WEBVTT - Is It Time For Public Checking Accounts at the Fed? 0:00:10.160 --> 0:00:14.560 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.680 --> 0:00:18.279 I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, there's 0:00:18.280 --> 0:00:23.400 still tons of dimensions potentially to explore so much with 0:00:23.440 --> 0:00:26.880 regard to the Silicon Valley Bank collapsed. But one of 0:00:26.920 --> 0:00:28.960 the sort of simple questions that a lot of people 0:00:28.960 --> 0:00:31.360 are asking is, from here on out, do we just 0:00:31.400 --> 0:00:34.720 assume that every deposit in the bank is ensured, even 0:00:34.760 --> 0:00:38.199 if officially they only promise up to two hundred and 0:00:38.159 --> 0:00:41.040 fifty k. Yeah. Well, I mean that was kind of 0:00:41.080 --> 0:00:46.080 the implicit takeaway from the weekend announcement. And I know 0:00:46.240 --> 0:00:48.640 we spoke with Dan Davies and he made the point 0:00:48.760 --> 0:00:54.520 that historically it is rareferred depositors in modern financial times 0:00:54.800 --> 0:00:57.960 to lose a bunch of their money because normally bondholders 0:00:57.960 --> 0:01:00.520 and equity holders lose all their money when bank fails, 0:01:00.520 --> 0:01:03.560 and some of that gets taken away to pay the 0:01:03.640 --> 0:01:08.720 deposit holders because deposits have seniority over bonds and equity. 0:01:09.360 --> 0:01:13.440 But I still think this is a pretty big change. 0:01:14.120 --> 0:01:17.200 It feels very major, or at a minimum, it feels 0:01:17.200 --> 0:01:20.280 like the implicit has been made explicit in a way 0:01:20.480 --> 0:01:24.080 that's before because yeah. Maybe in the end, even without 0:01:24.120 --> 0:01:27.800 any intervention SVB as depositors may have gotten whole. We 0:01:27.840 --> 0:01:30.560 don't know that there was no fire sale or anything 0:01:30.600 --> 0:01:33.480 like that. They just announced everyone is getting their money 0:01:33.560 --> 0:01:38.040 back Signature bank too. And then that raises a second question, Well, 0:01:38.080 --> 0:01:42.400 if depositors are really always implicitly or explicitly guaranteed by 0:01:42.400 --> 0:01:45.360 the government, what is the point of having like private 0:01:45.440 --> 0:01:49.160 retail banking for profit retail banking. Why not just let 0:01:49.160 --> 0:01:51.200 everyone have a checking account at the FED and then 0:01:51.480 --> 0:01:53.480 you never have to worry about any of this. That's right. 0:01:53.520 --> 0:01:55.720 So we touched on this a little bit when we 0:01:55.760 --> 0:01:57.920 spoke to love men end. But if you think about 0:01:58.000 --> 0:02:02.880 banks as providing an public function, you know, not only 0:02:02.920 --> 0:02:05.440 do they provide a safe place for people to actually 0:02:05.480 --> 0:02:08.640 put their money, but they also create money, you know, 0:02:08.840 --> 0:02:12.800 yea in the system. They lubricate the economy with credit. 0:02:13.280 --> 0:02:19.040 But they also tend to fail, sometimes repeatedly, as we're saying, 0:02:19.320 --> 0:02:21.840 and they also tend to get bailed out. Right, because 0:02:21.880 --> 0:02:24.760 the argument that you see time and time again is oh, 0:02:24.800 --> 0:02:27.160 you can't let this go because it would be bad 0:02:27.200 --> 0:02:29.560 for the financial system as a whole. You don't want 0:02:29.560 --> 0:02:33.080 to publish these particular people or this group of people, 0:02:33.560 --> 0:02:36.920 because then you know what happens if the little guy 0:02:37.040 --> 0:02:40.079 is in trouble next time. What if it's a farmer's credit. 0:02:40.280 --> 0:02:42.840 There's always a farmer At the end. It really says 0:02:42.919 --> 0:02:45.720 something about I think people's moral intuition still that like 0:02:46.280 --> 0:02:49.720 the thought experiment is like replaced Silicon Valley with like 0:02:50.040 --> 0:02:53.200 Kansas Farmers Bank or something. Right, But it's true. The 0:02:53.320 --> 0:02:56.120 point is true that a lot of people, like a 0:02:56.480 --> 0:02:59.480 people can't be expected to do due diligence, like on 0:02:59.560 --> 0:03:02.240 a bank. It's not realistic. Most professionals can't do that. 0:03:02.560 --> 0:03:05.120 But b it's also true that like there