WEBVTT - The Scintillating World of Interest Rates 0:00:01.440 --> 0:00:04.240 Welcome to Stuff you Should Know, a production of I 0:00:04.360 --> 0:00:13.640 Heart Radio. Hey, and welcome to the podcast. I'm Josh Clark, 0:00:13.680 --> 0:00:16.840 and there's Charles W. Chuck Bryant seated directly across me, 0:00:17.120 --> 0:00:21.680 within almost arms reaches, Jerry Rowland seeded to my right, 0:00:22.280 --> 0:00:25.400 and I'm seated right here in my access in the 0:00:25.480 --> 0:00:28.080 center of my own being. And this is stuff you 0:00:28.080 --> 0:00:32.360 should know. Yeah, in person a dish, first time since uh, 0:00:33.000 --> 0:00:38.599 the the one time three D audio experience experiment. Well, 0:00:38.640 --> 0:00:41.440 I forgot about that. I marked it out of my head. 0:00:41.520 --> 0:00:43.160 That's the only time we've been in the same room 0:00:43.200 --> 0:00:46.960 to record since COVID was that that those two episode? 0:00:46.960 --> 0:00:48.680 I remember the second one. I remember the first one. 0:00:49.080 --> 0:00:52.960 It was the Ivy League hobbit thing. Yeah, because Ivy 0:00:53.040 --> 0:00:56.720 League and three D audio or just like it's such 0:00:56.800 --> 0:01:00.720 low hanging fruit, you know. Yeah. But we're back because uh, 0:01:00.800 --> 0:01:02.640 you know, I put it on my Instagram. The studio 0:01:02.720 --> 0:01:07.320 is going away. We're moving house. And surprisingly to me, 0:01:07.360 --> 0:01:09.959 at least, you said, hey, guys, I would really like 0:01:10.000 --> 0:01:12.600 to record in there together one more time. Why is 0:01:12.600 --> 0:01:14.640 that so surprised? I don't know. You don't seem overly 0:01:14.680 --> 0:01:17.479 sentimental about stuff like this, that's not true. I weep 0:01:17.560 --> 0:01:22.360 a lot, yeah, but not about studio rooms though. No, 0:01:22.720 --> 0:01:25.440 I mean I'll miss this particular room. Okay, me too. 0:01:25.440 --> 0:01:27.319 I mean this has been I mean, I think like 0:01:27.880 --> 0:01:30.240 seven of the most solid years we've ever had been 0:01:30.440 --> 0:01:34.600 right here. Pretty solid. Although the the corner office with 0:01:34.680 --> 0:01:38.000 moving blankets his sound bafflers was a pretty solid couple 0:01:38.040 --> 0:01:40.800 of years to the quaint early days. I drove by 0:01:40.840 --> 0:01:42.600 that building the other day too, and for the first 0:01:42.640 --> 0:01:44.880 time in forever, yeah, in Buckhead, and I was just like, 0:01:45.400 --> 0:01:47.720 do you remember there was like, for some reason, every 0:01:47.760 --> 0:01:50.240 time we recorded at like one thirty, when we had 0:01:50.280 --> 0:01:52.160 just started to get going, a fire truck with go 0:01:52.360 --> 0:01:55.880 right outside every day at the same time. It's like 0:01:55.920 --> 0:01:59.760 they knew, oh the memories. So that's enough fun for now. 0:02:00.200 --> 0:02:02.600 Because we're talking about interest rates, all right. I don't 0:02:02.600 --> 0:02:04.280 know why I picked this. I mean, I do know why, 0:02:04.360 --> 0:02:06.400 but I just I'm so not good at this stuff. 