Siegel, Sonnenfeld: Fed 'Shrapnel' Killed Silicon Valley Bank

Wharton economist Jeremy Siegel, who has sharply criticized the Federal Reserve’s aggressive steps to address inflation, considers the central bank a key catalyst, albeit not the only one, in Silicon Valley Bank’s collapse.

“Sure, there were some missteps by Silicon Valley Bank executives — they thought they were making the most prudent investments in U.S. Treasuries, the gold standard of risk-free investments, only to see Treasuries prices plummet with rising rates,” the emeritus finance professor said in a Fortune opinion piece co-written with Jeffrey Sonnenfeld and Steven Tian of the Yale School of Management.

“More perplexingly, they ostensibly had 3% more capital reserves than required yet they were still needlessly alarmist in announcing additional capital raises, sparking a fear-driven stampede through their own ham-handed execution. But they only pulled the fire alarm because somebody lit a match. Who was it that lit that match?” Siegel and his co-authors asked.

“Make no mistake about one of the prime reasons for SVB’s implosion,” they wrote. ”Fed shrapnel killed this bank and may send the economy into recession in the process.

“We have been warning for months that the Fed is oversteering the economy, but this crisis is more evidence that the Fed has gone too far and might steer the economy not just off the highway but right off a cliff.”

They called on the Fed to pause further rate hikes when the central bankers meet later this month, as “it needs to realize that it has now oversteered the economy to the precipice.”

Even after SVB’s collapse, some economists continue to call for the Fed to raise interest rates by 50 basis points, which Siegel and his co-authors called reckless.

“The full impact of one of the most rapid tightening policies in Fed history is yet to be felt,” they wrote. “Maybe now, with the collapse of SVB and other banks, the Fed will realize that its impatience risks dire consequences for the whole economy.”

The Fed persists in targeting the wrong problem and using the wrong tool, they said.

“The Fed’s monomaniacal focus on labor market tightness is thoroughly misguided. Average real hourly wages have been down (ever) since the pandemic began and the pace of nominal wage growth severely lags behind the pace of inflation across food, fuel, shelter and other key household spending. Put more simply, it is hard to argue that wages are causing inflation when wages are rising less than inflation,” the authors wrote.

They suggested the Fed “is too worried about having to prove their mettle and so wounded for being late and dismissive over inflation in 2021 that they are still fighting the last war — not realizing that there is now pervasive disinflation across virtually the entire economy.”

High mortgage rates have slowed new housing activity, many commodities are down sharply from peaks last year, and shipping and cargo rates have collapsed as consumers run through their pandemic savings, they said, suggesting that the Fed should take precise aim at residual inflation through non-monetary policy fixes that lower consumer costs, increase competition and boost the labor supply, they suggested.

“Continuing to tighten monetary policy in this environment of bank blowups and declining consumer and business confidence is a surefire recipe for disaster,” they wrote.

Pictured: Jeremy Siegel (Photo: Lila Photo for TD Ameritrade Institutional)