BRYAN, Texas (KBTX) – Following recent bank failures and the federal government raising interest rates, Sorin M. Sorescu, finance professor at Texas A&M’s Mays Business School, came to First News at Four on Monday to discuss the future of the economy speak.
In an article published in Texas A&M Today, Sorescu called the Fed’s rate hike “unprecedented.” Sorescu said it has been more than four years since US interest rates have risen rapidly and the national debt has been higher.
“The federal government ends up paying these interest rates on the national debt, at least on new loans,” Sorescu said. “The rate hikes come after two major banks failed in part because interest rates rose.”
Sorescu said if the crisis is contained with the banks, the economic impact will be minimal.
“Yes, there were two bank failures, there were losses, about $33 billion in losses,” Sorescu said. “These losses have been absorbed by the FDIC from the insurance fund, so taxpayers are not directly impacted.”
If the crisis continues, there could be more bank failures, Sorescu said.
“We conducted a study at Texas A&M University and uncovered over $1 trillion in unrecorded losses across the banking sector,” Sorescu said. “Most of these are due to Federal Reserve rate hikes. These are all paper losses and paper losses don’t become real unless people panic and take the money out of the bank.”
This panic caused the Silicon Valley Bank to collapse with $20 billion in paper losses.
“If we don’t contain prices and restore confidence in the system, depositors may want to remove money from the banking system, which could lead to additional losses and additional bank failures.”
If that happens, Sorescu said, the economy would face a recession.
“We cannot operate without a solid back-up system that helps small, medium and large companies access capital,” Sorescu said.
While high interest rates are used to fight inflation, Sorescu says her studies have shown that high interest rates have unintended consequences.
“Some economists, myself included, believe that we should address the root causes of inflation that is overspending,” Sorescu said.
Despite the current economic situation, Sorescu is “cautiously optimistic” about the future.
“We have challenges,” Sorescu said. “One of them is the national debt and the skyrocketing deficit, which is probably why we are here today. The other challenge, I think, is the declining standard of living in the middle class.”
Sorescu hopes policymakers can come together to address issues, but in the meantime prepare for the possibility of prolonged inflation.
“Consider at least investing in the type of asset classes that allow you to do well in inflation, and that would be government bonds, bonds and inflation-protected things,” Sorescu said.
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