$2 Trillion to Bail Out Banks, Fed’s Desperate Attempt to Avoid Recession

Lorenzo Bagnato

16 March 2023 - 12:28

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The Federal Reserve might inject up to $2 trillion in liquidity into the American banks to save them from disaster. Will it work to avoid a recession?

$2 Trillion to Bail Out Banks, Fed's Desperate Attempt to Avoid Recession

After having pushed hard on the gas pedal for a year, the Federal Reserve wants to finally break. Unfortunately, the wall of bricks might be too close now to avoid a crash.

After last week’s collapse of the Silicon Valley Bank (SVB) and Signature Bank, the entire world is afraid of a new 2008 crisis. SVB is the largest financial institution to collapse since 2008, when the world experienced the worst recession in almost a century.

SVB and Signature Bank failed because of the monetary tightening of the Federal Reserve. In an attempt to bring inflation down, the Fed raised interest rates to historical levels, hiking by another quarter of a point last January.

Though the economy seemed to hold, with unemployment at extremely low levels, the constant rate hikes were worrying investors. And indeed, last week SVB found itself in a situation where, because of the hikes, they couldn’t repay their debt on financial assets.

SVB was an institution specialized in lending to tech companies. The technology sector has experienced a severe downturn in its own right, and investors were starting to withdraw money from their SVB accounts.

Eventually, the pressure was too much and SVB collapsed. Its fall generated a panic wave across the entire globe, and now the Fed is trying to salvage what it can.

A trillionaire bail-out

In an attempt to save other banks from a similar collapse, the Federal Reserve could inject up to $2 trillion into the banking system. The news comes from a JPMorgan source, though no official confirmation has been issued yet.

This massive investment could solve the bank’s liquidity issue for the moment, but it won’t be enough forever. The Federal Reserve is probably trying to delay a recession as long as possible, in order to finish their monetary tightening strategy.

Some analysts believed that interest rates would keep rising, or at least remain stable, until September. By then, the Fed hoped that inflation would have come down to the 2% target level. Only then would interest rates start to come down again.

Next week, the Fed will gather again for another meeting. There is some speculation that they will avoid raising interest rates this time, postponing this decision to the following meeting.

On the other hand, however, inflation is hardly coming down after the Fed’s last meeting. It is likely that they will try to bail banks out until September, when the monetary tightening policy should end.

What if inflation is still high though? What if more and more banks start to fail nevertheless? Is a recession truly inevitable?

But, most importantly, is the world ready for the third global recession in 15 years?

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