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Silicon Valley Bank could be a canary in a coal mine.
The California bank’s failure Friday shined a spotlight on the large losses that the whole banking system has seen on investments in bonds as a result of rising interest rates.
After having created a credit market bubble with its ultra-aggressive response to the COVID-induced recession, the Federal Reserve would be well advised to think carefully before continuing to slam the brakes as it tries to control inflation.
If not, we should brace ourselves for a hard economic landing as additional parts of the financial system start to break.
If ever the Fed created a US and world credit market bubble, it was in 2020 and 2021.
Not only did it keep rates near zero for far too long, it also flooded the market with liquidity by purchasing a staggering $4 trillion in US Treasury bonds and mortgage-backed securities.
Thanks to the easy terms, the world’s debt level soared to 350 percent of GDP.
