Silicon Valley and Credit Suisse are tableaux, the real picture is yet to come, warns Raghuram Rajan

Former RBI governor Raghuram Rajan has warned that the banking crisis may deepen in the coming days. Recently two big banks in America drowned and Europe’s leading bank Credit Suisse was sold. Rajan said that for a decade, central banks have become addicted to easy money and huge liquidity. Now they are tightening the policy which has created a crisis in the financial system. Rajan has also been the Chief Economist of the International Monetary Fund (IMF). Rajan, currently teaching at the University of Chicago Booth School of Business, was the RBI governor from 2013 to 2016.

According to a Bloomberg report, Rajan said, ‘I expect a better situation but this crisis may deepen in the coming days. This is because some of what happened was not expected. The problem is that easy money and high liquidity over a long period of time creates a structure that makes it difficult to make a comeback. Silicon Valley Bank and Credit Suisse are indicative of the problems in the global financial system. As the Chief Economist of the IMF, Rajan had already predicted the Global Financial Crisis in 2008. He warned of a crisis in the banking sector in his Jackson Hole speech in 2005. Then US Treasury Secretary Larry Summers made fun of him.

Addicted to banks

Rajan said that governments have given free ride to central bankers. They are rapidly reversing the steps taken during the decade following the 2008 financial crisis. The impact of the monitoring policy is very high. Central banks have flooded the system with liquidity, which has increased the difficulties of banks. They have made the system addicted to it. Flooded the system with low return liquid assets. Now the banks are saying that enough is enough. What will we do with it? In March, $ 400 billion was withdrawn from American banks.