Raghuram Rajan: Former Reserve Bank of India Governor Raghuram Rajan has discussed about the global economy and global economic challenges. He believes that the world’s largest economy (America), which has recently faced the collapse of three big banks, still has many more challenges ready for it. In a way, this economy is standing at the mouth of a time bomb in which there is a danger of harmless capitalism, due to domino effect, banks are facing many challenges.
Raghuram Rajan answers important issues in podcast
In a podcast with Timur Baig, Chief Economist of DBS Bank, Raghuram Rajan said that the way the US authorities handled the banking crisis, it was expected to a large extent. Because perhaps they had an idea that due to this crisis it would be difficult to handle the economic situation there and panic could spread.
Current solutions only short term solutions – won’t work in the long term
Raghuram Rajan said that “I think the short term problem has been solved through the insurance placed in front of the deposits but the long term problem is still going to persist. He also feels that the depositors in front of the banks at this time Both managing and growing safe havens is emerging as a challenge as depositors seek safety on their money. Banks in the US are faced with the challenge of maintaining long-term profitability as interest rates on safe assets continue to rise. And investors are diverting their money there.”
Rajan emphasized that the continuous increase in interest rates in the economic policy is preparing such a path in front of the banks, to cross which they will have to take tough measures. Quantitative Easing has also spread there and due to this there have been many changes in the economic scenario which are different from the old times. Banks are already facing the fear of recession and in such a situation, problems are increasing for some small and big businesses and they are facing huge difficulties from repaying their loans to service loans.
Why are some banks facing problems
From the year 2022, the Federal Reserve has increased its interest rates by up to 4.5 percent and its effect has come on the likes of Silicon Valley Bank and First Republic Bank. Due to the steps taken to control inflation, there was a strong increase in bond yields as well. However, another banking giant, Credit Suisse of Switzerland, was caught in huge financial troubles until the US authorities made efforts to secure depositors’ money in view of the situation.
Looking at all these circumstances, Raghuram Rajan believes that whatever efforts are being made to save the banking system from collapse are increasing riskless capitalism in a way and are not a permanent solution. Such concrete steps will have to be taken soon regarding these which will prove to be a relief for the banks as well as their depositors.
read this also