1 00:00:01,920 --> 00:00:05,880 Speaker 1: Welcome to Crash Course, a podcast about business, political, and 2 00:00:05,960 --> 00:00:09,320 Speaker 1: social disruption and what we can learn from it. I'm 3 00:00:09,360 --> 00:00:14,800 Speaker 1: Tim O'Brien. Today's Crash Course Silicon Valley Bank versus the Fed. 4 00:00:16,079 --> 00:00:20,560 Speaker 1: Imagine you couldn't take another breath because oxygen disappeared. You 5 00:00:20,680 --> 00:00:25,160 Speaker 1: gasp for air until your body just shuts down. Money 6 00:00:25,160 --> 00:00:28,840 Speaker 1: provides oxygen to our economy. When the money flows slows, 7 00:00:29,200 --> 00:00:33,959 Speaker 1: so does the economy. If money stops circulating, the economy seizes. 8 00:00:34,640 --> 00:00:38,800 Speaker 1: Like your body deprived of oxygen, it shuts down. That's 9 00:00:38,840 --> 00:00:42,960 Speaker 1: why banking crises freak out people. Banks are the lungs 10 00:00:43,000 --> 00:00:48,200 Speaker 1: of a thriving economy, oxygen eating everything with money. When 11 00:00:48,240 --> 00:00:53,599 Speaker 1: one bank topples, no biggie. When many banks topple, whoops. 12 00:00:55,000 --> 00:00:58,920 Speaker 1: Silicon Valley Bank collapsed recently, a debacle that exposed fault 13 00:00:58,960 --> 00:01:03,160 Speaker 1: lines running beneath a legendary financial ecosystem. But it was 14 00:01:03,200 --> 00:01:06,840 Speaker 1: just one bank. Since then, though other banks have run 15 00:01:06,840 --> 00:01:12,160 Speaker 1: into trouble, Depositors, investors, regulators, and managers have all been worried. 16 00:01:13,040 --> 00:01:17,000 Speaker 1: Sitting atop that uncertainty is the Federal Reserve, the powerhouse 17 00:01:17,040 --> 00:01:20,280 Speaker 1: that sets interest rates and thus governs how easy it 18 00:01:20,360 --> 00:01:23,920 Speaker 1: is for money to course through the economy. What does 19 00:01:23,920 --> 00:01:27,520 Speaker 1: this mean and what's going to happen next? To help 20 00:01:27,520 --> 00:01:30,720 Speaker 1: solve that mystery, I give you Paul Davies, a financial 21 00:01:30,720 --> 00:01:34,160 Speaker 1: calumnist for Bloomberg Opinion, and somebody steeped in the chaos 22 00:01:34,160 --> 00:01:37,720 Speaker 1: that can happen when banks and money collide with human 23 00:01:37,760 --> 00:01:42,400 Speaker 1: frailty and the power of the FED. Hi, Paul, Hey, Hi, 24 00:01:42,560 --> 00:01:46,080 Speaker 1: Dingdin good. You're such a calm guy most of the time, 25 00:01:46,120 --> 00:01:47,920 Speaker 1: and so I was wondering if any of this has 26 00:01:47,960 --> 00:01:50,880 Speaker 1: you worried at a thirty five thousand foot level. I 27 00:01:50,920 --> 00:01:55,120 Speaker 1: mean it does. It didn't at first, because the situation 28 00:01:55,160 --> 00:01:58,200 Speaker 1: of banks in Europe and in the US mostly is 29 00:01:58,240 --> 00:02:00,800 Speaker 1: that they are very well capitalized and that they have 30 00:02:00,840 --> 00:02:04,560 Speaker 1: an awful lot of easily sellable and liquid assets on 31 00:02:04,560 --> 00:02:06,920 Speaker 1: their balance sheets to sort of meet any necessity. We 32 00:02:07,000 --> 00:02:10,200 Speaker 1: have no kind of problem with, you know, mortgages going 33 00:02:10,240 --> 00:02:13,160 Speaker 1: bad like we did, you know, fifteen years ago. But 34 00:02:13,480 --> 00:02:16,280 Speaker 1: it started to worry me more because a lot of 35 00:02:16,280 --> 00:02:18,400 Speaker 1: what we're seeing just sort of seems to make so 36 00:02:18,480 --> 00:02:20,360 Speaker 1: little sense in a way. There's a kind of a 37 00:02:20,600 --> 00:02:23,040 Speaker 1: fear and a loss of faith that seems to be 38 00:02:23,120 --> 00:02:25,919 Speaker 1: running through large parts of the banking system, or well, 39 00:02:26,160 --> 00:02:28,440 Speaker 1: some small and obvious parts of the banking system, but 40 00:02:28,480 --> 00:02:31,120 Speaker 1: it seems to have spread in sort of unpredictable ways. 41 00:02:31,639 --> 00:02:35,040 Speaker 1: And this sort of fear is affecting the stability of 42 00:02:35,520 --> 00:02:39,840 Speaker 1: funding to banks by making deposits you a worry in 43 00:02:39,880 --> 00:02:42,200 Speaker 1: a way that they really ought not to be. People 44 00:02:42,200 --> 00:02:46,400 Speaker 1: are moving deposits when they probably have no real fundamental 45 00:02:46,480 --> 00:02:49,000 Speaker 1: reason too. But when a lot of people move deposits 46 00:02:49,040 --> 00:02:52,160 Speaker 1: at the same time, that causes problems. Well, and I 47 00:02:52,200 --> 00:02:55,079 Speaker 1: do think that we're in a moment right now where 48 00:02:55,360 --> 00:03:00,359 Speaker 1: information flow and money flow are both very rapid, almost 49 00:03:00,360 --> 00:03:03,760 Speaker 1: hear trigger way, and that is something that's distinct about 50 00:03:03,800 --> 00:03:06,880 Speaker 1: what we're living through right now, is that average people 51 00:03:07,000 --> 00:03:10,280 Speaker 1: and big institutions can get what they think are important 52 00:03:10,320 --> 00:03:14,520 Speaker 1: insights into the possibility of failure. And because we're weak 53 00:03:14,520 --> 00:03:17,440 Speaker 1: and fearful people, we run for the exits when things 54 00:03:17,480 --> 00:03:21,359 Speaker 1: like that happen. And this, to me watching it feels 55 00:03:21,400 --> 00:03:26,079 Speaker 1: like it's an example of how quickly panic can spread 56 00:03:26,600 --> 00:03:30,320 Speaker 1: even if there's not an authentic financial contagion. It's true, 57 00:03:30,360 --> 00:03:32,959 Speaker 1: I mean, rumors can spread obviously, very very quickly through 58 00:03:33,040 --> 00:03:37,040 Speaker 1: social media and other means in a way that they 59 00:03:37,440 --> 00:03:40,440 Speaker 1: simply didn't fifteen years ago. I don't think lots of 60 00:03:40,440 --> 00:03:43,600 Speaker 1: people have made the point that during two thousand and eight, 61 00:03:43,840 --> 00:03:47,320 Speaker 1: when we last had a financial crisis, the iPhone as 62 00:03:47,360 --> 00:03:50,680 Speaker 1: the most common smartphone, was only a year old, and 63 00:03:50,960 --> 00:03:54,800 Speaker 1: the ability of all of us to communicate rapidly with 64 00:03:54,880 --> 00:03:56,800 Speaker 1: large numbers of other people and also to kind of 65 00:03:56,840 --> 00:03:59,800 Speaker 1: move our money from one bank account to another just 66 00:04:00,000 --> 00:04:02,600 Speaker 1: through the screen of our phone just didn't exist in 67 00:04:02,640 --> 00:04:04,720 Speaker 1: the way that it does now. I want to come 68 00:04:04,760 --> 00:04:07,080 Speaker 1: back a little later to the implications of that, but 69 00:04:07,480 --> 00:04:09,440 Speaker 1: I want to also put all of this in context 70 00:04:09,800 --> 00:04:13,360 Speaker 1: how we got into this sort of swamp of fear 71 00:04:13,840 --> 00:04:16,599 Speaker 1: and uncertainty that we're in right now. And let's start 72 00:04:16,680 --> 00:04:20,120 Speaker 1: with Silicon Valley Bank as a departure point that essentially 73 00:04:20,720 --> 00:04:24,440 Speaker 1: the collapse of Silicon Valley Bank recently is sort of 74 00:04:24,440 --> 00:04:29,400 Speaker 1: the incenting moment that's what got everyone paying attention across 75 00:04:29,480 --> 00:04:33,480 Speaker 1: the US and then ultimately across both oceans to see 76 00:04:33,480 --> 00:04:36,799 Speaker 1: where other problems might reside. Tell us a little bit 77 00:04:36,960 --> 00:04:40,520 Speaker 1: about what got Silicon Valley Bank into trouble. So Sinicon 78 00:04:40,600 --> 00:04:43,400 Speaker 1: Valley Bank in the same way as Silvergate Bank before it, 79 00:04:43,520 --> 00:04:47,159 Speaker 1: or around the same time as well. We're very interesting 80 00:04:47,200 --> 00:04:50,120 Speaker 1: in the sense that what killed them wasn't bad assets, 81 00:04:50,120 --> 00:04:52,839 Speaker 1: which is normally what provokes panic in banks. It was 82 00:04:52,880 --> 00:04:55,080 Speaker 1: bad liabilities. And what I mean by that is they 83 00:04:55,120 --> 00:04:58,840 Speaker 1: had too many of the same kinds of deposits from 84 00:04:58,880 --> 00:05:02,159 Speaker 1: the same kinds of people who were all going to 85 00:05:02,279 --> 00:05:06,880 Speaker 1: behave in a very similar way. They were concentrated, so Silvergate, 86 00:05:06,920 --> 00:05:10,320 Speaker 1: on people who wanted to trade crypto and settle money 87 00:05:10,360 --> 00:05:13,920 Speaker 1: going in and out of crypto currencies and normal currencies. 