Rescue SVB costs taxpayers nothing? ‘There’s no free lunch’

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The fact that the US government keeps the system afloat and guarantees the deposits after the chaos at various investment banks will indirectly cost taxpayers money, says macro economist Edin Mujagic.

“Americans can trust that the banking system is safe.” That said US President Joe Biden on Monday, after Silicon Valley Bank (SVB) and Signature Bank collapsed over the weekend. “Your deposits will be there when you need them.” He also added that the banks will bear the cost of this. The taxpayer would not pay a dime.

Mujagic has reservations about that. ‘Economists then say: there is no free lunch. I think in the rush to draft a statement they forgot one word: direct. It won’t immediately cost taxpayers money.’ In the long run, yes.

Firstly, because the banks will eventually pass on the costs they have to incur to the end customers, Mujagic expects. “Those are the same taxpayers.”

Previously, expectations were that the Fed would raise interest rates to 5.6 to 5.7 by later this year. That expectation has now dropped to 4.5 percent.’ (ANP / AFP)

Secondly, because the fall of SVB and Signature Bank could have an effect on the interest rate decisions of the central American bank (the Fed). Some stock market analysts are speculating that the Fed may refrain from further rate hikes next week because of the problems in the banking sector.

Greater chance of higher prices

According to Mujagic, that would mean that inflation is not being addressed as necessary. ‘This increases the chance that the higher prices will continue to affect consumers for much longer. Although these are indirect costs for the taxpayer, they are indeed costs.’

“I can hardly imagine the Fed not raising rates this week. As a compromise, they could increase by 25 basis points instead of 50′

Edin Mujagic, Macroeconomist

Earlier expectations were that the Fed would raise rates to 5.6 to 5.7 by later this year, Mujagic said. Due to the problems in the banking sector, that expectation has already fallen to 4.5 percent. ‘While the other preconditions have not changed. The labor market is still running too smoothly. Inflation remains too high.’

Mujagic does not expect the interest rate hike to be completely overturned later this week. ‘I can hardly imagine that. As a compromise, they could raise interest rates by 25 basis points instead of 50. There is no avoiding raising interest rates.’

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