Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, there's
Speaker 1: still tons of dimensions potentially to explore so much with
Speaker 1: regard to the Silicon Valley Bank collapsed. But one of
Speaker 1: the sort of simple questions that a lot of people
Speaker 1: are asking is, from here on out, do we just
Speaker 1: assume that every deposit in the bank is ensured, even
Speaker 1: if officially they only promise up to two hundred and
Speaker 1: fifty k. Yeah. Well, I mean that was kind of
Speaker 1: the implicit takeaway from the weekend announcement. And I know
Speaker 1: we spoke with Dan Davies and he made the point
Speaker 1: that historically it is rareferred depositors in modern financial times
Speaker 1: to lose a bunch of their money because normally bondholders
Speaker 1: and equity holders lose all their money when bank fails,
Speaker 1: and some of that gets taken away to pay the
Speaker 1: deposit holders because deposits have seniority over bonds and equity.
Speaker 1: But I still think this is a pretty big change.
Speaker 1: It feels very major, or at a minimum, it feels
Speaker 1: like the implicit has been made explicit in a way
Speaker 1: that's before because yeah. Maybe in the end, even without
Speaker 1: any intervention SVB as depositors may have gotten whole. We
Speaker 1: don't know that there was no fire sale or anything
Speaker 1: like that. They just announced everyone is getting their money
Speaker 1: back Signature bank too. And then that raises a second question, Well,
Speaker 1: if depositors are really always implicitly or explicitly guaranteed by
Speaker 1: the government, what is the point of having like private
Speaker 1: retail banking for profit retail banking. Why not just let
Speaker 1: everyone have a checking account at the FED and then
Speaker 1: you never have to worry about any of this. That's right.
Speaker 1: So we touched on this a little bit when we
Speaker 1: spoke to love men end. But if you think about
Speaker 1: banks as providing an public function, you know, not only
Speaker 1: do they provide a safe place for people to actually
Speaker 1: put their money, but they also create money, you know,
Speaker 1: yea in the system. They lubricate the economy with credit.
Speaker 1: But they also tend to fail, sometimes repeatedly, as we're saying,
Speaker 1: and they also tend to get bailed out. Right, because
Speaker 1: the argument that you see time and time again is oh,
Speaker 1: you can't let this go because it would be bad
Speaker 1: for the financial system as a whole. You don't want
Speaker 1: to publish these particular people or this group of people,
Speaker 1: because then you know what happens if the little guy
Speaker 1: is in trouble next time. What if it's a farmer's credit.
Speaker 1: There's always a farmer At the end. It really says
Speaker 1: something about I think people's moral intuition still that like
Speaker 1: the thought experiment is like replaced Silicon Valley with like
Speaker 1: Kansas Farmers Bank or something. Right, But it's true. The
Speaker 1: point is true that a lot of people, like a
Speaker 1: people can't be expected to do due diligence, like on
Speaker 1: a bank. It's not realistic. Most professionals can't do that.
Speaker 1: But b it's also true that like there are a
Speaker 1: lot of quote innocent people who did not take like
Speaker 1: some crazy risk, who think they have money, and then
Speaker 1: the idea that they're told they don't like. I mean,
Speaker 1: the point is like the points are legit, well, we
Speaker 1: should get into them. But I do think like overall,
Speaker 1: there is this question of and I think we're going
Speaker 1: to see even more of it. People are still digesting
Speaker 1: what's happening. But there's this question of, Okay, if we're
Speaker 1: going to keep supporting banks in quite dramatic ways, then
Speaker 1: why let them be private? Entities, yeah, or why not
Speaker 1: give them I guess like a closer relationship with the
Speaker 1: government in one way or another, whether that's a regulatory
Speaker 1: function or something else. Right, there's all kinds of questions.
Speaker 1: I think we should get to our guests, because our guest,
Speaker 1: I really do believe we have the perfect guest, someone
Speaker 1: who's been warning about a lot of these exact issues
Speaker 1: for a long time, has anticipated a lot of these
Speaker 1: debates that people started having over the weekend, and who
Speaker 1: also has ideas about rethinking the banking system and what
Speaker 1: it means when some of these implicit guarantees become explicit.
Speaker 1: We're gonna be speaking with Salle Amarova. She's a professor
Speaker 1: of law at Cornell. She also had been President Biden's
Speaker 1: original nominee to head the Office of the Comptroller of
Speaker 1: the Currency. Because of her perspective, she came under very
Speaker 1: sort of like vicious attacks, some by some moderate Democrats,
Speaker 1: a lot of attacks by sort of like the community
Speaker 1: and regional bank lobby and all the Republican senators. It
Speaker 1: was a pretty awful affair. There was a lot of
Speaker 1: red baiting, basically accusing our guest of being a communist,
Speaker 1: very publicly because of wanting to have different thoughts about
Speaker 1: how the banking system works. But I kind of feel
Speaker 1: like some vindication over the weekend and people are sort
Speaker 1: of like rethinking a lot of what she's written about.