88 00:05:14,080 --> 00:05:17,960 Speaker 1: Silicon Valley Bank just very concentrated on a certain group 89 00:05:18,120 --> 00:05:22,359 Speaker 1: of venture capital funds and their companies that they invested 90 00:05:22,400 --> 00:05:26,600 Speaker 1: in and Silicon Valley startups, Silicon Valley startups. Indeed, and 91 00:05:26,720 --> 00:05:29,400 Speaker 1: when those some of those vcs, some of them publicly 92 00:05:29,600 --> 00:05:34,120 Speaker 1: decided that they were a bit unsure about Silicon Valley 93 00:05:34,120 --> 00:05:39,120 Speaker 1: banks viability, they advised and again sometimes quite publicly advised 94 00:05:39,120 --> 00:05:41,719 Speaker 1: a lot of their companies to start moving their money, 95 00:05:42,080 --> 00:05:45,400 Speaker 1: and sometimes over Twitter. Which is also a new aspect 96 00:05:45,520 --> 00:05:49,040 Speaker 1: of this crisis, is that social media platforms would become 97 00:05:49,120 --> 00:05:53,800 Speaker 1: megaphones for different stakeholders to incent people to behave in 98 00:05:53,839 --> 00:05:58,160 Speaker 1: certain ways, and to behave in extremely irresponsible ways and 99 00:05:58,240 --> 00:06:02,760 Speaker 1: provoke panic. But yes, this was the problem. Concentrated deposits 100 00:06:02,800 --> 00:06:06,400 Speaker 1: and herd like behavior among those depositors meant that it 101 00:06:06,400 --> 00:06:10,680 Speaker 1: didn't really matter what assets Silicon Valley Bank had. I mean, 102 00:06:10,680 --> 00:06:13,120 Speaker 1: in fact, it had what we would traditionally expect to 103 00:06:13,160 --> 00:06:17,680 Speaker 1: be highly liquid and very valuable assets. But it didn't 104 00:06:17,680 --> 00:06:19,560 Speaker 1: matter what they had because the problem is when you 105 00:06:19,680 --> 00:06:22,440 Speaker 1: have to realize a lot of cash to pay back 106 00:06:22,480 --> 00:06:25,640 Speaker 1: depositors all at once, and you have to sell in 107 00:06:26,279 --> 00:06:28,800 Speaker 1: a panic or in a hurry, you're never going to 108 00:06:28,839 --> 00:06:30,760 Speaker 1: get the value of those assets that you think they're 109 00:06:30,800 --> 00:06:34,320 Speaker 1: worth well. And I think as it pertains to Silicon 110 00:06:34,400 --> 00:06:36,880 Speaker 1: Valley Bank, or as VB as some people call it, 111 00:06:37,520 --> 00:06:40,400 Speaker 1: I don't think it's actually the problem didn't reside on 112 00:06:40,440 --> 00:06:42,800 Speaker 1: the assets side of the balance sheet. To me, it 113 00:06:42,839 --> 00:06:46,920 Speaker 1: resides and resided on the liability side. They had been 114 00:06:46,960 --> 00:06:50,960 Speaker 1: part of this very unique ecosystem decades of amazing growth 115 00:06:51,400 --> 00:06:55,400 Speaker 1: ventric capitalists in Silicon Valley, the startups they funded, and 116 00:06:55,440 --> 00:06:59,200 Speaker 1: the bank all sort of had this virtuous cycle of 117 00:06:59,279 --> 00:07:03,880 Speaker 1: relationship that allowed them to seed one another's activities without 118 00:07:04,080 --> 00:07:07,920 Speaker 1: ever losing any of its momentum. Until the FED raised 119 00:07:07,960 --> 00:07:11,360 Speaker 1: interest rates, and then the fact that Silicon Valley Bank 120 00:07:11,400 --> 00:07:15,120 Speaker 1: had so much of its business concentrated in one population 121 00:07:15,160 --> 00:07:18,240 Speaker 1: of customers. That was actually what brought it down, not 122 00:07:18,360 --> 00:07:20,760 Speaker 1: the asset side of its balance sheet, right, Yeah, the 123 00:07:20,800 --> 00:07:24,160 Speaker 1: asset side was the sort of the precursor in a way, 124 00:07:24,160 --> 00:07:28,280 Speaker 1: and this is something that people had noticed months in advance. 125 00:07:28,760 --> 00:07:30,560 Speaker 1: The problem in the US, or one of the problems 126 00:07:30,560 --> 00:07:32,520 Speaker 1: in the US, is we ended up with a sort 127 00:07:32,560 --> 00:07:36,200 Speaker 1: of a two tier system of regulation where all banks 128 00:07:36,280 --> 00:07:38,200 Speaker 1: with assets of more than two hundred and fifty billion 129 00:07:38,240 --> 00:07:43,120 Speaker 1: dollars were held to standards of liquidity, held to standards 130 00:07:43,200 --> 00:07:46,840 Speaker 1: of having to mark their assets to market and reports 131 00:07:46,880 --> 00:07:50,000 Speaker 1: those values and take the hit through their equity, through 132 00:07:50,040 --> 00:07:53,080 Speaker 1: their capital, and smaller banks didn't have to do a 133 00:07:53,080 --> 00:07:55,760 Speaker 1: lot of this stuff. In the same way, people knew 134 00:07:55,920 --> 00:07:59,200 Speaker 1: that Silicon Valley Bank was carrying a bunch of safe 135 00:07:59,240 --> 00:08:02,360 Speaker 1: bonds but which had declined in value because of interest 136 00:08:02,440 --> 00:08:05,280 Speaker 1: rate rises, and if it had to sell those bonds, 137 00:08:05,280 --> 00:08:07,600 Speaker 1: it was going to realize some losses. People knew that 138 00:08:07,640 --> 00:08:11,600 Speaker 1: for months, but for some reason it suddenly became much 139 00:08:11,640 --> 00:08:14,480 Speaker 1: more pertinent to worry about that, and that's part of 140 00:08:14,480 --> 00:08:16,440 Speaker 1: what started the run on the bank. But I mean 141 00:08:16,520 --> 00:08:19,800 Speaker 1: both of these banks, Silicon Value Bank and Silvergate Bank 142 00:08:20,320 --> 00:08:24,600 Speaker 1: were exposed to interest rate risk in multiple ways because 143 00:08:25,000 --> 00:08:28,880 Speaker 1: the industries that they served were industries that benefited directly 144 00:08:28,880 --> 00:08:32,280 Speaker 1: off of ultra low interest rates. The reason why cryptotokov 145 00:08:32,640 --> 00:08:34,400 Speaker 1: is because of ultra low rates and all of the 146 00:08:34,440 --> 00:08:37,319 Speaker 1: money that had flooded into the economy through the COVID pandemic. 147 00:08:37,679 --> 00:08:40,320 Speaker 1: People were just looking for other stuff to do with 148 00:08:40,360 --> 00:08:42,160 Speaker 1: their money, and that's kind of part of what drove 149 00:08:42,480 --> 00:08:45,880 Speaker 1: the whole crypto trading boom. Similarly, with vcs, it's like 150 00:08:46,400 --> 00:08:49,560 Speaker 1: over the last what ten fifteen years, that industry has 151 00:08:49,600 --> 00:08:53,280 Speaker 1: boomed as people have looked to invest in companies that 152 00:08:53,280 --> 00:08:56,400 Speaker 1: don't necessarily produce a good return now or profits now, 153 00:08:56,880 --> 00:09:00,880 Speaker 1: but because ultra low interest rates value future profits much 154 00:09:00,880 --> 00:09:03,640 Speaker 1: more highly and you expect these to be fast growing companies, 155 00:09:03,880 --> 00:09:07,800 Speaker 1: they attracted huge swarms of cash, huge floods of cash, 156 00:09:07,840 --> 00:09:10,880 Speaker 1: and cash that went into essentially kind of an opaque 157 00:09:10,960 --> 00:09:14,000 Speaker 1: environment because in the past, those small companies, if they 158 00:09:14,040 --> 00:09:16,560 Speaker 1: wanted a lot of cash, had to go public, and 159 00:09:16,679 --> 00:09:20,840 Speaker 1: going public offered some transparency into how solid their finances were. 160 00:09:21,160 --> 00:09:23,400 Speaker 1: But in a world in which there's really low interest rates, 161 00:09:23,400 --> 00:09:25,960 Speaker 1: and they can get money elsewhere. You can keep some 162 00:09:26,040 --> 00:09:28,640 Speaker 1: of those startup problems in the dark. I want to 163 00:09:28,720 --> 00:09:30,440 Speaker 1: step back for a second on what you were just 164 00:09:30,480 --> 00:09:34,440 Speaker 1: saying about interest rates rising. This wasn't a normal interest 165 00:09:34,520 --> 00:09:38,160 Speaker 1: rate environment. Obviously, because of the fear of inflation, the 166 00:09:38,240 --> 00:09:41,160 Speaker 1: FAT and other central banks around the world began hiking 167 00:09:41,200 --> 00:09:45,040 Speaker 1: interest rates at a historically