This month’s financial crises have caused experts to revise their recession estimates and could cause long-term harm to the US financial system. Some banks are on the verge of failure, while volatile markets and tighter regulation could lead to a credit crisis. When the Federal Reserve meets on Wednesday, it will face an unenviable choice: halt the pace of interest rate rises or combat surging inflation.
Risk of contagion
The Fed has a difficult challenge in containing the spread of contagion from Signature Bank’s bankruptcy. Signature Bank in New York collapsed just days after SVB, necessitating broad government intervention to restore trust. First Republic, located in San Francisco, is in jeopardy, but larger US banks have clubbed together to give a $30 billion deposit to shore up its solvency. Treasury Secretary Janet Yellen has promised to intervene once again if problems at other banks “pose a risk of contagion.” Even if central bankers successfully control contagion, lending conditions are destined to tighten more swiftly as a result of market and regulatory pressure.
Analysts at JPMorgan refer to the present issues as a “Minsky moment,” after American economist Hyman Minsky. A number of economic and geopolitical threats have emerged in recent weeks, including banking crises on both sides of the Atlantic, China reaching a new diplomatic agreement with Saudi Arabia and Iran, and Chinese President Xi Jinping’s high-profile trip to Moscow and meeting with sanctioned Russian counterpart Vladimir Putin. Investors and historians have warned that the US’ extended bull market since 2009 would result in an economic overcorrection, and Jeremy Grantham has been warning of an all-consuming “everything bubble” which he called “pretty damn big” during an interview with economist David Rosenberg.
JPMorgan and Goldman Sachs have both reduced their economic estimates owing to the financial crisis, and former Treasury Secretary Larry Summers has warned that the economy might be headed for a “Wile E. Coyote moment”. The longest bull market in US history ended in 2020 due to the COVID-19 epidemic, but the long-awaited Minsky moment may have come after a year of decreasing growth.
