1
00:00:10,160 --> 00:00:14,560
Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

2
00:00:14,680 --> 00:00:18,279
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, there's

3
00:00:18,280 --> 00:00:23,400
Speaker 1: still tons of dimensions potentially to explore so much with

4
00:00:23,440 --> 00:00:26,880
Speaker 1: regard to the Silicon Valley Bank collapsed. But one of

5
00:00:26,920 --> 00:00:28,960
Speaker 1: the sort of simple questions that a lot of people

6
00:00:28,960 --> 00:00:31,360
Speaker 1: are asking is, from here on out, do we just

7
00:00:31,400 --> 00:00:34,720
Speaker 1: assume that every deposit in the bank is ensured, even

8
00:00:34,760 --> 00:00:38,199
Speaker 1: if officially they only promise up to two hundred and

9
00:00:38,159 --> 00:00:41,040
Speaker 1: fifty k. Yeah. Well, I mean that was kind of

10
00:00:41,080 --> 00:00:46,080
Speaker 1: the implicit takeaway from the weekend announcement. And I know

11
00:00:46,240 --> 00:00:48,640
Speaker 1: we spoke with Dan Davies and he made the point

12
00:00:48,760 --> 00:00:54,520
Speaker 1: that historically it is rareferred depositors in modern financial times

13
00:00:54,800 --> 00:00:57,960
Speaker 1: to lose a bunch of their money because normally bondholders

14
00:00:57,960 --> 00:01:00,520
Speaker 1: and equity holders lose all their money when bank fails,

15
00:01:00,520 --> 00:01:03,560
Speaker 1: and some of that gets taken away to pay the

16
00:01:03,640 --> 00:01:08,720
Speaker 1: deposit holders because deposits have seniority over bonds and equity.

17
00:01:09,360 --> 00:01:13,440
Speaker 1: But I still think this is a pretty big change.

18
00:01:14,120 --> 00:01:17,200
Speaker 1: It feels very major, or at a minimum, it feels

19
00:01:17,200 --> 00:01:20,280
Speaker 1: like the implicit has been made explicit in a way

20
00:01:20,480 --> 00:01:24,080
Speaker 1: that's before because yeah. Maybe in the end, even without

21
00:01:24,120 --> 00:01:27,800
Speaker 1: any intervention SVB as depositors may have gotten whole. We

22
00:01:27,840 --> 00:01:30,560
Speaker 1: don't know that there was no fire sale or anything

23
00:01:30,600 --> 00:01:33,480
Speaker 1: like that. They just announced everyone is getting their money

24
00:01:33,560 --> 00:01:38,040
Speaker 1: back Signature bank too. And then that raises a second question, Well,

25
00:01:38,080 --> 00:01:42,400
Speaker 1: if depositors are really always implicitly or explicitly guaranteed by

26
00:01:42,400 --> 00:01:45,360
Speaker 1: the government, what is the point of having like private

27
00:01:45,440 --> 00:01:49,160
Speaker 1: retail banking for profit retail banking. Why not just let

28
00:01:49,160 --> 00:01:51,200
Speaker 1: everyone have a checking account at the FED and then

29
00:01:51,480 --> 00:01:53,480
Speaker 1: you never have to worry about any of this. That's right.

30
00:01:53,520 --> 00:01:55,720
Speaker 1: So we touched on this a little bit when we

31
00:01:55,760 --> 00:01:57,920
Speaker 1: spoke to love men end. But if you think about

32
00:01:58,000 --> 00:02:02,880
Speaker 1: banks as providing an public function, you know, not only

33
00:02:02,920 --> 00:02:05,440
Speaker 1: do they provide a safe place for people to actually

34
00:02:05,480 --> 00:02:08,640
Speaker 1: put their money, but they also create money, you know,

35
00:02:08,840 --> 00:02:12,800
Speaker 1: yea in the system. They lubricate the economy with credit.

36
00:02:13,280 --> 00:02:19,040
Speaker 1: But they also tend to fail, sometimes repeatedly, as we're saying,

37
00:02:19,320 --> 00:02:21,840
Speaker 1: and they also tend to get bailed out. Right, because

38
00:02:21,880 --> 00:02:24,760
Speaker 1: the argument that you see time and time again is oh,

39
00:02:24,800 --> 00:02:27,160
Speaker 1: you can't let this go because it would be bad

40
00:02:27,200 --> 00:02:29,560
Speaker 1: for the financial system as a whole. You don't want

41
00:02:29,560 --> 00:02:33,080
Speaker 1: to publish these particular people or this group of people,

42
00:02:33,560 --> 00:02:36,920
Speaker 1: because then you know what happens if the little guy

43
00:02:37,040 --> 00:02:40,079
Speaker 1: is in trouble next time. What if it's a farmer's credit.

44
00:02:40,280 --> 00:02:42,840
Speaker 1: There's always a farmer At the end. It really says

45
00:02:42,919 --> 00:02:45,720
Speaker 1: something about I think people's moral intuition still that like

46
00:02:46,280 --> 00:02:49,720
Speaker 1: the thought experiment is like replaced Silicon Valley with like

47
00:02:50,040 --> 00:02:53,200
Speaker 1: Kansas Farmers Bank or something. Right, But it's true. The

48
00:02:53,320 --> 00:02:56,120
Speaker 1: point is true that a lot of people, like a

49
00:02:56,480 --> 00:02:59,480
Speaker 1: people can't be expected to do due diligence, like on

50
00:02:59,560 --> 00:03:02,240
Speaker 1: a bank. It's not realistic. Most professionals can't do that.

51
00:03:02,560 --> 00:03:05,120
Speaker 1: But b it's also true that like there are a

52
00:03:05,120 --> 00:03:08,160
Speaker 1: lot of quote innocent people who did not take like

53
00:03:08,200 --> 00:03:10,680
Speaker 1: some crazy risk, who think they have money, and then

54
00:03:10,720 --> 00:03:12,679
Speaker 1: the idea that they're told they don't like. I mean,

55
00:03:12,840 --> 00:03:16,400
Speaker 1: the point is like the points are legit, well, we

56
00:03:16,400 --> 00:03:19,200
Speaker 1: should get into them. But I do think like overall,

57
00:03:19,200 --> 00:03:22,160
Speaker 1: there is this question of and I think we're going

58
00:03:22,200 --> 00:03:24,240
Speaker 1: to see even more of it. People are still digesting

59
00:03:24,240 --> 00:03:27,079
Speaker 1: what's happening. But there's this question of, Okay, if we're

60
00:03:27,080 --> 00:03:31,399
Speaker 1: going to keep supporting banks in quite dramatic ways, then

61
00:03:31,600 --> 00:03:35,440
Speaker 1: why let them be private? Entities, yeah, or why not

62
00:03:35,560 --> 00:03:39,760
Speaker 1: give them I guess like a closer relationship with the

63
00:03:39,800 --> 00:03:43,560
Speaker 1: government in one way or another, whether that's a regulatory

64
00:03:43,640 --> 00:03:46,720
Speaker 1: function or something else. Right, there's all kinds of questions.

65
00:03:46,760 --> 00:03:49,200
Speaker 1: I think we should get to our guests, because our guest,

66
00:03:49,320 --> 00:03:51,680
Speaker 1: I really do believe we have the perfect guest, someone

67
00:03:51,720 --> 00:03:54,600
Speaker 1: who's been warning about a lot of these exact issues

68
00:03:54,600 --> 00:03:57,960
Speaker 1: for a long time, has anticipated a lot of these

69
00:03:58,000 --> 00:04:02,000
Speaker 1: debates that people started having over the weekend, and who

70
00:04:02,040 --> 00:04:05,400
Speaker 1: also has ideas about rethinking the banking system and what

71
00:04:05,440 --> 00:04:08,640
Speaker 1: it means when some of these implicit guarantees become explicit.

72
00:04:08,920 --> 00:04:12,440
Speaker 1: We're gonna be speaking with Salle Amarova. She's a professor

73
00:04:12,520 --> 00:04:16,719
Speaker 1: of law at Cornell. She also had been President Biden's

74
00:04:16,920 --> 00:04:20,240
Speaker 1: original nominee to head the Office of the Comptroller of

75
00:04:20,240 --> 00:04:24,480
Speaker 1: the Currency. Because of her perspective, she came under very

76
00:04:24,520 --> 00:04:29,480
Speaker 1: sort of like vicious attacks, some by some moderate Democrats,

77
00:04:29,560 --> 00:04:32,560
Speaker 1: a lot of attacks by sort of like the community

78
00:04:32,600 --> 00:04:36,320
Speaker 1: and regional bank lobby and all the Republican senators. It

79
00:04:36,400 --> 00:04:38,120
Speaker 1: was a pretty awful affair. There was a lot of

80
00:04:38,400 --> 00:04:41,960
Speaker 1: red baiting, basically accusing our guest of being a communist,

81
00:04:42,400 --> 00:04:45,560
Speaker 1: very publicly because of wanting to have different thoughts about

82
00:04:45,600 --> 00:04:48,480
Speaker 1: how the banking system works. But I kind of feel

83
00:04:48,600 --> 00:04:51,599
Speaker 1: like some vindication over the weekend and people are sort

84
00:04:51,640 --> 00:04:54,159
Speaker 1: of like rethinking a lot of what she's written about.

