The COVID-19 pandemic and subsequent economic downturn led to the implementation of various relief measures in the United States, including the distribution of stimulus checks and the creation of PPP loans for small businesses. While these measures were intended to stimulate the economy, they ultimately had unforeseen consequences, leading to inflation and other economic disruptions. In this article, we explore how the butterfly effect of COVID relief checks and PPP loans contributed to the largest bank failure since 2008, with a focus on the heavy reliance of the Silicon Valley Bank on lending to high-risk technology startups and other factors that left it vulnerable to credit losses.
The Covid relief checks, also known as stimulus checks, were intended to help individuals and families struggling financially due to the COVID-19 pandemic. By providing direct cash payments to millions of Americans, the hope was that this money would be spent on goods and services, thereby stimulating the economy.
PPP (Paycheck Protection Program) loans are a type of small business loan that was created by the United States government in response to the economic impacts of the COVID-19 pandemic. The purpose of PPP loans was to help small businesses maintain their payrolls and cover other operating expenses during the pandemic. The loans were designed to be forgivable if certain conditions were met, such as using the funds for eligible expenses such as payroll, rent, and utilities, and maintaining employee headcount and salaries.
The C.A.R.E.S. Act injected a whopping $2.2 trillion into the economy, eventually sending it into overdrive. Think of the relief checks and PPP loans as a low-pressure system and the shutdowns as warm tropical waters. Bring these two things together and you get a hurricane. Or in our case, inflation. Put simply, we had too much money chasing too few products/services. In the United States, the Federal Reserve, commonly referred to as 'The Fed' is the institution charged with the responsibility of keeping inflation stable.
The Fed's primary tool for influencing the economy is monetary policy. By adjusting the federal funds rate, which is the interest rate at which banks lend to one another overnight, the Fed can influence borrowing costs for consumers and businesses. Lowering interest rates can stimulate economic growth by making it cheaper to borrow and invest, while raising interest rates can slow down economic growth and control inflation.
As of today, March 10th, 2023, the fed rate currently sits at 4.57%. It may not sound like much, but compared to the rate of 0.08% last year it represents an increase of 5,612.5% year over year. It's been a devastating development, particularly for the tech sector.
Tech has fallen as much as 33% from all-time highs in Dec. of 2021. And it's no wonder what sector Silicon Valley Bank was overexposed to. One of the main reasons cited for the bank's failure was its heavy reliance on lending to startup companies in the technology sector. Many of these companies were high-risk ventures that had not yet achieved profitability, which made them more susceptible to market downturns and other disruptions.
In addition to its high concentration of lending to the technology sector, the bank also had a large exposure to a small number of high-risk borrowers. According to the article, the bank had made a significant amount of loans to a few large, highly-leveraged clients, which left it vulnerable to defaults and other credit losses. The failure of Silicon Valley Bank highlights the potential unintended consequences of economic relief measures such as stimulus checks and PPP loans. While these measures were intended to help individuals and businesses during the pandemic, their impact on the economy can be complex and difficult to predict. As the economy continues to recover from the pandemic, policymakers will need to carefully balance the need for relief with the potential risks and unintended consequences of these measures.
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