environmental impact of water over transition. mohammed: the shockwaves from the collapse of two u.s. banks have been felt around the world. it's the biggest failure since the 2008 financial crisis, when stricter regulation came. so, what lessons can we learn then, and what happens now? this is "inside story." ♪ hello and welcome to the program. i'm mohammed jamjoon. the global financial markets should have been in a better

position after the financial crisis of 2008. governments around the world had brought in strict rules to prevent that type of meltdown. but after the recent collapse of two u.s. banks and the turmoil it caused, some are now beginning to wonder if there's more reason to worry. the failure of silicon valley and signature bank's was as rapid as the intervention of u.s. regulators stepping into guaranty that no account holders would lose any of their money, president joe biden has assured the public the american banking system is safe. customers outside silicon valley bank's headquarters in santa clara, california were relieved after anxious weekend. >> it was quite nerve-racking because our money is banked here. being one of the largest banks in silicon valley, 15th largest in the u.s. overall, i think nobody thought that it should happen and in the manner in which it happened. going into the weekend, i think we were all worried about what was going to have, but i think

the fed coming in and stepping down and giving some comfort was were panicking. a lot of us were panicking. we were trying to get through how we open up a different bank account quickly and also whether we will get our cash back whatever money we have left on the backside. we are here to see if he can extract the money quickly, because liquid cash is what we need to run our operation. mohammed: mohammed: the failure of these two u.s. banks have made people nervous, but governments are moving quickly to reassure their public. the french finance minister says his nation's financial stability is secure. >> europeans have learned all the lessons of the 2008 financial crisis. to strengthen the protection of the banking system and european banks, in particular, french next. you now have a protection that is solid repeat with great seriousness, there is no risk to french banks there is no risk to

the french banking system. i want to say this to all the savers and entrepreneurs who have deposited their funds with french banks. mohammed: while politicians seek to emphasize stability, there have been jitters and volatility on world markets. at the frankfurt stock exchange, analysts remain cautious. >> there is a conviction here that central banks will have to intervene in an emergency. something like in 2008 won't happen when a small fly turned into an elephant with the lehman collapse and almost brought down the entire system. babut, there is definitely a lot of nervousness around. the alright, let's go ahead and bring in our guests. in new york, richard squire, professor at fordham university school of law and an expert on bank bailouts. in london. vicky price, chief economic adviser at the centre for economics and business research. and in berlin, ben aris, founder and editor-in-chief of bne intellinews. a warm welcome to you all and thank you very much for joining us today on in that story

returned, let me start with you today. why exactly did silicon valley and signature bank they'll? what are the reasons for these collapses? guest: it's nice to be with you. i think of this as having two main reasons. one is microeconomic, affecting the whole economy and you want to specific to these banks. the macroeconomic factor is that the u.s. federal reserve in the last few years, especially during the covid years, rented a large amount of money to pay for covid rescue and other federal deficit spending. this caused a lot of money to come out into the economy, kind of like a high tide of liquidity coming in. but then there was high inflation, and the federal reserve started to reverse that process, and so, the money started coming out again that is continuing. so, when you have liquidity rising and falling, it creates

basically rough financial seas. some banks out there are seaworthy and can ride out that those buffets, others cannot. and those two banks were not particularly seaworthy. they had nondiversified exposure to particular industries or to particular asset classes and so , when liquidity started to drain out causing interest rates to rise, they experienced losses on their investments and at the same time, they experienced loss of confidence among their depositors, causing depositors to pullout their cash. mohammed: vicky, these are the biggest bank failures since 2008. i want to ask you first, what were the lessons learned from 2008? and also, should the global financial markets have been in a better position after the financial crisis of 2008? guest: it is very interesting. if you look back where we were, i remember working for the government at the time. in the financial crisis there was all of this discussion at the time about moral hazard, let's not rescue one particular

bank because everyone else would expect to be rescued. but we did learn that the financial markets can be completely disincentivized to hold any shares of all, and people would be incentivized to go and take all the money out if there isn't support from government. so what we're seeing right now is that there was very quick intervention, and i think that looked like it was stabilizing the markets for a while. but it seems to me now that they will need to do more. they have moved in, supporting with government money, federal money in the u.s., and of course. , too, in the u.k. through -- and, of course,, here, too, in the u.k. through the insurance schemes that exist now. i have to slightly correct myself, because the money that is being used has been said very clearly that it does not come from taxpayers, but it comes from whatever it is that the

financial sector is expected to pay for this and the deposit. that guarantee schemes that exist and the funds that exist. but in reality, the end of the day whatever is being put in by , the banking sector is going to have to be paid for somehow. and who knows whether the taxpayer is not going to be involved at some point? . we live in a global banking world now. and the value of of shares in some banks around the world have tumbled after the collapse of these two banks in the u.s. and there is volatility in global markets. what is the risk currently when it comes to contagion in other countries? guest: i think it is relatively small, and so much as this was a specialist bank, specializing in tech and specifically with lots of business in california, it doesn't have a lot of exposure and connections to the rest of the banking sector. i mean, here in europe, we saw stocks and banks across the board tumble, not by too much, 2% or 3%.