85
00:04:54,160 --> 00:04:57,200
Speaker 1: So Professor Amarova, thank you so much for coming on

86
00:04:57,200 --> 00:05:02,000
Speaker 1: odd lots. Thank you so much for inviting me to day. Yeah. Absolutely,

87
00:05:02,240 --> 00:05:04,960
Speaker 1: you know we're going to get into all of your

88
00:05:05,160 --> 00:05:07,240
Speaker 1: thinking about how we can rethink the banking systement and

89
00:05:07,279 --> 00:05:10,040
Speaker 1: so forth. But just sort of like very simply to start,

90
00:05:10,720 --> 00:05:15,880
Speaker 1: as an almost regulator, what does the SVB disaster to

91
00:05:15,920 --> 00:05:20,359
Speaker 1: say to you about flaws within the existing regulatory structure

92
00:05:20,360 --> 00:05:24,080
Speaker 1: of banking. This is exactly the kind of questions that

93
00:05:24,200 --> 00:05:27,599
Speaker 1: I like to think about or cannot help myself thinking about.

94
00:05:27,680 --> 00:05:32,360
Speaker 1: So while of course there are many immediate reasons for

95
00:05:32,600 --> 00:05:36,400
Speaker 1: the failure of SVB in particular, there are also these

96
00:05:36,440 --> 00:05:40,720
Speaker 1: sort of more deeper structural issues here that are on display.

97
00:05:41,200 --> 00:05:43,640
Speaker 1: The first thing that we've learned is that the systemic

98
00:05:43,760 --> 00:05:47,440
Speaker 1: risk in the financial system is actually a very complex

99
00:05:47,440 --> 00:05:51,200
Speaker 1: and dynamic phenomenon. We are used to thinking about systemic

100
00:05:51,320 --> 00:05:57,279
Speaker 1: risk caused by banks because banks invested in particularly risky assets,

101
00:05:57,279 --> 00:05:59,640
Speaker 1: which they've done before. This is how we got the

102
00:05:59,640 --> 00:06:03,279
Speaker 1: tooth snate crisis. But in this situation, the assets themselves

103
00:06:03,279 --> 00:06:06,000
Speaker 1: didn't seem to be quite so risky until the monetary

104
00:06:06,000 --> 00:06:09,400
Speaker 1: policy tender changed. Right, So what it tells us is

105
00:06:09,440 --> 00:06:14,600
Speaker 1: that past policy choices actually shape future policy constraints in

106
00:06:15,240 --> 00:06:19,280
Speaker 1: this particular area. Another thing that sort of became really

107
00:06:19,360 --> 00:06:22,880
Speaker 1: obvious here is that there is a lot of political

108
00:06:22,880 --> 00:06:28,360
Speaker 1: economy involved in bank regulation and the banking sector in general. Right,

109
00:06:28,880 --> 00:06:32,120
Speaker 1: just like Joe what you said about how the rhetoric

110
00:06:32,279 --> 00:06:35,560
Speaker 1: changes depending on who's asking for a bailout in a

111
00:06:35,600 --> 00:06:40,320
Speaker 1: particular situation, right, And our perceptions change when people drug

112
00:06:40,320 --> 00:06:44,040
Speaker 1: out the farmers. Suddenly everybody feels sympathetic this time around

113
00:06:44,040 --> 00:06:47,960
Speaker 1: its venture capital industry, Silicon Valley. It's sort of difficult

114
00:06:47,960 --> 00:06:52,040
Speaker 1: to feel sympathetic right to these billionaires who usually are

115
00:06:52,120 --> 00:06:56,159
Speaker 1: known for being quite libertarian and kind of not liking

116
00:06:56,200 --> 00:06:59,960
Speaker 1: the government genuinely speaking. But most importantly, and I think

117
00:07:00,080 --> 00:07:02,800
Speaker 1: that's the point you've been driving at early, is that

118
00:07:03,360 --> 00:07:08,920
Speaker 1: this particular crisis really exposed the public nature of the

119
00:07:08,960 --> 00:07:13,320
Speaker 1: banking business, the deposit deposit taking the deposit money. Right,

120
00:07:13,640 --> 00:07:16,640
Speaker 1: And this is precisely what my scholarship has been about

121
00:07:16,720 --> 00:07:21,520
Speaker 1: for many many years. Banks are very special animals in

122
00:07:21,640 --> 00:07:27,080
Speaker 1: our free market economy because their products are twofold. On

123
00:07:27,120 --> 00:07:32,080
Speaker 1: the one hand, they create money that we treat as

124
00:07:32,320 --> 00:07:36,600
Speaker 1: equivalent to sovereign money, so we all basically use deposits

125
00:07:36,680 --> 00:07:39,320
Speaker 1: as if that was you know, the US dollars, but

126
00:07:39,400 --> 00:07:43,520
Speaker 1: of course their liabilities of private banks, private firms, And

127
00:07:43,760 --> 00:07:46,960
Speaker 1: the key about deposits at the bank is that they

128
00:07:47,000 --> 00:07:51,440
Speaker 1: absolutely must be safe, must be perceived as safe. We

129
00:07:51,520 --> 00:07:55,280
Speaker 1: need our money to be free of any doubt, so

130
00:07:55,360 --> 00:07:58,200
Speaker 1: that everybody knows that when tomorrow go my bank or

131
00:07:58,720 --> 00:08:01,600
Speaker 1: check my ownline back and bank account, the money that's

132
00:08:01,640 --> 00:08:04,680
Speaker 1: been there is going to have its power value no

133
00:08:04,760 --> 00:08:08,560
Speaker 1: matter what happens. And that is necessary because money is

134
00:08:08,760 --> 00:08:12,320
Speaker 1: a public good. It is really essential lubrican to all

135
00:08:12,640 --> 00:08:16,800
Speaker 1: economic transactions. So in effect, public goods like safety and security,

136
00:08:17,160 --> 00:08:22,000
Speaker 1: national defense, safety that we know that if there is

137
00:08:22,040 --> 00:08:24,480
Speaker 1: a fire and then the fire brigade will come, you

138
00:08:24,520 --> 00:08:26,960
Speaker 1: don't have to pay for it. Those kinds of things

139
00:08:26,960 --> 00:08:31,600
Speaker 1: we traditionally perceive as public goods, and they're provided publicly,

140
00:08:31,640 --> 00:08:35,000
Speaker 1: and that's fine. But safe money is a public good

141
00:08:35,120 --> 00:08:39,080
Speaker 1: exactly in the same way because it guarantees us the

142
00:08:39,280 --> 00:08:43,720
Speaker 1: right to participate in economic exchange without being worried about

143
00:08:43,760 --> 00:08:46,520
Speaker 1: the value of our money, the means of payment right.

144
00:08:47,280 --> 00:08:50,680
Speaker 1: And the funny thing about that particular public good provision

145
00:08:50,760 --> 00:08:54,840
Speaker 1: is that institutionally we have this system in which this

146
00:08:55,200 --> 00:09:00,920
Speaker 1: public good is provided by private profitmaking firms banks. We

147
00:09:01,040 --> 00:09:04,680
Speaker 1: regulate banks, which charter banks. We try to kind of

148
00:09:04,760 --> 00:09:09,000
Speaker 1: treat them as if they were franchises of the federal government,

149
00:09:09,520 --> 00:09:13,720
Speaker 1: purveyors of this public good. But nevertheless they are doing

150
00:09:13,760 --> 00:09:18,120
Speaker 1: it through private risk taking on their own balance sheet.

151
00:09:18,600 --> 00:09:23,000
Speaker 1: In other words, we've coupled this money creation with their

152
00:09:23,480 --> 00:09:30,160
Speaker 1: lending functions. So banks create money when they extend loans.

153
00:09:30,559 --> 00:09:33,800
Speaker 1: Right when they extend loans they open deposit accounts into

154
00:09:33,800 --> 00:09:36,960
Speaker 1: which they deposit is newly created purchasing power that didn't

155
00:09:37,000 --> 00:09:41,640
Speaker 1: exist before. And that is kind of ingenious because it

156
00:09:41,840 --> 00:09:47,839
Speaker 1: connected the deposit taking capacity, the money creation capacity, with

157
00:09:48,000 --> 00:09:51,800
Speaker 1: the sort of the judgment of supposedly kind of on

158
00:09:51,960 --> 00:09:55,360
Speaker 1: the ground, really attuned to the needs of the economy,

159
00:09:55,480 --> 00:10:00,760
Speaker 1: private banks that can judge which business, which house, which

160
00:10:00,800 --> 00:10:04,280
Speaker 1: individual deserves that that kind of valcation of credit, and

161
00:10:04,320 --> 00:10:08,000
Speaker 1: that creates the elastic currency. This is how we basically

162
00:10:08,040 --> 00:10:11,920
Speaker 1: have just enough money in the economy to satisfy all

163
00:10:11,960 --> 00:10:15,079
Speaker 1: the needs of the productive economy, right, and that also

164
00:10:15,120 --> 00:10:19,600
Speaker 1: creates that monetary policy transmission channel. So that's what connects

165
00:10:19,600 --> 00:10:22,440
Speaker 1: the Fed and Central Bank to the private banks that

166
00:10:22,600 --> 00:10:25,880
Speaker 1: extend money, allocate credit, and in the process of doing it,

