My Take | The chickens have come home to roost in US banking – again

It’s often claimed that those who don’t learn from history are condemned to repeat it. But the current banking crisis unfolding in the United States and spreading to Europe shows that even if you have studied the last crisis exhaustively, you can still repeat it, and come up with new ways to mess up.

The trigger of the current crisis, the collapse of the Silicon Valley Bank, was caused directly by the rapid rise of interest rates to stem high inflation. But why were interest rates kept so low for so long?

It’s because of the last financial crisis, triggered by the real estate market collapse in the United States. You can draw a direct line from then to now. All that is well-understood, and yet, here we are.

History may not offer many useful lessons; it does provide plenty of entertaining, unfortunately often tragic, ironies.

Through much of the 1990s and 2000s, American think tanks and public intellectuals kept decrying Japan’s lost decades and how the policies put in place by the Japanese government and the central bank – one of which incidentally was an early version of what we today call quantitative easing – wouldn’t work.

Then the Asian financial crisis hit; more pitying and supercilious criticism from the same US sources, including future Fed chief Ben Bernanke. Severe austerity and other punishing measures were imposed, almost like moral cleansing, on profligate Asian countries such as Indonesia and South Korea that ended up begging for help from financial institutions such as the International Monetary Fund.

But fear not, America came to the rescue. Time magazine announced that on a memorable cover in February 1999, more than a year after the events. The big headline shouted out: “The committee to save the world – the inside story of how the three marketeers have prevented a global economic meltdown – so far”, the three being then-US Fed chairman Alan Greenspan, Treasury secretary Robert Rubin and his deputy Lawrence Summers.