Watching an “old-fashioned bank run” is enough to give anyone the shivers, says Paul Krugman in The New York Times. But the collapse of Silicon Valley Bank is nothing to worry about. Despite its fancy name, SVB didn’t lend money out to risky tech start-ups – the risky start-ups just deposited their cash there and used it as a holding bank. The problem was that the government insures deposits of only up to $250,000, much less than most of SVB’s customers had stashed away. So when word got out that the bank had some relatively minor financing issues, everyone immediately tried to withdraw their cash – rendering SVB insolvent overnight. There’s virtually no risk of contagion, especially now the US government has bailed out depositors. And the underlying problems don’t apply to most other financial institutions. So relax. “SVB isn’t Lehman, and 2023 isn’t 2008.”
Perhaps, says James Surowiecki in The Atlantic. But the episode has provided a portent of a scary phenomenon: a bank run in which social media was a “major player”. Twitter was flooded with “dubious rumours and hysterical predictions”: people warned of a “Start-up Extinction Event” and a trillion-dollar bank run. The problem with this sort of talk is that it doesn’t matter whether or not it’s true – if enough people believe it, and rush to withdraw their own cash from their own bank, it becomes a “self-fulfilling prophecy”. Social media is basically designed to encourage “herding and trend-following” – exactly the opposite of what you need to avoid a stampede to ATMs. What happens when it’s a better-known bank than SVB, with millions of customers all reading the same rubbish online? Social media will “profoundly shape” the next financial crisis we go through. “It doesn’t feel like we’re ready for it.”