Banking system's wobble joins list of global economic concerns threatening seafood industry

The banking crisis that ignited with the failure of Silicon Valley Bank on 10 March, 2023, was not among the top threats to the seafood industry listed by Megan Greene, a senior fellow at the Mossavar-Rahmani Center for Business at the Harvard Kennedy School, during her keynote address at Seafood Expo North America/Seafood Processing North America on 12 March.

But with the subsequent failure of Signature Bank the same day, and the federal takeovers of both institutions representing the second- and third-largest bank failures in U.S. history, turmoil embroiled on the U.S. financial system as customers hurried to withdraw their deposits and investors rushed to devest from the banking sector.

Greene said Silicon Valley Bank’s business model was “fairly unique” and that while she expected the short-term market reaction to its failure to be “pretty ugly” as the market exposure of other banks comes to light, an expected government intervention that would make affected depositors at the failed banks whole was likely an effective solution to prevent more-significant fallout.

On Monday, 13 March, U.S. President Joe Biden said that the government would respond decisively to the crisis with a government rescue plan.

“Americans can rest assured that our banking system is safe – your deposits are safe,” Biden said. “Let me also assure you we will not stop at this; we’ll do whatever is needed.”

Greene said Silicon Valley Bank’s implosion was the result of developed countries’ central banks shrinking their balance sheets and hiking rates.

“So as borrowing costs are going up, liquidity is waning, and we're getting blowups in pockets of the markets. Silicon Valley Bank is another example of this,” she said.

With a clientele of tech start-ups, the bank used its deposits to invest in government bonds. Due to a pullback in the tech sector, clients began to withdraw funds, forcing the bank to sell off its bonds at a significant loss.

“When central banks expand their balance sheets, it changes bank behavior. So commercial banks end up extending a lot of credit lines in order to make a fee, which makes sense, but just because the central bank decides to shrink its balance sheet, commercial banks don't decide to unwind their behavior. So there's kind of an endless ratchet effect upwards of liquidity needs for banks,” Greene said. “Then every time when the central bank steps in with more quantitative easing, it increases the liquidity needs of a commercial banks. It just makes the problem worse. So I think ultimately, quantitative easing is kind of like Hotel California, and central banks aren't going to be able to get out of it, because if they try, they’ll see more market blow-ups. So I think central bank balance sheets will be pretty big for a while.”

Greene named ongoing inflation as another primary concern for the seafood industry.

“Inflation is top of mind for many, many businesses. I think there's a real risk that inflation remains element elevated and persistent. I think the probability of that is really high and I think that the impact of that would be pretty high,” she said.

In 2021, inflation was driven mostly by the cost of goods rising in the U.S., but in 2022, that shifted as the economy opened up fully so that inflation is now being driven by an increase in prices for services.

“That's a worrisome development just because the biggest component of services inflation is wages, and wage inflation tends to be sticky,” Greene said. “It's relatively easy to hike wages, it's really hard to cut them. And so that's the kind of inflation that will probably be lasting.”

Greene said she believed peak inflation is over but that the U.S. will still end 2023 with the inflation rate at 4 percent, twice the U.S. Federal Reserve’s target rate.

“There's a question about, if inflation is around 3 percent, whether the Fed will crush the economy with higher interest rates just to get it down one more percentage point. I think probably not,” Greene said.

The Fed will likely bring its benchmark funds rate to 5.5 percent and keep them there until 2024, Greene said. The aggressive rate-tightening has worked in bringing inflation down in many aspects of the economy, but labor markets have remained “incredibly tight,” according to Greene.

“It has been a real puzzle for economists, because central bank policy is supposed to work through financial markets and also through the real economy. Really aggressive tightening by the Fed and other central banks is working as you would expect through financial markets, with credit spreads widening and credit demand coming off. It's not working at all through the real economy, though. It's not totally clear why the labor market isn't deteriorating.”

Greene postulated lingering Covid-related issues are keeping some Americans from rejoining the workforce, and said many older workers have elected not to take post-retirement jobs. She also speculated some companies are “hoarding labor” so they’re not forced to rehire and retrain employees as they did in 2021 and 2022 as the economy reopened post-Covid.

"This is just anecdotal, as we don't have any data for this because we don't know how to measure whether companies are hanging on to workers because it makes business sense, or whether they're hanging on to them because they're hoping they can just get through this rough patch and then everything will be fine and they won't have to go out and rehire people,” Greene said.

Wage growth, at 6 percent, is off its previous record-highs, but remains elevated, a situation Greene called “every central bankers worst nightmare” because of the concern it could result in a wage-price spiral, whereby workers ask for more money and end up passing on the extra cost to the end-user in the form of inflation. Greene’s concerns about a wage-price spiral occurring in Europe is even higher than its potential of happening in the U.S., as the most-recent economic data from France, Germany, Spain, and Belgium show inflation increased across the Eurozone. Between higher labor costs and more spending on defense and sustainability investments, Greene forecasts structurally higher inflation globally as a medium-term trend.

China is also struggling with a difficult economic situation, according to Greene. China’s economy should grow by 5.7 to 5.8 percent in 2023, up from 3 percent in 2022, but that growth figure is lower than its pre-pandemic norm.

“After the global financial crisis, China's put the pedal to the metal and stimulus measures and pretty much pulled the rest of the world out of the recession. I don't think we can actually rely on that this time around,” Greene said. “I think that the expansion will be more measured and more targeted this time.”

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Photo courtesy of Cliff White/SeafoodSource