Silicon Valley Fractures

California’s tech-centric militarism, real estate speculation, and crypto mania are behind the recent bank failures.

By James M. Cypher | May/June 2023

This article is from Dollars & Sense: Real World Economics, available at

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Over a single weekend—after three dodgy banks, facing depositor bank runs, failed in March 2023—a clearly-stunned coterie of Federal government officials corralled 11 megabanks to lend billions to rescue a second large Silicon Valley bank. This had no effect, forcing the ante to the sky. Now—as formulated by a hedge fund oligarch (see sidebar “Morgan Then, Ackman Now”)—unlimited government funds were pledged to redeem all uninsured (even billionaire) bank accounts. The banking system teetered on the edge. Then, on May 1, First Republic bank collapsed: So far, for 2023, the total value of bank failures exceeds those in 2008, adjusted for inflation. Three interrelated themes lie at the root of the financial fragility revealed by the Silicon banking crash: 1) boom-and-bust speculation cycles; 2) libertarian rhetoric and practices; and 3) dependence on military expenditures to promote innovations and government bailouts to survive busts. A Ponzi “business model”—anchored in a trifecta of shaky venture capital loans, crypto-fueled financial speculation, and no-collateral mortgage lending—presaged the crash.

Silly Cons

Only in the San Francisco Bay Area could the five fastest-growing firms be entities almost nobody has ever heard of. None of them were even around seven years ago, but they all had soaring levels of growth. Number one being the crypto operator Uphold, with 2019–2021 revenue growth of 2,209%, then Harness, with a growth rate of 1,771% during the same period, Outschool, with a rate of 1,735%, Sigma Computing, at 1,069%, and “laggard” Quanta Networks, at a “paltry” 940%. Meanwhile, two large Bay Area banks, also once showing spectacular asset growth—Silicon Valley Bank Group’s assets leapt by 83% in 2021 alone (to $211 billion) and First Republic Bank’s assets more than doubled from 2019 to 2022, reaching over $205 billion—had crashed. Cryptocurrency was behind the little-noted failure of Silvergate Bank in La Jolla, Calif., two days before Silicon Valley Bank (SVB) collapsed, as it was at Signature Bank. First Republic was active in crypto and Circle, a $40 billion crypto operator, recouped all of its $3.3 billion account at SVB. This munificence was due to hedge fund billionaire Bill Ackman’s push for the government to insure all giant deposits—as joined by Silicon Valley venture capital titan David Sachs.

Parallels with the Panic of 1907:
Morgan Then, Ackman Now

In April 1913 Wall Street’s premier robber baron, J.P. Morgan, died. Eight months later, the U.S. Federal Reserve—the country’s central bank—was created. It was the bitter reaction to the Panic of 1907 that finally created sufficient momentum to end a long period of unstable, unregulated banking, giving rise to the Fed. As an intentionally weak private-public confection, the Fed stumbled in the midst of the Great Depression and was then restructured to be accompanied by the Federal Deposit Insurance Corporation, which would protect household bank accounts.

There are some strange parallels between the Panic of 1907 and the Silicon Valley-led bank bust of 2023: The U.S. oligarch—J.P. Morgan—played the pivotal role then as has crypto and venture capital investor and hedge fund oligarch Bill Ackman most recently. In March 1907, the U.S. stock market declined by almost 10%, beginning a long slide; 93 years later, on March 10, 2000, it happened again as the dot-com crash commenced. Then, 23 years later, on March 14, 2023, the Washington Post reported on Ackman’s plan “to confront the threat of a full-blow financial meltdown.” In 1907, the stock market continued its slide, crashing again on August 10, only weeks after Morgan had celebrated his steel corporation’s profits as “so enormous one hardly believes them possible.” President Theodore Roosevelt alleged “evil doing” behind the panic, blaming “malefactors of great wealth.” In 2023, President Joe Biden had no such comment. In 1907, some 21,000 banks were rudderless, with the lightly-regulated New York banks—particularly Morgan’s—holding most banks’ reserves.

