The bank failures in the US over the past several days are a stark reminder that the fight against inflation can come at a high cost. It was naive on the part of the Federal Reserve to imagine that it could take interest rates from zero to 4.75% in less than a year without creating mayhem: bankruptcies in the financial sector, a brutal dearth of funding for technology companies and more generally for the highest growth and most promising sectors of the economy, major strains in the real estate market and, last but not least, a looming public finance crisis.
Most governments have borrowed heavily to support their economies during Covid and now find themselves in the untenable situation of having to pay ever higher interest rates to service this debt. Where will the money come from if the private sector slows down and banks struggle to play their vital role supporting economic activity?