167
00:10:26,040 --> 00:10:32,080
Speaker 1: actually expand or contract the amount of money that we

168
00:10:32,200 --> 00:10:34,959
Speaker 1: treat a sovereign money available in the economy. So it's

169
00:10:35,000 --> 00:10:38,720
Speaker 1: a very complex system. There's sort of a mismatch between

170
00:10:39,000 --> 00:10:42,600
Speaker 1: the public money good and the private risk taking. But

171
00:10:43,000 --> 00:10:45,600
Speaker 1: just to play Devil's advocate for one second, you know,

172
00:10:45,679 --> 00:10:49,600
Speaker 1: one of the arguments that you do see going around is, okay,

173
00:10:49,880 --> 00:10:53,520
Speaker 1: the ftic ensures up to two hundred and fifty thousand dollars,

174
00:10:53,559 --> 00:10:57,440
Speaker 1: because the vast majority of people in the US do

175
00:10:57,640 --> 00:11:01,280
Speaker 1: not have more than one hundred and fifty thousand dollars

176
00:11:01,280 --> 00:11:04,800
Speaker 1: in their bank accounts. But if you're a company with

177
00:11:04,840 --> 00:11:09,480
Speaker 1: a lot of cash, presumably you're more sophisticated, maybe you

178
00:11:09,520 --> 00:11:12,760
Speaker 1: have a treasury function whose job it is to actually

179
00:11:12,800 --> 00:11:16,240
Speaker 1: manage that cash. Is there an argument to be made

180
00:11:16,520 --> 00:11:20,319
Speaker 1: that as the pool of money gets bigger, people should

181
00:11:20,360 --> 00:11:24,959
Speaker 1: be more attuned to managing it. And making sure it's

182
00:11:25,080 --> 00:11:29,960
Speaker 1: not going into riskier banks. This is actually a very

183
00:11:30,679 --> 00:11:34,400
Speaker 1: astute question and kind of the question that is on

184
00:11:34,440 --> 00:11:38,520
Speaker 1: the minds of many people today, and there is an

185
00:11:38,600 --> 00:11:41,360
Speaker 1: argument for that, and the argument. One argument would be

186
00:11:41,400 --> 00:11:44,800
Speaker 1: theoretical argument in a way to say that, look, let's

187
00:11:44,840 --> 00:11:49,760
Speaker 1: just stop pretending that bank deposit money is not in

188
00:11:49,840 --> 00:11:53,600
Speaker 1: fact public money, because it is publicly back. So let's

189
00:11:53,640 --> 00:11:56,760
Speaker 1: just dispense with this fiction by removing that that cap

190
00:11:57,200 --> 00:12:01,120
Speaker 1: so that everybody, wholesale depositors as well as retail depositors

191
00:12:01,400 --> 00:12:04,080
Speaker 1: don't really ever have to question and worry. And it

192
00:12:04,080 --> 00:12:08,040
Speaker 1: would definitely eliminate the incentive to run on a bank

193
00:12:08,480 --> 00:12:12,440
Speaker 1: by these big money holders who are now able to

194
00:12:12,559 --> 00:12:15,520
Speaker 1: orchestrate these runs faster than they used to do it before.

195
00:12:15,840 --> 00:12:19,520
Speaker 1: So it would be a systemic structural fix to this

196
00:12:19,640 --> 00:12:23,000
Speaker 1: problem of bank runs. The problem that I have with

197
00:12:23,040 --> 00:12:27,880
Speaker 1: this argument is that, well, in that case, if we

198
00:12:28,040 --> 00:12:32,040
Speaker 1: completely eliminate the fiction of some kind of private risk

199
00:12:32,120 --> 00:12:35,560
Speaker 1: management by the banks themselves on the assets and the

200
00:12:35,600 --> 00:12:38,320
Speaker 1: liability side of its balance sheet by saying work, all

201
00:12:38,320 --> 00:12:41,960
Speaker 1: of the important liabilities of banks are in fact the

202
00:12:42,000 --> 00:12:46,640
Speaker 1: federal government's liabilities, then we need to do one of

203
00:12:46,679 --> 00:12:49,920
Speaker 1: the two things. One thing would be either we need

204
00:12:49,960 --> 00:12:54,040
Speaker 1: to make sure that these banks really start acting truly

205
00:12:54,080 --> 00:12:58,000
Speaker 1: as public utilities on the assets side, on the investment

206
00:12:58,040 --> 00:13:00,319
Speaker 1: side of the balance sheets as well. In other words,

207
00:13:00,360 --> 00:13:02,480
Speaker 1: we need to make sure that they are not able

208
00:13:03,000 --> 00:13:08,439
Speaker 1: to abuse this kind of public subsidy, public backing, explicit

209
00:13:08,440 --> 00:13:12,120
Speaker 1: backing of its life of their liabilities to make investments

210
00:13:12,120 --> 00:13:16,240
Speaker 1: that would generate higher private profits for them but potentially

211
00:13:16,559 --> 00:13:20,440
Speaker 1: increase the liability for the FDIC that is now direct.

212
00:13:21,240 --> 00:13:24,000
Speaker 1: Or we need to basically say, well, you know what,

213
00:13:24,160 --> 00:13:27,520
Speaker 1: we don't really need private banks to intermediate this kind

214
00:13:27,520 --> 00:13:31,080
Speaker 1: of money creation, since all the money is public. Let's

215
00:13:31,080 --> 00:13:34,400
Speaker 1: just provide those accounts publicly and deposit accounts publicly, so

216
00:13:34,880 --> 00:13:37,640
Speaker 1: that this particular public with just the means of payment,

217
00:13:37,760 --> 00:13:42,679
Speaker 1: means of exchange will be provided publicly. Everything else, lending,

218
00:13:42,880 --> 00:13:46,680
Speaker 1: investment services, everything else that does require risk assessment on

219
00:13:46,760 --> 00:13:50,400
Speaker 1: the ground that is best provided by private firms should

220
00:13:50,400 --> 00:13:53,520
Speaker 1: be provided by proctors. But we would separate those two functions.

221
00:14:10,200 --> 00:14:13,120
Speaker 1: Let me ask you a question, I mean your nomination

222
00:14:13,280 --> 00:14:16,040
Speaker 1: to head the Office of the Controller of the Currency.

223
00:14:16,400 --> 00:14:21,120
Speaker 1: The community banks, the regional banks really were vociferous in

224
00:14:21,400 --> 00:14:24,720
Speaker 1: lobbying against you. And of course, so now the first

225
00:14:24,800 --> 00:14:28,040
Speaker 1: crisis that we've seen in the current era happens at

226
00:14:28,040 --> 00:14:31,720
Speaker 1: a community bank. Like you know, there is some questions

227
00:14:31,720 --> 00:14:34,040
Speaker 1: setting aside, and I want to get to your thoughts

228
00:14:34,040 --> 00:14:36,560
Speaker 1: on like FED accounts and all that, but setting aside that,

229
00:14:36,640 --> 00:14:38,240
Speaker 1: a lot of people over the weekend they're like, well,

230
00:14:38,240 --> 00:14:40,000
Speaker 1: why shouldn't I just have all my money at Chase?

231
00:14:40,040 --> 00:14:41,880
Speaker 1: Why shouldn't I just have all my money at City?

232
00:14:42,320 --> 00:14:45,080
Speaker 1: Because you know, we've been told they're too big to fail.

233
00:14:45,160 --> 00:14:46,960
Speaker 1: We know they're going to get failed out. Also, just

234
00:14:47,040 --> 00:14:50,440
Speaker 1: structurally they have they'll have a more diversified depositor base

235
00:14:50,880 --> 00:14:53,880
Speaker 1: most likely, so maybe less likely to run. Like, do

236
00:14:54,000 --> 00:14:57,480
Speaker 1: you see a positive role in the economy for these

237
00:14:57,520 --> 00:15:01,840
Speaker 1: community banks that opposed you so much? Well, I do

238
00:15:03,680 --> 00:15:07,000
Speaker 1: see a very important potential role for community banks to

239
00:15:07,040 --> 00:15:11,320
Speaker 1: play because community banks just by definition, they are tied

240
00:15:11,360 --> 00:15:15,280
Speaker 1: to their own communities, right, they are actually the epitome

241
00:15:15,480 --> 00:15:21,720
Speaker 1: of that image of a private bank being really aware

242
00:15:21,880 --> 00:15:26,600
Speaker 1: of what businesses and the households and individuals in any

243
00:15:26,600 --> 00:15:30,080
Speaker 1: particular community really need in terms of financing, right, what

244
00:15:30,160 --> 00:15:34,080
Speaker 1: kind of businesses they engage in, how responsible they are

245
00:15:34,160 --> 00:15:37,760
Speaker 1: in running their financial affairs, whether or not their ideas

246
00:15:37,760 --> 00:15:41,320
Speaker 1: are deserving of funding. This is the image that basically

247
00:15:41,800 --> 00:15:46,080
Speaker 1: underlies and informs our existing hybrid system of banking. When

248
00:15:46,080 --> 00:15:49,760
Speaker 1: we outsource the credit allocation and money creation to local banks,

249
00:15:50,000 --> 00:15:54,200
Speaker 1: and of course there's huge institutions for three trillion dollars

250
00:15:54,240 --> 00:15:58,040
Speaker 1: in assets, institutions like JP Morgan Chase, they cannot possibly

251
00:15:58,080 --> 00:16:01,240
Speaker 1: be held to the same standard of being aware of

252
00:16:01,240 --> 00:16:04,080
Speaker 1: what's happening on the ground. So to the extended community,

253
00:16:04,120 --> 00:16:07,080
Speaker 1: banks are that kind of a bank, we really should

254
00:16:07,560 --> 00:16:11,480
Speaker 1: promote their existence and support their existence and facilitating existence.