that is a sort of level whereby everyone's nervous that they are adjusting their positions because something nasty has happened. there's been a big bank failure in the states, but it's not like the massive selloffs we saw in 2008 where those banks, the u.s. banks were connected to everybody else here in europe. exposure to the credit default options and the subprime market. that spread rapidly. however, because the ecb was so socialized in tech, the most damage to have seen is companies listed on the stock exchange in the world sector. estonia has a very vibrant startup market. they have been affected because it has hit the worse, but it hasn't hit the mainstream of economy in europe. bank stocks reacted. i think the contagion is not going to go very far unless there is a wider banking crisis in the states, which as vicky said at the moment, fed's acted very fast.

it has effectively bailed out 100% of the deposits, which is unusual. normally it is insured up to $250,000. you could guarantee to get that money back. but for the feds to come in and say everything, hundreds of millions of dollars, you'll get it all back, is unusual. but they have done this to shore up the confidence and stop the contagion, to stop the spreading of bank failures. mohammed: vicky, i saw you nodding along. i think the contagion is not going to go very far. the fed acted very fast. do you think europe is effectively insulated from this at this point? guest: not necessarily. we have seen increases in bond yields and we have seen the drops in bond prices, and quite a lot of financial institutions had invested in those would liquidity was being given quite

easily into the system through the covid crisis and also since with the energy crisis we have seen. it's only recently that quantitative easing has stopped. we moved into quantitative tightening in some parts of the world, not quite yet in europe, but certainly in the u.k. what that has meant, of course, is that the value of all those holdings that quite a lot of financial institutions have is now in doubt. and i think that is why we have seen credit rating agencies downgraded the bank sector wholesale, expecting that there would be problems and that it would be much more difficult than perhaps had been anticipated in the very beginning of the crisis, this particular crisis. last week we thought that would be the case.

it looks like perhaps it is not going to be so easily contained as we expected. mohammed: richard, let's talk for a minute about the political dimension to all of this in the united states. this is tricky territory for u.s. president joe biden. because in in 2010, you know, he stood next to former president barack obama when this new legislation that was regulating banks was signed into law. it was declared then and there that there would be no more tax -funded bailouts in the u.s. when mr. biden made a televised address earlier in the week, he didn't even use the word "bailout." critics say the actions effectively constitute a bailout. i mean, what do you say and how difficult is this terrain for him to navigate? guest: it is difficult to navigate politically, there is no doubt about it. if we define a bailout the way i think is the normal definition, which is a government rescue of a private company or private investors who would otherwise taking losses, then this is certainly a bailout.

but the one thing that happened in 2008 was that american politicians learned that it is politically unpopular to be seen to be using the money taxpayer -money from your average american household to save bankers, especially rich or fat-cap bankers. so the rescues that were given recently to silicon valley bank, and signature bank, the government was careful not to rescue the managers themselves. they have lost their jobs. >> not to rescue the shareholders, and also not to rescue long term investors in those banks, basically bondholders. so it was the fact that those groups were not rescued that president biden can say that this is not a bailout. there is no doubt that there were people who were rescued, mainly the depositors in those companies. sometimes we think depositors are just regular individuals, households with maybe $57,000 or

less in the check-ins or savings account. but with svb in particular, you were talking about silicon valley startup companies and venture capital companies that had their corporate transaction accounts or their corporate checking accounts with svb. one company, roku, a streaming service had more than $40 million on deposit at svb. which as was mentioned earlier, is the insured amount of $250,000. so that company should have taken losses under the normal regime, in the absence of a bailout. or at least it should have had to wait for a while to get a recovery. but now it will be paid on time and in full. that is certainly a bailout. mohammed: vicky, one of the more interesting aspects about the collapse of silicon valley bank is that this had all the features of an old-school bank run. but at the same time, this all kind of happened online. i mean, the speed at which this all unfolded really seems to be a feature of the digital age

