Paul Krugman says Silicon Valley Bank could've been called the 'Schmoozing and Vibes Bank,' but it's probably not another 'Lehman moment'

Paul Krugman said it appeared "at most like a fairly narrow sectoral crisis." Brendan McDermid/Reuters

• Paul Krugman said SVB maybe should have been called the "Schmoozing and Vibes Bank."
• The Nobel Prize-winning economist said he didn't think SVB would trigger more bank failures.
• Investors including Mark Cuban and Bill Ackman have called for Fed intervention and bailouts.

Paul Krugman has played down the threat posed by Silicon Valley Bank's collapse to the financial sector, suggesting the startup lender was more a "Schmoozing and Vibes Bank" than the new Lehman Brothers.

In a Twitter thread, the NYU economist argued why SVB's failure wasn't a "harbinger for the banking system as a whole," or a repeat of the Lehman collapse that sparked the 2007/08 global financial crisis.

—Paul Krugman (@paulkrugman) March 11, 2023

Krugman noted that SVB deposits rose rapidly as it became a crucial part of the tech venture capital ecosystem in recent years.

"So what was SVB selling? As far as I can tell, it was just unusually good at cultivating relationships with, um, Silicon Valley, specifically VC," Krugman said. "Maybe it should have been called Schmoozing and Vibes Bank."

—Paul Krugman (@paulkrugman) March 11, 2023

SVB was shut down by regulators Friday after a $2.3 billion stock sale failed. The capital raise followed the announcement of a $1.8 billion loss from a $21 billion bonds fire sale. 

Rising interest rates hurt SVB's bond portfolio, with the value of short-term bonds rising above the long-term paper it had invested in.

At the same time, rising rates made it hard for SVB's largely startup-focused base to secure favorable funding, accelerating withdrawals from the bank.

Krugman said SVB sat on a lot of cash and put it into long-term securities which at the time offered a good return on investment. However, those returns fell as yields increased.

While this created huge problems for SVB, Krugman believed there was little chance of contagion to other banks. 

The Nobel Prize-winning economist said he did worry about the effects of SVB's collapse on the broader VC ecosystem. "But — hoping these aren't famous last words — this looks at most like a fairly narrow sectoral crisis."

Krugman's optimistic outlook is in contrast to that of "Shark Tank" investor Mark Cuban and Bill Ackman, who have called on the Federal Reserve to buy SVB deb,t and for a "highly dilutive" government bailout respectively.