255
00:16:12,160 --> 00:16:17,280
Speaker 1: But the problem is structural because it is true that

256
00:16:17,320 --> 00:16:21,080
Speaker 1: we've made along the way so many policy decisions that

257
00:16:21,240 --> 00:16:27,720
Speaker 1: effectively reward banks that are large diversified by virtue of

258
00:16:27,840 --> 00:16:32,120
Speaker 1: conducting businesses and providing financial services that go farther and

259
00:16:32,120 --> 00:16:36,640
Speaker 1: farther away from the traditional extension of long term loans

260
00:16:36,680 --> 00:16:40,360
Speaker 1: that they hold on their own banking books into I

261
00:16:40,400 --> 00:16:44,560
Speaker 1: don't know, investment advisory and investment banking and dealing and

262
00:16:44,640 --> 00:16:47,520
Speaker 1: trading in various derivatives, instruments and so and so forth.

263
00:16:47,840 --> 00:16:52,000
Speaker 1: Because that is the other side of what we call diversification.

264
00:16:52,080 --> 00:16:55,880
Speaker 1: That's how you diversify away from the traditional lending business.

265
00:16:55,920 --> 00:16:59,920
Speaker 1: Of course, that diversification has its own risks, but it also,

266
00:17:00,120 --> 00:17:04,160
Speaker 1: among other things, makes these big diversified institutions effectively too

267
00:17:04,160 --> 00:17:06,600
Speaker 1: big to fail, because now they have a hand and

268
00:17:06,640 --> 00:17:09,600
Speaker 1: they play a critical role in so many pockets of

269
00:17:09,760 --> 00:17:14,560
Speaker 1: the increasingly complex financial system. So of course it's rational

270
00:17:15,000 --> 00:17:17,879
Speaker 1: for wholesale depositors to take their deposits out of a

271
00:17:17,920 --> 00:17:22,000
Speaker 1: smaller community bank or even itsized regional bank and put

272
00:17:22,000 --> 00:17:25,399
Speaker 1: them into JPMorgan or Bank of America, simply because you

273
00:17:25,480 --> 00:17:29,119
Speaker 1: know that, for better for worse, these institutions are not

274
00:17:29,200 --> 00:17:32,280
Speaker 1: likely to fail, and you don't want to think about

275
00:17:32,280 --> 00:17:34,680
Speaker 1: the safety of your deposits on a going forward basis.

276
00:17:34,840 --> 00:17:36,960
Speaker 1: You have too many other things to worry about in

277
00:17:37,040 --> 00:17:41,000
Speaker 1: your actual business, right, So talk to us a little

278
00:17:41,040 --> 00:17:44,480
Speaker 1: bit more about what can be done about the mismatch

279
00:17:44,600 --> 00:17:48,919
Speaker 1: between you know, money as a public good and this

280
00:17:49,160 --> 00:17:55,679
Speaker 1: private risk taking idea. And specifically, you mentioned the political

281
00:17:55,680 --> 00:17:59,040
Speaker 1: economy earlier, and we've been talking a little bit about

282
00:17:59,080 --> 00:18:04,600
Speaker 1: your own experience with politicians. But what can be done

283
00:18:04,880 --> 00:18:10,720
Speaker 1: and what is realistic from a political perspective? Well, what

284
00:18:10,960 --> 00:18:14,560
Speaker 1: is realistic from a political perspective is a very difficult

285
00:18:15,880 --> 00:18:19,440
Speaker 1: thing to predict right, because politics is fickle, and it's

286
00:18:19,480 --> 00:18:25,760
Speaker 1: also very difficult to see which political lobbying groups, which

287
00:18:26,480 --> 00:18:31,160
Speaker 1: political interests are currently pushing forward, and you know how

288
00:18:31,359 --> 00:18:34,359
Speaker 1: that balance of power is playing out in a moment

289
00:18:34,400 --> 00:18:38,480
Speaker 1: when everybody is so nervous about potential further fallout from

290
00:18:38,520 --> 00:18:43,240
Speaker 1: this particular situation. So living that aside, what can be

291
00:18:43,320 --> 00:18:48,560
Speaker 1: done right, it's inherently extremely difficult to find the right

292
00:18:48,680 --> 00:18:54,480
Speaker 1: balance between the public interest in having saved money produced

293
00:18:54,480 --> 00:18:57,040
Speaker 1: by banks on the one hand, and the banks own

294
00:18:57,359 --> 00:19:03,760
Speaker 1: quite legitimate interest in being privately profitable on the other hand. Historically,

295
00:19:03,800 --> 00:19:09,200
Speaker 1: we've had this approach where we try to limit, for example,

296
00:19:09,240 --> 00:19:13,359
Speaker 1: the activities and investments of what banks could do. So

297
00:19:13,560 --> 00:19:17,480
Speaker 1: banks under the Glassdigal Active, and even before that, under

298
00:19:18,119 --> 00:19:23,000
Speaker 1: the National Banking Act, for example, were explicitly prohibited from

299
00:19:23,160 --> 00:19:28,919
Speaker 1: engaging an variety of activities outside the traditional landing. But then,

300
00:19:29,480 --> 00:19:33,520
Speaker 1: in a long story short, gradually we've allowed these banks,

301
00:19:33,560 --> 00:19:35,480
Speaker 1: even though they may be limited in what kind of

302
00:19:35,560 --> 00:19:40,200
Speaker 1: risks they can undertake, to affiliate with securities firms whose

303
00:19:40,280 --> 00:19:42,919
Speaker 1: business it is to take a lot of risks by

304
00:19:42,960 --> 00:19:46,639
Speaker 1: trading and dealing in capital markets and derivatives markets, and

305
00:19:46,760 --> 00:19:50,800
Speaker 1: there's other markets. Basically, their business is to assess and

306
00:19:50,960 --> 00:19:53,920
Speaker 1: take on various risks that their clients want to take

307
00:19:54,000 --> 00:19:57,440
Speaker 1: on or to buy or sell. So, for example, if

308
00:19:57,440 --> 00:20:01,640
Speaker 1: we want to really sever the kind of private risk

309
00:20:01,680 --> 00:20:05,360
Speaker 1: creation by virtue of certain types of incentives, certain types

310
00:20:05,400 --> 00:20:09,080
Speaker 1: of activities that banks undertake and keep their deposit taking

311
00:20:09,160 --> 00:20:12,520
Speaker 1: money creation function, then we would have to make these

312
00:20:12,560 --> 00:20:18,480
Speaker 1: banks instead of kind of almost universal diversified financial services

313
00:20:18,480 --> 00:20:24,720
Speaker 1: providers purely payments providers, providers of this particular public good,

314
00:20:24,760 --> 00:20:30,359
Speaker 1: public utility, safe deposit, safe money. We have to limit

315
00:20:30,600 --> 00:20:33,080
Speaker 1: the kinds of activities they can undertake, We have to

316
00:20:33,160 --> 00:20:37,080
Speaker 1: limit the kinds of affiliations they can have, so as

317
00:20:37,119 --> 00:20:41,600
Speaker 1: to limit their incentives to create further risks and to

318
00:20:41,720 --> 00:20:47,520
Speaker 1: abuse that specific public subsidy. And that of course immediately

319
00:20:47,600 --> 00:20:51,040
Speaker 1: brings back the ghost of the Glass Degalact. Right, And

320
00:20:51,160 --> 00:20:54,000
Speaker 1: we know that Glass Degalact was repealed in nineteen ninety

321
00:20:54,080 --> 00:20:59,400
Speaker 1: nine precisely because it was supposedly stifling competitional, stifling innovation

322
00:21:00,080 --> 00:21:03,080
Speaker 1: and all of these things. And we are now in

323
00:21:03,119 --> 00:21:07,160
Speaker 1: an era where stifling innovation is a really, really bad

324
00:21:07,680 --> 00:21:11,240
Speaker 1: label and everybody is afraid of being being accused of

325
00:21:11,240 --> 00:21:17,040
Speaker 1: stifling innovation. So personally, I just don't see how completely

326
00:21:18,119 --> 00:21:22,680
Speaker 1: acknowledging explicitly acknowledging that the government is going to stand

327
00:21:22,720 --> 00:21:26,439
Speaker 1: behind all private deposit liabilities of all private banks, no

328
00:21:26,480 --> 00:21:30,280
Speaker 1: matter what size and what assets side risk profile may be,

329
00:21:30,600 --> 00:21:35,680
Speaker 1: on the one hand, without actually, you know, basically poking

330
00:21:35,680 --> 00:21:39,159
Speaker 1: at that beast of activity limitations and the ghost of

331
00:21:39,200 --> 00:21:43,440
Speaker 1: glass Tigel, I just don't see how that will happen realistically.

