Triggering a cascade of bank runs might be an effective way to cool off an economy.
than they had been a year earlier with the core consumer-price index rising by 0.5 percentage points over the course of the month, a more rapid pace than expected.
But this appearance may be deceiving. The Fed will likely feel compelled to pull back on rate hikes for a while as the banking system recovers from last week’s shock. But that shock itself might do more to tighten credit conditions — and thus cool spending and investment — than the Fed’s previously planned rate hikes would have done.
. As cash piled up faster than the bank could lend it, SVB invested its money in long-term Treasury bonds and 30-year fixed mortgages. But this rendered the bank profoundly vulnerable to a sustained increase in interest rates: If the interest rates on U.S. Treasuries and new mortgages shot up, then the market value of older, lower-paying government bonds and mortgage securities would fall — which is to say SVB’s assets would lose market value.
Alas, SVB had another problem. In a high-interest-rate environment, start-ups are less attractive to investors: Why lock up your savings in a risky enterprise thatdeliver returns in the far future when the government is handing out substantial returns on risk-free assets? So, as rates rose, cash stopped pouring into tech start-ups. SVB’s customers started withdrawing more cash from their accounts than they put in.
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