- More bank failures are coming, according to top economist Raghuram Rajan.
- Rajan, who called the 2008 crisis, warned of more volatility stemming from the Fed’s rate hikes.
- Central bankers have hiked rates aggressively to control inflation, sowing chaos in markets over the past year.
Despite waning volatility in recent weeks, banking sector woes aren’t over, and more collapses could be coming, according to top economist Raghuram Rajan.
Rajan, who formerly served as the chief economist for the International Monetary Fund and was among the experts who predicted the 2008 financial crisis, pointed to trouble in regional banks last month stemming from the collapse of Silicon Valley Bank. The bank’s failure sparked a steep sell-off in regional bank stocks, leading some commentators to warn of a 1980s-style banking crisis.
Turmoil has died down in recent weeks as US banks regain their footing, but the crisis isn’t over, Rajan warned in an interview with Bloomberg on Thursday.
“I hope for the best but expect that there might be more to come, partly because some of what we saw was unexpected,” he said. “The entire concern is that very easy money [and] high liquidity over a long period creates perverse incentives and perverse structures that become fragile when you reverse everything.”
That echoes criticism from other market commentators, who have pinned blame on the Federal Reserve for setting banking failures in motion with its aggressive policy tightening after a decade of easy money that flooded the market with liquidity.
“This sense that the spillover effects of monetary policy are huge and aren’t dealt with by ordinary supervision has just escaped our consciousness over the last so many years,” Rajan said of central bank policy. He added that the Fed was now trying to reduce the market’s “addiction” to overliquid conditions, which has made the financial system fragile.
SVB was one of the first large casualties from the Fed’s aggressive tightening program, though investors have felt the pain of higher interest rates for months, with stocks down 20% in 2022.
Fed critics have urged central bankers to pause rate hikes or start cutting rates in order to avoid putting pressure on a fragile-looking banking system. But Fed Chair Powell has denied the possibility of a rate cut this year, warning markets that rates would continue remain restrictive through 2023. That could ultimately tip the economy into a recession, other experts have warned.