stimulus to fresh tensions in relations with China. British Prime Minister (PM) Rishi Sunak said at the announcement of the submarines deal in San Diego on March 13 that the growing security challenges confronting the world—“Russia’s illegal invasion of Ukraine, China’s growing assertiveness, the destabilising behaviour of Iran and North Korea”—“threaten to create a world codefined by danger, disorder and division.”

For his part, President Xi Jinping accused the US of leading Western countries to engage in an “all-around containment, encirclement and suppression of China.”

The Australian government described the AUKUS submarine project as “the single biggest investment in our defence capability in our history” that “represents a transformational moment for our nation.” However, it could yet be sunk by six minefields lurking underwater: China’s countermeasures, the time lag between the alleged imminence of the threat and the acquisition of the capability, the costs, the complexities of operating two different classes of submarines, the technological obsolescence of submarines that rely on undersea concealment, and domestic politics in the US and Australia.

Regional and global governance institutions can never be quarantined from the underlying structure of international geopolitical and economic orders. Nor have they proven themselves to be fully fit for the purpose of managing pressing global challenges and crises like wars, and potentially existential threats from nuclear weapons, climate-related disasters and pandemics.

To no one’s surprise, the rising and revisionist powers wish to redesign the international governance institutions to inject their own interests, governing philosophies, and preferences. They also wish to relocate the control mechanisms from the major Western capitals to some of their own capitals. China’s role in the Iran–Saudi rapprochement might be a harbinger of things to come.

The ”Rest” Look for Their Place in the Emerging New Order

The developments out there in “the real world,” testifying to an inflection point in history, pose profound challenges to institutions to rethink their agenda of research and policy advocacy over the coming decades.

On 22–23 May, the Toda Peace Institute convened a brainstorming retreat at its Tokyo office with more than a dozen high-level international participants. One of the key themes was the changing global power structure and normative architecture and the resulting implications for world order, the Indo-Pacific and the three US regional allies Australia, Japan, and South Korea. The two background factors that dominated the conversation, not surprisingly, were China–US relations and the Ukraine war.

The Ukraine war has shown the sharp limits of Russia as a military power. Both Russia and the US badly underestimated Ukraine’s determination and ability to resist (“I need ammunition, not a ride,” President Volodymyr Zelensky famously said when offered safe evacuation by the Americans early in the war), absorb the initial shock, and then reorganise to launch counter-offensives to regain lost territory. Russia is finished as a military threat in Europe. No Russian leader, including President Vladimir Putin, will think again for a very long time indeed of attacking an allied nation in Europe.

That said, the war has also demonstrated the stark reality of the limits to US global influence in organising a coalition of countries willing to censure and sanction Russia. If anything, the US-led West finds itself more disconnected from the concerns and priorities of the rest of the world than at any other time since 1945. A study published in October from Cambridge University’s Bennett Institute for Public Policy provides details on the extent to which the West has become isolated from opinion in the rest of the world on perceptions of China and Russia. This was broadly replicated in a February 2023 study from the European Council on Foreign Relations (ECFR).

The global South in particular has been vocal in saying firstly that Europe’s problems are no longer automatically the world’s problems, and secondly that while they condemn Russia’s aggression, they also sympathise quite heavily with the Russian complaint about NATO provocations in expanding to Russia’s borders. In the ECFR report, Timothy Garton-Ash, Ivan Krastev, and Mark Leonard cautioned Western decision-makers to recognise that “in an increasingly divided post-Western world,” emerging powers “will act on their own terms and resist being caught in a battle between America and China.”

US global leadership is hobbled also by rampant domestic dysfunctionality. A bitterly divided and fractured America lacks the necessary common purpose and principle, and the requisite national pride and strategic direction to execute a robust foreign policy. Much of the world is bemused too that a great power could once again present a choice between Joe Biden and Donald Trump for president.

The war has solidified NATO unity but also highlighted internal European divisions and European dependence on the US military for its security.

The big strategic victor is China. Russia has become more dependent on it and the two have formed an effective axis to resist US hegemony. China’s meteoric rise continues apace. Having climbed past Germany last year, China has just overtaken Japan as the world’s top car exporter, 1.07 to 0.95 million vehicles. Its diplomatic footprint has also been seen in the honest brokerage of a rapprochement between Iran and Saudi Arabia and in promotion of a peace plan for Ukraine.