Speaker 1: So Professor Amarova, thank you so much for coming on
Speaker 1: odd lots. Thank you so much for inviting me to day. Yeah. Absolutely,
Speaker 1: you know we're going to get into all of your
Speaker 1: thinking about how we can rethink the banking systement and
Speaker 1: so forth. But just sort of like very simply to start,
Speaker 1: as an almost regulator, what does the SVB disaster to
Speaker 1: say to you about flaws within the existing regulatory structure
Speaker 1: of banking. This is exactly the kind of questions that
Speaker 1: I like to think about or cannot help myself thinking about.
Speaker 1: So while of course there are many immediate reasons for
Speaker 1: the failure of SVB in particular, there are also these
Speaker 1: sort of more deeper structural issues here that are on display.
Speaker 1: The first thing that we've learned is that the systemic
Speaker 1: risk in the financial system is actually a very complex
Speaker 1: and dynamic phenomenon. We are used to thinking about systemic
Speaker 1: risk caused by banks because banks invested in particularly risky assets,
Speaker 1: which they've done before. This is how we got the
Speaker 1: tooth snate crisis. But in this situation, the assets themselves
Speaker 1: didn't seem to be quite so risky until the monetary
Speaker 1: policy tender changed. Right, So what it tells us is
Speaker 1: that past policy choices actually shape future policy constraints in
Speaker 1: this particular area. Another thing that sort of became really
Speaker 1: obvious here is that there is a lot of political
Speaker 1: economy involved in bank regulation and the banking sector in general. Right,
Speaker 1: just like Joe what you said about how the rhetoric
Speaker 1: changes depending on who's asking for a bailout in a
Speaker 1: particular situation, right, And our perceptions change when people drug
Speaker 1: out the farmers. Suddenly everybody feels sympathetic this time around
Speaker 1: its venture capital industry, Silicon Valley. It's sort of difficult
Speaker 1: to feel sympathetic right to these billionaires who usually are
Speaker 1: known for being quite libertarian and kind of not liking
Speaker 1: the government genuinely speaking. But most importantly, and I think
Speaker 1: that's the point you've been driving at early, is that
Speaker 1: this particular crisis really exposed the public nature of the
Speaker 1: banking business, the deposit deposit taking the deposit money. Right,
Speaker 1: And this is precisely what my scholarship has been about
Speaker 1: for many many years. Banks are very special animals in
Speaker 1: our free market economy because their products are twofold. On
Speaker 1: the one hand, they create money that we treat as
Speaker 1: equivalent to sovereign money, so we all basically use deposits
Speaker 1: as if that was you know, the US dollars, but
Speaker 1: of course their liabilities of private banks, private firms, And
Speaker 1: the key about deposits at the bank is that they
Speaker 1: absolutely must be safe, must be perceived as safe. We
Speaker 1: need our money to be free of any doubt, so
Speaker 1: that everybody knows that when tomorrow go my bank or
Speaker 1: check my ownline back and bank account, the money that's
Speaker 1: been there is going to have its power value no
Speaker 1: matter what happens. And that is necessary because money is
Speaker 1: a public good. It is really essential lubrican to all
Speaker 1: economic transactions. So in effect, public goods like safety and security,
Speaker 1: national defense, safety that we know that if there is
Speaker 1: a fire and then the fire brigade will come, you
Speaker 1: don't have to pay for it. Those kinds of things
Speaker 1: we traditionally perceive as public goods, and they're provided publicly,
Speaker 1: and that's fine. But safe money is a public good
Speaker 1: exactly in the same way because it guarantees us the
Speaker 1: right to participate in economic exchange without being worried about
Speaker 1: the value of our money, the means of payment right.
Speaker 1: And the funny thing about that particular public good provision
Speaker 1: is that institutionally we have this system in which this
Speaker 1: public good is provided by private profitmaking firms banks. We
Speaker 1: regulate banks, which charter banks. We try to kind of
Speaker 1: treat them as if they were franchises of the federal government,
Speaker 1: purveyors of this public good. But nevertheless they are doing
Speaker 1: it through private risk taking on their own balance sheet.
Speaker 1: In other words, we've coupled this money creation with their
Speaker 1: lending functions. So banks create money when they extend loans.
