Fake images.
So far there is no reliable narrative about what the banking crisis in the United States will mean for the world economy. Even after the implosion of Silicon Valley Bank (SVB
VB
As an academic economist with a bull’s-eye focus on the old-age security of all Americans, that’s how I see it. The chances of a recession have increased since the federal government took control of Silicon Valley Bank and Signature Bank on Sunday morning. The risk of recession has increased because credit has tightened. Businesses and households will find it more difficult to obtain loans, which will reduce growth in the overall economy.
Mind you, curbing credit and lending availability is just what the Federal Reserve has been trying to do by raising interest rates. The Fed began tightening credit exactly one year ago as of this writing, on March 17, 2022, and in doing so inadvertently set Silicon Valley Bank into its deep troubles last week (although SVB, for of course, deserves a lot of the blame).
What the Fed is trying to do reminds me of when I first started driving. I bounced my way up a small hill tapping on the brakes to keep from going too fast. The Federal Reserve has been trying to rein in consumer and business spending by raising the cost of credit without falling into a recession. Although Fed officials have expressed caution about slipping into a recession, I have been concerned by signs that the job market is already cooling off.
But in the wake of the SVB failure, if I may extend the vehicular metaphor, there’s a huge platform fully loaded with tight credit pushing the economy downhill towards recession. It is an open question if the Fed and the Treasury Department will try to put the car in reverse and stop this slide. For its part, the Fed continues expected to follow through with a rate hike when it meets next week, even if it is smaller than previously expected.
Another way to view current recession risk is through the lens of a Minsky cycle, which predicts easy and tight credit cycles. In Minsky’s famous phrase, stability breeds instability. For SVB, years of abundant deposits from startups through the venture capital industry led to complacency about interest rate risk.
Now, if the Minsky cycle is indeed turning, the uncertainty facing investors and lenders about where the next bank run will come from or what bad debts are on whose balance sheets will curb investment. Companies will be nervous about expanding their activity and employment and banks will be worried about lending.
The good news in all of this is that the Federal Reserve may cut its rate hikes, as noted above. Plus, the Fed’s latest loan facility for troubled banks is helping banks cushion their deposit outflows. The anti-crisis announcements from the federal government last week gave me some hope that we are not destined for an incoming recession.
This may be good news for older workers who are trying to avoid old-age poverty by continuing to work. Recessions are bad for all workers, but they are especially damaging for older workers. Older workers who are laid off take big hits to your profits if they are lucky enough to find another job. Many are not.
For the middle and upper class, people who have significant amounts in their 401(k) plans, the stock market impacts may be mitigated by a slower path of interest rate hikes from the Federal Reserve. If this bank run can be contained, and if the Federal Reserve really does change its course on interest rates, two big ifs, there may indeed be a silver lining to the current economy.