Even more tellingly, according to data published by the UK-based economic research firm Acorn Macro Consulting in April, the BRICS grouping of emerging market economies (Brazil, Russia, India, China, South Africa) now accounts for a larger share of the world’s economic output in PPP dollars than the G7 group of industrialised countries (Canada, France, Germany, Italy, Japan, UK, USA). Their respective shares of global output have fallen and risen between 1982 and 2022 from 50.4 percent and 10.7 percent, to 30.7 percent and 31.5 percent. No wonder another dozen countries are eager to join the BRICS, prompting Alec Russell to proclaim recently in The Financial Times: “This is the hour of the global south.”

The Ukraine war might also mark India’s long overdue arrival on the global stage as a consequential power. For all the criticisms of fence-sitting levelled at India since the start of the war, this has arguably been the most successful exercise of an independent foreign policy on a major global crisis in decades by India. Foreign Minister S. Jaishankar even neatly turned the fence-sitting criticism on its head by retorting a year ago that “I am sitting on my ground” and feeling quite comfortable there. His dexterity in explaining India’s policy firmly and unapologetically but without stridency and criticism of other countries has drawn widespread praise, even from Chinese netizens.

On his return after the G7 summit in Hiroshima, the South Pacific and Australia, PM Narendra Modi commented on 25 May: “Today, the world wants to know what India is thinking.” In his 100th birthday interview with The Economist, Henry Kissinger said he is “very enthusiastic” about US close relations with India. He paid tribute to its pragmatism, basing foreign policy on non-permanent alliances built around issues rather than tying up the country in big multilateral alliances. He singled out Jaishankar as the current political leader who “is quite close to my views.”

In a complementary interview with The Wall Street Journal, Kissinger also foresees, without necessarily recommending such a course of action, Japan acquiring its own nuclear weapons in 3-5 years.

In a blog published on 18 May, Michael Klare argues that the emerging order is likely to be a G3 world with the US, China, and India as the three major nodes, based on attributes of population, economic weight and military power (with India heading into being a major military force to be reckoned with, even if not quite there yet). He is more optimistic about India than I am but still, it’s an interesting comment on the way the global winds are blowing. Few pressing world problems can be solved today without the active cooperation of all three.

The changed balance of forces between China and the US also affects the three Pacific allies, namely Australia, Japan, and South Korea. If any of them starts with a presumption of permanent hostility with China, then of course it will fall into the security dilemma trap. That assumption will drive all its policies on every issue in contention, and will provoke and deepen the very hostility it is meant to be opposing.

Rather than seeking world domination by overthrowing the present order, says Rohan Mukherjee in Foreign Affairs, China follows a three-pronged strategy. It works with institutions it considers both fair and open (UN Security Council, WTO, G20) and tries to reform others that are partly fair and open (IMF, World Bank), having derived many benefits from both these groups. But it is challenging a third group which, it believes, are closed and unfair: the human rights regime.

In the process, China has come to the conclusion that being a great power like the US means never having to say you’re sorry for hypocrisy in world affairs: entrenching your privileges in a club like the UN Security Council that can be used to regulate the conduct of all others.

Instead of self-fulfilling hostility, former Australian foreign secretary Peter Varghese recommends a China policy of constrainment-cum-engagement. Washington may have set itself the goal of maintaining global primacy and denying Indo-Pacific primacy to China, but this will only provoke a sullen and resentful Beijing into efforts to snatch regional primacy from the US. The challenge is not to thwart but to manage China’s rise—from which many other countries have gained enormous benefits, with China becoming their biggest trading partner—by imagining and constructing a regional balance in which US leadership is crucial to a strategic counterpoint.

In his words, “The US will inevitably be at the centre of such an arrangement, but that does not mean that US primacy must sit at its fulcrum.” Wise words that should be heeded most of all in Washington but will likely be ignored.

Author

  • Ramesh Thakur

    Ramesh Thakur, a Brownstone Institute Senior Scholar, is a former United Nations Assistant Secretary-General, and emeritus professor in the Crawford School of Public Policy, The Australian National University.

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