Speaker 1: Right when they extend loans they open deposit accounts into
Speaker 1: which they deposit is newly created purchasing power that didn't
Speaker 1: exist before. And that is kind of ingenious because it
Speaker 1: connected the deposit taking capacity, the money creation capacity, with
Speaker 1: the sort of the judgment of supposedly kind of on
Speaker 1: the ground, really attuned to the needs of the economy,
Speaker 1: private banks that can judge which business, which house, which
Speaker 1: individual deserves that that kind of valcation of credit, and
Speaker 1: that creates the elastic currency. This is how we basically
Speaker 1: have just enough money in the economy to satisfy all
Speaker 1: the needs of the productive economy, right, and that also
Speaker 1: creates that monetary policy transmission channel. So that's what connects
Speaker 1: the Fed and Central Bank to the private banks that
Speaker 1: extend money, allocate credit, and in the process of doing it,
Speaker 1: actually expand or contract the amount of money that we
Speaker 1: treat a sovereign money available in the economy. So it's
Speaker 1: a very complex system. There's sort of a mismatch between
Speaker 1: the public money good and the private risk taking. But
Speaker 1: just to play Devil's advocate for one second, you know,
Speaker 1: one of the arguments that you do see going around is, okay,
Speaker 1: the ftic ensures up to two hundred and fifty thousand dollars,
Speaker 1: because the vast majority of people in the US do
Speaker 1: not have more than one hundred and fifty thousand dollars
Speaker 1: in their bank accounts. But if you're a company with
Speaker 1: a lot of cash, presumably you're more sophisticated, maybe you
Speaker 1: have a treasury function whose job it is to actually
Speaker 1: manage that cash. Is there an argument to be made
Speaker 1: that as the pool of money gets bigger, people should
Speaker 1: be more attuned to managing it. And making sure it's
Speaker 1: not going into riskier banks. This is actually a very
Speaker 1: astute question and kind of the question that is on
Speaker 1: the minds of many people today, and there is an
Speaker 1: argument for that, and the argument. One argument would be
Speaker 1: theoretical argument in a way to say that, look, let's
Speaker 1: just stop pretending that bank deposit money is not in
Speaker 1: fact public money, because it is publicly back. So let's
Speaker 1: just dispense with this fiction by removing that that cap
Speaker 1: so that everybody, wholesale depositors as well as retail depositors
Speaker 1: don't really ever have to question and worry. And it
Speaker 1: would definitely eliminate the incentive to run on a bank
Speaker 1: by these big money holders who are now able to
Speaker 1: orchestrate these runs faster than they used to do it before.
Speaker 1: So it would be a systemic structural fix to this
Speaker 1: problem of bank runs. The problem that I have with
Speaker 1: this argument is that, well, in that case, if we
Speaker 1: completely eliminate the fiction of some kind of private risk
Speaker 1: management by the banks themselves on the assets and the
Speaker 1: liability side of its balance sheet by saying work, all
Speaker 1: of the important liabilities of banks are in fact the
Speaker 1: federal government's liabilities, then we need to do one of
Speaker 1: the two things. One thing would be either we need
Speaker 1: to make sure that these banks really start acting truly
Speaker 1: as public utilities on the assets side, on the investment
Speaker 1: side of the balance sheets as well. In other words,
Speaker 1: we need to make sure that they are not able
Speaker 1: to abuse this kind of public subsidy, public backing, explicit
Speaker 1: backing of its life of their liabilities to make investments
Speaker 1: that would generate higher private profits for them but potentially
Speaker 1: increase the liability for the FDIC that is now direct.
Speaker 1: Or we need to basically say, well, you know what,
Speaker 1: we don't really need private banks to intermediate this kind
Speaker 1: of money creation, since all the money is public. Let's
Speaker 1: just provide those accounts publicly and deposit accounts publicly, so
Speaker 1: that this particular public with just the means of payment,
Speaker 1: means of exchange will be provided publicly. Everything else, lending,
Speaker 1: investment services, everything else that does require risk assessment on
Speaker 1: the ground that is best provided by private firms should
Speaker 1: be provided by proctors. But we would separate those two functions.
Speaker 1: Let me ask you a question, I mean your nomination
Speaker 1: to head the Office of the Controller of the Currency.
Speaker 1: The community banks, the regional banks really were vociferous in
Speaker 1: lobbying against you. And of course, so now the first
Speaker 1: crisis that we've seen in the current era happens at
Speaker 1: a community bank. Like you know, there is some questions
Speaker 1: setting aside, and I want to get to your thoughts
Speaker 1: on like FED accounts and all that, but setting aside that,
Speaker 1: a lot of people over the weekend they're like, well,
Speaker 1: why shouldn't I just have all my money at Chase?
Speaker 1: Why shouldn't I just have all my money at City?
Speaker 1: Because you know, we've been told they're too big to fail.
Speaker 1: We know they're going to get failed out. Also, just
Speaker 1: structurally they have they'll have a more diversified depositor base
Speaker 1: most likely, so maybe less likely to run. Like, do
Speaker 1: you see a positive role in the economy for these
Speaker 1: community banks that opposed you so much? Well, I do
Speaker 1: see a very important potential role for community banks to
Speaker 1: play because community banks just by definition, they are tied
Speaker 1: to their own communities, right, they are actually the epitome
Speaker 1: of that image of a private bank being really aware
Speaker 1: of what businesses and the households and individuals in any
Speaker 1: particular community really need in terms of financing, right, what
Speaker 1: kind of businesses they engage in, how responsible they are
Speaker 1: in running their financial affairs, whether or not their ideas
Speaker 1: are deserving of funding. This is the image that basically
Speaker 1: underlies and informs our existing hybrid system of banking. When
Speaker 1: we outsource the credit allocation and money creation to local banks,
Speaker 1: and of course there's huge institutions for three trillion dollars
Speaker 1: in assets, institutions like JP Morgan Chase, they cannot possibly
Speaker 1: be held to the same standard of being aware of
Speaker 1: what's happening on the ground. So to the extended community,
Speaker 1: banks are that kind of a bank, we really should
Speaker 1: promote their existence and support their existence and facilitating existence.
