Banking Crises in the US: Implications and Forecasts

In the past month, a series of banking crises, highlighted by the failure of Silicon Valley Bank (SVB), has caused analysts from multiple banks, including JPMorgan Chase, to rewrite their recession forecasts from scratch. After months of small victories against inflation and a relatively strong economy, these crises could potentially sweep away the progress made in under two weeks.

Implications for the Financial System

Even if the government and private sector successfully contain the contagion from bank collapses spreading through the economy, the failures may still lead to lasting damage to the US financial system. Some banks are teetering on the edge in Europe and the US, while jittery markets and the promise of stricter regulation could lead to a credit crunch – a steep decline in banks’ willingness to lend caused by a lack of funds.

Difficult Choices for the Federal Reserve

The Federal Reserve faces an impossible choice when officials meet on Wednesday: slow down the pace of interest rate hikes or plow ahead to bring down resurgent inflation and risk amplifying the damage to the economy. However, hopes of engineering a soft landing for the economy and avoiding a recession may already be in the rearview mirror, according to JPMorgan strategists led by Marko Kolanovic, the bank’s chief global markets strategist.

Minsky Moment Nearing

The analysts referred to current challenges as a possible “Minsky moment,” named after the American economist Hyman Minsky, who famously predicted that extended bull markets naturally end in epic and monumental collapses. A Minsky moment happens when the inevitable check comes due, and the house of cards finally falls down. JPMorgan analysts wrote that our Minsky moment is nearing as the past few weeks alone have seen a number of economic and geopolitical threats to the world, including banking crises on both sides of the Atlantic, China striking a new diplomatic deal with Saudi Arabia and Iran, and Chinese President Xi Jinping’s high-profile trip to Moscow and visit with sanctioned Russian counterpart Vladimir Putin, who was recently issued an international arrest warrant for war crimes committed in Ukraine.

Forecasts from JPMorgan and Other Banks

JPMorgan isn’t the only major bank to have downgraded its economic forecasts in recent weeks; Goldman Sachs also told clients last week the banking crisis could deliver a severe blow to U.S. economic growth. Former Treasury Secretary Larry Summers has warned multiple times in recent months even before the banking crisis that the economy could be headed for a “Wile E. Coyote moment,” having already run off a cliff edge but still blissfully unaware of the sudden crash about to happen.

The longest bull market in US history that began in 2009 only ended in 2020 because of the COVID-19 pandemic. The short-lived 2020 recession was quickly replaced by another ferocious bull market in 2021, but after a year of slowing growth, the long-awaited Minsky or Wile E. Coyote moment may have finally arrived.