Recently, the bankruptcy of Silicon Valley Bank ignited a crisis of trust in Bank of America, and investors worried: "There may be more than one cockroach in the kitchen." Federal Reserve Vice Chairman Michael Barr said the collapse of Silicon Valley banks was a textbook case of mismanagement. Will the "Lehman Moment" in the United States repeat itself? Is a new financial crisis kicking off? Will the world pay for the United States again?

Focusing on these issues, China News Agency's East-West Dialogue invited Joseph Mahoney, deputy editor-in-chief of the US Journal of Chinese Political Science and professor of the School of Politics and International Relations of East China Normal University, to have a dialogue with Qu Qiang, a researcher at the Beijing University of Foreign Chinese.

Joseph Mahoney said the bankruptcy of Silicon Valley Bank could be a harbinger of broader problems, and risks are accumulating. Problems have also arisen with U.S. fiscal policy, government regulation, and even basic governance capacity. The United States is often the source of crises, and with each new economic crisis, the deep-seated problems continue to worsen, further undermining national well-being and leading to greater political polarization, instability, and poor governance.

Video: China Dialogue: The United States is often the source of financial crises: China News Network

Qu Qiang believes that the turmoil in the US financial system will not really affect China's finance. China's financial regulators have a lot of room to maneuver to ensure the stability of China's financial system. China's economy is now in a recovery phase, and with stable interest rates, a smooth transition is possible.

Excerpts from the conversation are as follows:

China News Agency: The collapse of Silicon Valley banks has aroused global attention, two banks in the United States have failed in three days, what are the reasons for the sudden failure? Who are the biggest victims?

Joseph Mahoney: By investing short-term deposits in long-term bonds, Silicon Valley banks are overexposed to liquidity risk. When interest rates rise, the value of bonds falls, and with them, bank equity. Silicon Valley Bank customers have withdrawn more deposits than the bank's cash reserves, triggering a run. This is the direct cause of the crash.

Who are the losers? Fears that the bankruptcy of Silicon Valley banks could portend broader problems, the banking sector lost billions of dollars after the crisis erupted, and the credibility of U.S. government regulators and the Federal Reserve were damaged. U.S. taxpayers will have to pay for the event with more deficit spending, which is usually filled by the Fed by printing money. The Fed will have to rethink its interest rate regime. At the same time, spillover effects pose risks to the world.

On March 2023, 3, the reporter interviewed in front of the headquarters of Silicon Valley Bank in Santa Clara, California, USA. On the same day, the Federal Deposit Insurance Corporation (FDIC) said that Silicon Valley Bank had been closed by California regulators due to insolvency, and the company took over. Photo by Liu Guanguan

Qu Qiang: As the 16th largest bank in the United States, the run on the bankruptcy of Silicon Valley Bank has spread to many well-run banks. What makes these "top students" fall into this situation? I think it's the Fed raising interest rates too aggressively and too quickly. No bank can be ready in such a short period of time. Imagine raising interest rates from essentially zero to more than 5 percent in six months' time, implying an uncertain future for U.S. financial security and economic stability.

If the Fed continues to raise interest rates, it is not known how many other banks will suffer as a result. Interestingly, the Fed said that "taxpayers will not pay anything for it." We don't know if it's true or not, because the Fed promises that it will bear all the losses. But how to do it? It will need to issue other bonds to cover these losses, and these funds will eventually need to be repaid by future American taxpayers or other stakeholders, or even people around the world, and this will ultimately come at a cost.

China News Agency: The outside world is worried that the successive failures of US banks will trigger a new financial crisis. Do you think the United States has entered a "Lehman moment" again, and is a new financial crisis kicking off?

Joseph Mahoney: I think the risks are accumulating. The "Lehman moment" may not be immediate, but I am convinced that the Fed is largely out of the box to manage the US economy. At the same time, problems have arisen with U.S. fiscal policy, government regulation, and even basic governance capacity.

While much of the crisis was caused by banking or interest rate risk management, the Silicon Valley bank failure was not an isolated event, and it has been the case at other banks. This also shows that the negative effect of the Fed's monetary policy on the US economy is both expected and unexpected. These reactions are now intertwined, creating greater risks and making it harder for the Fed to deal with.

Video: China Dialogue: Financial risks are accumulating, US governance is failingSource: China News Network

Qu Qiang: Assuming that interest rates continue to rise by more than 6% or even 7%, how many people can afford it? Silicon Valley banks are not the biggest buyers and holders of U.S. Treasuries, and there are bigger players who hold more U.S. Treasuries. So if rising interest rates break through the financial safety buffer zones of these institutions, more banks will be caught in the muddy waters.

China News Agency: Federal Reserve Vice Chairman Michael Barr recently said that the collapse of Silicon Valley banks is a textbook case of mismanagement. So, can the intervention of the US government solve the problem?

Joseph Mahoney: Some analysts believe that the reason for this bank failure is mainly due to poor supervision and the gradual loss of the ability of the Fed to manage the banking system and the financial sector. Apparently, the US government immediately recognized the danger and took active measures to deal with the crisis, but this was only a stopgap measure after the problem arose. Now, due to divisions within the U.S. Congress and the antagonism between Democrats and Republicans, especially Republican opposition to banking reform and regulation, there is currently no clear legislative path to financial regulatory reform.

On the one hand, the United States is currently at risk of mismanaging this issue; On the other hand, because it pretends to have everything under control, this may pose a more serious threat and danger.

China News Agency: The impact of the US bank crisis is gradually spreading to the world, will China be affected?

Qu Qiang: I don't think the instability of the US financial system will really affect China's financial stability. First, China has not fully liberalized its capital account, which gives the Chinese government and financial regulators a lot of leeway to ensure the stability of the financial system. Second, China's economy is in a recovery stage, China's interest rates are very stable, and interest rates will be lower in some specific areas, such as agriculture, small and medium-sized enterprises, etc. To sum up, I don't think China's financial stability will be affected this time.

Qu Qiang: The US banking crisis will not affect China's financial stabilitySource: China News Network

China News Agency: Why does the United States often become the source of global financial crises?

Joseph Mahoney: The United States has not always been the source of global financial crises, but it has been, especially since the '20s.

First of all, the problem of the petrodollar and its circulatory system began during the oil crisis of the 20s of the 70th century. Since then, the United States has begun a cycle of erratic growth cycles.

Second, in the 20s of the 80th century, when the United States was moving towards financial deregulation, Reagan's economic policies solved the problems that arose in the 70s, but gave rise to a new cycle of crises and a "boom-bust" model.

Finally, the long-standing Cold War mentality and "end-of-history," including aggressive, costly, and unsustainable military interventionism abroad, and "zero-sum" capitalism that undermined unions, usurped pensions, and harmed workers' rights, hollowed out the middle class and witnessed a severe aging of America's infrastructure. At the same time, special interest groups related to fossil fuels and the automotive industry are hindering green innovation in the United States. All this has led to more and more social problems.

With each new economic crisis, these problems continue to worsen, further undermining national well-being and leading to greater political polarization, instability and poor governance. Today, these three problems remain and are becoming more intertwined with other global challenges, such as climate change and the pandemic.