Moment of Reckoning

In post-Covid times, the Fed embarked on a most aggressive and irresponsible monetary policy of hiking interest rates, leading to predictable financial instability all over. All other countries including India have been blindly following its prescriptions even when interest rate hikes were clearly failing to arrest inflation

- GOVIND BHATTACHARJEE

Apparently, the US Fed has learnt very little from the 2008 meltdown of the financial sector. Before that crisis, it thought, like most Western economists, that economic disasters could happen only in volatile emerging markets and that developed economies were far too sophisticated to fail, their financial institutions too sound to crack. When the subprime crisis erupted in 2008-09, triggering the most catastrophic global economic collapse since the Great Depression and the banks, mortgage lenders and insurers failed one by one, and then the contagion started spreading across the globe, shrinking economies that made up three quarters of the global GDP, economist and central bankers were taken aback.

The failing institutions and banks considered too big to fail had to be bailed out by the Fed and the US government, while regulatory measures were strengthened by taking various steps, most importantly by the Dodd Frank Act. Most of these economies had recovered through a slow and painful process, but even after 10 years, when Queen Elizabeth-II had asked in 2018, “Why did nobody notice it?”, economists had no idea. That question should haunt the US Fed again, and make it reflect on the consequences thrust upon the global economy when within a span of merely a year, the interest rate is raised from almost nil to 5 per cent.