Hey, if you're currently teaching micro (time for some game theory), macro (bank runs!) or even finance (maturity transformation!) you may want to add a bit about the Silicon Valley bank run.
Lemme try to give you a quick couple of slides you can insert into class. #TeachEcon
Here's the Diamond-Dybvig model, written down as a simple 2x2. Have the students solve for the *multiple* equilibria! (Pure strategies is enough for today's class.)
[I use the "check mark method" to find the Nash equilibrium]
Next, explain what deposit insurance is.
Now have the students pair off. Together they should: 1. Revise the payoff matrix now that deposit insurance means folks no longer lose $ in a bank run. 2. Solve for the new equilibrium.
Viola! They just solved the problem of bank runs.
Your students just solved bank runs -- in theory... Does it work in practice?
Pretty much perfectly: Bank runs have almost been eradicated since the adoption of deposit insurance.
(Aside: The 2008 financial crisis was a run on shadow banks which don't have deposit insurance.)
Okay, so what's up with Silicon Valley bank?
FDIC insures only the first $250k of your savings. (Aside: When you get rich, open multiple accounts.)
Silicon Valley Bank was different: Its customers were businesses with $$$, so 97% of its deposits were uninsured!
A huge outlier.
This insight helps explain why markets are worried about some banks (but not most banks).
Basically they're looking for other SVB-like banks where customers are uninsured. In fact, as @AliHortacsu shows, these are the banks markets are worried about.
@AliHortacsu All of this explains the government's response.
It's effectively promising to insure everyone's deposits. And then (if our analysis is correct!) this implies that Treasury's actions will put an end to this round of bank runs.
There's *a lot* more to be said about SVB. But this is a barebones structure for what I think will yield a useful class discussion, drawing on a lot of the concepts we teach in introductory econ.
[Paid ad: These notes / graphs come from the Stevenson-Wolfers intro econ textbook]
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I don't hate this policy as much as I thought I would bc this isn't traditional rent control.
Think of it as macro policy—setting a nominal anchor when the Fed's target isn't working—rather than as micro policy setting the relative price of housing.
The proposed controls appear not to apply to new construction. And so they still allow the price signal to provide an incentive for new construction.
Blunting price signal is bad — to the extent that it affects those at the margin. But this policy is mostly infra-marginal.
Also, these are price control on the rate of change of rent, rather than on its level. If *relative* prices are somewhat coherent now, and the policy is temporary, they'll stay somewhat coherent for at least a few years.
This striking pattern of Trump under-performing his poll numbers continues. According to 538, Trump was meant to win:
- Massachusetts by 37 (NYT says he's up by 23)
- Tennessee by 69 (he's up 57)
- Texas by 64 (he's up 56)
- Virginia by 49 (he's up by 29)
The exception:
- North Carolina by 46 (he's up 51)
Plus in those states with more sparse polling there's no 538 average. But the final Trump-Haley poll suggested Trump would win:
- Alabama by 75 (he's up 68)
- Oklahoma by 77 (he's up 66)
- Maine 58 by (he's up 47)
- Minnesota by 64 (he's up 41)
- Utah by 27 (he's up 14)
Most striking, of course, is Vermont.
There were two polls, and they put Trump up by +30 and +28, respectively. At this point the NYT says Haley will win, by about 4 points.
Yes kids, we are: The inflation measure the Fed targets (core PCE) has run at an annualized rate of 1.9% over the past six months, *below* the Fed's two percent target.
This isn't a one-off blip; it's six months of sustained low inflation.
Core PCE inflation over the past year was 3.2%, but that tells us a lot about what was happening in late 2022.
Over the past 6 months, inflation was 1.9%; over the prior 6 months it was 4.5%. As those high rates "fall out" of the 12 month window, year-ended inflation will fall.
Inflation is now lower than when President Biden took office.
There's no question people are telling pollsters they're miserable about the economy. But riddle me this: Why can't we find evidence of this pessimism in anything other that public opinion polls?
Every non-poll based indicator of confidence suggests folks are optimistic [thread]
Take consumption. If folks were worried about their economic future, you might think they would be squirrelling money away for the hard times coming. But they're spending like they expect ongoing economic strength.
Or investment. If our future were grim, businesses wouldn't want to invest to serve a shrinking market. But they're investing at robust rates.
Let's start with the claim "uncooked turkey" is 7.2% more expensive. That's actually the CPI for a broader category of "other uncooked poultry" which includes Turkey.
But turkeys? The USDA says the retail price of fresh Hens is down -7.6% and fresh Toms are down -8.1%
The observation that retail turkey prices is down is confirmed by the Farm Bureau, which says they're down -5.6%. fb.org/news-release/c…
An absolutely bonkers example of the bad-news bias (and a failure to take Econ 101) in econ reporting: The @WSJ observes that the price of metals used in electric vehicles are crashing, and somehow infers that it will create shortages and snarl adoption of EV's.
The best part: The headline assures us that this is bad for Biden.
But to be clear, it's not just a bad news bias: It's also bad economics.
"Oh no, my product will definitely fail because my input costs are too low," said no producer ever.