[Insight & Opinion] US Bank Failures and the Prisoner's Dilemma

The policy of neighborhood impoverishment is an economic policy in which one country attempts to solve its economic problems by worsening the economic issues of other countries. It has been a year since the United States tried to raise interest rates amid the highest inflation in 41 years. Even though it was an unavoidable measure, the consumer price index in February still remained high at 6% compared to the same month last year. Countries highly dependent on raw material imports have long been in trouble due to the continued strong dollar phenomenon. Our economy, which has been experiencing a continuous trade deficit, is also growing increasingly troubled.

When Jerome Powell, Chairman of the Federal Reserve (Fed), called for "higher for longer" interest rates, many countries found themselves in a dilemma over their own interest rate policies and could only sigh deeply. This is because they fear that the "babsae" (small bird) trying to follow the "hwangsae" (large stork) might end up with torn legs. Previously, competitive currency devaluation was the problem. Instead of reducing import volumes from trade partners, countries tried to recover their economies and increase jobs by boosting their own exports. On the export side, there were currency appreciation, export subsidies, and on the import side, tariff increases and widespread non-tariff import barriers.

Was the excessive interest rate hike a case of "too much is as bad as too little"? Banks that could not endure the high rates collapsed. Silicon Valley Bank (SVB), a funding source for startups, went bankrupt. The Fed used the full deposit guarantee card, usually reserved for systemic crises, to prevent contagion of the crisis. When New York commercial banks, Signature Bank, also failed one after another, the Fed created a new bank support program that could use up to $2 trillion to support liquidity shortages in financial institutions. The Fed must find a way to support banks and ease inflation without causing a recession, but it does not seem easy. The financial instability in the U.S. reminded us of the forgotten fear of Credit Suisse's bankruptcy across the Atlantic. On the 15th, the Swiss National Bank and the Financial Market Supervisory Authority issued a joint statement promising emergency funding support to Credit Suisse if necessary. The largest shareholder, Saudi National Bank, firmly stated that it had no plans for additional liquidity support for Credit Suisse. Fortunately, on the 19th, UBS, Switzerland's largest financial institution, agreed to acquire Credit Suisse for about $3.2 billion.

The discussion of big-step interest rate hikes due to high inflation has now quietly disappeared from the market. The U.S. stock market, still amid bubble controversies, firmly points out problems with the Fed's rate hikes. Rather, it now argues that the Fed should lower interest rates to ensure financial stability. It is worth watching how U.S. authorities will act after having absorbed so much liquidity only slightly.

The bankruptcy of three banks including SVB does not seem to have a significant short-term impact on the market. So how should we view this issue? In the long term, it seems impossible to deny that U.S. banks may face structural problems. Who will support the high stock and real estate prices pushed up by liquidity? On August 9, 2007, the French bank BNP Paribas suddenly announced the suspension of asset valuation and redemption for three funds invested in U.S. subprime mortgages. Later, Bear Stearns' bankruptcy in March 2008 was a definite prelude to Lehman Brothers' collapse. On September 15 of the same year, Lehman Brothers went bankrupt. We remember that day as a single day of "Free Market Day." The next day, U.S. policymakers did not let AIG go bankrupt. The national will for the free market lasted only one day. Still, it was better then. The Group of Twenty (G20) called for freezing protectionism and urged cooperation. Amid escalating U.S.-China conflicts, great powers prioritize their own interests. The legislation by these great powers, citing "green" and "security," ironically threatens the world, and this situation resembles a prisoner's dilemma, which is worrisome.

Wonkyung Cho, Professor at UNIST / Director of the Global Industry Cooperation Center