Warning Signs: Is America Headed for Another Banking Crisis?
A former official from the International Monetary Fund (IMF) has expressed concerns about the current trajectory of the U.S. Federal Reserve, suggesting that it may be leading the country toward another banking crisis.
In a recent article for The American Enterprise Institute (AEI), Desmond Lachman, who previously served as deputy director in the IMF’s Policy Development and Review Department, argues that the policies of Fed Chair Jerome Powell could be exacerbating existing pressures on banks. Lachman criticizes the Fed for maintaining a tight monetary policy and thinning out liquidity, which he believes is worsening the situation.
Lachman points out that the Fed’s failure to adapt its policy stance to the expansive fiscal measures undertaken in 2021 led to a significant surge in inflation by June 2022. He suggests that the Fed’s current approach of maintaining tight monetary policy amidst domestic banking vulnerabilities and a weakening global economic environment could precipitate a severe economic downturn.
According to Lachman, a significant portion of US banks’ loan portfolios comprises commercial real estate, which he identifies as a potential weakness in the industry.
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He highlights the imminent challenge of refinancing over $900 billion worth of commercial property loans, particularly considering the current higher interest rates compared to when these loans were originated.
Lachman warns that the failure to address this issue could result in the collapse of approximately 385 small and medium-sized banks, posing a significant risk to the broader economy, especially as commercial property loans make up around 18% of regional banks’ overall loan portfolios.