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An interesting segment on CNN’s Outfront w/ErinBurnett(03/16/23 )revealed that five months ago, renowned Economist Douglas Diamond, who won a Nobel Prize for his research in bank runs, predicted, even warned, that banks would go under if the federal reserve kept raising interest rates. This of course means that the recent collapse of Silicon Valley Bank(SVB), and the ripple effect it has caused around the banking world, were totally foreseeable. Host Erin Burnett rightly wondered why nobody at the fed heeded warnings from this esteemed economist known for his work on bank runs?
Douglas Diamond specifically told host Erin Burnett when asked whether he was surprised by the collapse of SVB(1:21): “I’m actually quite surprised. I realized that they[interest rate hikes]could wreak havoc, and I assumed that the supervisors–the Fed, FDIC, control of the currency–would have carefully looked at the balance sheets of all these banks and made sure that they would have been resilient, could have made it through this huge interest rate increase. So clearly from the Silicon Valley National Bank and First Republic, it’s pretty much the interest rate increases that caused their problems, so I’m surprised that we got here, and I would have thought that either the Fed would have slowed interest rate increases a bit, or even better, made sure these banks were stable so they could increase them to fight inflation.”
More importantly, Douglas Diamond pointed out that this was not a problem caused by lack of adequate banking regulations, but rather, just a failure of supervision. He specifically told host Erin Burnett(3:30): “Within the existing laws, the supervisors and regulators could have done a thousand times better.”
Bottom line folks, the collapse of SVB and its ripple effects, were totally foreseeable. The Biden administration is justified in extending generous bailouts to affected banks in an effort to prevent a “contagion” from SVB. Reasonable people can reasonably disagree about the wisdom of extending generous bailouts to struggling banks who made bad financial decisions. What we must not disagree about however, is that the supervisors and regulators, whose job it was to prevent this totally foreseeable crisis, must be held to account–beginning with Fed Chair Jerome Powell.
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