Silicon Valley Bank's downfall was the result of Powell inflicting 'callous' and unnecessary pain on the economy, Nobel economist says

"Now, as a result of Powell's callous - and totally unnecessary - advocacy of pain, we have a new set of victims," top economist Joseph Stiglitz said.

• The downfall of SVB was caused by Powell inflicting unnecessary pain, according to economist Joseph Stiglitz.
• Stiglitz pointed to the Fed's aggressive policy, which raised interest rates 1700% over the last year.
• Higher interest rates were the catalyst that led to SVB's demise, Stiglitz said, blasted Fed policy.

The downfall of Silicon Valley Bank was the result of Federal Reserve Chairman Jerome Powell inflicting unnecessary pain on the economy, according to Nobel economist Joseph Stiglitz. 

Stiglitz, the former chief economist of World Bank and a Columbia professor, blasted the Fed's role in the collapse of SVB on Monday, blaming the recent chaos in markets on the central bank's aggressive monetary tightening policy.

"Now, as a result of Powell's callous – and totally unnecessary – advocacy of pain, we have a new set of victims, and America's most dynamic sector and region will be put on hold," Stiglitz said in an op-ed for Project Syndicate on Monday, echoing other commentators who say the collapse of SVB will ripple through the tech sector for years to come.

"Silicon Valley's startup entrepreneurs, often young, thought the government was doing its job, so they focused on innovation, not on checking their bank's balance sheet daily."

The tech-focused bank roiled markets last week after reporting a $1.8 billion loss on its bond portfolio, causing its stock to plunge 60% in a single day and, eventually, for the bank to be shuttered by state regulators and put under the control of the FDIC. 

The fiasco is largely the fault of the Fed, Stiglitz said, as central bankers raised interest rates 1,700% last year to control inflation. The move has weighed heavily on bond prices, and by the end of 2022, US banks were sitting on $620 billion in unrealized losses in their bond portfolios, according to the FDIC.

Other Wall Street commentators have been critical of the Fed's response to inflation as well, as central bankers blew off rising prices as "transitory" in late 2021, before aggressively hiking rates in 2022. Wharton Professor Jeremy Siegel called Fed policy one of the main reasons behind SVB's implosion, and warned another 50 basis-point interest rate hike would increase the risk of more bank failures.

Markets have dialed back expectations for next rate hike at the upcoming policy meeting, as some see the Fed pulling back in order to avoid putting additional stress on an already fragile banking system.

Investors are pricing in a 83% chance of a 25 basis-point rate hike, and a 17% chance that the Fed will pause altogether, according to the CME FedWatch tool.