Former Central Bank Governor Raghuram Rajan was once a running mate for the Bank of England. Photo: David Rose
Waves of money printing have turned banks into "addicts" One of the world's leading central banks has warned that it is necessary to rely on cheap cash to survive.
Raghuram Rajan, who was once a contender for the post of the head of the Bank of England, announced repeated rounds of quantitative easing. (QE) urged lenders to take on more risk in search of profits that disappear in a world of higher interest rates.
The former head of the Central Bank of India said about «overly aggressive monetary policy.» was ultimately to blame for the collapse of the Silicon Valley bank in the US, whose billions of dollars were tied into long-term bonds.
More than a decade of low rates and money printing has made commercial banks addicted to "stimulant drug" Mr Rajan warned that this would lead to more setbacks as central banks continue to tighten policy.
“High QE has made the banking system more dependent on central bank liquidity,” he told the Telegraph.
“And when you try to get it out really fast, you find yourself ;s like an addict. Drug habit. And you can't provide the old levels of the drug because they are used to the new high levels. And so when you do that, everything stalls.
“I think we need to get back to the question, 'Why did these systemic risks arise?' And almost always the main cause of these systemic risks is monetary policy. Fund (IMF) has warned that the banking crisis is far from over, predicting that creditors with long-term debt and those who invested most in commercial real estate and office buildings before the pandemic will suffer.
" We will see more bankruptcies" he said.
Mr Rajan blamed the current turmoil facing the struggling First Republic on its holdings of «giant mortgages.» issued when interest rates were at their lowest.
Worried customers withdrew $100bn (£80bn) of deposits from the bank in March over fears the bank was incurring large losses.The Federal Deposit Insurance Corporation (FDIC), which is responsible for overseeing US depositor protection up to $250,000 for depositors, has warned that US banks are suffering more than $620 billion in paper losses due to higher interest rates. < /p>
Scientists at New York University's Stern School of Business estimate that figure could be as high as $1.7 trillion, «comparable to the total capital of the entire banking system.»
Mr. Rajan said the FDIC estimate did not take into account losses from all long-term debt as he warned of a potential reckoning.
2704 deposits
"So there are losses from long-term loans, but there are also losses of commercial real estate from buildings to office buildings that no one wants to go into right now,» he added.
"Therefore, rental fees will drop. The prices of these buildings will fall. So I'm not saying there's a huge crisis coming, but I'm saying there's enough to worry about.
The 60-year-old, who was one of the few economists to correctly predict the 2008 financial crisis, said a decade of moderate inflation coupled with low interest rates has led politicians and some economists to mistakenly believe they can «stimulate up to a high paradise» during pandemics without price increases.
He said that attempts by politicians in the UK, US, eurozone and Japan to «rise up»; Inflation created an environment in which «borrowing was very easy», leading some to believe that «spending does not require spending», which spurred the rise of populist theories, including modern monetary theory. "And politicians love it" he added.
Flooding the world with trillions of pounds of cash has resulted in banks «sucking up that liquidity»; by providing riskier credit lines, Mr. Rajan said. Higher interest rates meant that cheap money began to evaporate, creating problems for both banks and businesses.
Now a professor of finance at the University of Chicago's Booth School of Business, the economist said central banks risk doing more harm than good because they are trying to «do too much.» Mr. Rajan, who himself is called a «rock star». the central bank, said the public expects policymakers to keep rates low to support economic growth.
"My prescription has always been 'don't try to do too much'. Don't think you have this great weapon that will take care of everything. And don't think that you can solve every single problem in society. He said. "Because the more you claim to be superhuman, the more people will expect. And the harder the fall will be when they find out you really can't fix them"
2104 Eurozone money supply
He warned that advanced economies cannot ignore the very warnings they have often forced developing countries to follow. He said that many are avoiding the tough reforms that the IMF usually proposes to countries in need of financial assistance.
"We are trying to solve too many problems that have arisen in the industrial sector. The West with stimulus, when in fact the IMF prescription for emerging market countries with the same problems is called structural reforms.” he said.
He warned that the current problems facing the banking sector cannot be automatically solved by increased regulation.
Global regulators are examining whether smaller banks, which cannot raise cash in financial markets in the same way as their larger counterparts, may need to have more capital or better depositor protection.
But Mr Rajan said: “The big question with all this regulation regarding these small and medium banks is what happened to the old rules? Duration [interest rate] risk is the first thing the supervisor looks at. We used to regularly look at this in India and say, let's reduce this risk. So, if you don't enforce existing rules, what's the point of new ones?
He cautioned against general guarantees, which he said would encourage more risk. “I think [the 2008 crash] of Lehman Brothers burned people so badly that they don't want any crashes. The problem is that the regulators are sending a message that they will be there to help you out whenever they want.
"Every time you save, you make it even clearer that you will be there to help. once again save the system.”
Mr Rajan suggested that central banks, including the Bank of England, made the mistake of selling their government bonds amid soaring interest rates. .
The bank has announced that it will return £80bn of public debt to the market this year. It also said last week that taxpayers could potentially see losses of £200bn over the next 10 years, more than the loss of £120bn in profits from a decade of quantitative easing.
Mr Rajan called the top position at the Bank of England «a very political position.» which can «get ugly very quickly» Credit: David Rose
“There is a perception [from central banks] that [selling bonds] is like watching paint dry. This is a boring process, it will be without risk. And I'm saying that we don't know what the risks are in the downsizing process. So, given that raising rates is already a risky proposition, it's best to shelve it for the future.
Mr. Rajan admits he was "approached" be the next Governor of the Bank of England before Mark Carney stepped down in 2020 but did not apply.
He describes the job as «a very political position,» adding, «It's not that I'm dodging a challenge. But I have to know that I can do a good job. And I feel that given the politics of the particular situation, the last thing you want to present is another dimension of this guy from another country. Does he understand what we're talking about?
"How much pain can you cause? What will be the consequences? This is a political decision. This is done by unelected officials. But that requires an understanding of what tolerance levels might be."
He also knows all too well the consequences of too much pressure. His sudden decision to leave the Reserve Bank of India in 2016 came after growing political unrest over the RBI's decision to keep interest rates high to quell inflation.
Though Mr Rajan insists he was ; many popular" with the public, he offers a brief glimpse into life at the top and why he has stayed away from policymaking for the time being. "It can get ugly very quickly"
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