Justin Wolfers Profile picture
Mar 13, 2023 11 tweets 5 min read Read on X
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.

[Govt response is here:
home.treasury.gov/news/press-rel…]
@AliHortacsu Some of your students might still ask why some (but only some!) bank stocks are sinking today. I think this is a partial explanation:
What hustle is over?

This one: Basically SVB took in deposits, and rather than lend them to businesses, it bet on bonds.

But it's a one-sided bet: Heads, it gets the profits. Tails, it lost its customers money, and the govt levies taxes to pay the bill.
What about a critique of the government's policy approach? It's this: If we regulated SVB's betting activity, it couldn't take on this much risk.

Alternatively: If we had insured all the funds a week ago, there never would have been a bank run.
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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More from @JustinWolfers

May 9
It's a "deal," not a deal:
"This document serves to define the general terms for the EPD that set forth the shared desires of the US and the UK... Both the US and the UK recognize that this document does not constitute a legally binding agreement."

ustr.gov/sites/default/…Image
My favorite bit: The filename is:
"US UK EPD_050825_FINAL rev v2.pdf"
(don't know why they didn't include "_latestDJT")

That title might also yield a hint as to why the press conference started late.
Here's the "unprecedented access to UK market" that Lutnick promised:

"The UK and the US plan to work constructively in an effort to enhance agricultural market access. Further, both countries positively support future discussions to strengthen bilateral agricultural trade. " Image
Read 5 tweets
May 2
Phew.

Payrolls grew a relatively uninteresting (and positive!) +177k in April, and unemployment was unchanged at 4.2%.

This economy is still humming along.

NOTE: This is a reading largely from the pre-tariff period. Still very foggy about what lies ahead.
Revisions were somewhat worrying: March was revised down -43k to +185k. Feb down -15k to +102k.

Three month average payrolls growth -- a useful indicator of the underlying pace of job growth -- is a healthy +155k. That's a pretty great place to be at this point in the cycle.
Nominal wage growth was 0.2% this month, and are up 3.8% over the year. That's probably enough to keep inflation above the Fed's target (and that's before factoring in the effect of tariffs).

The period of disinflation may be over.
Read 8 tweets
Apr 30
Ugh. It's happening. The economy shrank in the first quarter, at an annual rate of -0.3%.

The good news: Consumption and investment remained strong. Think of this as a hard-to-interpret report due to -- **all of this**. Remember, this is the average of Q1, and the real concern is about Q2.Image
Look into the details, and the GDP report really isn't that bad. (We already know from the jobs data that the economy did okay in Q1.)

@jasonfurman suggested focusing on Real final sales to private domestic purchasers (basically C+I, the reliable parts of GDP) which grew +3.0% Image
The sharp rise in investment appears to be almost all due to pre-tariff front-running. Investment contributed 3.6%-pts to Q1 GDP growth.

Of that, inventory accumulation was 2.2%-pts.

And an additional 1.1% came from equipment investment (which is what the China tariffs hit).
Read 6 tweets
Apr 9
Biggest mistakes I'm seeing in early reporting:

1. Tariffmageddon isn't over: Lotsa tariffs to account for, but the average tariff rate is only down around one quarter.
2. He's not going to get big wins: Tariffs were low before this mess, and if Trump negotiates competently, they'll be low again. Basically no gain.

You've seen this movie before: It was NAFTA which got relabeled by Trump in 2020, but really barely changed.
3. The rationale for this policy keeps changing. Remember when it was all about bringing manufacturing home? (That was yesterday.) Now it's negotiating deals. Those are fundamentally in tension.

(I'm only going to build a factory in the US if tariffs are likely to persist.)
Read 5 tweets
Feb 17
One thing I've learned to do when I have questions about social security number holders who are age 100 or older is to look up the SSA Inspector General audit report, "Numberholders Age 100 or Older Who Did Not Have Death Information on the Numident."

oig.ssa.gov/assets/uploads… x.com/elonmusk/statu…
It's a gripping read. It tells me, for instance, that 98 percent of these folks have received no payments. Image
Why are there dead people on (this one table of) the social security database? They died before the use of electronic death records. Image
Read 4 tweets
Nov 4, 2024
This counter-response essentially says that any form of weighting in survey research is herding. If so, I love herding!

He's right about the motivation: All weighting is done to ensure that you don't get crazy results. But that's a feature of a good poll, not a bug!
After all: Is there a principled difference between weighting on age (to ensure that your sample includes youngs and olds) and weighting on past vote (to ensure you get folks from across the political spectrum)?
Both age and past vote are:
- Predetermined (before this poll)
- Non-manipulable
- Though self-reported
- And we have good population estimates to weight them to.

What principle would make one of these a legitimate survey design weight and the other "herding"?
Read 9 tweets

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