To prevent more bank runs, the Fed should pause rate hikes | Robert Reich

On one horn is their fear that inflation will become entrenched in the economy, requiring more interest-rate hikes.

That means that raising interest rates could cause more runs on more banks. The financial system is already shaky.

But will the Fed see it that way?

But investors and depositors are still worried.

Reportedly, the Biden administration is even in talks with Warren Buffett, the chairman of Berkshire Hathaway, who invested billions to bolster Goldman Sachs during the 2008 financial crisis.

Meanwhile, on the other side of the Atlantic, the European Central Bank last week raised interest rates by half a percentage point, asserting its commitment to fighting inflation.

Yet the higher interest rates, combined with the failure of the two smaller American banks, have shaken banks in Europe.

Credit Suisse had been battered by years of mistakes and controversies. It is now on its third CEO in three years.

One advantage of being a bank (whether headquartered in the US or Switzerland) is that you get bailed out when you make dumb bets. Another is you can choose where around the world to make dumb bets.

In the panic of 1907, when major New York banks were heading toward bankruptcy, the secretary of the treasury, George B Cortelyou, deposited $35m of federal money in the banks. It was one of the earliest bank bailouts, designed to restore confidence.

Confidence was restored, but the underlying weaknesses of the financial system remained. Those weaknesses finally became painfully and irrevocably apparent in the great crash of 1929.