are a 0:03:05.120 --> 0:03:08.160 lot of quote innocent people who did not take like 0:03:08.200 --> 0:03:10.680 some crazy risk, who think they have money, and then 0:03:10.720 --> 0:03:12.679 the idea that they're told they don't like. I mean, 0:03:12.840 --> 0:03:16.400 the point is like the points are legit, well, we 0:03:16.400 --> 0:03:19.200 should get into them. But I do think like overall, 0:03:19.200 --> 0:03:22.160 there is this question of and I think we're going 0:03:22.200 --> 0:03:24.240 to see even more of it. People are still digesting 0:03:24.240 --> 0:03:27.079 what's happening. But there's this question of, Okay, if we're 0:03:27.080 --> 0:03:31.399 going to keep supporting banks in quite dramatic ways, then 0:03:31.600 --> 0:03:35.440 why let them be private? Entities, yeah, or why not 0:03:35.560 --> 0:03:39.760 give them I guess like a closer relationship with the 0:03:39.800 --> 0:03:43.560 government in one way or another, whether that's a regulatory 0:03:43.640 --> 0:03:46.720 function or something else. Right, there's all kinds of questions. 0:03:46.760 --> 0:03:49.200 I think we should get to our guests, because our guest, 0:03:49.320 --> 0:03:51.680 I really do believe we have the perfect guest, someone 0:03:51.720 --> 0:03:54.600 who's been warning about a lot of these exact issues 0:03:54.600 --> 0:03:57.960 for a long time, has anticipated a lot of these 0:03:58.000 --> 0:04:02.000 debates that people started having over the weekend, and who 0:04:02.040 --> 0:04:05.400 also has ideas about rethinking the banking system and what 0:04:05.440 --> 0:04:08.640 it means when some of these implicit guarantees become explicit. 0:04:08.920 --> 0:04:12.440 We're gonna be speaking with Salle Amarova. She's a professor 0:04:12.520 --> 0:04:16.719 of law at Cornell. She also had been President Biden's 0:04:16.920 --> 0:04:20.240 original nominee to head the Office of the Comptroller of 0:04:20.240 --> 0:04:24.480 the Currency. Because of her perspective, she came under very 0:04:24.520 --> 0:04:29.480 sort of like vicious attacks, some by some moderate Democrats, 0:04:29.560 --> 0:04:32.560 a lot of attacks by sort of like the community 0:04:32.600 --> 0:04:36.320 and regional bank lobby and all the Republican senators. It 0:04:36.400 --> 0:04:38.120 was a pretty awful affair. There was a lot of 0:04:38.400 --> 0:04:41.960 red baiting, basically accusing our guest of being a communist, 0:04:42.400 --> 0:04:45.560 very publicly because of wanting to have different thoughts about 0:04:45.600 --> 0:04:48.480 how the banking system works. But I kind of feel 0:04:48.600 --> 0:04:51.599 like some vindication over the weekend and people are sort 0:04:51.640 --> 0:04:54.159 of like rethinking a lot of what she's written about. 0:04:54.160 --> 0:04:57.200 So Professor Amarova, thank you so much for coming on 0:04:57.200 --> 0:05:02.000 odd lots. Thank you so much for inviting me to day. Yeah. Absolutely, 0:05:02.240 --> 0:05:04.960 you know we're going to get into all of your 0:05:05.160 --> 0:05:07.240 thinking about how we can rethink the banking systement and 0:05:07.279 --> 0:05:10.040 so forth. But just sort of like very simply to start, 0:05:10.720 --> 0:05:15.880 as an almost regulator, what does the SVB disaster to 0:05:15.920 --> 0:05:20.359 say to you about flaws within the existing regulatory structure 0:05:20.360 --> 0:05:24.080 of banking. This is exactly the kind of questions that 0:05:24.200 --> 0:05:27.599 I like to think about or cannot help myself thinking about. 0:05:27.680 --> 0:05:32.360 So while of course there are many immediate reasons for 0:05:32.600 --> 0:05:36.400 the failure of SVB in particular, there are also these 0:05:36.440 --> 0:05:40.720 sort of more deeper structural issues here that are on display. 