California’s history of putting the world economy at risk

Don’t bank on California, especially when banks are involved.

Silicon Valley Bank’s collapse is widely discussed as a harbinger of the future, a sign of problems in technology businesses that were its best customers. But this bank failure actually fits a very old pattern — of California putting the world economy at risk.

Our state’s history of precipitating economic crisis is rooted in our need to get rich quick, a characteristic of our state since the Gold Rush.

California’s 1849 state constitution barred banking. But with the discovery of gold, banks proliferated quickly — and failed faster.  The history of San Francisco of the 1850s is one of financial panics, followed by attempts to climb out of them. The Bank of California, the first commercial bank in the West, launched in 1864 and failed by 1875. (It later reopened.)

Catastrophe only spawned new banks. After San Francisco’s 1906 earthquake, A.P. Giannini set up a makeshift bank in North Beach. Eventually, he would establish Bank of America, which in the 1980s, was briefly the world’s largest bank.

Bank of America endured (but merged and moved to North Carolina). But in the past two generations, California has regularly authored crisis and global recession.

The savings and loan crisis of the late 1980s and early 1990s was in part the product of bank deregulation pushed by a California president, Ronald Reagan, and furthered by California lawmakers. The state’s thrifts, under financial pressure because of high inflation, sought to escape their woes by making speculative investments, which only compounded their problems.

This deregulation was most shamelessly exploited by the Lincoln Savings and Loan Association, based in Irvine, and its head, Charles Keating, who used depositors’ money to make high-risk investments. Keating, seeking to evade federal regulators and keep control of his thrift, compromised five U.S. senators, the so-called Keating Five, including California’s Alan Cranston. Keating was eventually convicted of fraud but freed on appeal.

Hundreds of savings and loans closed for good. The federal government intervened to protect some thrifts and depositors, at an estimated cost to taxpayers of $100 billion.

The 21st century has seen two California-driven busts. The first came in 2000, when collapse of many tech startups, and of tech stock prices, helped spark a national recession. But that recession proved minor compared to the Great Recession of 2008.

Then, as now, the Golden State had the country’s biggest, most expensive housing market. Our middle class, desperate to buy homes, led the way to ever-growing consumer and mortgage debt. Our banks and mortgage companies — including Calabasas-based Countrywide Financial, once the nation’s largest mortgage lender — led the way in making bad subprime loans that left borrowers owing more than their homes were worth. Countrywide and its friends on Wall Street also recklessly securitized those loans.

When the housing market crashed and foreclosures proliferated, the carnage included stock market collapse, double-digit unemployment, record bankruptcies, giant state budget deficits, and mass layoffs. In California, family income declined, the middle class shrunk, and income inequality surged to the highest level in at least 30 years, according to the Public Policy Institute of California.

Californians are proud of the size of their state’s economy, the world’s fifth largest. But when an economy of that scale crashes, it extends beyond borders. It remains to be seen whether aggressive action by the U.S. government to seize Silicon Valley Bank, and guarantee even uninsured funds, will contain the damage.

These days, major global institutions track “systemic risks” or “mega-risks” to the future of the world and its economies. The World Economic Forum has a report on risks that covers natural disasters, inequality and its impacts, climate change, democratic decline, aging infrastructure, technological disruption, war, terrorism, and infectious diseases.

Maybe they should add California, with its talent for financial failure, to the list.

Joe Mathews writes the Connecting California column for Zócalo Public Square.

Bessie Venters

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