that we live in. right? this is pretty different than the way this kind of thing used to unfold, correct? guest: absolutely. it can happen very quickly, but we are not talking here about retail depositors. these are all, as we've just been hearing, corporates, so 40,000 accounts, i think they were in the bank, which were held by mainly tech. not exactly startups necessarily, but certainly tech companies that weren't necessarily making any profits yet. the sector had been hit recently, and losses were appearing even bigger. we have been hearing today of cuts in in the numbers employed even by the big tech firms. so what happened at the time is that some of those companies tried to get, you know, use some of the money they had in the bank to meet some of their own obligations. and that seemed to have

accelerated for some reason, you know, over the week. and it was at a time when silicon valley bank tried to raise a bit more money to just balance its books and discovered , everyone realized that there was a bit of a problem, and when they look at what they could sell their books because they to balance their books because they had made all those investments, mainly in bonds and mortgage securities, their value had fallen so significantly that they became insolvent almost immediately. and indeed it was the rapidity. the rapidity with which some of the money was disappearing that was the problem for them. it may not have happened normally. it would take more time and discussions and so on. it must have caught them unawares. . they had to react quickly, and then that spread panic. mohammed: you heard vicki there talk about the impact. i just want to ask you from your vantage point, if these actions hadn't been taken by the biden administration, what kind of impact do you think would have that had on the tech sector

going forward? and what are the wider ramifications of this throughout the u.s.? guest: exactly. i think it is interesting that it is the tech sector, which for the states, is an extremely important one -- it has gotten into a spat china where it's banned all of its exports of architects to china. that is america's looking over the white house, looking at the tech sector to keep it in the lead, as it were, in the global race. and that is what i the reasons why i think they acted so fast in order to backstop those deposits completely, to not destroy the tech sector. there is a moral hazard that if you bank all the deposits then people take untoward risks. and in the way banks are supposed to fail is that people

who have money beyond the guaranteed limit are supposed to lose it. you make an example, that makes people more cautious and they do risk management. and if you put all of your money in one bank, then you are taking a risk. this is where i think the failure of the regulator, the banks took to risk with its short-term liabilities which are deposits that are taken out from day-to-day to day, and they invested it into long-term assets like mortgage-backed securities, which are inflation, sensitive, but then it didn't hedge against the inflation rates. that is basic banking 101. if you are going to do that kind of bet, you should hedge against it. so the fed has been raising rates the fastest time for i forget, 20 years? it has been going up quickly and it has made these assets of svb bank go bad very fast. that is something the regulators should have picked up on and didn't. so people are pointing the finger there as well. but the moral hazards is an

important point, that you are supposed to let the depositor suffer, lose their money, or if their assets are in the bank, it could be recovered over time. they would probably have to wait a year. and i don't think anybody wanted to go there. this is why the fed came in and just said 100% of the posits backed immediately. the deposit insurance fund that is connected to retail, you pay a small tax every time you take a retail deposit in and that covers the $250,000. so that is not on the taxpayer, it is on the banking sector itself. but when you start backing or guaranteeing 100 million dollars, that money has to come from the taxpayer, and that is the problem here. mohammed: richard, i will let you jump in, but i also want to ask you, ben was talking about the fed and raising interest rates. why does controlling inflation

often seem to be the be all and end all when it comes to the federal reserve? and is a policy of raising interest rates too crude of a tool to really control inflation? guest: sure. so let me react first to what ben was saying. i just want to underline something about moral hazard and then i would like to talk to your question about the fed and raising interest rates. first of all, i would need -- to be clear, it is the depositors at those two banks that have had their limits basically waived. and they will recover in full. that has not been announced for the whole sector because of the tremendous problems that would cause. that would come out of the fdic's insurance fund, but that fund will have to be replenished and it will be replenished by what is called an assessment. an assessment is just another word for a tax, just like a

rescue is another word for a bailout. but really using euphemisms here, because words are highly charged. so other banks will have to pay that assessment, which is a tax. and if you are paying a tax, in my view, you are a taxpayer, then that cost will absolutely be borne by the bank's customers and shareholders, many of whom are average americans who own bank stocks as part of their retirement funds. this will impact taxpayers. then there is a moral hazard there that is very perverse, because that is what is happening, the banks that were responsible and hedged risk appropriately will be on the hook to pay for the depositors of the bank that were poorly run. that is the opposite of the incentive that you want to create. in terms of fighting inflation and why the fed does that, the federal reserve has to fight inflation for one reason, because inflation is very clear, ly unpopular. it is very damaging to the