As President Roosevelt hunted and ate bear in Louisiana, J.P. Morgan & Co.’s heft—far and away the United States’ dominant banking and financial services corporation—allowed Morgan to be the one-man central bank. The weakest bank in the New York-centric structure—Knickerbocker Trust—was left to die as Morgan plotted. This sent New York “call” money (short-term loan rates) to 70% on October 21, then to 90% two days later, and to 150% on October 25—meaning that all lending stopped. From October 23 through October 25, Morgan pledged substantial funds to back up failing banks, as did the U.S. Treasury, but to little avail. On October 28 New York City announced impending bankruptcy. Then Morgan arranged a banking pool to inject funds in exchange for bonds, and he prompted a European shipment of gold. According to Jean Strouse, the author of Morgan: American Financier, “For the rest of the week ...Morgan troops continued to shore up trusts [the venture capital operations of the day] plug[ging] holes in the banking system with cash.” By November 5, the panic had abated. A crucial shipment of gold arrived the next day to expand the money supply and facilitate lending. But Morgan’s “altruism” had limits—he grabbed at a bargain price the collapsing giant Tennessee Coal, Iron, and Railroad Company, thereby tightening the industrial chokehold of his United States Steel Corporation.

“Fighting Bob” La Follette, the voice of populism in the U.S. senate, claimed that Morgan and his allies had “deliberately brought on the late panic to serve their own ends,” Strouse writes in Morgan: American Financier. The United States Steel Corporation ended up paying $30 million for the Tennessee company, which was worth perhaps $2 billion, giving it, according to Strouse, “control of the country’s iron ore supply and open-hearth rail production, as well as a monopoly of the iron and steel trade in the South.”

Thereafter, the national intention was to end any possibility that the stability of the U.S. economy would ever again depend on a small band of financial plutocrats. But the events of early March 2023, when Ackman called the tune while Treasury Secretary Janet Yellen floundered and private-equity-hustler-turned-Fed-Chair Jerome H. Powell dithered, have turned all that on its head. This Gilded Age Part II drama was reminiscent of Morgan’s 1907 role, as Yellen’s ally at JPMorgan Chase, billionaire Jamie Dimon, strong-armed a bevy of megabankers to inject $30 billion into moribund New Republic bank, to no avail. But then the Ackman plan was adopted—bailing out all bank depositors in Silicon Valley and potentially every depositor throughout the country without regard to the prior rule that if you put more than $250,000 in one bank, you were on your own.

Libertarians in Silicon Valley enjoy mocking those who champion a social safety net, claiming they want a “Nanny State” to protect them from their fecklessness. But now, giant crypto and venture capital corporations that promoted private currencies, promising “decentralization and democratization” while disparaging “fiat” (government-issued) currencies and central banks as “irrelevant,” have pocketed lots of money provided by the Fed and the FDIC. The government’s gifting JPMorgan with First Republic’s assets should produce a windfall 2023 profit of at least $500 million. In the crisis of 2008–2009, homeowners were roundly blamed for taking on financial risks they could not handle. Then, in contrast with now, it was important to stick by the rules and let over six million households lose their homes.

Sources: Hilary Allen, “The Superficial Allure of Crypto,” Finance & Development, September 2022 (; Roger Lowenstein “The Bank Rescues Just Changed Capitalism,” New York Times, March 16, 2023 (; Luc Olinga, “SVB: Mark Cuban and Bill Ackman Used Their Influence to Corner Regulators,” TheStreet, March 13, 2023 (; Jean Strouse, Morgan: American Financier (Perennial,1999).

These banks served the superrich, while provisioning venture capital companies, as they grew willy-nilly—with start-up funding doubling 2020–2021—increasing the bloat at the top: SVB’s web page stated that it was “the go-to bank” for venture capital firms as the source of “more than 50% of all venture-backed tech and life science companies in the U.S.” By 2021, venture capital companies were the source of 11% of all nonresidential fixed investments in the United States—more than 50% above the level hit just before the dot-com bubble crashed in 2000. Venture capital had also dumped $27 billion into cryptocurrency scams by 2021. In 2023, San Francisco had 62 billionaires, more than New York City, with the states’ four wealthiest locations, by zip code, all in the Bay Area. By late 2022 in Atherton, Calif.—where average home prices had leapt above $6 million by 2016—“crypto queen” Katie Haun bought a $41 million mansion. There and elsewhere, First Republic offered “no-down” mortgage loans at 1% interest to precocious silicon alchemists, including Facebook’s creator. But in early 2022 Bay Area luxury home sales had dropped 64% from early 2021—and by December 2022, First Republic held $102 billion in loans secured by sinking residential real estate.

