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My grandfather used to say the business cycle was driven by how long it took to forget lessons learned the hard way. He rolled up banks working for The Comptroller of the Currency during the Great Depression.It’s easy for investors to dismiss the ripples from the collapse of Silicon Valley Bank SVIB as contained and nothing to worry about when it comes to a broader portfolio.
But if there’s one thing to know about banking crises, it’s that they are never just about the banks. They may start there, but they don’t end there. Easy financial conditions tend to lead to higher risk-taking and a complacency that long-established patterns will continue. Until they don’t.
As Warren Buffett has been known to observe, only when the tide goes out do you see who’s been swimming naked.
The Worry Is Fear
The failure of two major regional banks since Friday threatens to erode investor and consumer confidence to a degree that could spiral in unexpected ways. And with inflation still raging at the highest levels in 40 years and the Federal Reserve raising interest rates at the most accelerated pace since those years, things are starting to break.
“The worry is about fear,” says Tim Murray, capital markets strategist for multi-asset portfolios at investment manager T. Rowe Price.
In good times, too, policymakers get lax and tend to feel like it is safe to repeal or reduce important protections designed to prevent systemic events and consumer safeguards.
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