After the high-profile failures of Silicon Valley Bank and Signature Bank last month, U.S. officials have assured Americans that the financial system is sound, and that depositors will get their money back. But one seasoned investor who predicted 2008’s great financial crisis thinks that more chaos will unfold.
“Other things will break, and who knows what they will be,” Jeremy Grantham, the co-founder and chief investment strategist at asset management firm GMO, told CNN in an interview Thursday. “We’re by no means finished with the stress to the financial system.”
SVB collapsed in part because it had placed big bets on longer-term bonds, the value of which plunged amid the Fed’s persistent rate hikes to battle inflation. And while some market players thought the bank failures may lead the Fed to temporarily halt its interest rate increases, the central bank hiked rates about a week later by 25 basis points.
Grantham believes that the Fed’s low interest rate and easy money policies over the past several years have contributed to an “everything bubble” in which investors pursued risky investments and untenable businesses. And he believes that the Fed’s low interest rates during the pandemic created a major financial bubble. So he isn’t against the Fed’s interest rate hikes—which is what he says the economy needs right now.
He points to former Fed Chair Paul Volcker’s tenure as a model for current Fed Chair Jerome Powell. Volcker served two terms—from 1975 to 1979, and from 1983 to 1987. To cool down high inflation, he instituted a series of aggressive interest rate hikes, which hit 19% at one point (today, the rate is between 4.75 and 5%). Those rate increases were succeeded by a double-dip recession.
“If Powell could just channel a little bit of Volcker, that would be a distinct improvement,” Grantham said.
So far, the Fed has raised rates nine times since early 2022, marking the fastest pace of rate increases in history. The inflation rate has gone from a 40-year high last June of 9.1%, to the current rate of 5%.
