Robert Reich suggests that pausing rate hikes could prevent further bank runs.

The world's financial system is going through a difficult time when it comes to trust. This is why the upcoming gathering of the United States' central bankers holds great significance.

All 12 officials who make up the Federal Reserve Board's Open Market Committee were appointed, not elected. Most Americans are not familiar with their identities, except for the head, Jerome Powell.

As America's central bankers ponder whether to increase interest rates and by how much, they hold the power to determine the future of not only America's economy, but also that of the world.

They are currently facing a difficult decision and are unsure of which direction to take.

They are worried that inflation might stick around in the economy and force them to increase interest rates.

On the flip side, their concern is that raising interest rates further may result in smaller banks facing a shortage of funds to cater to their clients' requirements.

Increased interest rates may pose a threat to additional financial institutions, particularly those that utilized funds from their depositors to acquire bonds with extended maturities when interest rates were lower, including Silicon Valley Bank.

This implies that an increase in interest rates may result in more banks experiencing financial runs. The current state of the financial system is already unsteady.

The two goals of increasing rates to combat inflation and preventing a bank panic are opposing objectives. As the classic tune goes, there has to be a sacrifice. What will be the outcome?

It would be wise for the Federal Reserve to stop increasing the interest rates temporarily to allow the financial system to stabilize. Additionally, inflation is decreasing, albeit at a gradual pace. There is no grounds to jeopardize the financial stability by taking more risks.

However, would the Federal Reserve share the same opinion?

Last week, the Federal Reserve aimed to make sure that the banks were stable enough to allow the Fed to increase interest rates this week without causing any additional bank withdrawals.

The Federal Reserve provided financial assistance to depositors who were not covered by insurance at two banks and indicated that it would do the same for others, effectively broadening the scope of federal deposit insurance to protect all depositors at all banks.

Moreover, eleven of the largest banks in the United States assented to donate a combined sum of $30 billion to support First Republic, which is another smaller bank that got affected due to the disturbance.

The recent event, dubbed a "show of support," received a positive reaction from both Jerome Powell and Janet Yellen, who were pleased with the gesture. It seems likely that they were the ones who arranged for it to happen.

Investors and those who deposit money are still concerned.

Numerous banks in different regions of the United States have followed Silicon Valley Bank's path - investing in bonds that mature later and whose worth has decreased due to the increase in interest rates. A study suggests that approximately 190 additional banks may encounter failure.

The financial health of First Republic continued to be at risk even though it received a cash injection of $30 billion last week. The New York Stock Exchange had to pause trading of its shares multiple times to prevent a sudden and significant drop in value.

The recent decrease in bank ratings by rating agencies such as Moody's has had a negative impact.

Apparently, the Biden government is currently in discussions with Warren Buffett, the leader of Berkshire Hathaway. Buffett invested a significant amount of money to help Goldman Sachs during the financial crisis of 2008.

Over in Europe, the European Central Bank recently increased the interest rates by 0.5%, showing their determination to combat inflation.

Despite the fact that interest rates have grown, and two smaller American banks have collapsed, European banks have been greatly affected.

A few hours prior to the announcement by the European Central Bank, Credit Suisse – a major bank, was granted a lifeline of $54 billion by the central bank of Switzerland.

However, even this action did not fully regain trust. Following multiple days of discussions with regulatory bodies in Switzerland, the US, and the UK, UBS, the largest bank in Switzerland, made an emergency acquisition agreement with Credit Suisse over the weekend.

The foundation of finance is based on the trust people have in banks being secure, and a belief that costs aren't spiraling out of control.

Since the nearly catastrophic event on Wall Street in 2008, which was followed by the unimpressive Dodd-Frank regulation of 2010 and the distressing 2018 law, which freed smaller banks from regulation, trust in American banks has been uncertain.

The news in November that FTX, a major player in the crypto world, was not as strong as it seemed, has added to concerns about the industry. People are wondering why the authorities did not intervene.

The news that Silicon Valley Bank did not possess sufficient funds to meet the demands of its depositors heightened concerns, leaving many to question the whereabouts of the regulators.

Credit Suisse has faced numerous setbacks and scandals, resulting in the replacement of three CEOS in as many years.

The financial regulations in Switzerland are known to be quite lenient, but American bankers have been urging Europeans to ease their financial regulations as well. This has sparked a competition where the bankers are the only ones who come out on top. Lloyd Blankfein, who was the CEO of Goldman Sachs at the time, cautioned Europeans about the possibility of operations being shifted throughout the world and the access to capital being global.

There are a couple of perks that come with being a bank, regardless of whether your main base is in the US or Switzerland. Firstly, if you make imprudent wagers, you will likely receive a government bailout. Secondly, you have the ability to pick and choose where worldwide you wish to take risky chances with your money.

This is the reason why it's crucial for central banks and bank regulators across the globe to not only halt the increase of interest rates but also cooperate to establish more stringent bank policies. The ultimate goal is to safeguard the public instead of engaging in a competition towards deterioration.

The banking industry heavily relies on trust. In the event that the general public no longer has faith in banks, the financial system will inevitably collapse.

During the panic of 1907, when the major banks in New York were on the brink of bankruptcy, George B Cortelyou, who was the secretary of the treasury at the time, infused $35m of federal funds into the banks. This bailout initiative was aimed at reinstating confidence and is considered one of the earliest bank rescues.

However, it proved to be insufficient. The founder of the bank, JP Morgan, gathered the country's top financial experts to come up with a private rescue plan for the banks, similar to the recent $30 billion arrangement.

Trust was regained, but the fundamental flaws in the monetary structure persisted. The flaws were ultimately exposed in a devastating and irreversible manner during the massive financial collapse of 1929.

Former US Labor Secretary Robert Reich is currently a professor of public policy at the University of California, Berkeley. He has authored several books, including Saving Capitalism: For the Many, Not the Few and The Common Good. Reich's latest book, The System: Who Rigged It, How We Fix It, has just been published. Additionally, he is a columnist for Guardian US and offers a newsletter at robertreich.substack.com.