rapid clip. Within a matter 168 00:09:45,080 --> 00:09:48,280 Speaker 1: of months, you were seeing one hundred basis point moves 169 00:09:48,840 --> 00:09:51,400 Speaker 1: that no one was prepared for. The stock market wasn't 170 00:09:51,400 --> 00:09:53,520 Speaker 1: prepared for it, the bond market wasn't prepared for it. 171 00:09:53,520 --> 00:09:57,240 Speaker 1: And now we know banks like Silicon Valley Bank wasn't 172 00:09:57,280 --> 00:10:00,800 Speaker 1: prepared for it. Do you think that that interest free hike, 173 00:10:01,200 --> 00:10:04,520 Speaker 1: that rapid interest rate hike in the US by the 174 00:10:04,679 --> 00:10:09,120 Speaker 1: dead was what did SVB in or was it also 175 00:10:09,200 --> 00:10:12,000 Speaker 1: just the bank's own mismanagement over a period of time 176 00:10:12,480 --> 00:10:15,080 Speaker 1: without it, doubt it was the bank's own mismanagement over 177 00:10:15,120 --> 00:10:20,239 Speaker 1: a long period of time. They could have invested their liquidity, 178 00:10:20,320 --> 00:10:23,800 Speaker 1: their spare cash better. They could have hedged their interest 179 00:10:23,880 --> 00:10:26,439 Speaker 1: rate risk on the asset side of their books, and 180 00:10:26,520 --> 00:10:29,119 Speaker 1: they could have done I guess lots of other things 181 00:10:29,200 --> 00:10:33,720 Speaker 1: to ensure that the precipitate cause to their collapse didn't 182 00:10:33,760 --> 00:10:37,440 Speaker 1: crop up in the same way. However, the problem cropped 183 00:10:37,520 --> 00:10:40,440 Speaker 1: up in part because of the interest rate rises. And 184 00:10:40,480 --> 00:10:43,600 Speaker 1: I think the interesting thing about that is they are, 185 00:10:43,760 --> 00:10:47,560 Speaker 1: in some senses more of a symptom of a bunch 186 00:10:47,600 --> 00:10:51,120 Speaker 1: of tensions that are being laid bare in the economy 187 00:10:51,240 --> 00:10:54,080 Speaker 1: through these interest rate rises. And this is what's going 188 00:10:54,080 --> 00:10:55,959 Speaker 1: to get really interesting in the next sort of month 189 00:10:56,080 --> 00:11:00,199 Speaker 1: or so, is just how quickly or how rapidly those 190 00:11:00,240 --> 00:11:04,400 Speaker 1: interest rate rises are now feeding through into the flow 191 00:11:04,440 --> 00:11:07,480 Speaker 1: of money, and how credit is extended, and banks own 192 00:11:07,760 --> 00:11:10,880 Speaker 1: attitudes to risk because you know, you can keep raising 193 00:11:10,960 --> 00:11:12,800 Speaker 1: rates and keep raising rates, and keep raising rates, and 194 00:11:12,840 --> 00:11:15,480 Speaker 1: expect at sometime the economy is going to start to 195 00:11:15,480 --> 00:11:18,120 Speaker 1: sort of slow down steadily. The way I think it 196 00:11:18,160 --> 00:11:20,800 Speaker 1: happens actually, and I think what we're seeing now is 197 00:11:21,160 --> 00:11:22,880 Speaker 1: you raise rates, you raise rates, you raise rates, and 198 00:11:22,880 --> 00:11:25,360 Speaker 1: then at a certain point, like an elastic band, it 199 00:11:25,400 --> 00:11:28,240 Speaker 1: comes pinging towards you. The result of your rate rises, 200 00:11:28,559 --> 00:11:32,160 Speaker 1: and what comes being towards you is a rapid tightening 201 00:11:32,160 --> 00:11:35,880 Speaker 1: in credit availability from banks, a rapid reduction in banks 202 00:11:35,960 --> 00:11:40,480 Speaker 1: own risk appetites, and how much cash they want to 203 00:11:40,520 --> 00:11:43,719 Speaker 1: hoard themselves against being called on their own deposits, and 204 00:11:43,720 --> 00:11:46,560 Speaker 1: how much they're prepared to lend to companies and people 205 00:11:46,640 --> 00:11:49,840 Speaker 1: and to other financial institutions through the system. And actually, 206 00:11:49,840 --> 00:11:52,720 Speaker 1: what we have seen is also now this kind of 207 00:11:52,760 --> 00:11:56,760 Speaker 1: global coordination among central banks to try and aid and 208 00:11:56,840 --> 00:11:59,680 Speaker 1: support the amount of dollars flowing through the system. And 209 00:11:59,720 --> 00:12:03,400 Speaker 1: I think that's a sign of liquidity issues spreading beyond 210 00:12:03,440 --> 00:12:06,240 Speaker 1: the borders of the US, and you know, people finding 211 00:12:06,240 --> 00:12:08,360 Speaker 1: it difficult to access to all this because of these 212 00:12:08,440 --> 00:12:12,240 Speaker 1: changes in risk appetite. One of Warren Buffett's famous aphorisms 213 00:12:12,360 --> 00:12:15,079 Speaker 1: is when the tide goes out, you get to see 214 00:12:15,120 --> 00:12:19,000 Speaker 1: who's been swimming naked. And interest rates rose, and we 215 00:12:19,000 --> 00:12:20,840 Speaker 1: started to see who was swimming naked. Some of the 216 00:12:20,840 --> 00:12:26,760 Speaker 1: crypto banks SVB, etc. Etc. And swimming naked implies that 217 00:12:26,840 --> 00:12:29,360 Speaker 1: they were taking risks they shouldn't have taken, and now 218 00:12:29,360 --> 00:12:34,600 Speaker 1: they're exposed. Nonetheless, when Silicon Valley Bank began teetering, the 219 00:12:34,679 --> 00:12:40,280 Speaker 1: Feds rushed in and they contemplated using federal powers. They 220 00:12:40,280 --> 00:12:44,040 Speaker 1: didn't use taxpayers money in that instance, but federal powers 221 00:12:44,040 --> 00:12:47,240 Speaker 1: to essentially backstop that bank. I still have a lot 222 00:12:47,280 --> 00:12:49,000 Speaker 1: of problems with that, But I want to know what 223 00:12:49,040 --> 00:12:53,000 Speaker 1: you think about that. First, Was it wise for federal 224 00:12:53,080 --> 00:12:59,400 Speaker 1: regulators to intervene in the Silicon Valley bank collapse? I 225 00:12:59,440 --> 00:13:03,520 Speaker 1: mean sense it seems as if the bank could have 226 00:13:03,600 --> 00:13:10,680 Speaker 1: been small enough to have fallen over without very widespread repercussions. Obviously, 227 00:13:10,720 --> 00:13:12,360 Speaker 1: we don't get to see everything that they get to 228 00:13:12,360 --> 00:13:14,520 Speaker 1: see in terms of the state of the financial system, 229 00:13:14,960 --> 00:13:19,320 Speaker 1: but they decided in their wisdom that this was a 230 00:13:19,360 --> 00:13:23,400 Speaker 1: systemic bank after all. To me, what that says is 231 00:13:23,600 --> 00:13:25,920 Speaker 1: kind of I'm less interested or are less worried about 232 00:13:26,559 --> 00:13:29,760 Speaker 1: whether they acted rightly or wrongly in this instance. I'm 233 00:13:29,800 --> 00:13:32,640 Speaker 1: more concerned about the fact that we saw this big 234 00:13:32,679 --> 00:13:37,320 Speaker 1: push for deregulation in twenty eighteen, which took away the 235 00:13:37,600 --> 00:13:40,760 Speaker 1: systemic designation from a lot of banks under the two 236 00:13:40,880 --> 00:13:43,719 Speaker 1: hundred and fifty billion dollar asset level, after a lot 237 00:13:43,760 --> 00:13:46,440 Speaker 1: of lobbying from a lot of smaller banks, including SVB 238 00:13:46,600 --> 00:13:50,640 Speaker 1: itself directly, and with the idea that the only banks 239 00:13:50,640 --> 00:13:54,000 Speaker 1: that were systemically threatening to the economy, the only banks 240 00:13:54,000 --> 00:13:57,600 Speaker 1: that could cut oxygen supplies off to the economy, were 241 00:13:57,640 --> 00:14:00,120 Speaker 1: the large money center banks. Exactly had been at the 242 00:14:00,120 --> 00:14:02,600 Speaker 1: center of the two thousand and eight collapse. Yeah, and 243 00:14:02,679 --> 00:14:06,600 Speaker 1: so everybody decided in their wisdom that these smaller banks 244 00:14:06,800 --> 00:14:09,839 Speaker 1: were not systemic, and yet the seconds one of them 245 00:14:09,880 --> 00:14:12,720 Speaker 1: teaters and not even the biggest of these smaller banks. 246 00:14:13,120 --> 00:14:15,600 Speaker 1: You have to rush in decide it is systemic after all, 247 00:14:15,920 --> 00:14:18,840 Speaker 1: and then do whatever you can to support the financial system. 