Speaker 1: But the problem is structural because it is true that
Speaker 1: we've made along the way so many policy decisions that
Speaker 1: effectively reward banks that are large diversified by virtue of
Speaker 1: conducting businesses and providing financial services that go farther and
Speaker 1: farther away from the traditional extension of long term loans
Speaker 1: that they hold on their own banking books into I
Speaker 1: don't know, investment advisory and investment banking and dealing and
Speaker 1: trading in various derivatives, instruments and so and so forth.
Speaker 1: Because that is the other side of what we call diversification.
Speaker 1: That's how you diversify away from the traditional lending business.
Speaker 1: Of course, that diversification has its own risks, but it also,
Speaker 1: among other things, makes these big diversified institutions effectively too
Speaker 1: big to fail, because now they have a hand and
Speaker 1: they play a critical role in so many pockets of
Speaker 1: the increasingly complex financial system. So of course it's rational
Speaker 1: for wholesale depositors to take their deposits out of a
Speaker 1: smaller community bank or even itsized regional bank and put
Speaker 1: them into JPMorgan or Bank of America, simply because you
Speaker 1: know that, for better for worse, these institutions are not
Speaker 1: likely to fail, and you don't want to think about
Speaker 1: the safety of your deposits on a going forward basis.
Speaker 1: You have too many other things to worry about in
Speaker 1: your actual business, right, So talk to us a little
Speaker 1: bit more about what can be done about the mismatch
Speaker 1: between you know, money as a public good and this
Speaker 1: private risk taking idea. And specifically, you mentioned the political
Speaker 1: economy earlier, and we've been talking a little bit about
Speaker 1: your own experience with politicians. But what can be done
Speaker 1: and what is realistic from a political perspective? Well, what
Speaker 1: is realistic from a political perspective is a very difficult
Speaker 1: thing to predict right, because politics is fickle, and it's
Speaker 1: also very difficult to see which political lobbying groups, which
Speaker 1: political interests are currently pushing forward, and you know how
Speaker 1: that balance of power is playing out in a moment
Speaker 1: when everybody is so nervous about potential further fallout from
Speaker 1: this particular situation. So living that aside, what can be
Speaker 1: done right, it's inherently extremely difficult to find the right
Speaker 1: balance between the public interest in having saved money produced
Speaker 1: by banks on the one hand, and the banks own
Speaker 1: quite legitimate interest in being privately profitable on the other hand. Historically,
Speaker 1: we've had this approach where we try to limit, for example,
Speaker 1: the activities and investments of what banks could do. So
Speaker 1: banks under the Glassdigal Active, and even before that, under
Speaker 1: the National Banking Act, for example, were explicitly prohibited from
Speaker 1: engaging an variety of activities outside the traditional landing. But then,
Speaker 1: in a long story short, gradually we've allowed these banks,
Speaker 1: even though they may be limited in what kind of
Speaker 1: risks they can undertake, to affiliate with securities firms whose
Speaker 1: business it is to take a lot of risks by
Speaker 1: trading and dealing in capital markets and derivatives markets, and
Speaker 1: there's other markets. Basically, their business is to assess and
Speaker 1: take on various risks that their clients want to take
Speaker 1: on or to buy or sell. So, for example, if
Speaker 1: we want to really sever the kind of private risk
Speaker 1: creation by virtue of certain types of incentives, certain types
Speaker 1: of activities that banks undertake and keep their deposit taking
Speaker 1: money creation function, then we would have to make these
Speaker 1: banks instead of kind of almost universal diversified financial services
Speaker 1: providers purely payments providers, providers of this particular public good,
Speaker 1: public utility, safe deposit, safe money. We have to limit
Speaker 1: the kinds of activities they can undertake, We have to
Speaker 1: limit the kinds of affiliations they can have, so as
Speaker 1: to limit their incentives to create further risks and to
Speaker 1: abuse that specific public subsidy. And that of course immediately
Speaker 1: brings back the ghost of the Glass Degalact. Right, And
Speaker 1: we know that Glass Degalact was repealed in nineteen ninety
Speaker 1: nine precisely because it was supposedly stifling competitional, stifling innovation
Speaker 1: and all of these things. And we are now in
Speaker 1: an era where stifling innovation is a really, really bad
Speaker 1: label and everybody is afraid of being being accused of
Speaker 1: stifling innovation. So personally, I just don't see how completely
Speaker 1: acknowledging explicitly acknowledging that the government is going to stand
Speaker 1: behind all private deposit liabilities of all private banks, no
Speaker 1: matter what size and what assets side risk profile may be,
Speaker 1: on the one hand, without actually, you know, basically poking
Speaker 1: at that beast of activity limitations and the ghost of
Speaker 1: glass Tigel, I just don't see how that will happen realistically.