0:05:41.200 --> 0:05:43.640 The first thing that we've learned is that the systemic 0:05:43.760 --> 0:05:47.440 risk in the financial system is actually a very complex 0:05:47.440 --> 0:05:51.200 and dynamic phenomenon. We are used to thinking about systemic 0:05:51.320 --> 0:05:57.279 risk caused by banks because banks invested in particularly risky assets, 0:05:57.279 --> 0:05:59.640 which they've done before. This is how we got the 0:05:59.640 --> 0:06:03.279 tooth snate crisis. But in this situation, the assets themselves 0:06:03.279 --> 0:06:06.000 didn't seem to be quite so risky until the monetary 0:06:06.000 --> 0:06:09.400 policy tender changed. Right, So what it tells us is 0:06:09.440 --> 0:06:14.600 that past policy choices actually shape future policy constraints in 0:06:15.240 --> 0:06:19.280 this particular area. Another thing that sort of became really 0:06:19.360 --> 0:06:22.880 obvious here is that there is a lot of political 0:06:22.880 --> 0:06:28.360 economy involved in bank regulation and the banking sector in general. Right, 0:06:28.880 --> 0:06:32.120 just like Joe what you said about how the rhetoric 0:06:32.279 --> 0:06:35.560 changes depending on who's asking for a bailout in a 0:06:35.600 --> 0:06:40.320 particular situation, right, And our perceptions change when people drug 0:06:40.320 --> 0:06:44.040 out the farmers. Suddenly everybody feels sympathetic this time around 0:06:44.040 --> 0:06:47.960 its venture capital industry, Silicon Valley. It's sort of difficult 0:06:47.960 --> 0:06:52.040 to feel sympathetic right to these billionaires who usually are 0:06:52.120 --> 0:06:56.159 known for being quite libertarian and kind of not liking 0:06:56.200 --> 0:06:59.960 the government genuinely speaking. But most importantly, and I think 0:07:00.080 --> 0:07:02.800 that's the point you've been driving at early, is that 0:07:03.360 --> 0:07:08.920 this particular crisis really exposed the public nature of the 0:07:08.960 --> 0:07:13.320 banking business, the deposit deposit taking the deposit money. Right, 0:07:13.640 --> 0:07:16.640 And this is precisely what my scholarship has been about 0:07:16.720 --> 0:07:21.520 for many many years. Banks are very special animals in 0:07:21.640 --> 0:07:27.080 our free market economy because their products are twofold. On 0:07:27.120 --> 0:07:32.080 the one hand, they create money that we treat as 0:07:32.320 --> 0:07:36.600 equivalent to sovereign money, so we all basically use deposits 0:07:36.680 --> 0:07:39.320 as if that was you know, the US dollars, but 0:07:39.400 --> 0:07:43.520 of course their liabilities of private banks, private firms, And 0:07:43.760 --> 0:07:46.960 the key about deposits at the bank is that they 0:07:47.000 --> 0:07:51.440 absolutely must be safe, must be perceived as safe. We 0:07:51.520 --> 0:07:55.280 need our money to be free of any doubt, so 0:07:55.360 --> 0:07:58.200 that everybody knows that when tomorrow go my bank or 0:07:58.720 --> 0:08:01.600 check my ownline back and bank account, the money that's 0:08:01.640 --> 0:08:04.680 been there is going to have its power value no 0:08:04.760 --> 0:08:08.560 matter what happens. And that is necessary because money is 0:08:08.760 --> 0:08:12.320 a public good. It is really essential lubrican to all 0:08:12.640 --> 0:08:16.800 economic transactions. So in effect, public goods like safety and security, 0:08:17.160 --> 0:08:22.000 national defense, safety that we know that if there is 0:08:22.040 --> 0:08:24.480 a fire and then the fire brigade will come, you 0:08:24.520 --> 0:08:26.960 don't have to pay for it. Those kinds of things 0:08:26.960 --> 0:08:31.600 we traditionally perceive as public goods, and they're provided publicly, 0:08:31.640 --> 0:08:35.000 and that's fine. But safe money is a public good 0:08:35.120 --> 0:08:39.080 exactly in the same way because it guarantees us the 0:08:39.280 --> 0:08:43.720 right to participate in economic exchange without being worried about 0:08:43.760 --> 0:08:46.520 the value of our money, the means of payment right. 0:08:47.280 --> 0:08:50.680 And the funny thing about that particular public good provision 0:08:50.760 --> 0:08:54.840 is that institutionally we have this system in which this 0:08:55.200 --> 0:09:00.920 public good is provided by private profitmaking firms banks. We 0:09:01.040 --> 0:09:04.680 regulate banks, which charter banks. We try to kind of 0:09:04.760 --> 0:09:09.000 treat them as if they were franchises of the federal government, 0:09:09.520 --> 0:09:13.720 purveyors of this public good. But nevertheless they are doing 0:09:13.760 --> 0:09:18.120 it through private risk taking on their own balance sheet. 0:09:18.600 --> 0:09:23.000 In other words, we've coupled this money creation with their 0:09:23.480 --> 0:09:30.160 lending functions. So banks create money when they extend loans. 