248 00:14:19,200 --> 00:14:21,320 Speaker 1: So on the note of deciding to do whatever we 249 00:14:21,360 --> 00:14:23,440 Speaker 1: need to do to support the financial system, I'm going 250 00:14:23,480 --> 00:14:25,760 Speaker 1: to take a break so we can hear from our 251 00:14:25,760 --> 00:14:29,080 Speaker 1: sponsor who's helping us support this show. We'll be right back. 252 00:14:33,320 --> 00:14:37,320 Speaker 1: I'm talking with Paul Davies, who is a financial wizard 253 00:14:37,360 --> 00:14:40,160 Speaker 1: and a columnist for Bloomberg Opinion and a wonderful guy 254 00:14:40,160 --> 00:14:42,880 Speaker 1: to speak to when you're trying to sort out something 255 00:14:42,880 --> 00:14:46,440 Speaker 1: as complex as a banking crisis. We've been talking about 256 00:14:46,480 --> 00:14:51,400 Speaker 1: the debacle at Silicon Valley Bank and some troubled crypto banks. 257 00:14:52,080 --> 00:14:55,440 Speaker 1: It's a very specific sector of banks, and it makes 258 00:14:55,480 --> 00:14:58,680 Speaker 1: me wonder whether or not more problems why ahead for 259 00:14:58,800 --> 00:15:03,440 Speaker 1: other banks, Paul, and thus the economy more generally, or again, 260 00:15:03,560 --> 00:15:07,200 Speaker 1: is this just sector specific and not systemic? Couldn't we 261 00:15:07,280 --> 00:15:11,600 Speaker 1: dismiss the crypto lenders and SVB as victims of their 262 00:15:11,640 --> 00:15:15,840 Speaker 1: own recklessness and ineptitude allow them to crash and burn 263 00:15:16,160 --> 00:15:19,800 Speaker 1: and then move happily on as healthier banks do business 264 00:15:19,840 --> 00:15:22,680 Speaker 1: the way they should. Well, this is going to depend 265 00:15:22,720 --> 00:15:25,960 Speaker 1: a hell of a lot on how other banks react 266 00:15:26,040 --> 00:15:31,280 Speaker 1: to this environment. We have been expecting banks to perhaps 267 00:15:31,320 --> 00:15:34,440 Speaker 1: start reigning in the amounts of credit that they're willing 268 00:15:34,480 --> 00:15:37,320 Speaker 1: to provide for a while already. I mean, that's kind 269 00:15:37,320 --> 00:15:40,480 Speaker 1: of natural when interest rates rise, it's sort of part 270 00:15:40,520 --> 00:15:43,680 Speaker 1: of what increasing interest rates is meant to do. But 271 00:15:43,840 --> 00:15:46,360 Speaker 1: at the same time, we've had this kind of weird 272 00:15:46,480 --> 00:15:51,120 Speaker 1: situation where, especially in the US consumer balance sheets, household 273 00:15:51,120 --> 00:15:54,560 Speaker 1: balance sheets, people's own financial position has been very healthy 274 00:15:54,600 --> 00:15:57,120 Speaker 1: because people saved up all manner of money during the 275 00:15:57,160 --> 00:15:59,960 Speaker 1: period of lockdowns during the COVID pandemic. They pay down 276 00:16:00,120 --> 00:16:02,920 Speaker 1: personal debt, and so the amount of problem owns, the 277 00:16:02,920 --> 00:16:05,160 Speaker 1: amount of problems that people have been having repaying their 278 00:16:05,200 --> 00:16:08,400 Speaker 1: debt has been utterly minimal for ages and ages and ages. 279 00:16:08,520 --> 00:16:11,440 Speaker 1: And this has been a very strange world with high 280 00:16:11,480 --> 00:16:14,760 Speaker 1: inflation and rising rates and yet still a healthy consumer 281 00:16:14,960 --> 00:16:18,200 Speaker 1: and very very healthy bank earnings. Now we've reached this 282 00:16:18,280 --> 00:16:20,640 Speaker 1: kind of tipping point, I think, and it's how banks 283 00:16:20,680 --> 00:16:24,760 Speaker 1: react to that, how quickly they rain in their credit provision, 284 00:16:24,840 --> 00:16:28,960 Speaker 1: how rapidly their risk appetite shrinks, that will really govern 285 00:16:29,320 --> 00:16:32,400 Speaker 1: what is the impact on the economy beyond the banks themselves. 286 00:16:33,040 --> 00:16:35,000 Speaker 1: The old adage is a banker is someone who will 287 00:16:35,040 --> 00:16:36,840 Speaker 1: give you an umbrella when it is the sun is shining, 288 00:16:36,840 --> 00:16:38,320 Speaker 1: and then ask for it back as soon as it 289 00:16:38,320 --> 00:16:41,120 Speaker 1: starts to rain. If they're all asking for their umbrellas 290 00:16:41,200 --> 00:16:43,960 Speaker 1: back right now, that's going to hurt the economy directly, 291 00:16:44,120 --> 00:16:46,320 Speaker 1: and that's going to be the end of the interest 292 00:16:46,440 --> 00:16:48,840 Speaker 1: right hiking cycle. Yet, one of the other things that 293 00:16:49,000 --> 00:16:51,680 Speaker 1: is said about banks is that they love a free market, 294 00:16:51,760 --> 00:16:54,240 Speaker 1: winner take all system on the way up, and they 295 00:16:54,320 --> 00:16:56,800 Speaker 1: love socialism on the way down. And I think that 296 00:16:56,800 --> 00:17:00,160 Speaker 1: that's going to get tested, possibly in future months, as 297 00:17:00,000 --> 00:17:04,600 Speaker 1: a crisis continues to reveal itself. As we know in crises, 298 00:17:04,640 --> 00:17:08,640 Speaker 1: sometimes new things flare up in unexpected places. And shortly 299 00:17:08,640 --> 00:17:13,439 Speaker 1: after Silicon Valley Bank got wobbly, a well known and 300 00:17:13,640 --> 00:17:18,960 Speaker 1: legendary Swiss bank, Credit Suiss revealed itself as another victim 301 00:17:19,080 --> 00:17:23,840 Speaker 1: of a nasty interest rate environment and public doubts about 302 00:17:23,840 --> 00:17:28,320 Speaker 1: its viability. You covered that from ground zero. Tell me 303 00:17:28,840 --> 00:17:31,080 Speaker 1: why was there so much hand ringing to begin with 304 00:17:31,119 --> 00:17:33,920 Speaker 1: about Credit Suis? Again? Was this a bank that was 305 00:17:34,040 --> 00:17:36,720 Speaker 1: systemic or was it a bank that was just an 306 00:17:36,720 --> 00:17:40,120 Speaker 1: individual victim of its own missteps? I mean, Credit Suis 307 00:17:40,359 --> 00:17:44,240 Speaker 1: is definitely a globally systemic bank. All regulators recognize that, 308 00:17:44,280 --> 00:17:47,000 Speaker 1: and it carries higher capital charges because of that. But 309 00:17:47,160 --> 00:17:50,439 Speaker 1: explain that. Why is a system Why is Credit Suis systemic? 310 00:17:50,760 --> 00:17:54,320 Speaker 1: And Silicon Valley Bank may not be so. Credit Suiss 311 00:17:54,320 --> 00:17:58,440 Speaker 1: has operations all around the world. It's a big dealer 312 00:17:58,560 --> 00:18:03,280 Speaker 1: in stocks and bonds and most importantly, derivatives of all 313 00:18:03,400 --> 00:18:06,159 Speaker 1: kinds between banks, and it's got an investment bank and 314 00:18:06,160 --> 00:18:08,560 Speaker 1: a trading operation in the US and in Europe and 315 00:18:08,680 --> 00:18:12,080 Speaker 1: in Asia. It has lots of other banks as counterparties, 316 00:18:12,119 --> 00:18:15,240 Speaker 1: as banks it faces off against in trades. So what 317 00:18:15,359 --> 00:18:17,720 Speaker 1: makes a bank systemic is if it gets into trouble 318 00:18:17,800 --> 00:18:20,360 Speaker 1: or falls over, then it can default on a lot 319 00:18:20,400 --> 00:18:23,720 Speaker 1: of obligations or positions it has with lots of other banks, 320 00:18:23,880 --> 00:18:27,280 Speaker 1: and that sends a series of dominoes cascading through the 321 00:18:27,320 --> 00:18:31,359 Speaker 1: system of trade failures, collateral losses and so on. And 322 00:18:31,400 --> 00:18:34,399 Speaker 1: as all other banks react to any loss that they 323 00:18:34,480 --> 00:18:37,520 Speaker 1: might take off of the first one that's failed. They'll 324 00:18:38,480 --> 00:18:41,040 Speaker 1: maybe default on some of their own obligations to other banks, 325 00:18:41,119 --> 00:18:44,120 Speaker 1: or just pull in extra liquidity that they suddenly need, 326 00:18:44,359 --> 00:18:45,959 Speaker 1: and before you know it, you've just got this kind 327 00:18:46,000 --> 00:18:50,080 Speaker 1: of rolling storm going through the financial system, and banks 328 00:18:50,080 --> 00:18:54,159 Speaker 1: that may not have been stressed become stressed because of 329 00:18:54,240 --> 00:18:59,399 Speaker 1: credit sweezes stresses exactly, and everybody. Yeah, I mean, the 330 00:18:59,520 --> 00:19:02,720 Speaker 1: onset of COVID nineteen is a really sort of good example, 331 00:19:02,760 --> 00:19:06,159 Speaker 1: because that was a moment when everybody gathered all of 332 00:19:06,200 --> 00:19:09,200 Speaker 1: the cash that they possibly could to themselves to protect 333 00:19:09,240 --> 00:19:12,040 Speaker 1: themselves against you not being able to pay other people 