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Bailouts, low rates, and their impact on financial stability

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  • Sheila Bair

Abstract

A bail-out culture has infiltrated our financial system, with extraordinary procedures recently used to ignore deposit insurance caps in resolving two mid-sized bank failures. It would be desirable to have a regime where supervisors and regulators were empowered to act decisively when problems emerge, while accepting that banks do sometimes fail and they should be handled with consistent rules and clear communications to the public. Moreover, the Federal Reserve needs to be more cognizant about the linkages between monetary policy decisions and financial stability: sustained eras of very low interest rates create inflated asset values and excessive leverage- conditions that make our financial system highly vulnerable to serious damage when rates are lifted. As history has shown, financial crises have been responsible for our most serious recessions and must be avoided, even if that prolongs the inflation fight.

Suggested Citation

  • Sheila Bair, 2023. "Bailouts, low rates, and their impact on financial stability," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 58(2), pages 77-84, April.
    • Handle: RePEc:pal:buseco:v:58:y:2023:i:2:d:10.1057_s11369-023-00318-2
    DOI: 10.1057/s11369-023-00318-2
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