During 24 hours, $42 billion reportedly fled Silicon Valley Bank. At Signature, the total was $18 billion. Somewhat similarly, $56 billion left Credit Suisse during October, 2022.
Referring to bank runs Federal Reserve Chair Jerome Powell yesterday commented on their speed.
But it’s not only bank runs. There is so much more to consider.
We could say that faster moving money and information created more efficiency and catastrophe.
The upside of speed
During the first half of the 19th century, cotton merchants in the U.S. and Liverpool did a lot of guessing. Waiting two weeks for a boat to dock in Liverpool and another two for it to return, New York businessmen never had up-to-date information. With constantly changing markets, even the fastest shipments conveyed inaccurate prices and quantities.
Then though, once facts could travel by cable, markets became more efficient. Merchants knew how much to ship. Their clients knew what a shipment would contain. Because of the telegraph, everyone could plan more knowledgeably.
Our point? By speeding the movement of money and information, technology created efficiency.
The downside of speed
More than a century later, we moved onward to fiber optic cable and microwave networks. In Flash Boys, Michael Lewis tells us that crews were racing in 2009 to bury the cable that would connect a data center in Chicago with a Northern New Jersey stock exchange. Moving along the shortest possible “route,” data could travel round-trip in an eye blink–13.3 milliseconds.
But we also wound up with new problems.
In Stocks For the Long Run, finance scholar Jeremy Siegel tells us that stocks hit an “air pocket” at 2:42 p.m on May 6, 2010. For no apparent reason, the Dow Industrial Average dove more than 600 points in just 5 minutes. Already down by 300, after those 5 minutes, the Dow’s drop totaled 999 points.
When you are describing a flash crash, sometimes a graph can say it all:
Subsequently, an SEC investigation of the crash cited the computer interplay that shot all downward.
Our Bottom Line: Friction
As economists we can look at friction. Like physics, in finance and banking, friction slows the movement of money and information. My favorite examples include the voicemail instructions we repeatedly endure and the forms we fill out. Similarly, the movement of market facts can be restrained by information frictions that range from inadequate technology to inappropriate human capital. But when we “grease” those frictions with a telegraph or a speedy internet, we cut the time between a forecast and consumption. We shrink the gap among behavior, consequence, and a response.
According to a Bruegel paper on recent bank failures, the short response time is the problem. Dealing with far reaching issues that relate to depositor confidence, bank insurance incentives, and the seniority of creditors, an “over-hasty” decision has “long-term policy consequences.”
My sources and more: My inspiration came from Chairman Jerome Powell’s comment on speedy bank runs during his press conference. Then, looking for analysis and data, I went to Bruegel’s paper on recent bank failures. I also returned to Michael Lewis’s Flash Boys and Frank Partnoy’s Wait. In addition, Jeremy Siegel’s Stocks For the Long Run is a classic that I use as a handy reference. Finally, I was reminded of this Peterson Institute podcast on 19th century information and this article on the telegraph.
Please note that today’s post included sections that we published in the past.
Friction is nowhere more important than in labor markets. What has kept wages from declining to bare subsistence over the past century has been friction in labor markets, together with labor market convulsions caused by progression of technological changes in goods.
Now, however, computer-aided uberization of labor is putting an end to that. Forget objections to “capitalism” ; even in a universe of isolated independent producers, the interest of isolated independent consumers (not merely capitalists) will drive wages toward subsistence levels.