334 00:19:12,040 --> 00:19:14,480 Speaker 1: that they owed money too. Because nobody wants to go bust. 335 00:19:14,800 --> 00:19:17,680 Speaker 1: And in a situation where you see one bank going bust, 336 00:19:17,760 --> 00:19:20,159 Speaker 1: what we saw in two thousand and seven two thousand 337 00:19:20,160 --> 00:19:22,440 Speaker 1: and eight was very much that. I mean, it was 338 00:19:22,480 --> 00:19:25,880 Speaker 1: caused by different things, but a bank goes bust, everybody 339 00:19:25,880 --> 00:19:27,919 Speaker 1: gets worried about all of their exposures, all of their 340 00:19:27,960 --> 00:19:30,679 Speaker 1: ability to pay anybody, and they all gather their assets 341 00:19:30,720 --> 00:19:33,639 Speaker 1: the aquidity to themselves, and they just sort of stop 342 00:19:34,040 --> 00:19:35,919 Speaker 1: doing business. You kind of stopped doing business and like 343 00:19:35,960 --> 00:19:38,240 Speaker 1: you were saying at the beginning, like if the oxygen 344 00:19:38,359 --> 00:19:40,359 Speaker 1: is turned off, then the rest of the body just 345 00:19:40,359 --> 00:19:43,440 Speaker 1: sort of fails. What happened in Credit Sweet's case is 346 00:19:43,480 --> 00:19:47,880 Speaker 1: also interesting because they weren't a failing bank per se. 347 00:19:47,920 --> 00:19:51,280 Speaker 1: They had viable assets. They had a lot of goods 348 00:19:51,280 --> 00:19:54,080 Speaker 1: and their balance sheet that they could have used to 349 00:19:54,160 --> 00:19:57,320 Speaker 1: keep themselves afloat or am I simplifying that too much? No, 350 00:19:57,440 --> 00:20:00,080 Speaker 1: you are not simplifying out. Their balance sheet was perfectly good. 351 00:20:00,240 --> 00:20:03,000 Speaker 1: But they were a failing bank in the sense of 352 00:20:03,560 --> 00:20:07,679 Speaker 1: they could not get their strategy clear and sorted. They 353 00:20:07,720 --> 00:20:09,879 Speaker 1: were kind of in the middle of their three years 354 00:20:09,920 --> 00:20:11,679 Speaker 1: they could be years, so I mean they were in 355 00:20:11,720 --> 00:20:16,480 Speaker 1: the middle of their third strategic overhaul and restructuring since 356 00:20:16,560 --> 00:20:21,080 Speaker 1: twenty fifteen twenty sixteen. They were struggling to get the 357 00:20:21,160 --> 00:20:24,040 Speaker 1: details about how this was going to work and what 358 00:20:24,160 --> 00:20:25,760 Speaker 1: exactly they were going to do and where they were 359 00:20:25,760 --> 00:20:28,280 Speaker 1: going to be focused. They were struggling to get those 360 00:20:28,320 --> 00:20:31,800 Speaker 1: details out quickly enough. Their problem really was it All 361 00:20:31,840 --> 00:20:34,439 Speaker 1: of this left them with very few supporters. There was 362 00:20:34,480 --> 00:20:39,120 Speaker 1: no keen marginal buyer of the shares in Credit Suis 363 00:20:39,119 --> 00:20:42,000 Speaker 1: on any day when they fell, including the Swiss government, 364 00:20:42,080 --> 00:20:44,919 Speaker 1: including the Swiss government, and in the end with Credit 365 00:20:44,960 --> 00:20:48,080 Speaker 1: SWIEZ they arranged the shotgun marriage. Tell me a little 366 00:20:48,080 --> 00:20:50,560 Speaker 1: bit about what happened there. As you said, Credit swie 367 00:20:50,560 --> 00:20:52,960 Speaker 1: had plenty of cash on its balance sheet, it could 368 00:20:52,960 --> 00:20:56,200 Speaker 1: service a lots of withdrawals. The Swiss National Bank had 369 00:20:56,200 --> 00:20:58,000 Speaker 1: come out in the middle of the week and said, 370 00:20:58,359 --> 00:21:01,320 Speaker 1: we'll give you another fifty four billion dollars or fifty 371 00:21:01,320 --> 00:21:04,080 Speaker 1: billion Swiss francs if you need it. Should you still 372 00:21:04,080 --> 00:21:08,320 Speaker 1: get lots of withdrawals. But despite the strength of their 373 00:21:08,359 --> 00:21:11,280 Speaker 1: balance sheet, the amount of capital they had, they had 374 00:21:11,359 --> 00:21:15,360 Speaker 1: just sort of lost the faith of two important constituents. 375 00:21:15,440 --> 00:21:19,480 Speaker 1: One a lot of depositors, particularly, it seems, among their 376 00:21:19,560 --> 00:21:23,240 Speaker 1: very rich clients in places like Asia. But two, and 377 00:21:23,440 --> 00:21:27,240 Speaker 1: perhaps even more importantly, among their counterparties. So as I 378 00:21:27,280 --> 00:21:30,240 Speaker 1: was talking about earlier, the people that they face off 379 00:21:30,240 --> 00:21:32,920 Speaker 1: against when they're doing derivatives trades and this sort of thing. 380 00:21:33,440 --> 00:21:37,040 Speaker 1: And the problem with that is when you lose the 381 00:21:37,040 --> 00:21:39,600 Speaker 1: faith of those counterparties, they want a number of things. 382 00:21:39,640 --> 00:21:42,200 Speaker 1: They want to do no more business with you, which 383 00:21:42,240 --> 00:21:45,160 Speaker 1: means you don't make any money. They want to ask 384 00:21:45,200 --> 00:21:47,280 Speaker 1: you for more collateral. You know you have to give 385 00:21:47,320 --> 00:21:49,960 Speaker 1: them more cash or more safe bonds sometimes, which is 386 00:21:50,000 --> 00:21:54,480 Speaker 1: another drain on your balance sheet. Or they will reject 387 00:21:54,680 --> 00:21:58,560 Speaker 1: your own securities as collateral against other people's trades, which 388 00:21:58,600 --> 00:22:02,119 Speaker 1: means your own securities getting sold too, and you just 389 00:22:02,200 --> 00:22:06,600 Speaker 1: look riskier and riskier. It's a very mechanical and difficult 390 00:22:06,680 --> 00:22:10,399 Speaker 1: spiral to break out of. When your stocks and your bonds, 391 00:22:10,480 --> 00:22:13,600 Speaker 1: your own shares and your own bonds keep collapsing in value, 392 00:22:13,720 --> 00:22:17,119 Speaker 1: you look increasingly risky. People just don't want to do 393 00:22:17,160 --> 00:22:19,960 Speaker 1: business with you so much. They sell your stocks and 394 00:22:19,960 --> 00:22:23,119 Speaker 1: your bonds mechanically when they're using them as collateral, and 395 00:22:23,200 --> 00:22:26,399 Speaker 1: that's it. The situation just fairplane goes into a nose dive, exactly, 396 00:22:26,480 --> 00:22:28,280 Speaker 1: and even if you can get the engines running again, 397 00:22:28,359 --> 00:22:29,680 Speaker 1: you may not be able to pull out of that 398 00:22:29,720 --> 00:22:32,600 Speaker 1: before you hit the water, exactly. I guess one virtue 399 00:22:32,600 --> 00:22:36,600 Speaker 1: to me of the UBS credit squee steal is that 400 00:22:36,720 --> 00:22:41,080 Speaker 1: it didn't involve taxpayer funds. Essentially, it forced two banks 401 00:22:41,119 --> 00:22:44,879 Speaker 1: to merge to solve the weaker banks problems. That seems 402 00:22:44,920 --> 00:22:47,359 Speaker 1: to may be an elegant solution, it may not be 403 00:22:47,400 --> 00:22:49,880 Speaker 1: a permanent solution. Elegant may not be the right word. 404 00:22:49,880 --> 00:22:52,359 Speaker 1: Maybe it feels to me like a better solution, because 405 00:22:52,440 --> 00:22:55,080 Speaker 1: the one thing that bothers me in all of this 406 00:22:55,280 --> 00:22:58,760 Speaker 1: is that age old problem of moral hazard, the idea 407 00:22:58,800 --> 00:23:02,040 Speaker 1: that if bankers know that the federal government is going 408 00:23:02,080 --> 00:23:04,520 Speaker 1: to come in and rescue them from their mistakes, there's 409 00:23:04,520 --> 00:23:07,840 Speaker 1: no penalty for them for making mistakes, and so they 410 00:23:07,920 --> 00:23:11,280 Speaker 1: keep making the mistakes again and again because they get 411 00:23:11,280 --> 00:23:14,600 Speaker 1: a bailout. Does moral hairs or loom large in your 412 00:23:14,640 --> 00:23:16,280 Speaker 1: mind right now as you look at how all of 413 00:23:16,280 --> 00:23:19,720 Speaker 1: this is unfolding. I mean, I don't think so in 414 00:23:19,840 --> 00:23:23,000 Speaker 1: terms of the recent collapses that we've seen, because in 415 00:23:23,040 --> 00:23:25,720 Speaker 1: the US cases, shareholders have been completely wiped out. I 416 00:23:25,760 --> 00:23:29,200 Speaker 1: think in Credit Sweets's case, shareholders have been mostly wiped 417 00:23:29,240 --> 00:23:32,400 Speaker 1: out and