Speaker 1: So we sort of teased at this. But one of
Speaker 1: the things you've written about is this idea of, Okay,
Speaker 1: if we're going to separate just sort of core checking
Speaker 1: and deposits from other banking functions, you know, why not
Speaker 1: have let people have a checking account it the FED.
Speaker 1: If that's all it takes. There's no risk there. And
Speaker 1: you've written about that, and you've advocated that, and it
Speaker 1: feels like a lot of people are talking about that
Speaker 1: these days, and people are talking about CBDCs and the
Speaker 1: difficulty in disbursing unemployment insurance and PPP money during the
Speaker 1: crisis also revealed some issues the government has in getting
Speaker 1: money to households. But I think the difference between your
Speaker 1: work and a lot of the popular conversation. The popular
Speaker 1: conversation it feels like kind of like technical, like almost
Speaker 1: like inspired by crypto, digital currency, etc. And your work
Speaker 1: and your case feels more explicitly political about changing the
Speaker 1: balance of power and changing this sort of conduct of banking,
Speaker 1: not not just a technocratic central bank fix. Can you
Speaker 1: talk about the sort of like impulse that you have
Speaker 1: as sort of like your vision for what the FED
Speaker 1: would offer, Yes, of course, Well, I believe that all
Speaker 1: finance is inherently political because we're talking about this public
Speaker 1: private partnership, right there is that vision of labor between
Speaker 1: the government that basically has to ensure the safety of
Speaker 1: all money as we are learning now, and the private
Speaker 1: institutions that get to allocate credit. And as we talked earlier,
Speaker 1: it's extremely difficult to maintain that balance. So it really
Speaker 1: is a win win situation. We have that fiction that
Speaker 1: we can basically manipulate technocratically by I don't know, capital
Speaker 1: regulation and various other tools. Technocratically somehow always fine tune
Speaker 1: that balance so that the private banks can be profitable,
Speaker 1: but also in the process of being profitable, they could
Speaker 1: generate this public good for us. My idea for the
Speaker 1: FED accounts is really kind of to imagine the world
Speaker 1: in which we bite the bullet and say look, instead
Speaker 1: of constantly trying to keep up with the fast changing environment,
Speaker 1: where private banks constantly keep pushing on that line right
Speaker 1: in favor of their private profit making capacity, why don't
Speaker 1: we just say, look, everybody can open an account deposit
Speaker 1: account at the Federal Reserve. Of course, the Federal Reserve
Speaker 1: then would have to re establish some form of partnership
Speaker 1: with private institutions, let's call them community banks, right, smaller
Speaker 1: private institutions that are more likely to adhere to this
Speaker 1: kind of a public utility model, and have them administer
Speaker 1: the opening and the management of those accounts on behalf
Speaker 1: of the FED for all of us, So that, for example,
Speaker 1: for me, not much will change. I would still go
Speaker 1: to my Tompkins Trust, which is a community bank where
Speaker 1: I bank right, and open my deposit account there, my
Speaker 1: checking account there. But my checking account would actually have
Speaker 1: in it the liability not of Tompkins Trust, but the
Speaker 1: liability director of the Federal Reserve. Now, if I want
Speaker 1: to have also savings account, or maybe some kind of
Speaker 1: a money market account, or maybe open a CD for
Speaker 1: some extra money that will not be provided by the Fed.
Speaker 1: Then Tomkins Trust will already have me at the branch
Speaker 1: right or on the phone, and it would have a
Speaker 1: great opportunity to tell me, well, by the way, if
Speaker 1: you want to have an SD or some saving account,
Speaker 1: here it is we can offer you that particular functionality
Speaker 1: for a fee, basically the way they do it now.
Speaker 1: So it will be a great situation for community banks.
Speaker 1: They would be effectively the agents of the central Bank
Speaker 1: for a fee that the Central Bank will pay them
Speaker 1: manage these kinds of deposit accounts, but also have other
Speaker 1: services that can deprop that they can provide to everybody
Speaker 1: like this, and their business model would have been under
Speaker 1: this situation much more stable than it is now when
Speaker 1: they're basically at the mercy of depositors thinking, well, you know,
Speaker 1: I'd rather move my money to JP Morgan Chase because
Speaker 1: that is definitely too big to fail institution. So that
Speaker 1: would have been for us how we would basically deal
Speaker 1: with it, And yet there would be no need for
Speaker 1: federal deposit insurance anymore, because the transactional accounts was checking
Speaker 1: accounts in which we hold our deposit money that we
Speaker 1: use for payments every day would be explicitly directly the
Speaker 1: federal government's liability, and the federal government doesn't have an
Speaker 1: incentive to provide that public good, safe money as some
Speaker 1: kind of a private, private profit making opportunity. So that
Speaker 1: would be the wind win, and we would separate the
Speaker 1: public money creation from the rest of the private financial
Speaker 1: and lending activities on the other side, and will not
Speaker 1: have to deal with all these complicated technical matters of
Speaker 1: making that regulatory system increasingly complex and increasingly unstable because
Speaker 1: we keep tinkering on the edges. Tinkering on the edges
Speaker 1: is a really good way of putting it. I have
Speaker 1: a very basic question, and I fully admit I haven't
Speaker 1: read that much about the whole FED checking account idea,
Speaker 1: but how do you deposit rates work in that scenario?
