Economics/Class Relations

Nobel-prize winning economist on SVB fallout

March 18, 2023



When Fortune’s Shawn Tully spoke with Nobel-winning economist Douglas Diamond late last year, Diamond had just been awarded the prize for his work on bank runs and financial crises.


Diamond told Tully at the time that he was worried about the potential impacts of the Federal Reserve’s interest rate hikes.


“One of the Fed’s reasons for existing is to promote financial stability,” Diamond said. “The Fed left rates too low for too long with no spinouts going around the track. Now, they have to ease on the brakes. But if they slam on the brakes, they will cause a crash.”


Diamond said the Fed’s persistence to rein in inflation would hit the bond portfolios of every bank that believed the policy of easy money would continue holding rates at near-zero.


So, was Silicon Valley Bank just the first bank to fall? In a new interview with Tully, Diamond notes the picture is more complicated than that.


Tully writes, “in our hour-long interview on the SVB debacle, Diamond stated that though Fed policy hurt, it wasn’t the main reason for the implosion. Nor did SVB suffer the classic ‘sound bank wrecked by a stampede’ scenario. Instead, SVB deployed just about every bad policy on both the assets and liabilities sides of its balance sheet. For Diamond, SVB is a case study in how setting a rickety structure to enable breakneck expansion created daunting risks that prudently run banks, despite the Fed’s huge run-up in rates, have avoided.”


To understand just how risky SVB’s structure was, read the rest of the interview below.


The economist who won the Nobel for his work on bank runs breaks down SVB’s collapse—and his fears over what’s next

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