Top economist Mohamed Al-Arian says it will be difficult to reverse unlimited deposit guarantees after SVB’s collapse: ‘We are in a different world now’

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The crisis and subsequent closure of Silicon Valley Bank has rocked financial markets since late last week. For the protection of depositors and investors, federal regulators announced on Sunday that they would “address any liquidity pressures that may arise.”

Many people described emergency measures a bailout And says they mark a major change in the way the federal government is dealing with the banking crisis. so far, only accumulates until $250,000 Were insured under federal law. But Sunday’s decision from regulators will protect all deposits made at SVB and the crypto-heavy signature bankWho regulators were injured on Sunday, to avoid “systemic risk”.

“We have changed the system,” economist Mohamed El-Arian, president of Queens College at the of Cambridge, told CNBC. squawk box on Monday. He also echoed Roger Altman, founder of the investment bank advisory firm evercorethat “we are in a different world now.”

“Did we need to do all this? I think given the urgency over the weekend and the fact that there was no right policy response, we had to make some compromises,” El-Arian said of the federal government’s intervention.

Despite fears that the failure of the Silicon Valley bank will result in many individuals and small companies losing their deposits, El-Arian is confident that its customers will get their money back.

“Depositors should not worry. Your is fine,” he said. “Going back to the unlimited deposit guarantee is almost impossible now.”

Shortly after the Silicon Valley bank’s troubles began, investors called for federal regulators to protect bank deposits. On Friday, billionaire investor Bill Ackman, head of Pershing Square Capital Management, tweeted how a government relief “Should be considered” if private capital cannot resolve the issue of making depositors whole. After federal officials took action on Sunday, he said the government “did the right thing.”

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Another effect of the banking crisis could be on the Fed’s monetary policy. For the past year, the Fed has been raising interest rates to curb inflation, and it was determined To continue El-Arian said that now that SVB and Signature Bank have failed in the past few days, the Fed may reconsider raising interest rates at its next meeting later this month. Rising rates were the source of SVB’s problems, According to Treasury Secretary Janet Yellen.

“We had a long period of extremely loose monetary policy. When it came to adjusting monetary policy, the Fed didn’t act fast enough, and then it had to hit the brakes,” El-Arian said, referring to the Fed’s interest rate hike.

Although the Fed may consider revising its approach towards interest rates, Al-Arian said the central bank should not completely halt hikes as inflation is still a major problem.

“Markets have voted that the Fed will back down from its inflation fight,” he said. “I would raise 25 basis points, explaining that I have other tools that I can use for financial stability reasons,” he told CNBC.

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