The Fed made a terrible mistake to keep rates so low for so long: Expert
The current banking crisis has its roots in pandemic-induced low interest rates, a panel of experts told Yahoo! Finance Live.
"The Fed made a terrible mistake to keep interest rates so low for so long," says Gillian Tett, U.S. editor-at-large at the Financial Times. She says the financial system is geared to preferring lower rates, and that the Fed's continued hawkishness shows the central bank is trying to "overreact and jam on the brakes to atone for the big mistake it made earlier."
A period of low interest rates made it easier for banks to take bigger risks, but ultimately led to the collapse of Silicon Valley Bank as interest rates resumed their climb under central bank hawkishness. The collapse created instability in smaller regional banks, and even in larger banks like Credit Suisse (CS) with exposures to the sector. Several banks have undergone rescues, with Credit Suisse recently being bought out by rival UBS (UBS) in a deal orchestrated by Swiss finance officials worth $3.2 billion.
Experts say the rescue plans give banks too much security. "They're aware of the risk, but they're expecting the bailout," says Dylan Ratigan, Host of “Truth or Skepticism” on Tastytrade. "These are people that benefitted from the credit expansion in 2006, then there was a massive overcompensation, which is the zero rates," he says.
But while the solution is not yet obvious, Tett says rescue methods like guaranteeing deposits encourage and amplify risk-taking behavior among banks. "The only thing that's worse than moral hazard, which the system is riddled with right now, is unpredictable moral hazard," she says.
Yahoo Finance's Brad Smith and Julie Hyman spoke to Tett, Ratigan and others. Key video moments:
00:00:52 - "The Fed made a terrible mistake to keep interest rates so low for so long."
00:01:51 - "The Fed is out of control running zero."
00:02:35 - "The only thing that's worse than moral hazard, which the system is riddled with right now, is that you have unpredictable moral hazard"
Watch the full video here.