Silicon Valley finance underwrote ridiculous mortgages and bungled venture capital loans for “fake it till you make it”—presumed heroic, visionary—libertarian Ayn Rand devotees. The indicted head of pipsqueak start-up HeadSpin (peak revenue of $6.6 million)—was one of 1,200 fictitious-capital unicorns once valued at over $1 billion. HeadSpin was funded by venture capital company Tiger Capital, which wrote off $23 billion (one-third of its “value” in 2022). Meanwhile, SVB-backed Slync’s now-indicted CEO used venture capital funds to treat himself to a $16 million private jet.

In the Fast Lane: Silicon Valley

Richard Walker, author of Pictures of a Gone City: Tech and the Dark Side of Prosperity in the San Francisco Bay Area, declared: “California has been the main engine for [U.S.] growth for the last 50 years. This is not sufficiently acknowledged.” During those 50 years, California incomes grew by 63% for the top 10% of wage earners and more than doubled for the top 5%. Over the same period, income for the poorest 10% (excluding unemployment payments) dropped by 5%. Silicon Valley is considered to be the state’s crucible of entrepreneurialism, with Stanford University being the power source. Promoted today as the locus of the nation’s most vital corporate research and development nexus, Stanford and Palo Alto spawned no less than the “crypto king” Sam Bankman-Fried: in March 2022 he was worth $26 billion, today zero. Facing 13 criminal charges, he now sits under house arrest on land owned by Stanford University. Enthusiastically backed by Sequoia Capital—the world’s largest venture capital company—fast-hustling Bankman-Fried exuded Leland Stanford’s predatory bravura: The most vulturine robber baron of the 19th century, he built a railroad empire thanks to taxpayer funds but never deigned to repay, bought the California governorship, and left the university teetering on the edge of bankruptcy when he died.

Stanford’s chutzpah was boundless: Employing 11,000 Chinese laborers, Stanford completed 700 miles of the transcontinental railroad in 1869: tapping in the solid gold “last spike” into a pre-drilled hole, he missed, hitting a rail. Apple, Silicon Valley’s and the world’s largest corporation, follows Stanford’s Silicon Valley path of merciless abuse of Chinese labor, relying on subcontractor Foxconn to harness 300,000 workers in Zhengzhou, China. Frequently requiring 130-hour workweeks, Apple’s first-place U.S. market capitalization ranking in 2021—with a value of $2.5 trillion—rests solidly on the breaking backs of the company’s hundreds of thousands of subcontracted Chinese workers.

Arsenal of the Old and New Cold War

From the self-inflating university, the center of tech hyper-capitalism runs through the Silicon Valley (really the Santa Clara Valley) and on to the Pentagon. Silicon Valley has few, if any, authentic market-driven innovators or entrepreneurs. Instead, since the 1950s it has developed and flourished as a favored locus for Pentagon largess. The Pentagon is run by a bevy of revolving corporate-military apparatchiks, such as retired General Lloyd J. Austin III: He left the military to join the corporate boards of three Pentagon contractors—steelmaker Nucor, Medicaid fraudster Tenet Healthcare, and United Technologies (which morphed into Raytheon Technologies in 2020). He became secretary of defense in 2021. From 1959 to 2004, United Technologies operated a secret 5,000-acre rocket engine design and test facility in Coyote Valley in Silicon Valley, leaching poisonous chemicals into the groundwater. The $78 million F-35 fighter zooming around in the opening scene of “Top Gun”—filmed near La Jolla’s Silvergate Bank and a First Republic branch—used United Technologies subsidiary Pratt & Whitney’s rocket engines, which were pioneered at Coyote Valley and nearby Sunnyvale.

