Paul Krugman Debunks Myths About the SVB Collapse and Reassures Investors

The collapse of Silicon Valley Bank has left a cloud of uncertainty in the markets, with many fearing a repeat of the 2008 financial crisis.^[0] But according to Nobel economist Paul Krugman, these fears are unfounded and the collapse of the tech-focused bank is unlikely to cause economic doom.

The FDIC stepped in to take over SVB last week and fully back its depositors, even those with balances above the customary $250,000 threshold.^[0] President Biden has promised the policy move will not be a bailout and will not cost taxpayers anything – though Krugman disagrees.^[0]

At the heart of the SVB collapse is the bank’s inability to match its investments’ maturities to depositors’ demands.^[1] SVB’s deposits grew rapidly due to venture capital investments, and the bank invested heavily in bonds that lost value as interest rates picked up.^[2] It had a small proportion of retail clients compared to tech startups and their founders, making it more prone to a bank run.

The bank had $80 billion of mortgage-backed securities on its balance sheet, with a weighted average maturity of over 10 years.^[1] This mismatch between deposits and investments meant SVB was destined for big operating losses, with the bank having to pay more interest on deposits than it was earning on its bonds.^[3]

Krugman has identified four myths about the SVB collapse that are being wrongly assumed by markets. First, that the failure of a large bank can cause a financial crisis. Second, that the size of SVB’s failure is unprecedented. Third, that the failure is a result of the Federal Reserve’s decision to raise interest rates. And finally, that the bailout of SVB will cost taxpayers money.

Analysts are predicting that there is a 76% probability that the Federal Reserve will increase interest rates by a quarter of a percent at the upcoming meeting, and a 24% chance of holding off on rate hikes.^[0] While the collapse of Silicon Valley Bank has sparked a wave of panic in the markets, Krugman insists that the fears of economic doom are largely unfounded.^[0]

0. “Nobel economist Paul Krugman says the Silicon Valley Bank collapse has led to ‘apocalyptic rhetoric' in markets, but almost none of it is true” Yahoo Canada Finance, 17 Mar. 2023, https://ca.finance.yahoo.com/news/nobel-economist-paul-krugman-says-132330069.html

1. “Will the collapse of SVB trigger a stock market crash?” Motley Fool UK, 18 Mar. 2023, https://www.fool.co.uk/2023/03/18/will-the-collapse-of-svb-trigger-a-stock-market-crash

2. “Why did the $212bn tech-lender Silicon Valley bank abruptly collapse?” The Guardian, 17 Mar. 2023, https://www.theguardian.com/business/2023/mar/17/why-silicon-valley-bank-collapsed-svb-fail

3. “The economist who won the Nobel for his work on bank runs breaks down SVB's collapse—and his fears over what's next” Yahoo Life, 15 Mar. 2023, https://www.yahoo.com/lifestyle/economist-won-nobel-bank-runs-160025143.html