I’m on vacation and I try to spend a few weeks without thinking about the usual.

But it turns out I can’t completely stay out of the debate about the sudden wave of banking crises and its effect on the economic outlook.

As everyone knows, the Silicon Valley Bank -an entity that is not very large, but an integral part of the financial ecosystem of the technology industry- the Federal Deposit Insurance Corp. intervened after facing a classic run on the banks.

FirmaBank followed soon after; Bank of the First Republic is under great pressure.

The Swiss authorities organized the takeover of Credit Suissea large bank, by its rival UBS.

And everyone wonders what else land mines they may be about to explode.

There will and should be many investigations into how and why these banks got into so much trouble.

In the case of Silicon Valley Bank, it appears that regulators have known for some time that the bank It was a problematic case but for some reason they didn’t stop it or couldn’t.

But the more pressing questions are for the future.

To what extent does the banking disaster change economic conditions?

To what extent should economic policy change?

Some commentators – mainly, from what I see, cryptocurrency enthusiasts – throw doomsday warnings about hyperinflation and the imminent collapse of the dollar.

But this is almost certainly the opposite of the truth.

When depositors withdraw their money from banks, the effect is disinflationary, even deflationary.

That’s certainly what happened in the early s Great Depression.

The savings and loan crisis of the 1980s was not a depression-level event, especially since depositors were generally insured, so they bounced back (at taxpayer expense) despite huge industry losses.

Even so, the crisis may have slowed business lending, especially in commercial real estate, contributing to the 1990-91 recession.

And the 2008 financial crisis – which was functionally a run on banks, even though the crisis focused on “shadow banks” and not traditional depository institutions – was also disinflationary and helped cause the worst economic downturn in history. times of Great Depression.

What is the current situation?

There is no doubt that it will be a drag on the economy.

But to what extent?

And how much should economic policy change, especially the Federal Reserve’s interest rate decisions?

The answer is simple: No one knows.

This is what we know:

Depositors don’t seem to ask for cash and shove it under the mattress.

However, to some extent, they are drawing funds from small and medium-sized banks to the big banksand to some extent to money market funds.

Both types of institutions are likely to make fewer commercial loans than the smaller banks now under pressure.

Large banks are subject to stricter regulation than small ones, as they are required to have more capital (the excess of assets over liabilities) and more liquidity (a larger percentage of their assets dedicated to investments that can easily be converted to cash).

Money market funds also face quite stringent liquidity requirements.

Add in the likelihood that even banks that haven’t experienced a rush on deposits will become much more cautious, and we are likely to face a sharp decline in credit.

Indeed, the banking turmoil will look a lot like a rate hike by the Federal Reserve.

But to what extent?

I see that intelligent and well-informed people present very different figures.

Goldman Sachs says we will see the equivalent of a 0.25 to 0.5 percentage point rate hike;

Torsten Slok by Apollo global management, says 1.5 percentage points.

I have no idea who is right.

However, the direction of the shake seems clear.

A couple of weeks ago I wrote that the Federal reserve You’re weaving your way through a thick fog of data, trying to navigate the peril of inflation if it hits too little and recession if it hits too much (or maybe it’s the other way around; opinions from Homer scholars are welcome).

Well, the fog has gotten even thicker.

But it is clear that the risk of a recession has increased and the risk of inflation has decreased.

So it makes sense for the Fed to lean slightly to the left.

What that probably means in practice is that the Fed should hold off on rate hikes until it happens more clarity about the inflation outlook and the effects of the banking mess – and it should be clear that that’s what he’s doing.

There doesn’t seem to be much danger of the Fed losing its inflation-fighting credibility if it takes some time to get its bearings.

Inflation expectations appear very well anchored.

Should the Federal Reserve go further and lower interest rates?

While I’m generally a monetary dove, I wouldn’t ask for a real cut, at least not yet.

By the way, this could convey aa feeling of panic

And while the wave of banking woes has shocked nearly everyone, panic doesn’t seem like the appropriate response.

On the other hand, the Fed continuing to hike rates right now may be sending the opposite signal: a sense of ignorance.

It seems the time to say:

“Don’t just do something – stay there.”

For what it’s worth — and these may be some famous last words — I actually take comfort in the way policy makers have responded to the current wave of banking woes.

Some of us remember the bitter debates of 2008-2009 about how to stabilize the financial system: the troubled institutions were complex and opaque, and no one in power seemed willing to seize them to bail them out without also bailing out the shareholders.

This time we’re talking conventional banks that can and have been seized by the FDIC, protecting depositors without putting shareholders out of business.

The upshot is that, at least so far, this doesn’t look like a full-blown financial crisis.

But stay tuned.

c.2023 The New York Times Society