Speaker 1: And how much differentiation would there be between individual banks
Speaker 1: under that sort of framework. So this is where there is,
Speaker 1: of course a range of design choices. And in the
Speaker 1: paper that I wrote the People's Ledger, my main point
Speaker 1: was kind of structural, to just imagine when this type
Speaker 1: of a decision is made, what kind of structural implications
Speaker 1: it will have, and that it's not as scary as
Speaker 1: people think because they have this sort of image of all,
Speaker 1: big bad government is just going to control all of
Speaker 1: my money and that's bad. And of course that would
Speaker 1: be a bad thing, but we don't have to design
Speaker 1: the system that way. So that was the point of
Speaker 1: the paper. But to your question, one of the beauties
Speaker 1: or potential opportunities that creating this type of a FED
Speaker 1: account system offers, particularly in the age of CBDC possibilities
Speaker 1: in other words, that those FED accounts will actually be
Speaker 1: digital money to okenized money perhaps or account based money,
Speaker 1: whatever it is, is that then the rates on various
Speaker 1: deposits can be established in a much more tailored, much
Speaker 1: more sort of finely managed way, right, depending on a
Speaker 1: variety of public policy needs by the FED. So there
Speaker 1: could be, for instance, interest paid on all of these
Speaker 1: FED accounts, right, and the ability to pay interest could
Speaker 1: actually be a very much adirect tool of monetary policy
Speaker 1: for the FED. Then one might ask a question, should
Speaker 1: the rates differ for individuals and for companies? Well, they
Speaker 1: can if that makes sense. For example, if a particular
Speaker 1: occurrence or particular dynamic and the economy may necessitate, for instance,
Speaker 1: to channel molly equidity into a particular sector of the
Speaker 1: economy by maybe increasing the rate on the deposits that's
Speaker 1: being paid to a particular type of institutional institutional deposits.
Speaker 1: That can be done vice versa. If the need is
Speaker 1: too for example, in the pandemic, to send more money
Speaker 1: to certain low income families, right, that can be done
Speaker 1: much faster and much more easily. And that's one of
Speaker 1: those flexibility tools that this type of a system would offer. Yeah,
Speaker 1: it definitely seems like there's potential for an improvement in
Speaker 1: the transmission of monetary policy, and to the extent that
Speaker 1: the average deposit holder doesn't even get any extra incentive
Speaker 1: in many cases. We just did in an episode about
Speaker 1: low deposit betas with Joe Botte at Parkleys, and you
Speaker 1: could imagine a much more sensitive as soon as the
Speaker 1: Fed hikes rates, you start getting more in your savings account.
Speaker 1: But that would that would clearly hurt nymbs of private
Speaker 1: banks across the category. So you could see why even
Speaker 1: though under your proposal as you envisioned, still a role
Speaker 1: for big banks, still a role for the community banks
Speaker 1: as branches, I mean, clearly, it would change their sort
Speaker 1: of like funding structure and parts of their profitability. Oh,
Speaker 1: that's absolutely right, And that is one of the one
Speaker 1: of the arguments against considering something like FED accounts because
Speaker 1: people say, well, where where are the banks going to
Speaker 1: get their funding, because right now they get their funding
Speaker 1: from chief deposits. Right, Well, we can actually engineer a
Speaker 1: similar similar way for private lending institution banks we call
Speaker 1: them banks now right to get subsidized, publicly subsidized funding
Speaker 1: for their loans pretty much the way they're getting it
Speaker 1: even today, right the discount window type of an arrangement
Speaker 1: where they could actually extend their loans to credit worthy
Speaker 1: individuals and businesses and turn to the FED and basically
Speaker 1: discount those loans to the FED at a preferable rate,
Speaker 1: at the preferred rate, very good rate of interest. This
Speaker 1: is basically what the FED has been doing for many decades,
Speaker 1: and what the FED does every time it sets up
Speaker 1: this type of liquidity facility that we're seeing set up
Speaker 1: over the weekend, right when the banks just basically bring
Speaker 1: their assets and discount those assets, plash those assets to
Speaker 1: the FED. And so that can be redesigned as a
Speaker 1: more permanent solution to the funding needs for those lending
Speaker 1: institutions that really are interested in lending to the real economy,
Speaker 1: and it would give the FED capacity to really find
Speaker 1: you in the credit policy. In other words, the FED
Speaker 1: wouldn't have to accept at that new discount window, for example,
Speaker 1: loans to I don't know, short sellers and speculators out
Speaker 1: there in capital markets. Not to say that banks cannot
Speaker 1: then lend to those speculatoris it's just when they lead
Speaker 1: to those speculators for speculative purposes, they would have to
Speaker 1: fund those loans in capital markets and leave it to
Speaker 1: the market discipline to figure out whether one of those
Speaker 1: loans are prudent. But if they want to extend loans
Speaker 1: to a productive enterprise, to small businesses, medium sized business
Speaker 1: or all large businesses in any community, then they would
Speaker 1: definitely have access to preferential funding through that kind of
Speaker 1: a redesigned discount window. In other words, you subsidize on
Speaker 1: the asset side rather than on the liability side. You know,
Speaker 1: you mentioned the FED facility just then, which allows banks
Speaker 1: to tap FED financing on their bonds at par rather
Speaker 1: than the market value. Because the whole problem here, or
Speaker 1: part of the problem, is unrealized losses on things like
Speaker 1: treasuries and agency mortgage backed securities and things like that.