332
00:21:43,760 --> 00:21:46,600
Speaker 1: So we sort of teased at this. But one of

333
00:21:46,680 --> 00:21:49,359
Speaker 1: the things you've written about is this idea of, Okay,

334
00:21:49,359 --> 00:21:51,560
Speaker 1: if we're going to separate just sort of core checking

335
00:21:51,560 --> 00:21:55,520
Speaker 1: and deposits from other banking functions, you know, why not

336
00:21:55,680 --> 00:21:58,320
Speaker 1: have let people have a checking account it the FED.

337
00:21:58,640 --> 00:22:00,560
Speaker 1: If that's all it takes. There's no risk there. And

338
00:22:00,600 --> 00:22:02,920
Speaker 1: you've written about that, and you've advocated that, and it

339
00:22:02,960 --> 00:22:05,480
Speaker 1: feels like a lot of people are talking about that

340
00:22:05,560 --> 00:22:08,840
Speaker 1: these days, and people are talking about CBDCs and the

341
00:22:09,040 --> 00:22:14,840
Speaker 1: difficulty in disbursing unemployment insurance and PPP money during the

342
00:22:14,880 --> 00:22:18,200
Speaker 1: crisis also revealed some issues the government has in getting

343
00:22:18,240 --> 00:22:21,800
Speaker 1: money to households. But I think the difference between your

344
00:22:21,840 --> 00:22:25,040
Speaker 1: work and a lot of the popular conversation. The popular

345
00:22:25,080 --> 00:22:28,560
Speaker 1: conversation it feels like kind of like technical, like almost

346
00:22:28,560 --> 00:22:32,680
Speaker 1: like inspired by crypto, digital currency, etc. And your work

347
00:22:32,720 --> 00:22:36,399
Speaker 1: and your case feels more explicitly political about changing the

348
00:22:36,440 --> 00:22:39,800
Speaker 1: balance of power and changing this sort of conduct of banking,

349
00:22:40,160 --> 00:22:43,960
Speaker 1: not not just a technocratic central bank fix. Can you

350
00:22:44,000 --> 00:22:46,159
Speaker 1: talk about the sort of like impulse that you have

351
00:22:46,240 --> 00:22:48,880
Speaker 1: as sort of like your vision for what the FED

352
00:22:48,920 --> 00:22:53,120
Speaker 1: would offer, Yes, of course, Well, I believe that all

353
00:22:53,240 --> 00:22:57,719
Speaker 1: finance is inherently political because we're talking about this public

354
00:22:57,720 --> 00:23:01,320
Speaker 1: private partnership, right there is that vision of labor between

355
00:23:01,359 --> 00:23:06,000
Speaker 1: the government that basically has to ensure the safety of

356
00:23:06,040 --> 00:23:09,760
Speaker 1: all money as we are learning now, and the private

357
00:23:09,800 --> 00:23:13,719
Speaker 1: institutions that get to allocate credit. And as we talked earlier,

358
00:23:13,760 --> 00:23:16,800
Speaker 1: it's extremely difficult to maintain that balance. So it really

359
00:23:16,920 --> 00:23:20,320
Speaker 1: is a win win situation. We have that fiction that

360
00:23:20,359 --> 00:23:24,359
Speaker 1: we can basically manipulate technocratically by I don't know, capital

361
00:23:24,480 --> 00:23:29,439
Speaker 1: regulation and various other tools. Technocratically somehow always fine tune

362
00:23:29,480 --> 00:23:33,440
Speaker 1: that balance so that the private banks can be profitable,

363
00:23:33,920 --> 00:23:37,680
Speaker 1: but also in the process of being profitable, they could

364
00:23:37,800 --> 00:23:41,760
Speaker 1: generate this public good for us. My idea for the

365
00:23:41,800 --> 00:23:46,800
Speaker 1: FED accounts is really kind of to imagine the world

366
00:23:46,840 --> 00:23:51,280
Speaker 1: in which we bite the bullet and say look, instead

367
00:23:51,320 --> 00:23:56,320
Speaker 1: of constantly trying to keep up with the fast changing environment,

368
00:23:56,440 --> 00:24:00,400
Speaker 1: where private banks constantly keep pushing on that line right

369
00:24:00,440 --> 00:24:04,040
Speaker 1: in favor of their private profit making capacity, why don't

370
00:24:04,080 --> 00:24:08,000
Speaker 1: we just say, look, everybody can open an account deposit

371
00:24:08,040 --> 00:24:11,360
Speaker 1: account at the Federal Reserve. Of course, the Federal Reserve

372
00:24:11,520 --> 00:24:14,800
Speaker 1: then would have to re establish some form of partnership

373
00:24:15,280 --> 00:24:19,840
Speaker 1: with private institutions, let's call them community banks, right, smaller

374
00:24:19,840 --> 00:24:23,080
Speaker 1: private institutions that are more likely to adhere to this

375
00:24:23,200 --> 00:24:26,640
Speaker 1: kind of a public utility model, and have them administer

376
00:24:27,040 --> 00:24:30,480
Speaker 1: the opening and the management of those accounts on behalf

377
00:24:30,520 --> 00:24:33,640
Speaker 1: of the FED for all of us, So that, for example,

378
00:24:33,680 --> 00:24:36,760
Speaker 1: for me, not much will change. I would still go

379
00:24:36,840 --> 00:24:39,240
Speaker 1: to my Tompkins Trust, which is a community bank where

380
00:24:39,280 --> 00:24:42,080
Speaker 1: I bank right, and open my deposit account there, my

381
00:24:42,160 --> 00:24:45,119
Speaker 1: checking account there. But my checking account would actually have

382
00:24:45,280 --> 00:24:48,960
Speaker 1: in it the liability not of Tompkins Trust, but the

383
00:24:49,000 --> 00:24:52,640
Speaker 1: liability director of the Federal Reserve. Now, if I want

384
00:24:52,640 --> 00:24:55,080
Speaker 1: to have also savings account, or maybe some kind of

385
00:24:55,119 --> 00:24:58,000
Speaker 1: a money market account, or maybe open a CD for

386
00:24:58,040 --> 00:25:01,520
Speaker 1: some extra money that will not be provided by the Fed.

387
00:25:01,840 --> 00:25:05,560
Speaker 1: Then Tomkins Trust will already have me at the branch

388
00:25:05,680 --> 00:25:08,159
Speaker 1: right or on the phone, and it would have a

389
00:25:08,200 --> 00:25:11,400
Speaker 1: great opportunity to tell me, well, by the way, if

390
00:25:11,400 --> 00:25:14,040
Speaker 1: you want to have an SD or some saving account,

391
00:25:14,400 --> 00:25:18,399
Speaker 1: here it is we can offer you that particular functionality

392
00:25:18,720 --> 00:25:21,200
Speaker 1: for a fee, basically the way they do it now.

393
00:25:21,600 --> 00:25:24,720
Speaker 1: So it will be a great situation for community banks.

394
00:25:24,760 --> 00:25:28,440
Speaker 1: They would be effectively the agents of the central Bank

395
00:25:28,480 --> 00:25:30,840
Speaker 1: for a fee that the Central Bank will pay them

396
00:25:31,200 --> 00:25:34,600
Speaker 1: manage these kinds of deposit accounts, but also have other

397
00:25:34,640 --> 00:25:37,840
Speaker 1: services that can deprop that they can provide to everybody

398
00:25:37,920 --> 00:25:42,840
Speaker 1: like this, and their business model would have been under

399
00:25:42,840 --> 00:25:46,360
Speaker 1: this situation much more stable than it is now when

400
00:25:46,359 --> 00:25:50,080
Speaker 1: they're basically at the mercy of depositors thinking, well, you know,

401
00:25:50,080 --> 00:25:52,640
Speaker 1: I'd rather move my money to JP Morgan Chase because

402
00:25:52,680 --> 00:25:55,760
Speaker 1: that is definitely too big to fail institution. So that

403
00:25:55,920 --> 00:25:59,320
Speaker 1: would have been for us how we would basically deal

404
00:25:59,359 --> 00:26:01,760
Speaker 1: with it, And yet there would be no need for

405
00:26:01,760 --> 00:26:05,520
Speaker 1: federal deposit insurance anymore, because the transactional accounts was checking

406
00:26:05,560 --> 00:26:08,679
Speaker 1: accounts in which we hold our deposit money that we

407
00:26:08,800 --> 00:26:12,719
Speaker 1: use for payments every day would be explicitly directly the

408
00:26:12,760 --> 00:26:17,600
Speaker 1: federal government's liability, and the federal government doesn't have an

409
00:26:17,600 --> 00:26:22,920
Speaker 1: incentive to provide that public good, safe money as some

410
00:26:23,000 --> 00:26:27,080
Speaker 1: kind of a private, private profit making opportunity. So that

411
00:26:27,119 --> 00:26:29,720
Speaker 1: would be the wind win, and we would separate the

412
00:26:29,880 --> 00:26:33,920
Speaker 1: public money creation from the rest of the private financial

413
00:26:34,359 --> 00:26:37,879
Speaker 1: and lending activities on the other side, and will not

414
00:26:38,200 --> 00:26:42,240
Speaker 1: have to deal with all these complicated technical matters of

415
00:26:42,280 --> 00:26:47,600
Speaker 1: making that regulatory system increasingly complex and increasingly unstable because

416
00:26:47,600 --> 00:26:51,480
Speaker 1: we keep tinkering on the edges. Tinkering on the edges

417
00:26:51,600 --> 00:26:53,560
Speaker 1: is a really good way of putting it. I have

418
00:26:53,640 --> 00:26:57,919
Speaker 1: a very basic question, and I fully admit I haven't

419
00:26:58,080 --> 00:27:01,680
Speaker 1: read that much about the whole FED checking account idea,

420
00:27:01,840 --> 00:27:06,920
Speaker 1: but how do you deposit rates work in that scenario?