According to researcher Thomas Heinrich, during the Cold War, Silicon Valley—with high-profit Pentagon contracts—“produced all of the United States Navy’s intercontinental ballistic missiles, the bulk of its reconnaissance satellites and tracking systems, and a wide range of microelectronics that became integral components of high-tech weapons and weapons systems.” All the while, these producers generally denied their roots as “merchants of death,” proclaiming their entrepreneurialism. Thereafter, as the Pentagon continued to pour money into the Bay Area, the Silicon Valley moguls postured, spouting their incoherent neoliberal/libertarian ideology. Overall, in 2020, California received 10.3% of Pentagon outlays, being the top state for military personnel (286,000) and a major location for top-tier contractors, including Raytheon. While housing 2022’s top contractor Lockheed Martin’s Advanced Technology Center and the research hub for Raytheon’s Multi-Domain Command and Control project, Silicon Valley operates under the radar. It subcontracts artificial intelligence and autonomous weapons, along with cloud computing, big data processing, cyber and electronic warfare systems, and space technologies. In 2015, the Pentagon created the Defense Innovation Unit in Silicon Valley to provide seed money for applied military advanced technologies—a step seen as pivotal as the Pentagon shifted into technologies only Silicon Valley could build.

Commercial Real Estate Bust

As these military contracts proliferated and profits from them soared, bank and start-up capital poured into the Bay Area: Business loans in 2020 were easy and nearly costless. Tech start-ups captured a record $167 billion in profits, and then $330 billion in 2021. Next, in 2022, venture capital funding shrunk by over 30%, while loan capital costs jumped as the Fed started tightening interest rates in March. Wall Street’s “in aggregate” year-on-year profits—led by investment banks such as Goldman Sachs—dropped by 52%. At the end of the first quarter of 2023, San Francisco’s office vacancy rate reached a record high of 33% (up from 4% in 2019–2020) and billionaires’ banks went bust. In February 2023, office developer Columbia Property Trust defaulted on $1.7 billion, including two office buildings in San Francisco. Banks currently hold $270 billion in commercial real estate loans in San Francisco while excess office capacity keeps growing—with 1.7 million square feet added in San Francisco in the last quarter of 2022. One out of four office spaces sit empty in downtown San Diego, along with nearly one in four in Silicon Valley. Across the United States, an estimated $1.1 trillion of over $3 trillion in office buildings are facing difficulties—11% of leases expire in 2023, more than one-half by 2025. In total, commercial real estate was (over)valued at $20 trillion in 2022.

Overinvesting in fixed-capital assets such as commercial real estate demonstrates the “anarchy of production”—one of the major failings of capitalism. Whenever there is a business cycle downturn, excess capacity rises spectacularly even while capitalists add more to the pile. This is because during a boom each capitalist calculates the future profit to be had, based on the current profit rate. Collectively, however, this stratagem—be it in steel, autos, or whatever—always generates (with a lag as new facilities are slowly built) overproduction, excess capacity, defaults, business failures and, most likely, a bank bust. In the end it is always the same—idle workers, idle capacity, and a downward spiraling economy. In early 2023 there were over 150,000 big-tech layoffs. Hotshot tech giant Meta (née Facebook) laid off 11,000 employees in November 2022 and another 10,000 in March 2023; and then, along with Salesforce’s 8,000 employees thrown into the streets in January, Meta and Salesforce sought in vain to sublease 560,000 square feet of empty office space.

How much of this junk do banks like SVB hold? What we know is that once the government took over this huckster bank it was stuck with $72 billion in loans, which it then unloaded on North Carolina’s First Citizens BancShares for $55.5 billion. First Citizens scooped up SVB’s loans for only 77% of their original cost. Thereby, the Federal Deposit Insurance Corporation (FDIC) took a loss of $16.5 billion, taking out 13% of all its assets. Meanwhile, Signature Bank’s $60 billion in commercial real estate, now owned by the FDIC, has remained unsold, regardless of whatever discount offered. Prior to the SVB collapse, the FDIC had $128 billion on hand—the 1.35% required Designated Reserve Ratio minimum used to back over $9.8 trillion of insured bank deposits. Once San Francisco’s First Republic bank is “adjusted” via a similar process, the FDIC will lose at least $13.3 billion. First Republic bank held $167 billion in loans, mostly to the superrich, and $10.8 billion of commercial real estate, before it collapsed. Yet, JPMorgan Chase acquired the bank for only $10.3 billion, while another 10.4% of the FDIC’s assets went down the drain. Nouriel Roubini, aka “Dr. Doom,” calculated U.S. banks’ total unrealized losses (valuing their assets at current market values, not face value) at $1.7 trillion—enough to wipe out 80% of all bank capital; Columbia University’s Tomasz Piskorski put this shortfall at $2.2 trillion.