Speaker 1: What's the overall impact of that kind of facility on
Speaker 1: the banking system? How do you see that playing out? Well,
Speaker 1: this is this facility, of course, is a familiar structure, right.
Speaker 1: The FED has done it in the two thousand and
Speaker 1: eight crisis, in twenty twenty pandemic situations, so to the
Speaker 1: extent that this is at least the third time we're
Speaker 1: seeing this type of approach, It is now, in my view,
Speaker 1: firmly ensconced in everybody's understanding as basically more or less
Speaker 1: a permanent type of a solution. Right. And the question
Speaker 1: here is that is it the right thing to do?
Speaker 1: Is the the right policy choice? And opinions differ. I
Speaker 1: do think that in the current situation, as a kind
Speaker 1: of market wide signal to support all the banks who
Speaker 1: are being heard by the fed's own monetary policy, it's
Speaker 1: the right thing to do. But at the same time,
Speaker 1: it's sort of what does it tell us about this
Speaker 1: whole conventional image, right of where the public subsidy ends
Speaker 1: and the private responsibility for the private risk taking begins.
Speaker 1: So we are in a situation where now you know,
Speaker 1: people are asking questions, well, how come banks get this
Speaker 1: type of liquidity facility. But for example, municipalities, right, or
Speaker 1: various other more publicly oriented institutions, finance institutions, they don't
Speaker 1: get something permanent of this kind. And this is where
Speaker 1: we get into this more complex and deeper issues of
Speaker 1: structural change. Right, if the FED really is the only
Speaker 1: balance sheet in this economy that is already standing to
Speaker 1: absorb all the risks on various assets, but it makes
Speaker 1: certain choices, whose risks on what assets is willing to absorb,
Speaker 1: then this question of what the choice entails and who
Speaker 1: should be making that choice becomes a political question. You know,
Speaker 1: it really feels to me just sort of big picture.
Speaker 1: It really feels to me like the events of SVB
Speaker 1: have opened the sort of Overton window a lot. I mean,
Speaker 1: we're having this conversation you and many other academics, and
Speaker 1: the CBDC conversation has been going on for a while,
Speaker 1: but suddenly it feels more mainstream because this tension that
Speaker 1: you've been talking about for years private profit in banking
Speaker 1: with this sort of like utility function that everyone expects,
Speaker 1: and you did see all these vcs. They're like, well,
Speaker 1: if we didn't come on, no one really thinks we're
Speaker 1: lending money to banks and we have a deposit and
Speaker 1: I think they kind of have a point. Nobody thinks that,
Speaker 1: and so why do we still pretend that that part
Speaker 1: of the structure. But it definitely feels like this blew
Speaker 1: the conversation wide out into the open. So what do
Speaker 1: you think like happens now? I mean, like it's hard
Speaker 1: to predict the future and obviously politics, etc. But like
Speaker 1: what would you look for and sort of the I
Speaker 1: don't know coming months in terms of like where this
Speaker 1: conversation goes, where you expect to see regulatory changes and
Speaker 1: sort of like how you're what you're watching to see
Speaker 1: how it unfolds. I am hopeful that this conversation about finally,
Speaker 1: you know, cutting that chord right between private deposit taking
Speaker 1: and the public responsibility for what happens in the crisis
Speaker 1: actually becomes more of an acceptable measure. But I'm not
Speaker 1: sure it will simply because you know, rationality of doing
Speaker 1: something is not the only factor that makes it more
Speaker 1: likely to happen. There are a lot of vested interests,
Speaker 1: economic and political interests that will be fighting tooth and
Speaker 1: nail against it. The banking industry, for one, right, So
Speaker 1: my worry is that yes, yeah, I just as a
Speaker 1: tag on you know, very minor. I would love to
Speaker 1: have you back on another time to talk about that
Speaker 1: whole experience of the failed nomination. But you know, just
Speaker 1: the political the vehemence of the opposition to you curious
Speaker 1: like you saw firsthand how powerful that community bank lobby is.
