Top economist Raghuram Rajan has warned that the banking sector is not out of the woods yet, and more collapses could be on the horizon. Rajan, who predicted the 2008 financial crisis, pointed to trouble in regional banks last month following the collapse of Silicon Valley Bank. The bank’s failure led to a sell-off in regional bank stocks, which some commentators warned could lead to a 1980s-style banking crisis. Despite the recent return to stability in US banks, Rajan remains cautious, citing the risks posed by easy money and high liquidity that can create fragile structures when reversed. Rajan’s criticism of the Federal Reserve’s aggressive policy tightening has been echoed by other market commentators who argue that the Fed is putting undue pressure on an already fragile-looking banking system.
The collapse of Silicon Valley Bank has sparked concerns about the banking sector and the possibility of further collapses. Rajan argues that the risks are exacerbated by the Fed’s aggressive policy tightening, which has created a fragile financial system that is vulnerable to collapse. He cites the perverse incentives created by very easy money and high liquidity, which can lead to fragile structures that collapse when reversed. Rajan’s warnings are supported by other market commentators, who have criticized the Fed’s policy tightening and called for a pause in rate hikes or rate cuts to avoid putting further pressure on a fragile-looking banking system.
Despite the recent return to stability in US banks, Rajan remains cautious about the future of the banking sector. He argues that the spillover effects of monetary policy are significant and have been ignored for too long. Rajan believes that the Fed is now trying to reduce the market’s addiction to overliquid conditions, which has made the financial system fragile. Critics of the Fed’s policy tightening warn that it could ultimately lead to a recession, and have called for a pause in rate hikes or rate cuts to avoid further damage to the banking sector.
In conclusion, the collapse of Silicon Valley Bank has highlighted the fragility of the banking sector and the risks posed by the Fed’s aggressive policy tightening. Rajan and other market commentators have warned of further collapses, citing the perverse incentives created by very easy money and high liquidity. Despite the recent return to stability in US banks, Rajan remains cautious about the future of the banking sector, and has called for a reduction in the market’s addiction to overliquid conditions. Critics of the Fed’s policy tightening have urged a pause in rate hikes or rate cuts to avoid further damage to the banking system and a possible recession.
