“We’ll be able to return to our regular crisis programming.”

Lee Heidhues 3.13.2023

Since last Friday I have been trying to sort through all the events surrounding the collapse of Silicon Valley Bank, the intervention by the Feds and, now, a blizzard of reporting on what comes next.

It took a column by Nobel Prize winning economist Paul Krugman to clear the air and provide a reality check.

Excerpted in The New York Times – Paul Krugman 3.13.2023

If 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.

While the value of bank deposits is federally insured, that insurance extends only up to $250,000. S.V.B., however, got its deposits mainly from business clients with multimillion-dollar accounts — at least one client (a crypto firm, of course) had $3.3 billion at S.V.B. Since S.V.B.’s clients were effectively uninsured, the bank was vulnerable to a bank run, in which everyone rushes to withdraw money while there’s still something left.

And the run came. Now what?

Even if the government had done nothing, the fall of S.V.B. probably wouldn’t have had huge economic repercussions. In 2008 there were fire sales of whole asset classes, especially mortgage-backed securities; since S.V.B.’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 S.V.B.’s fall led to runs on other medium-size banks.

That said, on precautionary grounds government officials felt — understandably — that they needed to find a way to guarantee all of S.V.B.’s deposits.

It’s important to note that this doesn’t mean bailing out stockholders: S.V.B. has been seized by the government, and its equity has been wiped out. It does mean saving some businesses from the consequences of their own foolishness in putting so much money in a single bank, which is infuriating — especially because so many tech types were vocal libertarians until they themselves needed a bailout.

Indeed, probably none of this would have happened if S.V.B. and others in the industry hadn’t successfully lobbied the Trump administration and Congress for a relaxation of bank regulations, a move rightly condemned at the time by Lael Brainard, who has just become the Biden administration’s top economist.

A notice hangs on the door of Silicon Valley Bank (SVB) located in San Francisco, California, U.S. March 10, 2023. REUTERS/Krystal Hu

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 S.V.B. 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.