0:09:30.559 --> 0:09:33.800 Right when they extend loans they open deposit accounts into 0:09:33.800 --> 0:09:36.960 which they deposit is newly created purchasing power that didn't 0:09:37.000 --> 0:09:41.640 exist before. And that is kind of ingenious because it 0:09:41.840 --> 0:09:47.839 connected the deposit taking capacity, the money creation capacity, with 0:09:48.000 --> 0:09:51.800 the sort of the judgment of supposedly kind of on 0:09:51.960 --> 0:09:55.360 the ground, really attuned to the needs of the economy, 0:09:55.480 --> 0:10:00.760 private banks that can judge which business, which house, which 0:10:00.800 --> 0:10:04.280 individual deserves that that kind of valcation of credit, and 0:10:04.320 --> 0:10:08.000 that creates the elastic currency. This is how we basically 0:10:08.040 --> 0:10:11.920 have just enough money in the economy to satisfy all 0:10:11.960 --> 0:10:15.079 the needs of the productive economy, right, and that also 0:10:15.120 --> 0:10:19.600 creates that monetary policy transmission channel. So that's what connects 0:10:19.600 --> 0:10:22.440 the Fed and Central Bank to the private banks that 0:10:22.600 --> 0:10:25.880 extend money, allocate credit, and in the process of doing it, 0:10:26.040 --> 0:10:32.080 actually expand or contract the amount of money that we 0:10:32.200 --> 0:10:34.959 treat a sovereign money available in the economy. So it's 0:10:35.000 --> 0:10:38.720 a very complex system. There's sort of a mismatch between 0:10:39.000 --> 0:10:42.600 the public money good and the private risk taking. But 0:10:43.000 --> 0:10:45.600 just to play Devil's advocate for one second, you know, 0:10:45.679 --> 0:10:49.600 one of the arguments that you do see going around is, okay, 0:10:49.880 --> 0:10:53.520 the ftic ensures up to two hundred and fifty thousand dollars, 0:10:53.559 --> 0:10:57.440 because the vast majority of people in the US do 0:10:57.640 --> 0:11:01.280 not have more than one hundred and fifty thousand dollars 0:11:01.280 --> 0:11:04.800 in their bank accounts. But if you're a company with 0:11:04.840 --> 0:11:09.480 a lot of cash, presumably you're more sophisticated, maybe you 0:11:09.520 --> 0:11:12.760 have a treasury function whose job it is to actually 0:11:12.800 --> 0:11:16.240 manage that cash. Is there an argument to be made 0:11:16.520 --> 0:11:20.319 that as the pool of money gets bigger, people should 0:11:20.360 --> 0:11:24.959 be more attuned to managing it. And making sure it's 0:11:25.080 --> 0:11:29.960 not going into riskier banks. This is actually a very 0:11:30.679 --> 0:11:34.400 astute question and kind of the question that is on 0:11:34.440 --> 0:11:38.520 the minds of many people today, and there is an 0:11:38.600 --> 0:11:41.360 argument for that, and the argument. One argument would be 0:11:41.400 --> 0:11:44.800 theoretical argument in a way to say that, look, let's 0:11:44.840 --> 0:11:49.760 just stop pretending that bank deposit money is not in 0:11:49.840 --> 0:11:53.600 fact public money, because it is publicly back. So let's 0:11:53.640 --> 0:11:56.760 just dispense with this fiction by removing that that cap 0:11:57.200 --> 0:12:01.120 so that everybody, wholesale depositors as well as retail depositors 0:12:01.400 --> 0:12:04.080 don't really ever have to question and worry. And it 0:12:04.080 --> 0:12:08.040 would definitely eliminate the incentive to run on a bank 0:12:08.480 --> 0:12:12.440 by these big money holders who are now able to 0:12:12.559 --> 0:12:15.520 orchestrate these runs faster than they used to do it before. 0:12:15.840 --> 0:12:19.520 So it would be a systemic structural fix to this 0:12:19.640 --> 0:12:23.000 problem of bank runs. The problem that I have with 0:12:23.040 --> 0:12:27.880 this argument is that, well, in that case, if we 0:12:28.040 --> 0:12:32.040 completely eliminate the fiction of some kind of private risk 0:12:32.120 --> 0:12:35.560 management by the banks themselves on the assets and the 0:12:35.600 --> 0:12:38.320 liability side of its balance sheet by saying work, all 0:12:38.320 --> 0:12:41.960 of the important liabilities of banks are in fact the 0:12:42.000 --> 0:12:46.640 federal government's liabilities, then we need to do