JPMorgan CEO Jamie Dimon predicts that more bank failures could be incoming, an assessment the the Library of Economics and Liberty (EconLib) agrees with.
This year has seen several major bank failures with Silicon Valley Bank (SVB) collapsing and Signature Bank and Silvergate following soon after, a report from EconLib said. Dimon recently claimed that the U.S. banking crisis is “not yet over, and even when it is behind us, there will be repercussions from it for years to come.”
EconLib believes that Dimon's prediction is a fair assessment given ongoing excessive spending by the government and actions by the Federal Reserve, the report said. Congress has increased the national debt by more than $7 trillion since 2020. During the same time period, the Federal Reserve helped keep interest rates artificially low.
As a result of these actions, the financial system experienced a surge of cash, which compelled banks to take on less lucrative investments including interest-rate-sensitive government bonds. The banks could not predict that the Fed would reverse its approach to interest rates, having raised the rate from 0% to up to 5%, which caused those bonds to plummet in value. When banks marked-to-market those assets, they did not have sufficient capital to fund withdrawals. EconLib expects the Fed to raise interest rates again to at least 6%, which will further devalue the government securities in bank coffers.
To exacerbate the problem, the FDIC insures many deposits at big banks, causing banking customers to switch from smaller regional banks to these larger banks. This brings more cash flow to the larger banks, leading them to take on more risks at the expense of smaller banks and the economy.
Econlib proposes less government interference in banking to avoid pitfalls like this in the future.
"Only by allowing people to exchange freely with limited government interference that simply sets the rules of the game but is a referee thereafter, not a participant, can we better avoid these boom and bust cycles in the banking sector and across the economy that threaten our freedom and prosperity," the report said. "We must let free people succeed and fail, as failure is essential for us to learn lessons, or we will keep making the same mistakes. But we should be eliminating government failures by ultimately shrinking government and ending the Fed."
