Get ready for more failed banks, says former IMF chief economist

The collapse of American banks still causes fears that the situation will continue to worsen. Despite the rescue of Silicon Valley Bank (SVB) and Credit Suisse, former chief economist of the International Monetary Fund (IMF), Raghuram Rajan, warns that further instability awaits the banks, according to a Finbold report.

Banks face instability

The main reason for concern is the fragility of the financial sector due to the flood of liquidity through quantitative easing. Rajan said he expects further instability in banks even if others do not expect it.

Currently, JPMorgan has come up with a prediction that the FED could pour another 2 trillion dollars into circulation in response to the banking crisis. It may save the banks, but the high emission of money in times of extreme inflation will be liquidating for ordinary people.

Markets were last supported by stimulus in 2020, but reflected in a low interest rate and low inflation environment. In other words, these macroeconomic indicators had room to rise because they were at the bottom. Today, however, the situation is completely different. I even informed you that the FED is allegedly losing control over inflation.

A cyclical situation

Interestingly, Rajan rightly warned against the banking sector in 2005 just before the global crisis. Although he hopes that the situation will not happen again, he expects it. If expansionary monetary policy is a problem, then the central bank can proceed to a restrictive policy, or increase interest rates.

In a recent forecast, we explained that interest rates are unlikely to fall this year. Central banks will continue to raise interest rates, or they will stop increasing them as much as possible. However, there is no assumption that they will decrease.

We are getting into an interesting situation where the FED will support the banking sector with incentives, but on the other hand suppress demand with interest rates. What is the result? Prices are high and will be even higher thanks to the stimulus, and on the other hand, high interest rates make financial products more expensive and limit demand. Rajan's fears are therefore justified and if more banks start to fail, the FED will flood us with new dollars that will impoverish us through inflation.