In a global banking crisis, why are the markets stable?
This is how the current collapse is different from the Great Recession.
Even as Credit Suisse declared it needed to borrow $54 billion from Switzerland’s central bank for short-term liquidity, stocks of Credit Suisse jumped on the news Wednesday, and the markets opened higher in Europe Thursday, remaining flat Thursday morning. Earlier in the week, the Dow Jones Industrial Average lost less than half a percentage point on news of the collapse of Silicon Valley Bank.
To the average person, the stability of the market in light of a banking crisis seems counterintuitive. But it really is not. Jordan Kaufman, a former hedge fund trader and former vice president of asset management at Goldman Sachs, now chief investment officer at Green Ridge Wealth Planning, explains in layman’s terms why this banking crisis is different.
This is not 2008
The Great Recession prompted by the collapse of Lehman Brothers in September of 2008 had deeper root causes, Kaufman said. The housing market was collateral. There is no real estate crisis this time around. The Dow fell over 800 points when Lehman Brothers collapsed in 2008.
The Fed stepped in quickly
To prevent a larger bank run, the Fed moved quickly to stave off a domino effect. Learning from 2008, the Federal Reserve has the latitude to do this without seeking Congressional approval first. The government announced all depositors at SVB and Signature Bank would be repaid. “The Fed has the tools now to handle crisis better,” Kaufman said.
Investors have drastically increased bets that the bank failures will mean a pause in Fed interest rate hikes at their next meeting March 21-22. The Fed has raised interest rates over the past year to tame inflation, and with an uncertain market, it is likely to remain in its current 4.5 to 4.75% range.
Due to the 24/7 news cycle and social media, news cycles much more quickly. What is making headlines now quickly dissipates. As more government efforts emerge, Kaufman hopes these emergency measures prevent a deepening of the crisis. If the headlines stop, so will the increasing concern around bank insolvency.
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