PAUL KRUGMAN: Silicon Valley Bank isn't Lehman
Tuesday, March 14, 2023 -- The issues facing the U.S. economy in 2023 are very different from those it faced in its last crisis in 2008. Back then we were dealing with collapsing banks and plunging demand; these days the big problem has seemed to be inflation, driven by too much demand relative to the available supply.
Posted — UpdatedIf there is one thing almost all observers of the economic scene have agreed about, it is that the issues facing the U.S. economy in 2023 are very different from those it faced in its last crisis, in 2008.
Back then, we were dealing with collapsing banks and plunging demand; these days, banking has been a back-burner issue and the big problem has seemed to be inflation, driven by too much demand relative to the available supply.
Oh, there were some echoes of past follies, because there always are. Hype springs eternal; the crypto cult shares some obvious features with the rise and fall of subprime mortgages, with people lured into complex financial arrangements they don’t understand. But nobody expected a repeat of those frightening weeks when the bottom seemed to be falling out of the world financial system.
To make sense of what happened, you need to understand the reality of what SVB was and what it did.
But SVB’s strategy was subject to two huge risks.
First, what would happen if and when short-term interest rates rose? (They couldn’t fall significantly, because they were already extremely low.) The spread on which SVB’s profits depended would disappear — and if long-term interest rates rose as well, the market value of SVB’s bonds, which paid lower interest than new bonds, would fall, creating large capital losses. And that, of course, is exactly what has happened as the Fed has raised rates to fight inflation.
And the run came. Now what?
Even if the government had done nothing, the fall of SVB probably wouldn’t have had huge economic repercussions. In 2008, there were fire sales of whole asset classes, especially mortgage-backed securities; since SVB’s investments were so boring, similar fallout would be unlikely. The main damage would come from disruption of business as firms found themselves unable to get at their cash, which would be worse if SVB’s fall led to runs on other medium-sized banks.
That said, on precautionary grounds, government officials felt — understandably — that they needed to find a way to guarantee all of SVB’s deposits.
The good news is that taxpayers probably won’t be on the hook for much if any money. It’s not at all clear that SVB was actually insolvent; what it couldn’t do was raise enough cash to deal with a sudden exodus of depositors. Once things have stabilized, its assets will probably be worth enough, or almost enough, to pay off depositors without an infusion of additional funds.
And then we’ll be able to return to our regularly scheduled crisis programming.
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