one of 0:12:46.679 --> 0:12:49.920 the two things. One thing would be either we need 0:12:49.960 --> 0:12:54.040 to make sure that these banks really start acting truly 0:12:54.080 --> 0:12:58.000 as public utilities on the assets side, on the investment 0:12:58.040 --> 0:13:00.319 side of the balance sheets as well. In other words, 0:13:00.360 --> 0:13:02.480 we need to make sure that they are not able 0:13:03.000 --> 0:13:08.439 to abuse this kind of public subsidy, public backing, explicit 0:13:08.440 --> 0:13:12.120 backing of its life of their liabilities to make investments 0:13:12.120 --> 0:13:16.240 that would generate higher private profits for them but potentially 0:13:16.559 --> 0:13:20.440 increase the liability for the FDIC that is now direct. 0:13:21.240 --> 0:13:24.000 Or we need to basically say, well, you know what, 0:13:24.160 --> 0:13:27.520 we don't really need private banks to intermediate this kind 0:13:27.520 --> 0:13:31.080 of money creation, since all the money is public. Let's 0:13:31.080 --> 0:13:34.400 just provide those accounts publicly and deposit accounts publicly, so 0:13:34.880 --> 0:13:37.640 that this particular public with just the means of payment, 0:13:37.760 --> 0:13:42.679 means of exchange will be provided publicly. Everything else, lending, 0:13:42.880 --> 0:13:46.680 investment services, everything else that does require risk assessment on 0:13:46.760 --> 0:13:50.400 the ground that is best provided by private firms should 0:13:50.400 --> 0:13:53.520 be provided by proctors. But we would separate those two functions. 0:14:10.200 --> 0:14:13.120 Let me ask you a question, I mean your nomination 0:14:13.280 --> 0:14:16.040 to head the Office of the Controller of the Currency. 0:14:16.400 --> 0:14:21.120 The community banks, the regional banks really were vociferous in 0:14:21.400 --> 0:14:24.720 lobbying against you. And of course, so now the first 0:14:24.800 --> 0:14:28.040 crisis that we've seen in the current era happens at 0:14:28.040 --> 0:14:31.720 a community bank. Like you know, there is some questions 0:14:31.720 --> 0:14:34.040 setting aside, and I want to get to your thoughts 0:14:34.040 --> 0:14:36.560 on like FED accounts and all that, but setting aside that, 0:14:36.640 --> 0:14:38.240 a lot of people over the weekend they're like, well, 0:14:38.240 --> 0:14:40.000 why shouldn't I just have all my money at Chase? 0:14:40.040 --> 0:14:41.880 Why shouldn't I just have all my money at City? 0:14:42.320 --> 0:14:45.080 Because you know, we've been told they're too big to fail. 0:14:45.160 --> 0:14:46.960 We know they're going to get failed out. Also, just 0:14:47.040 --> 0:14:50.440 structurally they have they'll have a more diversified depositor base 0:14:50.880 --> 0:14:53.880 most likely, so maybe less likely to run. Like, do 0:14:54.000 --> 0:14:57.480 you see a positive role in the economy for these 0:14:57.520 --> 0:15:01.840 community banks that opposed you so much? Well, I do 0:15:03.680 --> 0:15:07.000 see a very important potential role for community banks to 0:15:07.040 --> 0:15:11.320 play because community banks just by definition, they are tied 0:15:11.360 --> 0:15:15.280 to their own communities, right, they are actually the epitome 0:15:15.480 --> 0:15:21.720 of that image of a private bank being really aware 0:15:21.880 --> 0:15:26.600 of what businesses and the households and individuals in any 0:15:26.600 --> 0:15:30.080 particular community really need in terms of financing, right, what 0:15:30.160 --> 0:15:34.080 kind of businesses they engage in, how responsible they are 0:15:34.160 --> 0:15:37.760 in running their financial affairs, whether or not their ideas 0:15:37.760 --> 0:15:41.320 are deserving of funding. This is the image that basically 0:15:41.800 --> 0:15:46.080 underlies and informs our existing hybrid system of banking. When 0:15:46.080 --> 0:15:49.760 we outsource the credit allocation and money creation to local banks, 0:15:50.000 --> 0:15:54.200 and of course there's huge institutions for three trillion dollars 0:15:54.240 --> 0:15:58.040 in assets, institutions like JP Morgan Chase, they cannot possibly 0:15:58.080 --> 0:16:01.240 be held to the same standard of being aware of 0:16:01.240 --> 0:16:04.080 what's happening on the ground. So to the extended community, 0:16:04.120 --> 0:16:07.080 banks are that kind of a bank, we really should 0:16:07.560 --> 0:16:11.480 promote their existence and support their existence and facilitating existence. 