Paul Krugman

Paul Krugman @paulkrugman

So I'm seeing some people saying that banking problems will cause a recession, and also that financial dominance, b… https://t.co/8RWUJxpQxQ — PolitiTweet.org

Paul Krugman @paulkrugman

RT @nytimes: In Opinion "SVB isn't Lehman, and 2023 isn't 2008," Paul Krugman writes of the recent collapse of Silicon Valley Bank. "We pr… — PolitiTweet.org

Paul Krugman @paulkrugman

Schrodinger's CPI — PolitiTweet.org

Paul Krugman @paulkrugman

Two risks are a "no landing" scenario, in which economy just doesn't cool off, and an "air pocket" scenario in which past rate hikes finally hit construction employment hard. Absent SVB Fed would probably just keep gradual hiking; maybe even with SVB 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

My story for where we are: inflation came down substantially with no significant rise in unemployment, suggesting a near-vertical Phillips curve, but economy is still running too hot to get it down to target. 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

CPI not great but not grim. Supercore — ex food, energy, shelter and used cars — ticked up a bit on 3-mo basis, but it's fairly noisy; should be set against wages last week, which were mildly encouraging 1/ https://t.co/EWvkjCkYvz — PolitiTweet.org

Paul Krugman @paulkrugman

I mean, if you’re totally into crypto, how likely that you’re carefully thinking through the logic of deposit insurance? You haven’t even figured out what money is! — PolitiTweet.org

Paul Krugman @paulkrugman

Of course I’m boarding a long flight just as this stuff breaks. Will weigh in when I’ve arrived. But on moral hazard: I don’t think expectations of a bailout created this mess. The depositors weren’t that smart — PolitiTweet.org

Paul Krugman @paulkrugman

I think that the risk from it turning out to be systemic after all just trumped the argument that it probably wasn’t. — PolitiTweet.org

Paul Krugman @paulkrugman

But it is infuriating. At a fundamental level, we're arguably talking about a kind of scam: a bank that sold itself on false pretenses. It's really part of the larger story of delusion marketing that includes crypto 8/ — PolitiTweet.org

Paul Krugman @paulkrugman

The good news is that the FDIC has seized the bank, so the stockholders have been cleaned out. Unfortunately, there seems likely to be enough systemic spillover that the Feds will probably have to backstop some although maybe not all the uninsured deposits 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

And of course SVB lobbied successfully for a weakening of regulations that might have prevented the blowup — as Lael Brainard warned in real time 6/ https://t.co/SWGbYcPI12 — PolitiTweet.org

Paul Krugman @paulkrugman

In a deep sense — though not a legal sense — what SVB actually did was a kind of affinity fraud a la Madoff. It managed to convince the VC/startup/crypto etc world that it was one of them, part of their community, and hence trustworthy 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

So what was all the "dedicated to global innovation" stuff about? Some real business — but largely, I think, a form of marketing: a way to sell crypto, startups etc on the idea that SVB was their kind of bank, and hence a place to put large uninsured sums 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

And in fact longer-term securities paid more than short precisely because there was a one-sided risk that what did happen, would happen — that short rates couldn't go down, but could go up. So this wasn't a brilliant investment strategy, just unacknowledged risk-taking 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

SVB did indeed provide services to startups — loans, investment guidance, etc. But that wasn't where it made most of its money. Instead, it basically just attracted deposits and put the funds in long-term securities, a simple carry trade that went very wrong 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

More SVB: I think we can learn a lot about what happened from this 2001 Barry Ritholtz interview with SVB's CEO, which describes it as "the only bank dedicated to the global innovation sector" — which is indeed how it portrayed itself 1/ https://t.co/dTgPar8taW — PolitiTweet.org

Paul Krugman @paulkrugman

RT @nbeaudrot: "I never thought the leopard would eat MY face", said the crank libertarian venture capitalists who put his money in the Ban… — PolitiTweet.org

Paul Krugman @paulkrugman

RT @Noahpinion: Helpful thread. — PolitiTweet.org

Paul Krugman @paulkrugman

RT @paulkrugman: OK, some very early morning thoughts on SVB, and why it probably isn't a harbinger for the banking system as a whole — why… — PolitiTweet.org

Paul Krugman @paulkrugman

What I don't have a sense of is how much this will damage the VC financial ecosystem — or how much the rest of us should care. But — hoping these aren't famous last words — this looks at most like a fairly narrow sectoral crisis 14/ — PolitiTweet.org

Paul Krugman @paulkrugman

And because SVB was basically buying agencies and Treasuries, which are safe assets, its failure won't cause anything like the crash in MBS and run on repo that followed the Lehman collapse. Systemic issues much less obvious 13/ — PolitiTweet.org

Paul Krugman @paulkrugman

Maybe the important point is that all of this looks fairly sui generis. Other banks like SVB could be in the same fix — but which are these similar banks? Probably doesn't herald a wave of bank runs 12/ — PolitiTweet.org

Paul Krugman @paulkrugman

It's not at all clear whether SVB was inherently insolvent. The market value of its investments fell when long rates rose, but its earnings may still have been enough to cover interest on its deposits. But big deposits made it vulnerable to a classic bank run 11/ — PolitiTweet.org

Paul Krugman @paulkrugman

The reason is option value: short rates can go up but not down. Which means that betting on the spread is risky. If and when short rates go up, you're in trouble. They did, and SVB was. 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

So it was basically a kind of carry trade. The problem is that there was a reason long-term rates were higher than short-term. Wrote about it back in 2008: strongly upward-sloping yield curve is inevitable when short rates are near the zero lower bound 9/ https://t.co/JwmEKMfSep — PolitiTweet.org

Paul Krugman @paulkrugman

SVB had little of this. It was sitting on a huge pile of cash, without good places to put it to work. So what it did was put a lot of money into long-term securities, which at the time were paying much higher interest than short-term assets, incl deposits 8/ https://t.co/Yo7HotBmqt — PolitiTweet.org

Paul Krugman @paulkrugman

Conventional banks also earn money from credit card balances, which is similar but even more so, with a lot of inertia in the customer base 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

Conventional banks make money in part because they know something about/have special relationships with their borrowers. They lend money to businesses and consumers, at above market rates bc there's default risk, which they think they can manage. 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

There were two problems with this business model. First, the bank attracted big accounts, far larger than the 250K insured by the FDIC, making it vulnerable to a classic bank run. Second, it didn't really have any expertise in putting that money to work 5/ — PolitiTweet.org