0:02:06.920 --> 0:02:10.520 So I can imagine an ap economics like teacher picking 0:02:10.560 --> 0:02:13.000 this for for their high school class. So I think 0:02:13.000 --> 0:02:15.400 that's kind of like a public service you've done here. Well, 0:02:15.440 --> 0:02:17.480 I picked it because you know, the FED just raised 0:02:17.520 --> 0:02:21.040 the rate by it was half of a point, right, Yeah, 0:02:21.120 --> 0:02:24.520 biggest hikes in nineteen uh no, two thou Yeah, So 0:02:24.560 --> 0:02:26.200 I saw that biggest hike and I was like, oh 0:02:26.240 --> 0:02:29.400 my gosh, what was it? It was a half a point, 0:02:29.440 --> 0:02:31.120 And I was like, I don't understand this, so I 0:02:31.160 --> 0:02:33.760 might as well learn enough to tell other people a 0:02:33.800 --> 0:02:36.520 little bit about it. Do you understand now, Yeah, like 0:02:36.560 --> 0:02:39.080 that half of a percent is actually a pretty big deal. 0:02:39.360 --> 0:02:41.360 It is, and I understand now more than ever. There's 0:02:41.400 --> 0:02:44.160 like nine people that just controlled the economy of the 0:02:44.240 --> 0:02:47.560 United States, right exactly. Yeah, it's true. Yeah, that half 0:02:47.560 --> 0:02:49.799 of a percentage point is you'll see by the time 0:02:49.800 --> 0:02:55.680 we're done with this, everybody is basically the FED goingh yeah, 0:02:55.919 --> 0:02:58.959 they're really kind of nervous right now. And what they're 0:02:59.000 --> 0:03:01.400 going for by raised in the interest rate is to 0:03:01.560 --> 0:03:04.800 cool off the economy. We have inflation rates that haven't 0:03:04.800 --> 0:03:09.480 been since not a good time for inflation, um, And 0:03:09.520 --> 0:03:13.840 I mean we're talking the Great Recession was in there too, right, Like, 0:03:14.240 --> 0:03:16.400 this is a big deal, the inflation that we're seeing 0:03:16.480 --> 0:03:18.320 right now. So the FED is saying, Okay, we have 0:03:18.320 --> 0:03:21.840 an economy that is overheating, like you want some inflation 0:03:21.880 --> 0:03:24.639 as we'll see. But this is way too much inflation. 0:03:24.919 --> 0:03:27.520 The prices of like everything is going through the roof. 0:03:27.520 --> 0:03:30.639 People are getting really mad. We better do something about it. 0:03:30.680 --> 0:03:33.400 But what they're trying to do by raising the interest 0:03:33.520 --> 0:03:36.400 rates is to create a soft landing so that prices 0:03:36.440 --> 0:03:39.920 come down, but they don't affect productivity and employment. That's 0:03:39.960 --> 0:03:42.600 the big thing. And Ben ber Nankee put it once 0:03:42.680 --> 0:03:44.880 back when he was still just affect governor rather than 0:03:44.880 --> 0:03:47.800 the chair. Um. He said basically that what they were 0:03:47.840 --> 0:03:54.360 doing was like driving a car and paraphrasing here, well, um, yes, probably, 0:03:54.760 --> 0:03:57.320 he said the FED. Basically, what the FED does is 0:03:57.320 --> 0:04:00.440 is like driving a car with fogged up windshield, a 0:04:00.520 --> 0:04:05.240 faulty spedometer, and a brake, pedal and accelerator that when 0:04:05.240 --> 0:04:08.280 you press it, the car has a very significant delay 0:04:08.440 --> 0:04:10.880 before it responds. Oh, I thought you were going to say, 0:04:10.920 --> 0:04:13.760 a break in an accelerator that just switched positions without 0:04:13.800 --> 0:04:17.120 letting you know, which is with gender's on fire and 0:04:17.160 --> 0:04:20.520 there's monkeys everywhere and they're angry. Yeah. The delay, sure, 0:04:20.600 --> 0:04:23.679 because none of these uh you know, none of these moves. 