0:16:12.160 --> 0:16:17.280 But the problem is structural because it is true that 0:16:17.320 --> 0:16:21.080 we've made along the way so many policy decisions that 0:16:21.240 --> 0:16:27.720 effectively reward banks that are large diversified by virtue of 0:16:27.840 --> 0:16:32.120 conducting businesses and providing financial services that go farther and 0:16:32.120 --> 0:16:36.640 farther away from the traditional extension of long term loans 0:16:36.680 --> 0:16:40.360 that they hold on their own banking books into I 0:16:40.400 --> 0:16:44.560 don't know, investment advisory and investment banking and dealing and 0:16:44.640 --> 0:16:47.520 trading in various derivatives, instruments and so and so forth. 0:16:47.840 --> 0:16:52.000 Because that is the other side of what we call diversification. 0:16:52.080 --> 0:16:55.880 That's how you diversify away from the traditional lending business. 0:16:55.920 --> 0:16:59.920 Of course, that diversification has its own risks, but it also, 0:17:00.120 --> 0:17:04.160 among other things, makes these big diversified institutions effectively too 0:17:04.160 --> 0:17:06.600 big to fail, because now they have a hand and 0:17:06.640 --> 0:17:09.600 they play a critical role in so many pockets of 0:17:09.760 --> 0:17:14.560 the increasingly complex financial system. So of course it's rational 0:17:15.000 --> 0:17:17.879 for wholesale depositors to take their deposits out of a 0:17:17.920 --> 0:17:22.000 smaller community bank or even itsized regional bank and put 0:17:22.000 --> 0:17:25.399 them into JPMorgan or Bank of America, simply because you 0:17:25.480 --> 0:17:29.119 know that, for better for worse, these institutions are not 0:17:29.200 --> 0:17:32.280 likely to fail, and you don't want to think about 0:17:32.280 --> 0:17:34.680 the safety of your deposits on a going forward basis. 0:17:34.840 --> 0:17:36.960 You have too many other things to worry about in 0:17:37.040 --> 0:17:41.000 your actual business, right, So talk to us a little 0:17:41.040 --> 0:17:44.480 bit more about what can be done about the mismatch 0:17:44.600 --> 0:17:48.919 between you know, money as a public good and this 0:17:49.160 --> 0:17:55.679 private risk taking idea. And specifically, you mentioned the political 0:17:55.680 --> 0:17:59.040 economy earlier, and we've been talking a little bit about 0:17:59.080 --> 0:18:04.600 your own experience with politicians. But what can be done 0:18:04.880 --> 0:18:10.720 and what is realistic from a political perspective? Well, what 0:18:10.960 --> 0:18:14.560 is realistic from a political perspective is a very difficult 0:18:15.880 --> 0:18:19.440 thing to predict right, because politics is fickle, and it's 0:18:19.480 --> 0:18:25.760 also very difficult to see which political lobbying groups, which 0:18:26.480 --> 0:18:31.160 political interests are currently pushing forward, and you know how 0:18:31.359 --> 0:18:34.359 that balance of power is playing out in a moment 0:18:34.400 --> 0:18:38.480 when everybody is so nervous about potential further fallout from 0:18:38.520 --> 0:18:43.240 this particular situation. So living that aside, what can be 0:18:43.320 --> 0:18:48.560 done right, it's inherently extremely difficult to find the right 0:18:48.680 --> 0:18:54.480 balance between the public interest in having saved money produced 0:18:54.480 --> 0:18:57.040 by banks on the one hand, and the banks own 0:18:57.359 --> 0:19:03.760 quite legitimate interest in being privately profitable on the other hand. Historically, 0:19:03.800 --> 0:19:09.200 we've had this approach where we try to limit, for example, 0:19:09.240 --> 0:19:13.359 the activities and investments of what banks could do. So 0:19:13.560 --> 0:19:17.480 banks under the Glassdigal Active, and even before that, under 0:19:18.119 --> 0:19:23.000 the National Banking Act, for example, were explicitly prohibited from 0:19:23.160 --> 0:19:28.919 engaging an variety of activities outside the traditional landing. But then, 0:19:29.480 --> 0:19:33.520 in a long story short, gradually we've allowed these banks, 