Policy Schizophrenia

Two days after SVB collapsed, the Fed created the Bank Term Funding Program. Through the program, the Fed buys all of the loans, bonds, etc., of any bank, paying “face value,” or 100%, for declining assets. Any “collateral” (such as government bonds, student and farm loans, and assets of government-sponsored enterprises e.g., “Fannie Mae”) can be dumped at the Fed; corporate welfare in the hundreds of billions of dollars was quickly pumped into the banking system via this program and through banks’ conventional “discount” borrowing from the Fed under the same giveaway conditions.

The war in Ukraine means that ever more tech-centered military contracts are cascading into the Bay Area, and the armed encirclement of China is on the horizon. But, to thwart inflation, the Fed seeks to constrict credit and slow the economy by continually raising interest rates. Schizophrenic policies are promoting expansion (or at least stabilization) and contraction at the same time. “Muddling through” via ad hoc improvisations by the Treasury and the Fed is not working. The self-proclaimed crypto mavens, venture capitalists, and Silicon Valley geniuses acted out their hyper- capitalist “free market” fantasies with ballooning financial flows for several years. The full consequences of their shuffling dance are yet unknown, while the piper is being paid by the libertarians’ nemesis—the U.S. government.

is an emeritus professor in the Doctoral Program in Development Studies at the Universidad Autónoma de Zacatecas (Mexico). His latest book (with Mateo Crossa) is The Transnational System of Power and Production: Mexico’s Metamorphosis 1982–2022, published by Routledge.

Raul Amoros, “Ranked: The World’s Wealthiest Cities, by Number of Millionaires,” Visual Capitalist, January 4, 2023 (; Charles Chase, “Pioneers in Propulsion—A History of CSD Pratt & Whitney’s Solid Rocket Company,” presented at the American Institute of Aeronautics and Astronautics conference, April 2010; Erin Griffith, “The End of Faking It in Silicon Valley” New York Times, April 15, 2023 (nytimes); Thomas Heinrich, “Cold War Armory: Military Contracting in Silicon Valley” Enterprise & Society, June 2002; Lauren Hirsch, “Bonuses Drop on Wall Street as Deals Slow,” New York Times, March 31, 2023 (; Kellie Hwang, “Bay Area leads a record drop in luxury home sales,” San Francisco Chronicle, October 26, 2022 (; Soumya Karlamangla, “Why So Many Billionaires Live in California,” New York Times, March 8, 2022 (; Roland Li, “S.F. office vacancy rises to 29.4%, a record high. Why haven’t rents gone down much?” San Francisco Chronicle, March 28, 2023 (; SVB: (; Elaine Lu, “Review: Dying for an iPhone: Apple, Foxconn, and the Lives of China’s Workers,” Labor Notes, September 11, 2020 (; Patty Nieberg, “Startups Thrive With Contracts Via Defense Innovation Office,” Bloomberg Government, January 9, 2023, (; Kim Phillips-Fein, “The World That Venture Capital Made” The New Republic, May 11, 2022 (; Nouriel Roubini, “The Coming Doom Loop,” Project Syndicate, March 31, 2023 (; Paul Rogers, “Historic Silicon Valley site becoming new public open space preserve,” The Mercury News, October 5, 2014 (; John Ward, “2023 Office Market Outlook: Optimal Space Utilization Is Key,” Forbes, January 30, 2023 (; Richard Walker, Pictures of a Gone City: Tech and the Dark Side of Prosperity in the San Francisco Bay Area (PM Press, 2018).

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