Carney on ‘Kudlow’: Silicon Valley Bank’s Failure Signals the End of the ‘Cheap Money Ecosystem’ Fueling CA Tech Start-Ups

The “cheap money ecosystem” that fed the tech start-up culture has come to an end with the Federal Reserve raising interest rates to curb inflation, and the failure of Silicon Valley Bank might be the first domino to fall among California-based financial institutions, Breitbart Economics Editor John Carney said in an interview Friday with Fox Business host Larry Kudlow.

“The sudden implosion of Silicon Valley Bank (SVB) is sending shock waves through the financial system and the technology sector,” Carney wrote in Friday’s Breitbart Business Digest. “SVB plays a central role in the start-up economy of San Francisco. According to Bloomberg, it does business with about half of venture capital backed start-up firms in the U.S.”

“One of the problems [for SVB] was when money was so freely available to all these start-ups, they didn’t borrow a lot,” Carney told Kudlow. “So, they had a ton of deposits coming in and not a lot of opportunity to make loans out to people. I mean, yeah, you can lend money so people can buy a yacht or a fancy mortgage on some tech start-up billionaire’s fancy mansion, but they really had way too much money. So, they invested it in bonds. Bank of America I think has 25 percent of its assets in bonds, but this bank had over 50 percent of its assets in bonds.”

Kudlow noted that when the yield curve inverted, these bonds incurred a negative return.

“They’re losing money,” Carney agreed. “And at the same time, all these start-ups who are depositing so much money there are now withdrawing it because they don’t have access to free money anymore. So, they’re withdrawing it just to pay their bills. So, you’re having the deposits go down. They have to sell into a market where they are actually producing real losses, not just mark to market losses.”

“That is what sparked the panic basically,” he continued. “Earlier this week, [SVB] announced something like a $2 billion loss on their assets. And people said, ‘I better get my money out quickly.’”

“Now the FDIC stepped in to avoid an old-fashioned run on the bank,” Kudlow said.

The bank went into receivership on Friday when the California Department of Financial Protection and Innovation shuttered it, and the Federal Deposit Insurance Corporation (FDIC) issued a statement guaranteeing the accounts of all insured depositors. However, as Carney told Kudlow, this will not be reassuring to the depositors of the reportedly 93 percent of SVB deposits that are uninsured.

“There are people who are at risk of losing their deposits at least on paper,” Carney said.

All of this has been exacerbated by the Federal Reserves’ rate-hiking fight against inflation, which has signaled the end of the cheap lending low interest rate monetary policy that fostered Silicon Valley start-ups, Carney explained.

“I think we’re going to see a lot of the California-based financial institutions get into trouble because they were so dependent on this very cheap money ecosystem that was feeding start-up culture and is no longer there,” he said.

“What happens to the start-up culture now that there’s no cheap money or there’s no cheap, cheap money?” Kudlow asked. “[Are] they’re going to have trouble getting loans?”

“Absolutely,” Carney said. “They’ll have trouble getting loans and have trouble raising money because if you can get five percent on a treasury bond, why are you trying to get 10 percent on a very risky start-up? You’re not going to do that. You might as well just double down on leverage and get a treasury. So, I think that they’re going to have a lot of trouble being able to continue to raise money. And we’re going to see a lot of the start-ups start to tilt over.”

Kudlow asked Carney about the risk that this bank failure will spread beyond SVB.

“I think there’s a high risk that it spreads,” he said. “People are right now looking at every other bank, not the big banks—the JP Morgans, Citigroups, Wells Fargos, they’ll be fine.”

“The banking system is extremely well capitalized,” he added. “And so, I don’t think we’re on the verge of a financial crisis. But I do think we’ll probably have a couple more bank failures ahead of us.”

However, the fact that a highly respected financial institution like SVB could fail as quickly as it did is cause for concern, Carney explained.

“Look, this bank, Silicon Valley Bank, was very well respected,” he said. “So, if you can tip them over this quickly in just a matter of days, I think people are going to start to look and say, ‘Uh oh, maybe I shouldn’t have my money in’—I don’t want to name the names of the other banks because I don’t want to start the panic—but ‘maybe I should put it into Wells Fargo instead.’ And any bank in a fractional reserve system can be tipped over if the depositors start to panic.”

Kudlow asked if this failure could spread beyond the west coast financial institutions and the tech sector. Could it, for example, impact real estate investments?

“Commercial real estate is in a lot of trouble,” Carney noted. “I mean, you think about all these loans into office buildings that now are not paying their rent because they’re half full. So, I think that there’s going to be losses.”