Shillong, April 7: After the bailouts of Silicon Valley Bank and Credit Suisse, Raghuram Rajan, the former chief economist of the International Monetary Fund, warned that the banking industry was destined for greater instability. Rajan anticipated the global financial crisis more than ten years ago.
Rajan, who served as governor of the Reserve Bank of India, claimed that the financial system has become fragile as a result of a decade of free credit and a rush of liquidity from central banks.
Rajan stated in an interview in Glasgow, “I hope for the best but believe that there might be more to come, partially because some of what we witnessed was unexpected. The main issue is that very easy money and great liquidity over an extended period of time produce perverse incentives and perverse institutions that are vulnerable to collapse when everything is reversed.
His remarks reinforce the cautions that the issues at SVB and Credit Suisse are a sign of more serious underlying issues with the banking system.
In 2005, while serving as the IMF’s top economist, Rajan gave a lecture in Jackson Hole that foresaw the global financial crisis and warned against it, prompting former US Treasury Secretary Larry Summers to label him a “luddite.” While serving as the Indian central bank’s president from 2013 to 2016, Rajan, who is currently a professor at the University of Chicago Booth School of Business, received praise for his management of the Indian economy.
Following the crises at SVB and Credit Suisse, bank shares fell, but central banks continued to tighten monetary policy in an effort to control inflation.