A former IMF official believes the U.S. Federal Reserve has pushed America to the brink of another banking crisis.
Desmond Lachman, who was deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department, says in a new blog post for public policy think tank The American Enterprise Institute (AEI) that Fed Chair Jerome Powell is “inviting a banking crisis.”
With banks already under pressure, Lachman says the Fed is making matters worse by keeping monetary policy tight, and liquidity thin.
The ex-IMF official says it’s a mistake that’s significantly raised the odds of a hard landing for the US economy while pushing lenders to the eve of a fresh banking crisis.
“In 2021, the Fed chose to ignore the markedly expansionary fiscal policy stance when it kept flooding the market with liquidity. The net result was a surge in inflation by June 2022 to a multi-decade high of over 9%.
Today, it seems to be making the opposite mistake of keeping monetary policy tight on the eve of a banking crisis at home and a weakening economic situation abroad. Unfortunately, this raises the risk of a hard economic landing within the next year or so.”
Lachman warns that commercial real estate, which makes up a major portion of US banks’ loan portfolios, is a clear Achilles heel for the industry that could result in the failure of around 385 small and medium-sized banks.
“It is estimated that this year more than $900 billion in commercial property loans fall due. It is difficult to see how those loans will be rolled over without major rescheduling. This is especially the case given how much higher interest rates are now than when those loans were originally contracted.
A wave of property loan defaults will be particularly problematic for the regional banks that are a major source of finance for small and medium-sized companies. Commercial property loans constitute around 18% of those banks’ overall loan portfolios.”
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