Current financial crisis caused by an excessively loose monetary policy
The market interprets the government's decision to guarantee the deposits of Silicon Valley Bank as a signal that the Federal Reserve would abandon its attempts to control inflation. That's the view of Mohamed El-Erian, the chief economist of Allianz, who said: “With the US, SVB-related bailout going beyond what many expected, markets see it as more than protecting deposits and small tech.”
“The immediate move in two-year bonds points to the view that, by treating this as a systemic threat, the Fed will also retreat from its inflation battle,” he added.
During CNBC's "Squawk Box" on Monday, El-Erian declared that "we are now in a different world" and claimed that the Fed's monetary policy was to blame for the banks' current situation.
“However, it is why we are here that’s important,” he continued. “We’re here basically because we had a prolonged period of overly loose monetary policy. When it came to adjusting monetary policy, the Fed did not act fast enough.”
He emphasized that even while there is a tendency for depositors to move their accounts, there is no longer any risk to their funds.
“It is almost impossible now to go back on unlimited deposit guarantees,” El-Erian said, since the government went above and beyond the regular $250,000 FDIC deposit protection maximum for SVP and Signature Bank clients.
El-Erian stated: "I would raise 25 basis points" if he were on the Fed panel making the decision to raise interest rates at its meeting later this month. “I would make it very clear that I have a set of tools to deal both with inflation and financial security.”
“We have an inflation problem, and the longer we allow it to get embedded into the system, the greater the cost to society,” he said.