0:04:23.680 --> 0:04:26.360 It's an immediate impact and it's sort of a fingers 0:04:26.360 --> 0:04:29.240 crossed behind your back kind of move. Yeah, almost always. Yeah. 0:04:29.240 --> 0:04:31.520 And so most people who are watching this are saying 0:04:31.520 --> 0:04:34.760 the Fed waited too long because they kept the economy 0:04:34.839 --> 0:04:37.000 juiced for years and years and years. It just kept 0:04:37.040 --> 0:04:39.880 getting hotter and hotter, and everybody's very happy until prices 0:04:39.880 --> 0:04:42.200 started going on, right, So they waited too long. So 0:04:42.400 --> 0:04:45.000 most most I shouldn't say most. A lot of people 0:04:45.080 --> 0:04:47.719 who know what they're talking about, say there's a recession 0:04:47.760 --> 0:04:51.040 coming pretty soon. So battened down the hat key indicators, 0:04:51.040 --> 0:04:53.960 as they say. Right, So, what does all this have 0:04:54.080 --> 0:04:57.440 to do with interest rates? Chuck, let's wrap well, I 0:04:57.440 --> 0:04:59.640 mean this is we'll get to the Fed, but this 0:04:59.680 --> 0:05:03.120 is generally about interest rates. The good news is everything 0:05:03.120 --> 0:05:06.640 else about interest rates is pretty basic. Uh. We are 0:05:06.720 --> 0:05:09.360 a nation and and and and a lot of ways 0:05:09.360 --> 0:05:15.040 a world that operates on loans and interest in barring money, 0:05:15.680 --> 0:05:17.800 and then banks borrow money from each other, and then 0:05:18.240 --> 0:05:20.479 the Fed lends money to banks, and it's just it's 0:05:20.520 --> 0:05:24.320 a it's a weird thing. It's a weird world economy 0:05:24.440 --> 0:05:26.640 that has been created over the past several hundred years. 0:05:26.640 --> 0:05:29.039 In this country, there's a lot of shiny shoot suits. 0:05:29.400 --> 0:05:32.320 People break your arms. Yeah, it's basically what it's all 0:05:32.320 --> 0:05:34.360 based on, sure, But it's all based on the fact 0:05:34.400 --> 0:05:36.640 that if you want to buy something as a person, 0:05:37.680 --> 0:05:41.080 uh and you know we're focusing on the United States here, uh, 0:05:41.120 --> 0:05:43.280 and you don't have the money, it's no big deal 0:05:43.320 --> 0:05:45.320 because you can get credit cards. If you want to 0:05:45.640 --> 0:05:49.480 pay large interest rates, you can get home loan or 0:05:49.520 --> 0:05:52.320 a car loan, because not everyone can shell out, you know, 0:05:52.400 --> 0:05:54.720 twenty two fifty grand for a car over my ch 0:05:54.720 --> 0:05:59.520 house's costs now eight eight million dollars. And you know 0:05:59.520 --> 0:06:02.000 there's risk get involved anytime you lend money and depending 0:06:02.240 --> 0:06:04.800 all of it really comes down to the risk of 0:06:04.839 --> 0:06:07.920 the loan as according to what the interest rates gonna 0:06:08.000 --> 0:06:09.960 end up being. Right. So what we're talking about now 0:06:09.960 --> 0:06:12.120 our interest rates on the micro level, like the you 0:06:12.240 --> 0:06:14.599 and me level, Like you're saying, how buying car, buying 0:06:14.680 --> 0:06:17.520 credit cards, all that stuff, and it's it is it's 0:06:17.560 --> 0:06:21.280 really basic, like you were saying, where um with it? 0:06:21.400 --> 0:06:26.559 With interest rates. If you go to get a loan, say, 0:06:26.760 --> 0:06:28.800 they're gonna look at a few things like what are 0:06:28.800 --> 0:06:33.279 you gonna buy? I'm gonna buy a really cool vintage 0:06:33.320 --> 0:06:36.760 poison T shirt on eBay ok Okay, it's like fifteen 0:06:36.800 --> 0:06:41.200 grand easily, I want to borrow some money to get 0:06:41.240 --> 0:06:43.960 that T shirt, that's right. Um, So they're gonna look 0:06:43.960 --> 0:06:46.440 at my whoever I borrow from is going to look 0:06:46.440 --> 0:06:50.960 at my um my credit score. Um, especially if it's 0:06:50.960 --> 0:06:56.279 an unsecured debt, right Yeah. Unsecure