Fear and trepidation are normal responses to a banking crisis. The impact of the collapse and subsequent government takeover of Silicon Valley and Signature Bank are not fully known. At the time of this writing, there has been no widespread panic in financial markets.
Many nations endure banking crises. Our professional colleagues in Lebanon give us insight.
From 2019 to 2021, Lebanese GDP per capita dropped more than 36%. The banking sector ceased functioning, neither lending nor taking deposits. When banks allow depositors to withdraw U.S. dollar deposits, it is at rates well below the market value. Ordinary people, including police officers, are robbing banks to withdraw their own money! As usual, however, influential people were able to get their money out of the banks before the collapse.
Lebanon recently devalued its official exchange rate by 90%, from 1,507 Lebanese pounds per dollar to 15,000 pounds per dollar. However, colleagues in Lebanon report the black-market exchange rate is currently over 90,000 Lebanese pounds per dollar.
Lebanese inflation was about 85% in 2020 and 155% in 2021, so prices change daily. Much of the country’s population has become impoverished since the currency’s value plummeted. The savings of the middle class were wiped out.
Two causes of the crisis include oversized government debt caused by years of government deficits and cronyism between the banking sector and the government. Foreign lenders are unwilling to bail the country out without reforms. The crisis is especially intractable because of the political paralysis between different factions. Reforms that could restore the trust of investors are not adopted.
Even with these hardships, the Lebanese people are resilient. Emigrants send money to their families. Our colleagues tell us people are returning to hotels and restaurants, and life goes on. The Lebanese people have an admirable knack for figuring out how to make do and improvise.
The United States, like Lebanon, has years of government deficits, political polarization and a ballooning government debt.
There are also major differences. Our economy is much larger, and we enjoy the exorbitant privilege of the U.S. dollar being the world’s reserve currency. Our debt is in our own dollars rather than a foreign currency. So, as our most recent banking crisis continues to unfold, even in its worst-case scenario, we Americans are unlikely to bear the burden Lebanese citizens have borne. Whatever happens, maybe we can tap some of their grit and courage.•
Bohanon and Horowitz are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.