421
00:27:06,960 --> 00:27:12,160
Speaker 1: And how much differentiation would there be between individual banks

422
00:27:12,240 --> 00:27:16,919
Speaker 1: under that sort of framework. So this is where there is,

423
00:27:16,960 --> 00:27:20,280
Speaker 1: of course a range of design choices. And in the

424
00:27:20,320 --> 00:27:24,200
Speaker 1: paper that I wrote the People's Ledger, my main point

425
00:27:24,359 --> 00:27:28,840
Speaker 1: was kind of structural, to just imagine when this type

426
00:27:28,840 --> 00:27:32,080
Speaker 1: of a decision is made, what kind of structural implications

427
00:27:32,080 --> 00:27:35,760
Speaker 1: it will have, and that it's not as scary as

428
00:27:35,800 --> 00:27:39,080
Speaker 1: people think because they have this sort of image of all,

429
00:27:39,160 --> 00:27:42,199
Speaker 1: big bad government is just going to control all of

430
00:27:42,240 --> 00:27:44,120
Speaker 1: my money and that's bad. And of course that would

431
00:27:44,160 --> 00:27:46,080
Speaker 1: be a bad thing, but we don't have to design

432
00:27:46,080 --> 00:27:48,560
Speaker 1: the system that way. So that was the point of

433
00:27:48,920 --> 00:27:53,200
Speaker 1: the paper. But to your question, one of the beauties

434
00:27:53,560 --> 00:27:56,520
Speaker 1: or potential opportunities that creating this type of a FED

435
00:27:56,520 --> 00:28:02,720
Speaker 1: account system offers, particularly in the age of CBDC possibilities

436
00:28:02,720 --> 00:28:05,520
Speaker 1: in other words, that those FED accounts will actually be

437
00:28:05,640 --> 00:28:09,240
Speaker 1: digital money to okenized money perhaps or account based money,

438
00:28:09,480 --> 00:28:13,359
Speaker 1: whatever it is, is that then the rates on various

439
00:28:13,400 --> 00:28:18,640
Speaker 1: deposits can be established in a much more tailored, much

440
00:28:18,720 --> 00:28:22,639
Speaker 1: more sort of finely managed way, right, depending on a

441
00:28:22,720 --> 00:28:27,359
Speaker 1: variety of public policy needs by the FED. So there

442
00:28:27,440 --> 00:28:32,040
Speaker 1: could be, for instance, interest paid on all of these

443
00:28:32,040 --> 00:28:35,400
Speaker 1: FED accounts, right, and the ability to pay interest could

444
00:28:35,560 --> 00:28:40,800
Speaker 1: actually be a very much adirect tool of monetary policy

445
00:28:40,840 --> 00:28:43,560
Speaker 1: for the FED. Then one might ask a question, should

446
00:28:43,600 --> 00:28:47,520
Speaker 1: the rates differ for individuals and for companies? Well, they

447
00:28:47,560 --> 00:28:52,800
Speaker 1: can if that makes sense. For example, if a particular

448
00:28:53,320 --> 00:28:58,280
Speaker 1: occurrence or particular dynamic and the economy may necessitate, for instance,

449
00:28:58,480 --> 00:29:02,200
Speaker 1: to channel molly equidity into a particular sector of the

450
00:29:02,240 --> 00:29:06,120
Speaker 1: economy by maybe increasing the rate on the deposits that's

451
00:29:06,160 --> 00:29:10,240
Speaker 1: being paid to a particular type of institutional institutional deposits.

452
00:29:10,280 --> 00:29:14,000
Speaker 1: That can be done vice versa. If the need is

453
00:29:14,080 --> 00:29:16,880
Speaker 1: too for example, in the pandemic, to send more money

454
00:29:17,360 --> 00:29:21,240
Speaker 1: to certain low income families, right, that can be done

455
00:29:21,320 --> 00:29:24,200
Speaker 1: much faster and much more easily. And that's one of

456
00:29:24,200 --> 00:29:28,600
Speaker 1: those flexibility tools that this type of a system would offer. Yeah,

457
00:29:28,640 --> 00:29:33,080
Speaker 1: it definitely seems like there's potential for an improvement in

458
00:29:33,120 --> 00:29:36,840
Speaker 1: the transmission of monetary policy, and to the extent that

459
00:29:37,280 --> 00:29:41,240
Speaker 1: the average deposit holder doesn't even get any extra incentive

460
00:29:41,240 --> 00:29:43,880
Speaker 1: in many cases. We just did in an episode about

461
00:29:44,040 --> 00:29:47,440
Speaker 1: low deposit betas with Joe Botte at Parkleys, and you

462
00:29:47,440 --> 00:29:50,440
Speaker 1: could imagine a much more sensitive as soon as the

463
00:29:50,480 --> 00:29:54,680
Speaker 1: Fed hikes rates, you start getting more in your savings account.

464
00:29:54,880 --> 00:29:58,160
Speaker 1: But that would that would clearly hurt nymbs of private

465
00:29:58,160 --> 00:30:01,320
Speaker 1: banks across the category. So you could see why even

466
00:30:01,360 --> 00:30:04,160
Speaker 1: though under your proposal as you envisioned, still a role

467
00:30:04,200 --> 00:30:06,680
Speaker 1: for big banks, still a role for the community banks

468
00:30:06,760 --> 00:30:10,080
Speaker 1: as branches, I mean, clearly, it would change their sort

469
00:30:10,120 --> 00:30:13,760
Speaker 1: of like funding structure and parts of their profitability. Oh,

470
00:30:13,840 --> 00:30:16,600
Speaker 1: that's absolutely right, And that is one of the one

471
00:30:16,640 --> 00:30:21,920
Speaker 1: of the arguments against considering something like FED accounts because

472
00:30:22,200 --> 00:30:25,280
Speaker 1: people say, well, where where are the banks going to

473
00:30:25,320 --> 00:30:28,640
Speaker 1: get their funding, because right now they get their funding

474
00:30:28,680 --> 00:30:33,520
Speaker 1: from chief deposits. Right, Well, we can actually engineer a

475
00:30:33,640 --> 00:30:38,840
Speaker 1: similar similar way for private lending institution banks we call

476
00:30:38,880 --> 00:30:43,920
Speaker 1: them banks now right to get subsidized, publicly subsidized funding

477
00:30:44,000 --> 00:30:48,480
Speaker 1: for their loans pretty much the way they're getting it

478
00:30:48,600 --> 00:30:53,200
Speaker 1: even today, right the discount window type of an arrangement

479
00:30:53,240 --> 00:30:57,720
Speaker 1: where they could actually extend their loans to credit worthy

480
00:30:57,920 --> 00:31:01,920
Speaker 1: individuals and businesses and turn to the FED and basically

481
00:31:01,960 --> 00:31:06,000
Speaker 1: discount those loans to the FED at a preferable rate,

482
00:31:06,000 --> 00:31:09,280
Speaker 1: at the preferred rate, very good rate of interest. This

483
00:31:09,360 --> 00:31:13,240
Speaker 1: is basically what the FED has been doing for many decades,

484
00:31:13,280 --> 00:31:15,840
Speaker 1: and what the FED does every time it sets up

485
00:31:15,880 --> 00:31:19,440
Speaker 1: this type of liquidity facility that we're seeing set up

486
00:31:19,440 --> 00:31:22,960
Speaker 1: over the weekend, right when the banks just basically bring

487
00:31:23,000 --> 00:31:26,280
Speaker 1: their assets and discount those assets, plash those assets to

488
00:31:26,360 --> 00:31:30,600
Speaker 1: the FED. And so that can be redesigned as a

489
00:31:30,680 --> 00:31:35,120
Speaker 1: more permanent solution to the funding needs for those lending

490
00:31:35,160 --> 00:31:39,120
Speaker 1: institutions that really are interested in lending to the real economy,

491
00:31:39,360 --> 00:31:42,760
Speaker 1: and it would give the FED capacity to really find

492
00:31:42,800 --> 00:31:46,040
Speaker 1: you in the credit policy. In other words, the FED

493
00:31:46,240 --> 00:31:51,160
Speaker 1: wouldn't have to accept at that new discount window, for example,

494
00:31:51,520 --> 00:31:55,040
Speaker 1: loans to I don't know, short sellers and speculators out

495
00:31:55,040 --> 00:31:58,280
Speaker 1: there in capital markets. Not to say that banks cannot

496
00:31:58,320 --> 00:32:01,840
Speaker 1: then lend to those speculatoris it's just when they lead

497
00:32:01,880 --> 00:32:05,000
Speaker 1: to those speculators for speculative purposes, they would have to

498
00:32:05,080 --> 00:32:08,280
Speaker 1: fund those loans in capital markets and leave it to

499
00:32:08,480 --> 00:32:10,520
Speaker 1: the market discipline to figure out whether one of those

500
00:32:10,560 --> 00:32:14,080
Speaker 1: loans are prudent. But if they want to extend loans

501
00:32:14,080 --> 00:32:18,320
Speaker 1: to a productive enterprise, to small businesses, medium sized business

502
00:32:18,400 --> 00:32:21,320
Speaker 1: or all large businesses in any community, then they would

503
00:32:21,360 --> 00:32:26,040
Speaker 1: definitely have access to preferential funding through that kind of

504
00:32:26,040 --> 00:32:30,480
Speaker 1: a redesigned discount window. In other words, you subsidize on

505
00:32:30,600 --> 00:32:52,360
Speaker 1: the asset side rather than on the liability side. You know,

506
00:32:52,440 --> 00:32:56,480
Speaker 1: you mentioned the FED facility just then, which allows banks

507
00:32:56,520 --> 00:33:01,840
Speaker 1: to tap FED financing on their bonds at par rather

508
00:33:01,880 --> 00:33:05,160
Speaker 1: than the market value. Because the whole problem here, or

509
00:33:05,480 --> 00:33:08,000
Speaker 1: part of the problem, is unrealized losses on things like

510
00:33:08,120 --> 00:33:11,400
Speaker 1: treasuries and agency mortgage backed securities and things like that.

