Banking crises are old hat in capitalism, and much of what ails us these days is first and foremost a banking crisis. The question is whether that matters in diagnosing the cause, and the apparent solution for the recession du jour? It does…maybe.
Economic contractions brought on by a banking crisis must be distinguished from downturns born of what some might call the growth cycle’s old age. In the latter, the central bank takes away the proverbial punch bowl in an effort to reduce the risk of inflation. An extended period of economic growth tends to elevate inflationary pressures, which compels central bankers to raise interest rates. Elevating the price of money, in turn, raises the risk of recession.
Of the two basic drivers of recession, the former describes the source of our current predicament. The missteps by the financial sector, in other words, planted the seeds of this downturn. Recessions born of banking crises aren’t unprecedented, but they’re relatively rare. Good thing, too, since the blowback is particularly difficult to solve, at least in a timely and obvious manner.