Bank Failures, the Fed and an 'Uncertain Juncture' in the Economy

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The sudden collapse of two midsize banks has caused commotion across the United States.

On Friday, Silicon Valley Bank, which lent money mostly to technology start-ups, became the largest bank to fail since 2008, during the height of the financial crisis. The Federal Deposit Insurance Corporation stepped in, seizing the institution. Then on Sunday, to quell concerns over the health of the broader banking system, regulators took control of Signature Bank.

The volatile weekend provoked fears of a potential financial crisis and on Monday, despite President Biden’s assurances that the American banking system was safe, midsize banks across the country wrestled with market turmoil. Pressure had eased by Tuesday, but uncertainty still hangs in the air: According to two people with knowledge of the matter, the Justice Department has opened an investigation into the collapse of Silicon Valley Bank.

Jeanna Smialek, who writes about the Federal Reserve and the economy for The New York Times, was part of a team of reporters that covered the financial mess as it was coming into view — as well as the Fed’s efforts to clean it up. In an interview on Monday afternoon, she discussed her reporting and what these closures may mean. Read the edited conversation below.

What did your weekend look like?
I had houseguests — I was pretty much the worst host of all time. I spent the entire weekend on the phone.

I am an economics reporter, so on Friday I was covering the jobs report that the Labor Department released. It suddenly became obvious that we needed to stop focusing so much on the jobs report and start covering the unfolding banking crisis.

By Sunday afternoon, we had a lot of stories out there saying that this bank that was in a lot of trouble, Silicon Valley Bank, was trying to find a buyer. We were trying to figure out who was bidding and what the Fed could realistically do to shore up the rest of the financial system, because it became pretty clear that it wasn’t just Silicon Valley Bank that was in trouble. It was this much broader problem in banking. Then late Sunday night, we got the announcements that the Fed, the Treasury and the F.D.I.C. were going to make whole the uninsured depositors at Silicon Valley Bank. We got the announcement that they would also close Signature Bank and that the Fed was setting up a new lending facility to try and keep the system calm. It was a crazy day.

By Monday morning, President Biden was trying to reassure Americans that the U.S. banking industry was safe and that taxpayers wouldn’t take on the brunt of the burden. I think the question on everyone’s mind is, should we be worried?
We don’t actually know the answer to that question yet. There’s definitely some reason to think that this could continue to be a pretty tumultuous period.

But I don’t think anybody who says with confidence that this is either going to blow over or clear up actually knows too much. We’re at a very uncertain juncture.

Can you explain what the Fed’s emergency lending program is?
An emergency lending program is something that the Fed uses when circumstances in markets are what they call unusual and exigent, which basically means they think they need to step in to act as a lender of last resort and make sure that everybody has enough money so that liquidity problems don’t turn into real world solvency problems. So the fact that you can’t get your cash fast enough doesn’t become a situation where you don’t have any cash at all. That’s how I think about it.

The Fed rolls these out in times of trouble; we saw it use them pretty aggressively in 2008. We saw it use them again in 2020 at the onset of the coronavirus pandemic. These are reserved for real moments of crisis, which I think signals some of the seriousness here. But it also says something interesting about the fact that we are in an era when crises seem to have become a lot more frequent.

Silicon Valley Bank is the biggest bank closure since the global financial crisis in 2008. With that kind of comparison in mind, how do you and your colleagues approach your reporting?
The big question here is, are we going to see weaknesses across the entire system? Interest rates have risen a lot over the last year. When interest rates increase, you see vulnerabilities start to surface. Is this the end of the road or is this the canary in the coal mine? I don’t think we know yet.

At the onset of the 2008 crisis, there were a lot of people who thought that it wasn’t going to get as bad as it eventually did. By the same token, in 2020, we thought things were going to be disastrous — and nobody even remembers that there was a financial crisis in 2020.

What are you considering when reporting on a moment such as this?
I typically try to think about what questions a normal person would have. We were covering the breaking news story of these banks getting closed down and who’s getting protected, who’s not getting protected and who’s paying for it. Rather than be alarmist and say, this is going to be the end of the world for you, I approach it from more of a question standpoint, like, what does this mean for you?

The Fed’s next interest rate decision is on March 22. What can we expect?
This is going to be the biggest nail-biter of a Federal Reserve meeting I think I have ever covered.

I think the Fed is stuck in between a rock and a hard place. Does it raise interest rates in this environment or does it wait and see what happens? If you don’t raise interest rates, you risk looking weak on inflation. If you do raise interest rates, you risk exacerbating a financial crisis. It’s hard to guess what they’re going to do because we just don’t have a lot of precedent for something like this.

How do you keep your perspective during high-pressure reporting?
It’s reading broadly and not just reading about the news that you are involved in. Remembering that other things are happening in the rest of the world and interacting with the story you’re on helps you to stay grounded.