If diplomacy is used to end the Ukraine War, phase out Russian sanctions, and reduce tension with China, the world be much safer and stagflation will be eased.

by Jeffrey Sachs, LA Progressive

The banking crisis that hit Silicon Valley Bank (SVB) last week has spread. We recall with a shudder two recent financial contagions:

  1. the 1997 Asian Financial Crisis, which led to a deep Asian recession
  2. the 2008 Great Recession, which led to a global downturn

The new banking crisis hits a world economy already disrupted by pandemic, war, sanctions, geopolitical tensions, and climate shocks.

At the root of the current banking crisis is the tightening of monetary conditions by the Fed and the European Central Bank (ECB) after years of expansionary monetary policy. In recent years, both the Fed and ECB held interest rates near zero and flooded the economy with liquidity, especially in response to the pandemic.

Economic crisis in Russia concept. Toy military tank on Russian rubles. War conflict in Ukraine, economic sanctions and inflation in Russia

Easy money resulted in inflation in 2022, and both central banks are now tightening monetary policy and raising interest rates to staunch inflation.

Banks like SVB take in short-term deposits and use those deposits to make long-term investments.

The banks pay interest on the deposits and aim for higher returns on the long-term investments. When the central banks raise short-term interest rates, rates paid on deposits may exceed the earnings on long-term investments. In that case, the banks’ earnings and capital fall. Banks may need to raise more capital to stay safe and in operation. In extreme cases, some banks may fail.

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