0:19:33.560 --> 0:19:35.480 even though they may be limited in what kind of 0:19:35.560 --> 0:19:40.200 risks they can undertake, to affiliate with securities firms whose 0:19:40.280 --> 0:19:42.919 business it is to take a lot of risks by 0:19:42.960 --> 0:19:46.639 trading and dealing in capital markets and derivatives markets, and 0:19:46.760 --> 0:19:50.800 there's other markets. Basically, their business is to assess and 0:19:50.960 --> 0:19:53.920 take on various risks that their clients want to take 0:19:54.000 --> 0:19:57.440 on or to buy or sell. So, for example, if 0:19:57.440 --> 0:20:01.640 we want to really sever the kind of private risk 0:20:01.680 --> 0:20:05.360 creation by virtue of certain types of incentives, certain types 0:20:05.400 --> 0:20:09.080 of activities that banks undertake and keep their deposit taking 0:20:09.160 --> 0:20:12.520 money creation function, then we would have to make these 0:20:12.560 --> 0:20:18.480 banks instead of kind of almost universal diversified financial services 0:20:18.480 --> 0:20:24.720 providers purely payments providers, providers of this particular public good, 0:20:24.760 --> 0:20:30.359 public utility, safe deposit, safe money. We have to limit 0:20:30.600 --> 0:20:33.080 the kinds of activities they can undertake, We have to 0:20:33.160 --> 0:20:37.080 limit the kinds of affiliations they can have, so as 0:20:37.119 --> 0:20:41.600 to limit their incentives to create further risks and to 0:20:41.720 --> 0:20:47.520 abuse that specific public subsidy. And that of course immediately 0:20:47.600 --> 0:20:51.040 brings back the ghost of the Glass Degalact. Right, And 0:20:51.160 --> 0:20:54.000 we know that Glass Degalact was repealed in nineteen ninety 0:20:54.080 --> 0:20:59.400 nine precisely because it was supposedly stifling competitional, stifling innovation 0:21:00.080 --> 0:21:03.080 and all of these things. And we are now in 0:21:03.119 --> 0:21:07.160 an era where stifling innovation is a really, really bad 0:21:07.680 --> 0:21:11.240 label and everybody is afraid of being being accused of 0:21:11.240 --> 0:21:17.040 stifling innovation. So personally, I just don't see how completely 0:21:18.119 --> 0:21:22.680 acknowledging explicitly acknowledging that the government is going to stand 0:21:22.720 --> 0:21:26.439 behind all private deposit liabilities of all private banks, no 0:21:26.480 --> 0:21:30.280 matter what size and what assets side risk profile may be, 0:21:30.600 --> 0:21:35.680 on the one hand, without actually, you know, basically poking 0:21:35.680 --> 0:21:39.159 at that beast of activity limitations and the ghost of 0:21:39.200 --> 0:21:43.440 glass Tigel, I just don't see how that will happen realistically. 0:21:43.760 --> 0:21:46.600 So we sort of teased at this. But one of 0:21:46.680 --> 0:21:49.359 the things you've written about is this idea of, Okay, 0:21:49.359 --> 0:21:51.560 if we're going to separate just sort of core checking 0:21:51.560 --> 0:21:55.520 and deposits from other banking functions, you know, why not 0:21:55.680 --> 0:21:58.320 have let people have a checking account it the FED. 0:21:58.640 --> 0:22:00.560 If that's all it takes. There's no risk there. And 0:22:00.600 --> 0:22:02.920 you've written about that, and you've advocated that, and it 0:22:02.960 --> 0:22:05.480 feels like a lot of people are talking about that 0:22:05.560 --> 0:22:08.840 these days, and people are talking about CBDCs and the 0:22:09.040 --> 0:22:14.840 difficulty in disbursing unemployment insurance and PPP money during the 0:22:14.880 --> 0:22:18.200 crisis also revealed some issues the government has in getting 0:22:18.240 --> 0:22:21.800 money to households. But I think the difference between your 0:22:21.840 --> 0:22:25.040 work and a lot of the popular conversation. The popular 0:22:25.080 --> 0:22:28.560 conversation it feels like kind of like technical, like almost 0:22:28.560 --> 0:22:32.680 like inspired by crypto, digital currency, etc. And your work 0:22:32.720 --> 0:22:36.399 and your case feels more explicitly political about changing the 0:22:36.440 --> 0:22:39.800 balance of power and changing this sort of conduct of banking, 0:22:40.160 --> 0:22:43.960 not not just a technocratic central bank fix. Can you 0:22:44.000 --> 0:22:46.159 talk