History of Banking Crises Holds a Warning for the Fed

March 20, 2023


To brake? Or to break?

For central banks throughout history, there has been a recurrent tension between price stability and financial stability. Raising short-term interest rates acts as a brake on economic activity by increasing the cost of credit throughout the financial system.

But raising rates can also break financial intermediaries such as banks. It’s close to impossible to apply brakes to the economy without breaking something – even if investors and policymakers never tire of fantasies about soft landings, immaculate deleveragings or Goldilocks scenarios.

Niall Ferguson is a Bloomberg Opinion columnist and the Milbank Family Senior Fellow at the Hoover Institution at Stanford University, He is also the founder of Greenmantle, an advisory firm. Publications include Doom: The Politics of Catastrophe.

Originally published in Financial Review.

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