SVB Crash Will Slam California State and Local Budgets

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Commentary

We’re still early in the Silicon Valley Bank crisis. But one thing it will hurt is California’s state and local budgets. And not just in the short term, but the long term.

Banking crises come and go. But what’s different this time is what was advanced by Shark Tank judge Kevin O’Leary and in a New York Times column. O’Leary on March 13 said on CNN:

“But what effectively happened over the weekend is that [President Biden] nationalized the American banking system. It’s no longer a risk. It’s no longer private in any sense. It is now backstopped by the government and ultimately the taxpayer. So it doesn’t matter how bad you are as a bank manager. A good example is what happened to Silicon Valley Bank. That was a combination of a negligent board of directors and idiot management. That’s a very powerful cocktail when put together, and it completely wiped out that bank. And that’s what should have happened.

“And we knew before the weekend started that every account with $250,000 or less was insured. And anything beyond that, which is generally business accounts, or sophisticated investors, was not. But that’s all changed. Now you have no risk in any bank, any time, and you as the taxpayer bear that going forward ….

“[Biden] is effectively saying, ‘Look, I can’t take this risk anymore. I’m just going to nationalize the whole thing.’ And that’s the way we should look at banking going forward. Nothing more than highly regulated utilities. And that has profound impacts for you as an investor. If you thought putting money into bank stocks was a good idea, you should change your mind this morning forever. And should you own bank bonds? Never. You were taught that lesson over the weekend.”

Epoch Times Photo
President Joe Biden speaks about the banking system in the Roosevelt Room of the White House on March 13, 2023 in Washington. (Anna Moneymaker/Getty Images)

That was seconded by a column, also on Monday, in the New York Times by Peter Coy:

“If the federal government hadn’t given a blanket of protection to all deposits, companies that had deposits in either of the banks above $250,000, the maximum that’s insured by the Federal Deposit Insurance Corp., would not have been able to pay their workers. Start-ups that bank with Silicon Valley Bank would have been imperiled. ‘It could have destroyed early-stage biomedical research in this country for a decade,’ said Karen Petrou, the managing partner of the consulting firm Federal Financial Analytics, who sits on the board of a biomedical research foundation ….

“Insuring all bank deposits would make banks look more like public utilities, Petrou told me. She said she’d prefer relying more on market discipline, as originally intended. But that ship may already have sailed.”

I emphasized both mentioned Biden has turned all banks into “utilities.” Here’s the problem: Far more than any other state, California depends on risk-taking investments in new high-tech firms. That’s what powers Silicon Valley and numerous other state high-tech citadels. There still will be billionaires and hedge funds who invest their money in these startups. But a crucial investment center—banks—no longer will do so. Because utilities are about the opposite of risk.

Sure, utilities these days invest in “green” or “climate change” or ESG companies, but only because they’re supposed to under the current political climate. But that’s different.

Indeed, SVB itself got into trouble in part because it already invested too much in “woke” companies, as Rep. James Comer (R-Ky.), chairman of the House Oversight Committee, charged. On Fox News, he said SVB was “one of the most woke banks. We see now coming out they were one of the most woke banks in their quest for the ESG-type policy and investing.”

Epoch Times Photo
Customers wait in line outside of the shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, Calif., on March 13, 2023. (Vivian Yin/The Epoch Times)

Risk Drives Economies

People generally don’t understand how important risk is in propelling any economy—but especially California’s. What’s necessary to advance risk is low taxes, low regulations, and efficient banking and investment systems. More risk, more potential profit. No risk, no profit.

Silicon Valley really took off after:

  • 1978: Federal capital gains tax cut signed by President Carter, with the top rate cut from 49 percent to 28 percent. That meant after-tax profits were higher, allowing for more money to be ploughed back into a successful company.
  • 1978: California’s Proposition 13 cut property taxes, reducing the expense of office and factory space for startups.
  • 1980: Carter signed the Staggers Rail Act and the Motor Carrier Act, deregulating surface transportation.
  • 1981: President Reagan’s tax cuts reduced the top income tax rate from 70 percent to 50 percent; and the capital gains tax rate from 28 percent to 20 percent.
  • 1981-88: Reagan cut numerous regulations.

