America on the Brink of Another Banking Crisis, Warns Former IMF Official
A former official from the International Monetary Fund (IMF) is sounding the alarm on the potential for another banking crisis in the United States. Desmond Lachman, who served as deputy director in the IMF’s Policy Development and Review Department, believes that the U.S. Federal Reserve’s actions are inviting disaster.
Fed Chair Jerome Powell’s Risky Move
In a blog post for The American Enterprise Institute (AEI), a public policy think tank, Lachman criticizes Fed Chair Jerome Powell for exacerbating an already precarious situation. According to Lachman, the Fed’s decision to keep monetary policy tight and liquidity thin is a mistake that could lead to a hard landing for the U.S. economy and a fresh banking crisis.
The Consequences of Tight Monetary Policy
Lachman argues that the Fed’s failure to consider the expansionary fiscal policy stance has resulted in a surge in inflation, reaching a multi-decade high of over 9% by June 2022. Now, with monetary policy kept tight, Lachman warns that this approach increases the risk of a banking crisis and a hard economic landing within the next year or so.
Commercial Real Estate as a Vulnerable Sector
One major concern highlighted by Lachman is commercial real estate, which comprises a significant portion of U.S. banks’ loan portfolios. He points out that more than $900 billion in commercial property loans are due this year and questions how these loans will be rolled over without major rescheduling, especially given the higher interest rates compared to when these loans were initially contracted.
Lachman emphasizes that if there is a wave of property loan defaults, it could be particularly problematic for regional banks, which are a vital source of finance for small and medium-sized companies. Commercial property loans make up approximately 18% of these banks’ overall loan portfolios.
Hot Take: Is Another Banking Crisis Looming?
According to former IMF official Desmond Lachman, the U.S. Federal Reserve’s current approach to monetary policy could push America into another banking crisis. Here are the key takeaways from Lachman’s warning:
- Lachman believes that Fed Chair Jerome Powell is inviting disaster by keeping monetary policy tight and liquidity thin.
- The failure to consider the expansionary fiscal policy stance has led to a surge in inflation.
- Commercial real estate is a vulnerable sector that could trigger a wave of loan defaults, posing a significant risk to regional banks.
With these factors in mind, it’s crucial for regulators and financial institutions to closely monitor the situation and take appropriate measures to mitigate the potential risks. The implications of another banking crisis would be far-reaching, impacting not only lenders but also the broader economy.
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