Speaker 1: That's absolutely right. They're very powerful, and unfortunately they're too
Speaker 1: easily manipulated by the Wall Street big bank lobby in
Speaker 1: my view, because the real fear, from my views, you know,
Speaker 1: separate the public from private. The real fear was really
Speaker 1: coming from the big banks because they are the ones
Speaker 1: who run a lot of risk and take on a
Speaker 1: lot of risks and generate a lot of risk for
Speaker 1: all of us on the asset side of their balance sheets.
Speaker 1: And they knew that people who like me advocate for
Speaker 1: sort of you know, the return to more kind of
Speaker 1: public utility type banking or two more public role in
Speaker 1: banking sector in general, would not really hear the point
Speaker 1: of view really well. But the community banks are extremely
Speaker 1: powerful and they played the role unfortunately in that process.
Speaker 1: Sally Omarova so much, thanks for coming on. I feel
Speaker 1: like it is the perfect guest for real to like
Speaker 1: move this conversation forward someone who's been thinking about these
Speaker 1: for a lot longer than a week and a half,
Speaker 1: like many other people have. Great to get your perspective.
Speaker 1: Thank you so much. Yeah, thank you so much, Sally.
Speaker 1: That was really interesting. From discount window to overton window.
Speaker 1: Has anyone made that joke yet? Oh? That's a that's
Speaker 1: a good one. It does feel tracy like this sort
Speaker 1: of like glaring contradiction of like, look, we all just
Speaker 1: want a checking account, We just want to have a
Speaker 1: place to put our money and not have to think
Speaker 1: about it. And then the fact that once in a
Speaker 1: while our checking account holders blow up and they got
Speaker 1: the profits or whatever, like, it does feel like it's
Speaker 1: getting harder and harder to accept that that can't be resolved.
Speaker 1: Right if it all comes back to the FED eventually,
Speaker 1: then why not just go straight there? But I also
Speaker 1: thought Sally's point about tinkering at the edges of bank
Speaker 1: regulation was really accurate, because it does feel like it's
Speaker 1: not just that, it's also that the very nature of
Speaker 1: regulation tends to be quite backward looking, and so we're
Speaker 1: always fighting the last crisis, and so the result of
Speaker 1: two thousand and eight was well, we have a lot
Speaker 1: of new capital and liquidity rules that mandate banks hold
Speaker 1: big buffers of bonds, and now that you know, that
Speaker 1: was fine during a period of relatively low inflation, but
Speaker 1: fast forward to today, there's lots of inflation, and now
Speaker 1: those bonds are somewhat problematic, and now we're having to
Speaker 1: scramble to think of new things. When to her point,
Speaker 1: you could just kind of maybe try to strike at
Speaker 1: the heart of it. But that said that said, I
Speaker 1: do think political constraints are real, and I cannot even
Speaker 1: begin to imagine what this process, I mean, you're talking
Speaker 1: about serious structural reform banking would actually look like No,
Speaker 1: that's true. You know, it's funny you said, like how
Speaker 1: much like regulator it's always like fight the last War,
Speaker 1: And it is so wild that like a the real
Speaker 1: like sort of like panic was really on the depositor side,
Speaker 1: which is not something we thought about in two thousand
Speaker 1: and eight, when it was really about the assets. And
Speaker 1: then the assets that they did have, I mean it
Speaker 1: was like treasuries and MBIs, which they did take a
Speaker 1: big rate hit on. But it's like going back to
Speaker 1: like two thousand and eight, it's like, oh cool that,
Speaker 1: you know, we never I don't think people conceived of
Speaker 1: that is like where the location of like a big
Speaker 1: blow up would have happened, because it wasn't like they
Speaker 1: were like making really agregious loans to or like you know,
Speaker 1: really exotic, non good I mean the irony is they
Speaker 1: took money for risky startups and put it into really
Speaker 1: safe No, it's it really inverts everything, right, Like I
Speaker 1: was trying to think about, like it has there ever
Speaker 1: been another financial crisis or sort of banking bank that
Speaker 1: failed because they took money from risky entities and lent
Speaker 1: it to safe ones, Like it really does invert our
Speaker 1: conception of how these crises happen. Absolutely, But maybe you know,
Speaker 1: as we were discussing, maybe that's the peg that's needed
Speaker 1: to really start to think about some of these underlying issues.
Speaker 1: Because if even that is a problem, then then it
Speaker 1: seems like we need to start looking for an alternative solution. Yeah. Absolutely,
Speaker 1: all right, shall we leave it there? Let's leave it there.
Speaker 1: This has been another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway, and I'm Joe Wi isn't all. You can
Speaker 1: follow me on Twitter at the Stalwart, follow our guest
Speaker 1: sal Amarova, She's at st Amarova. Follow our producers Carmen
Speaker 1: Rodriguez at Kerman Arman and Dash Bennett at Dashbot. And
Speaker 1: check out all of Bloomberg's podcasts under the handle at podcasts.
Speaker 1: And for more odd Lots content, go to bloomberg dot
Speaker 1: com slash odd Lots, where we post transcripts. Tracy and
Speaker 1: I have a blog, and we have a newsletter that
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Speaker 1: for listening,