How Big is the State Deficit?

Gov. Gavin Newsom’s Jan. 10 budget proposal projected a deficit of $21.5 billion for fiscal year 2023-24, which begins on July 1. On Feb. 15, the Legislative Analyst projected “a larger budget problem by about $7 billion.”

We’ll have to see the number in the governor’s “May Revise,” as they call it in Sacramento, which will be the document used for negotiations leading up to the June 15 constitutional deadline to pass a budget.

Perhaps by then we will have some indication of how hard Biden’s socialization of the banks will hit investments in the startups crucial to California’s economy, and the state budget. Perhaps not.

Epoch Times Photo
A man walks past a Wells Fargo bank in Laguna Beach, Calif., on April 1, 2022. (John Fredricks/The Epoch Times)

But in the long run, it’s going to hurt—hard. Because the state itself, as I have been reporting in The Epoch Times, in recent years has been continually slamming businesses with higher taxes and regulations. There’s only so much companies can take before they say, “Great weather and the beach isn’t enough. I’m outta here.”

Local Government Risks

Local governments also will face greater problems meeting the high union paychecks negotiated by union-controlled city councils, county boards, and school boards. Useful here is former Sen. John Moorlach’s tallies of the units with the least solvent budgets. In The Epoch Times he wrote last month, “COVID Lockdowns Dealt a Huge Blow to OC School Districts’ Financial Health.” Those in the worst shape: Santa Ana Unified, Los Alamitos Unified, and Newport-Mesa Unified.

For cities, in other reports he has done, the worse are: Oakland, Richmond, Berkeley, and Cathedral City. Also in trouble are San Francisco, Los Angeles, and San Jose. In Orange County, the worst is Costa Mesa, followed by Santa Ana. Last November, Costa Mesa voters rejected Moorlach’s bid to become mayor and fix their broken finances. Now, if my analysis of the SVB fallout plays out, they’re going to suffer the consequences.

California itself remains in limbo on an accurate picture of state finances, because the last Annual Comprehensive Financial Report for the state was for June 30, 2020—almost three years ago, in the depths of the pandemic. Incompetent Controller Betty Yee is gone. But her replacement, Malia M. Cohen, has yet to repair the damage. At this crucial time, Californians basically have no idea what condition their state finances are in.

Conclusion

Other states, of course, will be damaged by Biden’s socialist bank takeover; their start-ups also will be hurt. But at least Tennessee, Texas, and Florida don’t also impose a state income tax, let alone California’s confiscatory 13.3 percent top rate.

bank-of-america
A Bank of America building is seen in Los Angeles, Calif., on May 6, 2019. (Lucy Nicholson/Reuters)

It’s ironic how, even as America is confronting Communist China, our free land is adopting the policies of this adversary. The New York Times reported March 14:

“At the annual gathering of China’s national legislature, which concluded on Monday, Mr. Xi introduced a series of sweeping changes to the country’s regulatory framework, allowing the party’s top leaders to assert more direct control over financial policy and bank regulation. Appointments for allies of Mr. Xi to key regulatory roles and additional shake-ups are expected in the coming days, further cementing the party’s oversight of the financial system.

“‘It’s very consistent with what Xi Jinping has been rolling out over the past 10 years,’ said Max Zenglein, chief economist at the Mercator Institute for China Studies in Berlin. ‘Whenever he’s confronted with a problem, the solution is greater centralization to the party.’

“The moves were the latest evidence of how Mr. Xi continues to reshape China’s business climate, steering the world’s second-largest economy away from the free-market policies that underpinned its ascent. While past Chinese leaders sought to maintain a buffer between the party and the private sector, Mr. Xi has erased those lines and made clear that businesses are there to advance the party’s agenda.”

Sounds familiar, doesn’t it? Too familiar. I was fortunate to live through the great times when free market policies took hold, as noted above for America, and produced great growth and the Internet Revolution. Contemporaneous events were Deng Xiaoping’s market reforms in China, Margaret Thatcher’s in the United Kingdom, and the Solidarity movement in Poland. To quote Wordsworth, “Bliss was it in that dawn to be alive, But to be young was very Heaven!”

This current folly too shall pass. Freedom lives in the breast of every man and one day again will triumph.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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