risky bonds have been completely wiped out. There's 418 00:23:32,440 --> 00:23:34,840 Speaker 1: an argument, and there's probably some lawsuits to be had 419 00:23:34,880 --> 00:23:36,959 Speaker 1: over that, the fact that bombs have gone when shares 420 00:23:37,000 --> 00:23:41,880 Speaker 1: haven't gone completely. But the people who benefit most from 421 00:23:41,960 --> 00:23:44,840 Speaker 1: taking risk when you're running a bank, either shareholders and 422 00:23:44,920 --> 00:23:48,080 Speaker 1: the managements. They've lost everything or most of what they 423 00:23:48,160 --> 00:23:50,520 Speaker 1: ever would have made. Oh, although the management probably spent 424 00:23:50,720 --> 00:23:53,080 Speaker 1: many many years patting their own bank accounts before the 425 00:23:53,119 --> 00:23:55,040 Speaker 1: crash happened, they might well have done. And I'm sure 426 00:23:55,040 --> 00:23:57,240 Speaker 1: there's plenty of people who still have nice, large houses 427 00:23:57,280 --> 00:23:59,000 Speaker 1: that at the very least they could sell to live 428 00:23:59,040 --> 00:24:01,880 Speaker 1: off the money, if not actually kind of live in forever. Right, 429 00:24:02,160 --> 00:24:05,919 Speaker 1: So that's not a problem. Well, I mean, perhaps it is. 430 00:24:06,000 --> 00:24:09,359 Speaker 1: We do have powers to kind of claw back pay. 431 00:24:09,400 --> 00:24:12,639 Speaker 1: And I guess if you decided if you wanted to 432 00:24:12,640 --> 00:24:18,240 Speaker 1: pursue somebody civilly or criminally for appallingly bad management, for negligence, 433 00:24:18,440 --> 00:24:22,240 Speaker 1: or even criminal behavior, then you absolutely could. I'm sure 434 00:24:23,240 --> 00:24:25,680 Speaker 1: we've seen in this whole Kind Valley Bank case, in fact, 435 00:24:25,720 --> 00:24:28,879 Speaker 1: that lawsuits have now been filed. The SEC's looking at it, 436 00:24:29,240 --> 00:24:31,879 Speaker 1: so there may be some court action in all of this. 437 00:24:32,040 --> 00:24:34,719 Speaker 1: They may have to pay up money to somebody somewhere 438 00:24:34,920 --> 00:24:38,240 Speaker 1: at some points. But we sure do give the financial 439 00:24:38,359 --> 00:24:43,080 Speaker 1: sector a set of cushions that we don't give other industries, 440 00:24:43,600 --> 00:24:47,000 Speaker 1: and it gets breaks that no one else gets. Why 441 00:24:47,119 --> 00:24:52,359 Speaker 1: is that? That is? Because finance banking is a kind 442 00:24:52,400 --> 00:24:56,160 Speaker 1: of a collective utility that we all rely on. It's 443 00:24:56,160 --> 00:24:59,280 Speaker 1: a service that the economy needs to some degree to 444 00:24:59,400 --> 00:25:03,320 Speaker 1: keep function without the provision of credit. In some form, 445 00:25:03,760 --> 00:25:07,359 Speaker 1: How would people invest, how would people build new factories 446 00:25:07,480 --> 00:25:10,680 Speaker 1: or add extra chairs to their hair salon, or anything 447 00:25:10,720 --> 00:25:14,000 Speaker 1: that you want to think about that could improve economic activity, 448 00:25:14,320 --> 00:25:17,320 Speaker 1: improve productivity, all of those good things that we like 449 00:25:17,359 --> 00:25:19,760 Speaker 1: to see, and that makes us all better off ultimately. 450 00:25:20,119 --> 00:25:23,600 Speaker 1: So it's very important that we have banking credit creation 451 00:25:23,640 --> 00:25:26,560 Speaker 1: of some form. Now, whether we've got it in exactly 452 00:25:26,600 --> 00:25:29,320 Speaker 1: the right form is an endless debate, and I think 453 00:25:29,320 --> 00:25:31,840 Speaker 1: that we've been having lots of debates about this since 454 00:25:31,920 --> 00:25:37,080 Speaker 1: two thousand and eight. But it's a very important part 455 00:25:37,119 --> 00:25:39,439 Speaker 1: of the economy that we've arrived at this way of 456 00:25:39,520 --> 00:25:43,080 Speaker 1: running banks. And maybe it's a bit like the old 457 00:25:43,119 --> 00:25:46,240 Speaker 1: Churchill quotes like democracy is the worst system you could 458 00:25:46,280 --> 00:25:48,639 Speaker 1: have apart from all of the other ones. So now 459 00:25:48,680 --> 00:25:51,359 Speaker 1: we've gotten both Winston Churchill and Warren Buffett into the 460 00:25:51,400 --> 00:25:53,560 Speaker 1: same podcast and on that. Now I'm going to take 461 00:25:53,560 --> 00:25:55,480 Speaker 1: a break, and when we come back, I demand that 462 00:25:55,520 --> 00:25:58,080 Speaker 1: you find some other historical figure to quote. In the 463 00:25:58,080 --> 00:26:04,000 Speaker 1: back end of the show, I am back with Paul 464 00:26:04,080 --> 00:26:08,720 Speaker 1: Davies talking about what happens when a bank of any 465 00:26:08,760 --> 00:26:12,800 Speaker 1: stripe collides with the reality of central banks raising interest 466 00:26:12,880 --> 00:26:17,080 Speaker 1: rates at a rapid clip. Central bankers. Paul obviously of 467 00:26:17,160 --> 00:26:20,879 Speaker 1: Loonblarge in this crisis that banks are wrestling with right 468 00:26:20,920 --> 00:26:25,840 Speaker 1: now because they engineered an unusually rapid round of rate 469 00:26:25,880 --> 00:26:30,239 Speaker 1: increases that took industries and everyone else off guard. And 470 00:26:30,320 --> 00:26:33,359 Speaker 1: we were talking earlier about this is the system we have, 471 00:26:33,480 --> 00:26:35,640 Speaker 1: These are the banks we have, This is the regulatory 472 00:26:35,720 --> 00:26:40,000 Speaker 1: architecture we have. What do you think is the best 473 00:26:40,040 --> 00:26:44,920 Speaker 1: path forward for regulators given what we've seen now in 474 00:26:44,960 --> 00:26:49,600 Speaker 1: the cryptosphere, in the venture capital banking sphere, in the 475 00:26:49,880 --> 00:26:55,520 Speaker 1: major investment banking sphere, with credit suites, what do regulators 476 00:26:55,560 --> 00:26:58,280 Speaker 1: need to think about going forward? I mean, in the 477 00:26:58,320 --> 00:27:01,320 Speaker 1: first instance, in the US, they need to do something 478 00:27:01,320 --> 00:27:02,840 Speaker 1: which I'm pretty sure they're going to do, which is 479 00:27:02,880 --> 00:27:08,760 Speaker 1: apply more systemic and tougher regulations to all of those 480 00:27:08,800 --> 00:27:11,840 Speaker 1: midsize banks less than two hundred and fifty billion dollars 481 00:27:11,880 --> 00:27:14,080 Speaker 1: in assets. That will end this kind of two tier 482 00:27:14,200 --> 00:27:18,240 Speaker 1: system and make those smaller banks I think, safer and 483 00:27:18,359 --> 00:27:21,600 Speaker 1: better managed and give them much stronger oversight. That's the 484 00:27:21,640 --> 00:27:25,520 Speaker 1: first thing. In terms of the wider regulatory picture. I mean, 485 00:27:26,240 --> 00:27:28,239 Speaker 1: this is part of the mystery of what's going on 486 00:27:28,320 --> 00:27:30,560 Speaker 1: right now, and part of the whole strangeness of it 487 00:27:30,680 --> 00:27:33,960 Speaker 1: is all of these banks now post the two thousand 488 00:27:33,960 --> 00:27:36,399 Speaker 1: and eight crisis, the way their balance sheets are set up, 489 00:27:37,119 --> 00:27:40,720 Speaker 1: they should be perfectly well defended against all of the 490 00:27:40,760 --> 00:27:44,879 Speaker 1: normal things that bring banks down. They don't have a 491 00:27:44,920 --> 00:27:47,080 Speaker 1: lot of terrible assets that are about to go bad. 492 00:27:47,440 --> 00:27:51,800 Speaker 1: They don't have too many assets that they can't shift 493 00:27:51,840 --> 00:27:54,920 Speaker 1: if they need to pay people back money. They do 494 00:27:55,040 --> 00:27:59,000 Speaker 1: have a lot of high quality liquid assets we call them, 495 00:27:59,040 --> 00:28:02,159 Speaker 1: you know, shorter to treasuries and other government bonds and 496 00:28:02,240 --> 00:28:05,600 Speaker 1: things like this, which are about as close to money 497 00:28:05,920 --> 00:28:08,360 Speaker 1: as you can get. So part of what's going on 498 00:28:08,600 --> 00:28:11,439 Speaker 1: is about some of the ripples of the higher interest 499 00:28:11,520 --> 00:28:14,560 Speaker 1: rates running through the system and how that might destabilize things. 