The SVB Social Contagion

Financial panics are nothing new. But the strange little panic we’re enduring—one that started last week with a massive bank run causing the collapse of Silicon Valley Bank (SVB) and that continued this morning with big sell-offs in the stocks of other regional banks—is arguably the first one in which social media, and particularly Twitter, has been a major player. And if the past few days are any indication, that does not bode well for the next major financial crisis.

Twitter has featured a useful flow of facts and analysis from informed observers and participants, on subjects including SVB’s balance sheet, the failures of bank regulation, and the pros and cons of bailing out depositors. But users have also been subjected to a flood of dubious rumors and hysterical predictions of new bank runs. Federal regulators worked assiduously over the weekend to come up with a plan that would forestall contagion and reassure depositors that their money was safe. But on Twitter, chaos loomed.

[Annie Lowrey: Silicon Valley Bank’s failure is now everyone’s problem]

The most notorious tweets of the past few days came from Silicon Valley venture capitalists, investors, and company executives, who were desperate for the government to guarantee that no SVB depositor would lose any money (even though most of SVB’s deposits were not FDIC-insured). Their rhetorical strategy of choice was to insist that unless SVB’s depositors were made immediately whole, the entire tech industry and every non-megabank in America would be at risk.

Specifically, they said we were facing a “Startup Extinction Event” that would set “innovation” back by 10 years or more. If the Federal Reserve and the FDIC made the wrong decision about SVB’s depositors, that could lead to “a bank run trillions of dollars in size.”

Jason Calacanis, an investor who spent much of the weekend tweeting red-alert messages in all caps, captured the general mood when he wrote, “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW.”

Now, the Silicon Valley bros insisting that everything was going to hell may well have believed what they were tweeting (even if it seemed like a somewhat hyperbolic reaction to the failure of a middling bank). But they were also, as the saying goes, talking their book. Almost all of them had a clear financial interest in seeing SVB depositors — which included companies they were invested—in made whole by the government.

More to the point, by tweeting in such over-the-top language about the inevitability—not the possibility, but the inevitability—of massive bank runs across the country, they were, of course, making such bank runs more likely. Shouting “Fire!” in a crowded theater is not necessarily wrong if the theater is on fire. But encouraging panic is never the best strategy.

Predictions can become a self-fulfilling prophecy: Everyone who thinks that everyone else is going to pull their money out of the bank is going to try to get in the door first. These tweets also typically drew no distinction between wealthy depositors—who may well have uninsured deposits—and the majority of Americans, whose deposits are insured no matter which bank they have them in. That, too, contributed to the atmosphere of panic.

Still, the predictions of imminent doom weren’t the worst that social media had to offer this weekend. We also got a wild proliferation of rumors about the health not just of the banking system, but of specific banks. Unsurprisingly, many of the Twitter bios of the people spreading these kinds of rumors included the words Bitcoin or crypto.

[Read: Nancy Pelosi: ‘Follow the money’]

One high-profile, and especially egregious, example of this phenomenon came from Mike Alfred, who identifies himself as an “engaged value investor” and has almost 130,000 followers. Over the course of the day on Saturday, he tweeted out (and then deleted) a series of very specific claims about what was supposedly happening to First Republic Bank, headquartered in California, whose stock went through a massive sell off on Friday on concerns that it might go under as a result of contagion from SVB’s collapse. His proof for these claims, he tweeted, was “corroborating evidence from several good sources.” Well, okay then.

You might reasonably say that although none of this is ideal, the obvious answer is for people to be skeptical of what they read, particularly when it comes from sources they’re unsure of, and not to make decisions or leap to conclusions on the basis of random tweets. And that’s obviously correct in principle. But as we’ve seen with the persistence of false claims about the 2020 presidential election being stolen, and the continued ubiquity of false claims about the supposed deadliness of the COVID vaccines, social media is built, in some respects, to make it hard for people to be skeptical and patient. It’s a medium that is designed to encourage herding and trend-following—which, after all, are what makes things go viral—not independent thought.

This is especially true when it comes to something like a financial panic, the nature of which makes people more likely to act on fear and impulse. In that environment, false or just overheated claims, even if they seem improbable, can nonetheless have a powerful effect. They cast a kind of shadow that helps instill uncertainty and doubt. And that’s often enough to lead to bad outcomes, given that during panics, many of us act first and think later. Social media is now going to profoundly shape any financial crisis we go through. It doesn’t feel like we’re ready for it.