about the sort of like impulse that you have 0:22:46.240 --> 0:22:48.880 as sort of like your vision for what the FED 0:22:48.920 --> 0:22:53.120 would offer, Yes, of course, Well, I believe that all 0:22:53.240 --> 0:22:57.719 finance is inherently political because we're talking about this public 0:22:57.720 --> 0:23:01.320 private partnership, right there is that vision of labor between 0:23:01.359 --> 0:23:06.000 the government that basically has to ensure the safety of 0:23:06.040 --> 0:23:09.760 all money as we are learning now, and the private 0:23:09.800 --> 0:23:13.719 institutions that get to allocate credit. And as we talked earlier, 0:23:13.760 --> 0:23:16.800 it's extremely difficult to maintain that balance. So it really 0:23:16.920 --> 0:23:20.320 is a win win situation. We have that fiction that 0:23:20.359 --> 0:23:24.359 we can basically manipulate technocratically by I don't know, capital 0:23:24.480 --> 0:23:29.439 regulation and various other tools. Technocratically somehow always fine tune 0:23:29.480 --> 0:23:33.440 that balance so that the private banks can be profitable, 0:23:33.920 --> 0:23:37.680 but also in the process of being profitable, they could 0:23:37.800 --> 0:23:41.760 generate this public good for us. My idea for the 0:23:41.800 --> 0:23:46.800 FED accounts is really kind of to imagine the world 0:23:46.840 --> 0:23:51.280 in which we bite the bullet and say look, instead 0:23:51.320 --> 0:23:56.320 of constantly trying to keep up with the fast changing environment, 0:23:56.440 --> 0:24:00.400 where private banks constantly keep pushing on that line right 0:24:00.440 --> 0:24:04.040 in favor of their private profit making capacity, why don't 0:24:04.080 --> 0:24:08.000 we just say, look, everybody can open an account deposit 0:24:08.040 --> 0:24:11.360 account at the Federal Reserve. Of course, the Federal Reserve 0:24:11.520 --> 0:24:14.800 then would have to re establish some form of partnership 0:24:15.280 --> 0:24:19.840 with private institutions, let's call them community banks, right, smaller 0:24:19.840 --> 0:24:23.080 private institutions that are more likely to adhere to this 0:24:23.200 --> 0:24:26.640 kind of a public utility model, and have them administer 0:24:27.040 --> 0:24:30.480 the opening and the management of those accounts on behalf 0:24:30.520 --> 0:24:33.640 of the FED for all of us, So that, for example, 0:24:33.680 --> 0:24:36.760 for me, not much will change. I would still go 0:24:36.840 --> 0:24:39.240 to my Tompkins Trust, which is a community bank where 0:24:39.280 --> 0:24:42.080 I bank right, and open my deposit account there, my 0:24:42.160 --> 0:24:45.119 checking account there. But my checking account would actually have 0:24:45.280 --> 0:24:48.960 in it the liability not of Tompkins Trust, but the 0:24:49.000 --> 0:24:52.640 liability director of the Federal Reserve. Now, if I want 0:24:52.640 --> 0:24:55.080 to have also savings account, or maybe some kind of 0:24:55.119 --> 0:24:58.000 a money market account, or maybe open a CD for 0:24:58.040 --> 0:25:01.520 some extra money that will not be provided by the Fed. 0:25:01.840 --> 0:25:05.560 Then Tomkins Trust will already have me at the branch 0:25:05.680 --> 0:25:08.159 right or on the phone, and it would have a 0:25:08.200 --> 0:25:11.400 great opportunity to tell me, well, by the way, if 0:25:11.400 --> 0:25:14.040 you want to have an SD or some saving account, 0:25:14.400 --> 0:25:18.399 here it is we can offer you that particular functionality 0:25:18.720 --> 0:25:21.200 for a fee, basically the way they do it now. 0:25:21.600 --> 0:25:24.720 So it will be a great situation for community banks. 0:25:24.760 --> 0:25:28.440 They would be effectively the agents of the central Bank 0:25:28.480 --> 0:25:30.840 for a fee that the Central Bank will pay them 0:25:31.200 --> 0:25:34.600 manage these kinds of deposit accounts, but also have other 0:25:34.640 --> 0:25:37.840 services that can deprop that they can provide to everybody 0:25:37.920 --> 0:25:42.840 like this, and their business model would have been under 0:25:42.840 --> 0:25:46.360 this situation much more stable than it is now when 0:25:46.359 --> 0:25:50.080 they're basically at the mercy of depositors thinking, well, you know, 0:25:50.080 --> 0:25:52.640