Pros and cons of the recent financial shock, a minor financial crisis can actually be a good thing

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Baird Private Wealth Management discussed the pros and cons of the recent financial shock. Following the SVB crisis, banks will likely prioritize strengthening their balance sheets over increasing lending. This may have adverse effects on small businesses, which are struggling to remain profitable due to the pandemic’s impact on consumer behavior and labor costs.

“A soft landing is not yet out of the question given consumer resilience and the nascent success of the government’s emergency programs, but all else equal, financial shocks are bad for economic growth,” added the analysts. However, while in a vacuum, a banking shock is negative, the analysts noted that it could be helpful if it (1) assists in the Fed’s battle against inflation, and (2) doesn’t spiral out of control.

“Remember, the Fed raises rates explicitly to reduce demand in the economy –less demand, weaker growth, less inflation,” said the analysts, noting that a banking shock that tightens lending conditions without causing a financial system collapse, could prove an ally to the Fed’s ultimate objective of achieving price stability in the long term. And given the Fed’s laser focus on quashing inflation (at any cost), this shock could actually be of use.