With two banks collapsing in just three days, what does it mean for the overall health of the economy? We talked with Ferris State University to get the broad perspective on what it means, and what we should learn from it.
Associate Professor of Economics at Ferris State University Dr. Tyler Watts says, “I think the bank failures we’ve seen recently are a sign that the recession is here. The fed raising interest rates and in the case of Silicon Valley Bank which I’ve read a little more bout, it was a badly managed bank. Who were particularly sensitive to interest rates rising.”
Watts says the collapses are not a reflection of the overall health of the nation’s banks.
“That bank by itself failing, that’s just mismanagement by that bank. It’s not a sign that all of the rest of the banks in the economy are in trouble. I think most of our banks are going to be just fine,” he says.
Bank customers are safe: their deposits up to $250,000 are insured through the FDIC. It’s the investors that have to worry. But in these cases, Watts says failing was appropriate. “I like to see a business that’s managed poorly, fail. That’s how capitalism works… Businesses that lose money need to fail. Otherwise there’s no discipline for other entrepreneurs in the economy to say, ‘hey you have to serve your customers well, you have be a wise manager of your assets.’”
Banks have failed before, two examples include: Citigroup receiving a bailout in 2008 for more than $280 billion in aid to keep them afloat and Bank of America getting $142 billion in 2009.
“The thing about letting a bank fail is like ripping a Band-Aid off. You get the pain out of the way and continue with the healing process. A bailout is just like leaving the Band-Aid on and letting the wound fester underneath,” Watts says.
Overall, Watts echoes President Biden’s comments, that the banking system in America is safe.
“I have confidence the banking system is safe, but it’s not because of anything the President or Congress or the Federal Reserve says. I’m the kind of person who thinks…the banking system would actually be a lot more safe and stable in the absence of bailouts. The Federal Reserve steps in to be the lender of last resort,” he says.