people in office. there is no sure way to get elected out of office or congress or president than to oversee sustained inflation. and the federal reserve realizes that if that happens, then it may reduce its independence going forward. it is supposed to be in the midst, but it cannot be fully independent from such political considerations. so it needs inflation. the only ultimately is effective way to fight inflation is to reduce the amount of money in circulation. inflation occurs when you have too much money chasing too few goods. and whenever you reduce the money stock or arrest its growth, which the fed is doing now interest rates have to go , up. it's a supply and demand a law . you can think of the interest rate simply as the price of

money going forward. let's say i want to borrow some money and i am talking to various banks, if they have lots of money to lend than i am at an advantage. they will compete with each other with a slower interest rate. but money is tight, they don't have as much to land and they are going to charge me more. mohammed: ben, it looks like you wanted to jump in. go ahead. guest: i just wanted to add to that. the fed finds itself in a particularly difficult position. i mean, as you know, the inflation in the states is very high and it needs to fight that. that means hiking rates. but then if it does hike rates, it slows the economy and it puts pressure on more banks who are also exposed to similar investments, even if they are hedged. i consume time, in order to take pressure off the banking sector and to avoid the kind of contagion that vicky was talking about where other people get scared and start selling or trying to sell their bonds and then the value falls and you have a spiraling crisis, the fed is caught between a rock and

the hard place. do they cut rates to save the banking sector or do they hike rates to fight inflation? that the furry tricky decision at the moment. our banking crisis would be far worse than having high inflation. but then if you don't take in account inflation, inflation expectations go up. then that drives inflation, and then inflation starts to run away from you and the fed can't get it back under control. so this is a very delicate moment and i think that is why you're hearing a lot of rhetoric, people trying to calm their nerves, trying to say everything is under control. that is why they came with this 100% backing up of deposits very quickly. because they need to go back to hiking rates in order to deal with the inflation problem. mohammed: vicky, to take a step back for a moment and simplify this reviewers when it comes to , the fed, how much impact does the federal reserve have on the european central bank and on what the european central bank ultimately does? guest: it's really interesting. i think everyone follows what others are doing. it doesn't necessarily mean that

they will raise rates the same rate. in fact, the ecb is determined and says that whatever president macron and others may have said about the financial system in france, they seem to be determined to raise interest rates by their central bank rate, by 50 basis points in the next meeting. very hawkish language being used right now. in a way, it is a bit strange given that inflation is coming down almost everywhere, and not because of anything the central banks have done, but because of a drop in energy prices. and food prices have been forming internationally for the last 10-11 months, although we haven't quite seen that in the shops yet. that all is making a big difference. we had the announcement of our own budget and the forecast that suggests that in the u.k., inflation will be more than halved by the end of the year. because of international factors.

nevertheless, they are looking at each other and saying that we need to raise rates in order to control inflation, when you know it takes a long time for increases in interest rates to have an impact. i think the real worry is much more at the longer-end of the market. what has been happening bonds, quantitative tightening. what i noticed is that the expectations of the market which were possibly for another 25 basis point increase in the fed bankrate, 50 basis points or 25 basis point increase, we may see zero. the market suddenly expects zero increase in order to do precisely what has just been discussed, calm the markets down. mohammed: richard, we only have a couple of minutes left. let me just ask you, the federal reserve is weighing tougher rules for midsized banks

going forward. do you think that is going to happen? how would those new rules be? guest: i think there will be some rule issues that will probably be targeted specifically at the problems we saw at these banks. banks would have to show some kind of hedging to manage the risk that occurs through their investment portfolios especially , when you see interest rates rising to fight inflation. something along those lines. i don't think it's going to be disclosure rules. disclosure rules enable or make it easier for depositors to see whether they are above insurance limits. deposits could be at risk so diversified accordingly. then he is so far is led right now by the republican party, would have the appetite for approving strong, new regulations. but whenever you have a situation or a crisis like this

with some large bank failures, you do have kind of like a just so response. a new rule that targets specifically what happened and i think we see some of that. mohammed: all right, we have run out of time. thank you so much to all of our guests, richard squire, vicky price and ben aris. and thank you too for watching. you can see the program again anytime by visiting our website, aljazeera.com. and for further discussion, go to our facebook page. that is facebook.com/aj inside story. you can also join the conversation on twitter. our handle is @ajinsidestory. from me, mohammed jamjoom, and the whole team here in doha. bye, for now. ♪

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