(March 13) The way to avoid an epidemic of bank failures similar to that of Silicon Valley Bank is to reduce the inflationary and anti-growth pressures that lawmakers effectively have put on the Federal Reserve Board.
Yes, inflation in the end is always a monetary phenomenon, but fiscal and regulatory policies can significantly affect the supply and velocity of money. The fiscal policies under former President Donald Trump were awful , and both the fiscal and regulatory policies under President Joe Biden have been so stunningly terrible as to beggar belief. Combined with the Fed’s several years of insanely “easy money” proclivities , they created an inflationary monster that is hard to tame without high interest rates.
Once interest rates rise above a certain point, however, banks that had depositors who were reveling in easy money suddenly find themselves in a bind when higher interest rates hit both the banks and their depositors. That, in a nutshell, is what appears to have happened to SVB.
Without some help from wiser fiscal and regulatory policy, the Fed governors find themselves in a bind. If they don’t keep interest rates high, or raise them even higher, inflation will continue at levels that eat holes in family budgets. On the other hand, if they do keep interest rates high, financial institutions such as SVB will fail, while families with credit card debt, which means most families in the United States, could see the debt, when compounded by higher rates, spiral beyond control. Either way, the threats of defaults or contagious financial panic grow.
The antidotes to the current problems, and the deterrent to future ones, are the same as they always have been: The federal government should spend less, regulate less, stop hobbling energy production, and rein in, even if not entirely eliminate, subsidies for trendy technologies that aren’t economically viable…. [The full column is here.]