511
00:33:12,160 --> 00:33:17,360
Speaker 1: What's the overall impact of that kind of facility on

512
00:33:17,520 --> 00:33:20,880
Speaker 1: the banking system? How do you see that playing out? Well,

513
00:33:20,920 --> 00:33:25,880
Speaker 1: this is this facility, of course, is a familiar structure, right.

514
00:33:25,960 --> 00:33:28,280
Speaker 1: The FED has done it in the two thousand and

515
00:33:28,320 --> 00:33:33,200
Speaker 1: eight crisis, in twenty twenty pandemic situations, so to the

516
00:33:33,240 --> 00:33:36,960
Speaker 1: extent that this is at least the third time we're

517
00:33:37,000 --> 00:33:41,960
Speaker 1: seeing this type of approach, It is now, in my view,

518
00:33:42,080 --> 00:33:47,400
Speaker 1: firmly ensconced in everybody's understanding as basically more or less

519
00:33:47,440 --> 00:33:51,520
Speaker 1: a permanent type of a solution. Right. And the question

520
00:33:51,600 --> 00:33:53,880
Speaker 1: here is that is it the right thing to do?

521
00:33:54,000 --> 00:33:57,239
Speaker 1: Is the the right policy choice? And opinions differ. I

522
00:33:57,280 --> 00:34:01,040
Speaker 1: do think that in the current situation, as a kind

523
00:34:01,080 --> 00:34:05,680
Speaker 1: of market wide signal to support all the banks who

524
00:34:05,760 --> 00:34:09,000
Speaker 1: are being heard by the fed's own monetary policy, it's

525
00:34:09,360 --> 00:34:12,560
Speaker 1: the right thing to do. But at the same time,

526
00:34:12,600 --> 00:34:15,759
Speaker 1: it's sort of what does it tell us about this

527
00:34:15,800 --> 00:34:20,600
Speaker 1: whole conventional image, right of where the public subsidy ends

528
00:34:20,719 --> 00:34:24,520
Speaker 1: and the private responsibility for the private risk taking begins.

529
00:34:25,239 --> 00:34:29,719
Speaker 1: So we are in a situation where now you know,

530
00:34:29,800 --> 00:34:32,239
Speaker 1: people are asking questions, well, how come banks get this

531
00:34:32,360 --> 00:34:38,160
Speaker 1: type of liquidity facility. But for example, municipalities, right, or

532
00:34:38,360 --> 00:34:44,799
Speaker 1: various other more publicly oriented institutions, finance institutions, they don't

533
00:34:44,840 --> 00:34:48,000
Speaker 1: get something permanent of this kind. And this is where

534
00:34:48,000 --> 00:34:52,279
Speaker 1: we get into this more complex and deeper issues of

535
00:34:52,400 --> 00:34:56,440
Speaker 1: structural change. Right, if the FED really is the only

536
00:34:56,480 --> 00:35:01,040
Speaker 1: balance sheet in this economy that is already standing to

537
00:35:01,160 --> 00:35:04,560
Speaker 1: absorb all the risks on various assets, but it makes

538
00:35:04,560 --> 00:35:09,640
Speaker 1: certain choices, whose risks on what assets is willing to absorb,

539
00:35:10,120 --> 00:35:14,040
Speaker 1: then this question of what the choice entails and who

540
00:35:14,120 --> 00:35:17,600
Speaker 1: should be making that choice becomes a political question. You know,

541
00:35:17,640 --> 00:35:20,560
Speaker 1: it really feels to me just sort of big picture.

542
00:35:20,680 --> 00:35:24,320
Speaker 1: It really feels to me like the events of SVB

543
00:35:24,560 --> 00:35:28,160
Speaker 1: have opened the sort of Overton window a lot. I mean,

544
00:35:28,160 --> 00:35:32,239
Speaker 1: we're having this conversation you and many other academics, and

545
00:35:32,320 --> 00:35:34,759
Speaker 1: the CBDC conversation has been going on for a while,

546
00:35:34,760 --> 00:35:38,120
Speaker 1: but suddenly it feels more mainstream because this tension that

547
00:35:38,200 --> 00:35:42,360
Speaker 1: you've been talking about for years private profit in banking

548
00:35:42,560 --> 00:35:45,560
Speaker 1: with this sort of like utility function that everyone expects,

549
00:35:45,600 --> 00:35:47,319
Speaker 1: and you did see all these vcs. They're like, well,

550
00:35:47,360 --> 00:35:49,239
Speaker 1: if we didn't come on, no one really thinks we're

551
00:35:49,280 --> 00:35:51,799
Speaker 1: lending money to banks and we have a deposit and

552
00:35:51,840 --> 00:35:54,040
Speaker 1: I think they kind of have a point. Nobody thinks that,

553
00:35:54,120 --> 00:35:56,160
Speaker 1: and so why do we still pretend that that part

554
00:35:56,200 --> 00:35:58,840
Speaker 1: of the structure. But it definitely feels like this blew

555
00:35:59,120 --> 00:36:02,120
Speaker 1: the conversation wide out into the open. So what do

556
00:36:02,160 --> 00:36:05,040
Speaker 1: you think like happens now? I mean, like it's hard

557
00:36:05,080 --> 00:36:08,960
Speaker 1: to predict the future and obviously politics, etc. But like

558
00:36:09,000 --> 00:36:11,080
Speaker 1: what would you look for and sort of the I

559
00:36:11,080 --> 00:36:13,440
Speaker 1: don't know coming months in terms of like where this

560
00:36:13,600 --> 00:36:18,200
Speaker 1: conversation goes, where you expect to see regulatory changes and

561
00:36:18,280 --> 00:36:20,359
Speaker 1: sort of like how you're what you're watching to see

562
00:36:20,360 --> 00:36:26,880
Speaker 1: how it unfolds. I am hopeful that this conversation about finally,

563
00:36:27,920 --> 00:36:33,440
Speaker 1: you know, cutting that chord right between private deposit taking

564
00:36:33,520 --> 00:36:37,120
Speaker 1: and the public responsibility for what happens in the crisis

565
00:36:38,000 --> 00:36:40,840
Speaker 1: actually becomes more of an acceptable measure. But I'm not

566
00:36:40,880 --> 00:36:45,160
Speaker 1: sure it will simply because you know, rationality of doing

567
00:36:45,239 --> 00:36:49,000
Speaker 1: something is not the only factor that makes it more

568
00:36:49,080 --> 00:36:52,160
Speaker 1: likely to happen. There are a lot of vested interests,

569
00:36:52,200 --> 00:36:56,800
Speaker 1: economic and political interests that will be fighting tooth and

570
00:36:56,880 --> 00:37:00,960
Speaker 1: nail against it. The banking industry, for one, right, So

571
00:37:01,080 --> 00:37:04,279
Speaker 1: my worry is that yes, yeah, I just as a

572
00:37:04,400 --> 00:37:06,920
Speaker 1: tag on you know, very minor. I would love to

573
00:37:06,920 --> 00:37:08,640
Speaker 1: have you back on another time to talk about that

574
00:37:08,640 --> 00:37:11,279
Speaker 1: whole experience of the failed nomination. But you know, just

575
00:37:11,320 --> 00:37:15,200
Speaker 1: the political the vehemence of the opposition to you curious

576
00:37:15,200 --> 00:37:20,200
Speaker 1: like you saw firsthand how powerful that community bank lobby is.

577
00:37:21,000 --> 00:37:25,239
Speaker 1: That's absolutely right. They're very powerful, and unfortunately they're too

578
00:37:25,280 --> 00:37:28,759
Speaker 1: easily manipulated by the Wall Street big bank lobby in

579
00:37:28,800 --> 00:37:33,120
Speaker 1: my view, because the real fear, from my views, you know,

580
00:37:33,280 --> 00:37:37,160
Speaker 1: separate the public from private. The real fear was really

581
00:37:37,200 --> 00:37:39,359
Speaker 1: coming from the big banks because they are the ones

582
00:37:39,360 --> 00:37:42,000
Speaker 1: who run a lot of risk and take on a

583
00:37:42,040 --> 00:37:43,840
Speaker 1: lot of risks and generate a lot of risk for

584
00:37:43,880 --> 00:37:46,040
Speaker 1: all of us on the asset side of their balance sheets.

