Future bank failures can be avoided if the world’s central banks provide sufficient liquidity to banks facing such a problem. The Swiss central bank approved a loan to Credit Suisse for this very reason. The US Federal Reserve has provided $152 billion in new loans to US banks in recent days. Emergency borrowing, however, partially offsets central banks’ efforts to control inflation. Central banks are in a dilemma. By raising interest rates, they increase the risk of a “bank run.” But if they keep interest rates too low, inflationary pressures are likely to continue.

Central banks will try to achieve both: higher interest rates plus emergency liquidity if needed. This is the right approach, but it comes at a price. The US and European economies were already experiencing stagflation: high inflation and slowing growth. A banking crisis will worsen stagflation and likely push the US and Europe into recession.

Part of the stagflation is a consequence of covid-19, which caused central banks to pump out massive liquidity in 2020, causing inflation in 2022. Part of the stagflation is the result of shocks caused by long-term climate change. The climate shock could worsen this year if another El Niño hits the Pacific, as scientists believe is increasingly likely.