The International Monetary Fund (IMF) specializes in prescribing solutions to the problems created by its own recipes, ironized the Uruguayan writer Eduardo Galeano. Half a century later, the same could be said of the big central banks, which are facing an epic dilemma after a decade and a half of hyper-expansionary monetary policies: to control inflation it is necessary to maintain the new policy of interest rate hikes. But this raises the risk of a new financial crisis.

The IMF’s new chief economist, Pierre-Olivier Gourinchas, summed up the problem during the meeting of the IMF and the World Bank last week in Washington: “After a long decade of very low interest rates (…), we are entering a highly dangerous phase. The financial risks have grown, inflation is still not under control”

The decade of zero or negative rates inflated financial bubbles and further enriched a global class of investor-speculators who staged a reckless search for yield. Private credit – non-bank loans to companies that complemented the unstoppable expansion of private equity – grew like foam, from $600 billion to $1.6 trillion, according to new IMF data.

The latest turn towards tightening by the Federal Reserve and the other big central banks has not only been necessary to curb inflation but also to rein in speculators. But the rate hikes have highlighted problems that “have been lying beneath the surface of the financial system for years,” the IMF warns.

Now, after the decision to bail out the depositors of Silicon Valley Bank (SVB) and later Sovereign and Credit Suisse, the markets, unaccustomed to being bailed out in times of crisis, “anticipate that central bankers will begin to ease monetary policy before than expected”, explains the IMF in its report. This despite the fact that inflation, highly damaging to the average wage earner, “is well above the target,” he adds.

The ability of finance ministers and central bankers meeting in Washington to resolve this dilemma will determine the outcome of what US historian Gary Gerstle calls the final phase of the “neoliberal order,” referring to the past four decades of deregulation and political promarket.

“Things are changing very fast,” Gerstle said in an interview. “I had a meeting the other day with people from the financial sector who had participated in the IMF/World Bank meeting; everyone is already talking about change. Uncertainty drives new thinking.

The root of the problem, explains Gerstle, author of the new book The Rise and Fall of the Neoliberal Order, is a serious crisis of political legitimacy. Its origins lie in the historic public bailout of financial markets after the Lehman Brothers bankruptcy in 2008.

The injection then into the US banking sector of more than a trillion dollars of public money and a similar bailout in Europe backed by a multi-trillion dollar quantitative easing led by the Federal Reserve, saved the financial system and the investing class. The stock recovery was immediate and spectacular.

Since then, the income of the 10% of Americans with the highest income has risen three times more than that of the poorest 50% and their wealth has skyrocketed 89%, according to data from the University of Berkeley.

But the bailout forever transformed perceptions of this so-called “neoliberal order,” Gerstle argues. “Precisely those who were responsible for the crisis, those who invested in financial assets and the banks, emerged unharmed. And people noticed. Wage earners without financial assets had not recovered the income they lost in the crisis, not even ten years later”.

“In that interval – between 2008 and 2016 or 2017 – politics got out of hand in the US and Europe,” Gerstle explains. “The Tea Party movement appeared on the right, and movements like Occupy Wall Street on the left. We had Brexit, the yellow vests in France, and then Trump.”

Six years later, the paradigm shift is already underway: “Among the four freedoms that define neoliberalism – the free movement of labor, goods, information and capital – none remain,” he sums up.

Now a new crisis is looming. The bankruptcy of the SVB – knocked down by a devastating flight of deposits worth 42,000 million dollars – could be “the canary in the mine”, warns the IMF. Markets in the era of neoliberal finance “always look for the weakest link (…) and the next target of attack may be institutions dependent on short-term financing (…)”.

Few foresee a repeat of the 2008 catastrophe. Banks are more capitalized and there is no fear of an underlying crisis like those of subprime (junk) mortgages. But nothing is predictable. Karen Dynan, an economist at the Peterson Institute in Washington, recalled that when banks like Bear Stearns failed in early 2008, seven months before the Lehman Brothers debacle, few were concerned.