The Fed’s moves after the Silicon Valley Bank crash, between inflation and the cost of money – Corriere.it

The whatever is neededpronounced by Joe Biden at dawn, before the opening of the markets, to reassure savers and economic operators recalls the famous whatever it takes with which 11 years ago Mario Draghithen head of the ECB, stopped the euro crisis with a powerful injection of confidence.

Will the Biden cure have the same effect? The answer must be sought at two levels: the immediate stop to the rush to withdraw deposits from banks considered more fragile and the longer-term consequences of the crisis on credit and the economy in general. A crisis that exploded in recent days, but comes from afar: almost 15 years (tomorrow is the fifteenth anniversary of the start of the 2008 crash with the Bear Stearns bailout) of money offered at no cost (or almost) and of the injection of trillions of dollars of liquidity into the system.

Everyone knew that in this way one was fed dangerous bubble but this appeared to be the lesser of evils in years in which it had come to fear not only a recession but even an economic depression. They counted on the possibility of gradually deflating the bubble, without trauma, once normal conditions of economic growth returned. The surge in inflation and the consequent rapid increase in interest rates to try to contain it they are crashing now like seismic waves on an already fragile building.

Even if three banks fell in three days and if yesterday medium and small credit institutions, those considered more fragile, lost a lot on the Stock Exchange, Biden and the Treasury will probably be able to stop the rush to withdraw deposits from banks less solid: even more than the president’s promises help the extension of the federal guarantee to all deposits of the failed bank in Silicon Valley and the Fed’s decision to lend money to banks against portfolio securities (Treasuries and bonds) considered at their face value of issue and not to the real one, reduced due to the surge in interest rates which made them less attractive. In this way, the main cause of the collapse of the SVB was removed, but at a high price, forced to sell devalued securities to repay depositors and, therefore, to report heavy losses.

But the problems will not end there: for curb inflation the Fed, and then also the ECB, began to increase the cost of money first slowly and then suddenly at the end of 2022. But prices, even if they have slowed down somewhat, in the US continue to grow at a pace judged unsustainable by the monetary authorities. For this reason, the head of the Fed has announced that another sharp increase in rates will be decided in a week. In light of what has happened in these days there could be a afterthoughtbut at this point the specter, so far pushed back into the background, risks materializing debt trap: the monetary authorities forced to loosen the squeeze not so much so as not to slow down the economy (prevailing fear up to now) but so as not to corner banks full of low-yield securities (the new alarm). But in that case it would become even more difficult to get inflation under control.