How The Bank Crisis May Affect The Economy And America’s Older Workers

So far there is no reliable narrative about what the banking crisis in the United States will mean for the world economy. Even after the implosion of Silicon Valley Bank (SVB
VB
) and Signature Bank, we likely have not heard the last of troubles in regional banking. The latest institution to face a life-or-death moment, First National Bank, is not yet out of the woods, and more surprises may be lurking in the banking system.

As an academic economist with a bull’s-eye focus on the old age security of all Americans, this is the way I see it. The chances for a recession went way up since the federal government takeover of Silicon Valley Bank and Signature Bank on Sunday morning. Recession risk is up because credit has tightened. Businesses and households will find it harder to get loans, reducing growth in the broader economy.

Mind you, putting a brake on credit and loan availability is just what the Federal Reserve has been trying to do by raising interest rates. The Fed started tightening credit exactly one year ago as of this writing—March 17, 2022—and in so doing it inadvertently set up Silicon Valley Bank for its deep trouble last week (though SVB of course deserves much of the blame).

What the Fed is trying to do reminds me when of when I first started to drive. I bunnyhopped my way down a slight hill by tapping on the brakes so I wouldn’t go too fast. The Federal Reserve has been trying to put on the brakes on consumer and business spending by raising the costs of credit without careening into a recession. Even though Fed officials have expressed caution about tipping into recession, I have been worried about signs that the job market is already cooling down.

But in the wake of SVB’s failure—if I can extend the vehicular metaphor—there is a fully loaded big rig of tight credit pushing the economy downhill to recession. It is an open question whether the Fed and Treasury Department will try to put the car in reverse and slow that decline. For its part, the Fed is still expected to follow through with a rate hike when it meets next week, albeit a smaller one than previously expected.

Another way to look at the current recession risk is through the lens of a Minsky cycle, which predicts cycles of easy and tight credit. In Minsky’s famous phrase, stability breeds instability. For SVB, years of plentiful deposits from startups via the venture capital industry led to complacency about interest rate risk.

Now, if the Minsky cycle is indeed turning, the uncertainty facing investors and lenders about where the next bank run is coming from or what bad debts are on whose balance sheets will slow down investments. Business will be nervous about extending their activity and employment and banks will be concerned about lending.

The good news in all of this is that the Federal Reserve may actually scale back their rate increases, as noted above. Moreover, the Fed’s newest lending facility for troubled banks is helping banks cushion their deposit outflows. The federal government’s crisis-fighting announcements of the last week gave me some hope that we are not destined for an incoming recession.

This may be good news for older workers who are trying to stave off poverty in old age by continuing to work. Recessions are bad for all workers, but they are especially harmful to older workers. Older workers who are laid off take major hits to their earnings if they are lucky enough to find another job. Many are not.

For the middle class and above—people who have significant amounts in their 401(k) plans—hits to the stock market may be mitigated by a slower path of interest rate increases by the Fed. If this banking panic can be contained, and if the Fed does indeed change its course on interest rates—two very big ifs—there may indeed be a silver lining in the current economy.