500 00:28:15,000 --> 00:28:17,080 Speaker 1: But another part of what's going on is a sort 501 00:28:17,119 --> 00:28:21,400 Speaker 1: of a general sense of mistrust of institutions, I think 502 00:28:21,440 --> 00:28:24,440 Speaker 1: more broadly, and in terms of not only where your 503 00:28:24,480 --> 00:28:28,280 Speaker 1: money is safe, but what money you should even have. Well, 504 00:28:28,320 --> 00:28:31,840 Speaker 1: you know, that's interesting because we were talking about assets. 505 00:28:32,480 --> 00:28:34,440 Speaker 1: But I think a factor in all this too is 506 00:28:34,520 --> 00:28:38,560 Speaker 1: gossip and the way that I think we as human beings. 507 00:28:38,600 --> 00:28:40,200 Speaker 1: We talked about this in the top of the show, 508 00:28:41,320 --> 00:28:45,440 Speaker 1: begin to let troubles mount in our own minds and 509 00:28:45,480 --> 00:28:48,360 Speaker 1: then can find an echo chamber for those fears on 510 00:28:48,360 --> 00:28:52,680 Speaker 1: social media over drinks with friends. With the big difference 511 00:28:52,720 --> 00:28:55,880 Speaker 1: again that now gossip moves at light speed, whether it's 512 00:28:55,960 --> 00:29:01,040 Speaker 1: political gossip or financial gossip or social gossip. And oh, 513 00:29:01,120 --> 00:29:02,800 Speaker 1: you know what I could bring in Mark Twain now, 514 00:29:02,840 --> 00:29:04,800 Speaker 1: since we said we would get a third person. But 515 00:29:04,880 --> 00:29:07,880 Speaker 1: I think he said something the effect that a lie 516 00:29:07,880 --> 00:29:10,600 Speaker 1: travels around the world before the truth even gets to 517 00:29:10,600 --> 00:29:12,920 Speaker 1: put its shoes on, or something that affect I'm sure 518 00:29:12,920 --> 00:29:14,440 Speaker 1: I blew that, but I just wanted to get our 519 00:29:14,480 --> 00:29:17,959 Speaker 1: trifecta of quotes of old men. But that is the 520 00:29:18,120 --> 00:29:20,520 Speaker 1: interesting thing about what we're in right now, is it's 521 00:29:20,520 --> 00:29:25,520 Speaker 1: a reflection as much human uncertainty in this mounting distrust 522 00:29:25,600 --> 00:29:28,320 Speaker 1: we've had. I think social media plays a role in 523 00:29:28,560 --> 00:29:33,200 Speaker 1: faith ad institutions, whether they're banks or governments or courts. Yeah, 524 00:29:33,240 --> 00:29:34,840 Speaker 1: I think there's two things. I think, as you say, 525 00:29:34,880 --> 00:29:40,360 Speaker 1: the social media aspect means that wacky, weird, untrue opinions 526 00:29:40,520 --> 00:29:45,280 Speaker 1: or views of the world can find mutual supports and 527 00:29:45,440 --> 00:29:49,280 Speaker 1: amplification much more rapidly and coalesced into large groups of 528 00:29:49,520 --> 00:29:53,360 Speaker 1: people who think the same thing, no matter how mad 529 00:29:53,600 --> 00:29:56,080 Speaker 1: more rational people might think that view is they can 530 00:29:56,080 --> 00:29:58,160 Speaker 1: hold that view and confirm that view with each other. 531 00:29:58,720 --> 00:30:01,400 Speaker 1: And at the same time, we've had, I think, a 532 00:30:01,440 --> 00:30:05,840 Speaker 1: class of politicians who have systematically set out to undermine 533 00:30:06,320 --> 00:30:09,720 Speaker 1: trust in all manner of institutions in not only the 534 00:30:09,800 --> 00:30:11,760 Speaker 1: US but in large parts of Europe and certainly in 535 00:30:11,800 --> 00:30:15,520 Speaker 1: the UK as well, and get people to question whether 536 00:30:15,560 --> 00:30:20,040 Speaker 1: they can even trust the most basic elements of parts 537 00:30:20,040 --> 00:30:22,800 Speaker 1: of governments. And ultimately, if we're really not careful, and 538 00:30:22,880 --> 00:30:26,600 Speaker 1: this is a somewhat sensationalist conclusion to it all, but ultimately, 539 00:30:27,000 --> 00:30:29,040 Speaker 1: if we're really not careful, you could get to the 540 00:30:29,040 --> 00:30:33,320 Speaker 1: point where people stop trusting in money at all. The 541 00:30:33,440 --> 00:30:36,400 Speaker 1: idea of fear currency. I mean, to be fair, there's 542 00:30:36,400 --> 00:30:38,720 Speaker 1: a whole lot of crypto people who would really like that. 543 00:30:38,440 --> 00:30:41,240 Speaker 1: That was their line, right, you shouldn't trust feed curency. 544 00:30:41,360 --> 00:30:45,360 Speaker 1: It's issued by the government. Therefore trust five thousand of 545 00:30:45,440 --> 00:30:48,320 Speaker 1: US whipper snappers who trade this stuff digitally and will 546 00:30:48,360 --> 00:30:50,200 Speaker 1: be there for you. But I think one of the 547 00:30:50,480 --> 00:30:54,000 Speaker 1: odd things about this current moment is you have people 548 00:30:54,040 --> 00:30:57,520 Speaker 1: taking deposits out of smaller banks, putting them into larger 549 00:30:57,560 --> 00:31:00,520 Speaker 1: banks sometimes or into things like money mark funds and 550 00:31:01,160 --> 00:31:04,080 Speaker 1: treasury bills in ways that can sometimes take that money 551 00:31:04,120 --> 00:31:06,040 Speaker 1: out of the market completely and go back to the FED. 552 00:31:06,360 --> 00:31:08,760 Speaker 1: And then the Fed and the large banks are recycling 553 00:31:08,760 --> 00:31:12,360 Speaker 1: that money background into the smaller banks temporarily or otherwise 554 00:31:12,440 --> 00:31:15,960 Speaker 1: to help keep them alive and stop them suffering from 555 00:31:16,360 --> 00:31:19,040 Speaker 1: any loss of deposits, giving them some oxygen. And at 556 00:31:19,040 --> 00:31:22,200 Speaker 1: a certain point everybody could turn around and sort of realize, actually, 557 00:31:22,720 --> 00:31:25,080 Speaker 1: this is all just the same money and all just 558 00:31:25,480 --> 00:31:28,000 Speaker 1: in some ways the same risk, and that would be 559 00:31:28,040 --> 00:31:30,480 Speaker 1: a real sort of danger point. I think, you know, 560 00:31:30,600 --> 00:31:33,680 Speaker 1: I'm old enough to remember long days and nights at 561 00:31:33,680 --> 00:31:36,280 Speaker 1: the New York Times in two thousand and eight trying 562 00:31:36,280 --> 00:31:39,920 Speaker 1: to sort through that financial crisis. We've come through this 563 00:31:40,080 --> 00:31:43,480 Speaker 1: time and again it keeps happening. Yes, we're in a 564 00:31:43,520 --> 00:31:46,600 Speaker 1: digital era where gasup moves around really quickly and people 565 00:31:46,640 --> 00:31:50,840 Speaker 1: don't trust institutions, but this stuff also keeps repeating itself. 566 00:31:50,880 --> 00:31:53,440 Speaker 1: Why is that? I think the reason that is is 567 00:31:53,480 --> 00:31:57,160 Speaker 1: because money itself is based on a kind of trust 568 00:31:57,200 --> 00:32:00,120 Speaker 1: and a kind of agreement, and what we count of 569 00:32:00,360 --> 00:32:03,360 Speaker 1: as things that are money, like in terms of you know, 570 00:32:03,840 --> 00:32:06,200 Speaker 1: the bonds that we will accept as being closest to 571 00:32:06,440 --> 00:32:10,200 Speaker 1: money or other sorts of assets when times are good. 572 00:32:10,640 --> 00:32:13,440 Speaker 1: You know, this is the theory of him and Minsky, really, 573 00:32:13,840 --> 00:32:16,040 Speaker 1: but when times are good, what we think counts as 574 00:32:16,040 --> 00:32:18,120 Speaker 1: money and what we think counts as good assets kind 575 00:32:18,120 --> 00:32:20,959 Speaker 1: of expands and takes in all manner of things. And 576 00:32:21,000 --> 00:32:24,520 Speaker 1: then when times get bumpy, then we all rush to 577 00:32:25,160 --> 00:32:28,120 Speaker 1: the most trustworthy form of money that we can think of, 578 00:32:28,240 --> 00:32:30,440 Speaker 1: or the most liquid form of money that we can 579 00:32:30,480 --> 00:32:32,760 Speaker 1: think of. And the reason why we keep having banking 580 00:32:32,760 --> 00:32:36,200 Speaker 1: crises is because each bank in some way is a 581 00:32:36,240 --> 00:32:39,320 Speaker 1: producer of its own money. The deposits that we have 582 00:32:39,480 --> 00:32:42,360 Speaker 1: in our bank accounts are just a promise that the 583 00:32:42,400 --> 00:32:46,120 Speaker 1: bank that we use will eventually make good on some 584 00:32:46,520 --> 00:32:49,120 Speaker 1: payment that we want to make to somebody else. And 585 00:32:49,200 --> 00:32:52,560 Speaker 1: now every time that we start to get a sort 586 00:32:52,560 --> 00:32:55,520 Speaker 1: of a panic or a worry about what is money 587 00:32:55,560 --> 00:32:58,640 Speaker 1: and what is the good money, part of the problem 588 00:32:58,680 --> 00:33:01,760 Speaker 1: is always that some banks are deemed not good money anymore. 