585
00:37:46,280 --> 00:37:50,839
Speaker 1: And they knew that people who like me advocate for

586
00:37:50,960 --> 00:37:53,000
Speaker 1: sort of you know, the return to more kind of

587
00:37:53,040 --> 00:37:57,279
Speaker 1: public utility type banking or two more public role in

588
00:37:57,640 --> 00:38:02,520
Speaker 1: banking sector in general, would not really hear the point

589
00:38:02,520 --> 00:38:05,320
Speaker 1: of view really well. But the community banks are extremely

590
00:38:05,320 --> 00:38:08,280
Speaker 1: powerful and they played the role unfortunately in that process.

591
00:38:09,560 --> 00:38:12,879
Speaker 1: Sally Omarova so much, thanks for coming on. I feel

592
00:38:12,880 --> 00:38:14,840
Speaker 1: like it is the perfect guest for real to like

593
00:38:14,840 --> 00:38:18,359
Speaker 1: move this conversation forward someone who's been thinking about these

594
00:38:18,400 --> 00:38:20,839
Speaker 1: for a lot longer than a week and a half,

595
00:38:20,920 --> 00:38:23,960
Speaker 1: like many other people have. Great to get your perspective.

596
00:38:24,920 --> 00:38:27,320
Speaker 1: Thank you so much. Yeah, thank you so much, Sally.

597
00:38:27,360 --> 00:38:31,040
Speaker 1: That was really interesting. From discount window to overton window.

598
00:38:31,080 --> 00:38:33,560
Speaker 1: Has anyone made that joke yet? Oh? That's a that's

599
00:38:33,560 --> 00:38:50,000
Speaker 1: a good one. It does feel tracy like this sort

600
00:38:50,040 --> 00:38:53,560
Speaker 1: of like glaring contradiction of like, look, we all just

601
00:38:53,960 --> 00:38:56,400
Speaker 1: want a checking account, We just want to have a

602
00:38:56,400 --> 00:38:58,160
Speaker 1: place to put our money and not have to think

603
00:38:58,200 --> 00:39:00,440
Speaker 1: about it. And then the fact that once in a

604
00:39:00,480 --> 00:39:02,799
Speaker 1: while our checking account holders blow up and they got

605
00:39:02,840 --> 00:39:05,680
Speaker 1: the profits or whatever, like, it does feel like it's

606
00:39:05,719 --> 00:39:09,000
Speaker 1: getting harder and harder to accept that that can't be resolved.

607
00:39:09,160 --> 00:39:11,919
Speaker 1: Right if it all comes back to the FED eventually,

608
00:39:12,000 --> 00:39:14,399
Speaker 1: then why not just go straight there? But I also

609
00:39:14,440 --> 00:39:19,000
Speaker 1: thought Sally's point about tinkering at the edges of bank

610
00:39:19,120 --> 00:39:23,200
Speaker 1: regulation was really accurate, because it does feel like it's

611
00:39:23,239 --> 00:39:27,200
Speaker 1: not just that, it's also that the very nature of

612
00:39:27,239 --> 00:39:31,080
Speaker 1: regulation tends to be quite backward looking, and so we're

613
00:39:31,120 --> 00:39:34,440
Speaker 1: always fighting the last crisis, and so the result of

614
00:39:34,480 --> 00:39:37,040
Speaker 1: two thousand and eight was well, we have a lot

615
00:39:37,040 --> 00:39:41,200
Speaker 1: of new capital and liquidity rules that mandate banks hold

616
00:39:41,320 --> 00:39:45,640
Speaker 1: big buffers of bonds, and now that you know, that

617
00:39:45,719 --> 00:39:48,239
Speaker 1: was fine during a period of relatively low inflation, but

618
00:39:48,360 --> 00:39:51,040
Speaker 1: fast forward to today, there's lots of inflation, and now

619
00:39:51,040 --> 00:39:55,120
Speaker 1: those bonds are somewhat problematic, and now we're having to

620
00:39:55,160 --> 00:39:59,280
Speaker 1: scramble to think of new things. When to her point,

621
00:39:59,360 --> 00:40:02,960
Speaker 1: you could just kind of maybe try to strike at

622
00:40:02,960 --> 00:40:05,360
Speaker 1: the heart of it. But that said that said, I

623
00:40:05,360 --> 00:40:09,040
Speaker 1: do think political constraints are real, and I cannot even

624
00:40:09,120 --> 00:40:13,480
Speaker 1: begin to imagine what this process, I mean, you're talking

625
00:40:13,480 --> 00:40:17,120
Speaker 1: about serious structural reform banking would actually look like No,

626
00:40:17,480 --> 00:40:20,320
Speaker 1: that's true. You know, it's funny you said, like how

627
00:40:20,560 --> 00:40:23,120
Speaker 1: much like regulator it's always like fight the last War,

628
00:40:23,239 --> 00:40:26,319
Speaker 1: And it is so wild that like a the real

629
00:40:26,400 --> 00:40:29,560
Speaker 1: like sort of like panic was really on the depositor side,

630
00:40:29,560 --> 00:40:31,600
Speaker 1: which is not something we thought about in two thousand

631
00:40:31,600 --> 00:40:33,440
Speaker 1: and eight, when it was really about the assets. And

632
00:40:33,480 --> 00:40:36,440
Speaker 1: then the assets that they did have, I mean it

633
00:40:36,560 --> 00:40:38,799
Speaker 1: was like treasuries and MBIs, which they did take a

634
00:40:38,800 --> 00:40:41,200
Speaker 1: big rate hit on. But it's like going back to

635
00:40:41,200 --> 00:40:42,759
Speaker 1: like two thousand and eight, it's like, oh cool that,

636
00:40:42,920 --> 00:40:45,160
Speaker 1: you know, we never I don't think people conceived of

637
00:40:45,280 --> 00:40:48,480
Speaker 1: that is like where the location of like a big

638
00:40:48,520 --> 00:40:51,000
Speaker 1: blow up would have happened, because it wasn't like they

639
00:40:51,000 --> 00:40:54,960
Speaker 1: were like making really agregious loans to or like you know,

640
00:40:55,200 --> 00:40:59,040
Speaker 1: really exotic, non good I mean the irony is they

641
00:40:59,080 --> 00:41:02,680
Speaker 1: took money for risky startups and put it into really

642
00:41:02,800 --> 00:41:06,360
Speaker 1: safe No, it's it really inverts everything, right, Like I

643
00:41:06,840 --> 00:41:08,319
Speaker 1: was trying to think about, like it has there ever

644
00:41:08,400 --> 00:41:11,440
Speaker 1: been another financial crisis or sort of banking bank that

645
00:41:11,520 --> 00:41:14,200
Speaker 1: failed because they took money from risky entities and lent

646
00:41:14,280 --> 00:41:16,920
Speaker 1: it to safe ones, Like it really does invert our

647
00:41:16,960 --> 00:41:21,359
Speaker 1: conception of how these crises happen. Absolutely, But maybe you know,

648
00:41:21,520 --> 00:41:25,480
Speaker 1: as we were discussing, maybe that's the peg that's needed

649
00:41:25,560 --> 00:41:28,680
Speaker 1: to really start to think about some of these underlying issues.

650
00:41:28,719 --> 00:41:32,040
Speaker 1: Because if even that is a problem, then then it

651
00:41:32,160 --> 00:41:36,040
Speaker 1: seems like we need to start looking for an alternative solution. Yeah. Absolutely,

652
00:41:36,120 --> 00:41:38,040
Speaker 1: all right, shall we leave it there? Let's leave it there.

653
00:41:38,200 --> 00:41:41,200
Speaker 1: This has been another episode of the Odd Thoughts podcast.

654
00:41:41,280 --> 00:41:43,799
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

655
00:41:43,840 --> 00:41:46,480
Speaker 1: Tracy Alloway, and I'm Joe Wi isn't all. You can

656
00:41:46,480 --> 00:41:49,680
Speaker 1: follow me on Twitter at the Stalwart, follow our guest

657
00:41:49,840 --> 00:41:55,000
Speaker 1: sal Amarova, She's at st Amarova. Follow our producers Carmen

658
00:41:55,080 --> 00:41:59,200
Speaker 1: Rodriguez at Kerman Arman and Dash Bennett at Dashbot. And

659
00:41:59,400 --> 00:42:03,080
Speaker 1: check out all of Bloomberg's podcasts under the handle at podcasts.

660
00:42:03,200 --> 00:42:06,239
Speaker 1: And for more odd Lots content, go to bloomberg dot

661
00:42:06,280 --> 00:42:09,680
Speaker 1: com slash odd Lots, where we post transcripts. Tracy and

662
00:42:09,719 --> 00:42:11,719
Speaker 1: I have a blog, and we have a newsletter that

663
00:42:11,760 --> 00:42:14,560
Speaker 1: comes out every Friday. Go there and sign up. Thanks

664
00:42:14,560 --> 00:42:15,040
Speaker 1: for listening,