Built on a mountain of debt, businesses could collapse under inflation and higher interest rates

For years, financial institutions have plied companies – particularly rising tech firms – with cheap money, allowing them to accumulate debt without ever turning a profit

Now, as this system threatens to implode, central banks are running to the rescue – again

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A man walks past a Silicon Valley Bank branch in Santa Monica, California on March 20. SVB, a key lender to start-ups across the US since the 1980s and the country’s 16th-largest bank by assets, had been hit by the tech sector slowdown. Photo: AFP

David Dodwell

David Dodwell is a journalist focused on Hong Kong and China since the 1970s.

Published: 3:30am, 27 Mar 2023

Combing through the wreckage of the 2008 banking crash, and the extraordinary era of quantitative easing (QE) that it launched, I recall two deep and unresolved anxieties: first, that QE measures may have kept the global economy on life support, but did not address the ailment that had brought it to the emergency-room operating table.

Second, that rescuing the banks targeted the wrong people. Behind them, the crux of the crisis was tens of thousands of families struggling with mortgages they could not afford, and homes they would be unable to keep. The banks may have fuelled the crisis, but they were proxies for the mortgaged victims that truly needed rescue.

I have the same uneasy feeling today, as I see central banks running to the rescue of Silicon Valley Bank, Credit Suisse and other financial institutions. Behind these unnerving catastrophes there remain problems that are being ignored. The first is the mountain of debt that has amassed during the QE era. The second is a business model, espoused in particular by tech enterprises, built on debt, low interest rates, and years of profitless growth.

The unaddressed elephant in the room is debt and, most important, the price of servicing that debt in an era in which financiers under 50 take for granted ultra-low rates and negligible inflation, and view this as “normal”.