589 00:33:02,040 --> 00:33:04,960 Speaker 1: So you want to move your ability to make payments 590 00:33:04,960 --> 00:33:07,400 Speaker 1: to a bank that is good money well, and they're 591 00:33:07,400 --> 00:33:12,400 Speaker 1: typically when a bank is deemed untrustworthy, it's often they're 592 00:33:12,480 --> 00:33:15,440 Speaker 1: not always We're seeing this nuance in the current crisis, 593 00:33:15,440 --> 00:33:18,280 Speaker 1: but at least in the past crisis they were exposed 594 00:33:18,280 --> 00:33:22,480 Speaker 1: as being just outrageously and up when it came to 595 00:33:22,600 --> 00:33:26,040 Speaker 1: risk management. You know, banks do do two things. They 596 00:33:26,080 --> 00:33:28,320 Speaker 1: are a vehicle for someone showing up at their door 597 00:33:28,360 --> 00:33:30,960 Speaker 1: with a piece of paper called a dollar, a pound 598 00:33:31,320 --> 00:33:33,520 Speaker 1: or euro, whatever it is, and you sort of have 599 00:33:33,520 --> 00:33:35,760 Speaker 1: this guarantee that it will be worth something later on. 600 00:33:36,520 --> 00:33:39,000 Speaker 1: But it's just a piece of paper. It's really built 601 00:33:39,040 --> 00:33:42,320 Speaker 1: on trust, which is ineffable. But banks are also supposed 602 00:33:42,360 --> 00:33:46,320 Speaker 1: to manage that responsibly and not take risks that would 603 00:33:46,320 --> 00:33:51,120 Speaker 1: imperil that trust. Yet we find banks taking outlandish risks 604 00:33:51,280 --> 00:33:55,400 Speaker 1: time and time again. Is that a necessity of vibrancy 605 00:33:55,440 --> 00:33:58,120 Speaker 1: in the economy or is it something that could be 606 00:33:58,240 --> 00:34:01,240 Speaker 1: curtailed in a more constructive way. I think it's something 607 00:34:01,280 --> 00:34:04,000 Speaker 1: that could be curtailed. It's something that we have curtailed 608 00:34:04,080 --> 00:34:07,040 Speaker 1: quite a lot since the last crisis. But I think 609 00:34:07,080 --> 00:34:12,480 Speaker 1: that whatever regulatory framework you have, the incentives of private 610 00:34:12,520 --> 00:34:15,880 Speaker 1: banks where people are paid based on the profits that 611 00:34:15,920 --> 00:34:21,120 Speaker 1: they make, is to often ecout every last little bit 612 00:34:21,160 --> 00:34:23,400 Speaker 1: of risk that you're allowed to take to the final 613 00:34:23,520 --> 00:34:25,680 Speaker 1: ultimate dollar of profit that you can make from that, 614 00:34:26,440 --> 00:34:29,920 Speaker 1: And there's a whole section of finance, and I think 615 00:34:29,920 --> 00:34:32,200 Speaker 1: it's probably lesser now than it was in two thousand 616 00:34:32,239 --> 00:34:34,719 Speaker 1: and eight, But there's a whole section of finance which 617 00:34:34,760 --> 00:34:39,360 Speaker 1: is it's debatable whether the function that is performing is 618 00:34:39,400 --> 00:34:42,960 Speaker 1: adding to the productive capability of the economy. Like I said, 619 00:34:43,000 --> 00:34:45,759 Speaker 1: you can lend to an entrepreneur who wants to build 620 00:34:45,800 --> 00:34:49,520 Speaker 1: a factory, buy plants and machinery and produce goods. That's 621 00:34:49,520 --> 00:34:52,439 Speaker 1: a sort of a productive endeavor. Or you can keep 622 00:34:52,520 --> 00:34:55,200 Speaker 1: lending to people so they can buy and sell the 623 00:34:55,280 --> 00:34:59,839 Speaker 1: same house among themselves for an ever greater value. Now 624 00:35:00,080 --> 00:35:03,200 Speaker 1: that is somewhat less productive. Or you can take a 625 00:35:03,239 --> 00:35:05,400 Speaker 1: whole load of those house loans, tie them up in 626 00:35:05,400 --> 00:35:08,000 Speaker 1: a big bundle, chop that bundle up into smaller bundles, 627 00:35:08,000 --> 00:35:10,000 Speaker 1: put it in another kind of vehicle, and then keep 628 00:35:10,080 --> 00:35:12,960 Speaker 1: selling pieces of those all around the world. Financial engineering. 629 00:35:13,400 --> 00:35:16,239 Speaker 1: That is really not very productive in terms of the 630 00:35:16,280 --> 00:35:19,080 Speaker 1: real economy. So you know, that's the sort of the 631 00:35:19,120 --> 00:35:21,600 Speaker 1: debate that we need to have. That's where we should look. 632 00:35:21,640 --> 00:35:23,920 Speaker 1: I think, you know, the banking system is better today 633 00:35:23,960 --> 00:35:27,000 Speaker 1: than it was fifteen years ago in that basis, But 634 00:35:27,320 --> 00:35:31,800 Speaker 1: as I say, private banks are incentivized to pursue almost 635 00:35:31,800 --> 00:35:34,480 Speaker 1: every last lot of profit that they can. Paul, we 636 00:35:34,520 --> 00:35:37,839 Speaker 1: don't let anybody escape the show without telling us what 637 00:35:37,920 --> 00:35:40,560 Speaker 1: they've learned that they didn't know before. And you've been 638 00:35:40,600 --> 00:35:44,560 Speaker 1: watching banks and the financial sector for a long time, 639 00:35:44,920 --> 00:35:48,760 Speaker 1: looking at the demise of SVB and its knockoff effects 640 00:35:49,080 --> 00:35:52,720 Speaker 1: at institutions like credit sweets. What have you learned from 641 00:35:52,760 --> 00:35:55,120 Speaker 1: this episode that you didn't know before? What has this 642 00:35:55,200 --> 00:35:58,520 Speaker 1: collision taught you? I think the key thing that it's 643 00:35:58,560 --> 00:36:03,160 Speaker 1: taught me is even when all of the fundamentals, all 644 00:36:03,200 --> 00:36:06,960 Speaker 1: of the foundational numbers of the state of an institution, 645 00:36:07,520 --> 00:36:10,560 Speaker 1: say that it sounds and say that it's trustworthy, you 646 00:36:10,600 --> 00:36:13,960 Speaker 1: can still have people turn around and say, ah, I 647 00:36:14,000 --> 00:36:17,520 Speaker 1: don't like it. I'm leaving. Paul, we're out of time. 648 00:36:17,760 --> 00:36:22,520 Speaker 1: Thanks for joining us. Thank you. You can follow Paul 649 00:36:22,560 --> 00:36:25,759 Speaker 1: Davies on Twitter at Paul J. Davies and read his deft, 650 00:36:25,760 --> 00:36:29,960 Speaker 1: handywork on our website Bloomberg Opinion. Here at Crash Course, 651 00:36:30,040 --> 00:36:34,439 Speaker 1: we believe the collisions can be messy, impressive, challenging, surprising, 652 00:36:34,680 --> 00:36:38,799 Speaker 1: and always instructive. In today's Crash Course, I learned that 653 00:36:38,840 --> 00:36:42,239 Speaker 1: this era of uncertainty and distrust that we live in 654 00:36:42,680 --> 00:36:48,600 Speaker 1: has left no institution untouched, including it would seem the 655 00:36:48,760 --> 00:36:52,600 Speaker 1: entire banking system and the consequences of that have yet 656 00:36:52,640 --> 00:36:56,960 Speaker 1: to be fully understood. What did you learn? We'd love 657 00:36:56,960 --> 00:36:59,760 Speaker 1: to hear from you. You can tweet at the Bloomberg Opinion, 658 00:36:59,760 --> 00:37:04,319 Speaker 1: hand at Opinion, or me at Tim O'Brien using the 659 00:37:04,360 --> 00:37:08,480 Speaker 1: hashtag Bloomberg crash. Course, you can also subscribe to our 660 00:37:08,480 --> 00:37:11,640 Speaker 1: show wherever you're listening right now and leave us a review. 661 00:37:12,000 --> 00:37:15,320 Speaker 1: It helps more people find the show. This episode was 662 00:37:15,360 --> 00:37:19,520 Speaker 1: produced by the indispensable Annam Azarakas and me, and we're 663 00:37:19,560 --> 00:37:22,839 Speaker 1: adding Moses Andem to our production team this week. Our 664 00:37:22,840 --> 00:37:26,480 Speaker 1: supervising producer is Magnus Hendrickson, and we had editing help 665 00:37:26,520 --> 00:37:30,640 Speaker 1: from Sage Bauman, Katie Boyce, Jeff Crocott, Mike Niezza and 666 00:37:30,760 --> 00:37:34,799 Speaker 1: Christine Vanden Bilard Blake Maple says. Our sound engineering and 667 00:37:34,880 --> 00:37:38,439 Speaker 1: our original theme song was composed by Luis Gara. I'm 668 00:37:38,480 --> 00:37:40,640 Speaker 1: Tim O'Brien. We'll be back next week.