I am on vacation and trying to spend a few weeks not
thinking about the usual stuff. But it turns out that I cannot stay completely
out of the debate over the sudden wave of banking crises and their effect on
the economic outlook.
اضافة اعلان
So as everyone knows, Silicon Valley Bank — not a huge
institution, but an integral part of the tech industry’s financial ecosystem —
has been taken over by the Federal Deposit Insurance Corp. after facing a
classic bank run. Signature Bank soon followed; First Republic Bank is under
severe pressure. Swiss authorities have arranged a takeover of Credit Suisse, a
major bank, by its rival UBS. And everyone is wondering what other land mines
may be about to go off.
There will and should be many inquests into how and why
these banks managed to get into so much trouble. In the case of Silicon Valley
Bank, it appears that regulators had known for some time that the bank was a
problem case, but for some reason did not or could not rein it in.
When depositors pull their money out of banks, the effect is disinflationary, even deflationary. That is certainly what happened in the early years of the Great Depression.
But the more pressing questions are forward-looking. How
much does the banking mess change economic conditions? How much should it
change economic policy?
Some commentators — mainly, as far as I can tell,
cryptocurrency enthusiasts — are issuing apocalyptic warnings about
hyperinflation and the imminent collapse of the dollar. But that is almost
certainly the opposite of the truth. When depositors pull their money out of
banks, the effect is disinflationary, even deflationary. That is certainly what
happened in the early years of the Great Depression.
The savings-and-loan crisis of the 1980s was not a
Depression-level event, largely because depositors were generally insured, so
they were made whole (at taxpayers’ immense expense) despite huge industry
losses. Even so, the crisis may have curbed business lending, especially in the
commercial real estate industry, contributing to the 1990–91 recession.
And the financial crisis of 2008 — which was functionally a
bank run even though the crisis centered on “shadow banks” rather than
traditional depository institutions — was also disinflationary and helped bring
on the worst economic slump since the Great Depression.
Is this a crisis?
So how does the current mess compare? It will definitely
impose a drag on the economy. But how big a drag? And how much should it change
policy, in particular the interest rate decisions of the Federal Reserve?
The answer is simple: Nobody knows.
In the likelihood that even banks that have not experienced a run on their deposits will become much more cautious, we are probably looking at a serious reduction in credit. In effect, banking turmoil will act a lot like a rate hike by the Fed.
Here is what we do know: Depositors do not seem to be
demanding cash and putting it under their mattresses. They are, however, moving
funds out of small- and medium-size banks, to some extent into big banks, and
to some extent into money market funds.
Both types of institutions are likely to do less business
lending than the smaller banks now under pressure. Big banks are more tightly
regulated than smaller banks, required to have more capital (the excess of
assets over liabilities) and more liquidity (a higher proportion of their
assets devoted to investments that can readily be converted into cash). Money
market funds also face quite stringent liquidity requirements. Add in the
likelihood that even banks that have not experienced a run on their deposits
will become much more cautious, we are probably looking at a serious reduction
in credit. In effect, banking turmoil will act a lot like a rate hike by the
Fed.
But how big an effective rate hike? I am seeing smart,
well-informed people produce numbers that are all over the place. Goldman Sachs
says we will see the equivalent of a rate hike of 0.25 to 0.5 percentage
points; Torsten Slok of Apollo Global Management says 1.5 percentage points. I
have no idea who is right.
Navigating between recession and inflation
However, the direction of the shock seems clear. I wrote a
couple of weeks ago that the Fed is creeping its way through a dense data fog,
trying to steer between the Scylla of inflation if it tightens too little and
the Charybdis of recession if it tightens too much (or maybe it is the other
way around; input from Homer scholars is welcome). Well, the fog has gotten
even thicker. But clearly the risk of recession has gone up and the risk of
inflation has gone down. So it makes sense for the Fed to steer somewhat to the
left.
What this probably means in practice is that the Fed should
pause its rate hikes until there is more clarity about the inflation picture
and the effects of the banking mess — and it should be clear that that is what
it is doing.
Even though the wave of bank problems has shocked almost everyone, panic does not seem like the right response. On the other hand, for the Fed to continue with rate hikes right now might send the opposite signal: a sense of cluelessness.
There does not seem to be much danger that the Fed will lose
its inflation-fighting credibility if it takes time to get its bearings.
Inflation expectations are looking very well anchored.
Avoiding panic
Should the Fed go further and actually cut rates? Even
though I am generally a monetary dove, I would not call for an actual cut, at
least just yet. Among other things, that might convey a sense of panic.
And even though the wave of bank problems has shocked almost
everyone, panic does not seem like the right response.
On the other hand, for the Fed to continue with rate hikes
right now might send the opposite signal: a sense of cluelessness. This seems
like a time to say, “Don’t just do something — stand there.”
For what it is worth — and these may be famous last words —
I am actually somewhat reassured by the way that policymakers have been responding
to the current wave of banking problems. Some of us remember bitter debates in
2008–09 about how to stabilize the financial system: The troubled institutions
were complex and opaque, and nobody in power seemed willing to seize them so
that they could be rescued without also bailing out shareholders. This time we
are talking about conventional banks that can be and have been seized by the
FDIC, protecting depositors without letting shareholders off the hook.
The upshot is that so far, at least, this does not look like
a full-blown financial crisis. Stay tuned, though.
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