debt is basically any 0:06:56.320 --> 0:06:58.479 kind of credit card debt because they can't come and 0:06:58.520 --> 0:07:00.880 take away anything. Basically, they're not going to take my 0:07:00.880 --> 0:07:03.839 poison shirt if I default on the loan. The way 0:07:03.839 --> 0:07:06.479 that they get you is they affect your credit, but 0:07:06.600 --> 0:07:08.599 I still get to keep the poison shirt. So who's 0:07:08.600 --> 0:07:12.080 the sucker here, right? As opposed to a secured UH debt, 0:07:12.120 --> 0:07:14.000 which is you've got like a home mortgage, because they 0:07:14.000 --> 0:07:16.600 can come and take that right. So getting back to 0:07:16.720 --> 0:07:20.440 interest rates, then that would mean that since the bank 0:07:20.560 --> 0:07:23.240 that lent you the money to buy your home can 0:07:23.320 --> 0:07:27.920 legally seize your home because it's a secured debt, they're 0:07:27.960 --> 0:07:29.640 going to charge you less because at the end of 0:07:29.640 --> 0:07:32.080 the day, if you default, they can take your house. 0:07:32.640 --> 0:07:34.720 The credit card is going to charge you a higher 0:07:34.760 --> 0:07:37.560 interest rate because at the end of the day, if 0:07:37.600 --> 0:07:40.640 you default, they can't take that poison shirt. So they're 0:07:40.640 --> 0:07:42.800 going to charge more. And the reason that there's a 0:07:42.840 --> 0:07:45.720 difference in charging more or less is because the entire 0:07:45.880 --> 0:07:50.200 point of interest is that's the price you're paying for 0:07:50.280 --> 0:07:53.360 somebody to loan you money in exchange for them taking 0:07:53.360 --> 0:07:56.280 a risk, because there's always a risk that you're going 0:07:56.360 --> 0:07:59.040 to not pay it back, even if you have great credit. 0:07:59.400 --> 0:08:03.800 Something could happen. Um, you could break bad or something 0:08:03.880 --> 0:08:06.240 like that. Who knows, but there's always a risk. And 0:08:06.280 --> 0:08:09.360 then that's what interest is. It's it's you're it's the 0:08:09.400 --> 0:08:11.640 money they make for loaning you that money and taking 0:08:11.680 --> 0:08:14.160 that risk. That's right. Uh, And it's a little it's 0:08:14.160 --> 0:08:16.640 not counterintuitive, but it kind of works both ways because 0:08:16.680 --> 0:08:19.760 if you had the collateral of like let's say a 0:08:19.800 --> 0:08:22.760 home mortgage and they can take that house, that's gonna 0:08:22.760 --> 0:08:24.520 be a much lower interest rate, like you said, than 0:08:24.560 --> 0:08:28.440 the credit card, but it's also gonna be higher in 0:08:28.520 --> 0:08:32.240 some ways because it's a long term loan. Uh. If 0:08:32.280 --> 0:08:34.440 it's you know, it's kind of a negative outlook. But 0:08:34.960 --> 0:08:36.880 I think that banks look at people and say, well, 0:08:37.000 --> 0:08:39.000 if you have a thirty year home mortgage, like, I 0:08:39.000 --> 0:08:41.240 don't know what you're gonna be doing in twenty seven years, 0:08:41.280 --> 0:08:44.080 Like you may be broke, maybe destitute, you may be 0:08:44.120 --> 0:08:48.000 in the hospital and have no money anymore, So that's 0:08:48.000 --> 0:08:51.200 gonna be a little higher. Which is why if you can, 0:08:51.440 --> 0:08:54.600 like people always I mean financial people, I'm not one 0:08:54.600 --> 0:08:56.880 of those, but they always recommend you, like refire your 0:08:56.880 --> 0:08:59.240 house and bring it down to a fifteen year loan 0:08:59.320 --> 0:09:03.080 because it's risky and it'll be a little bit less 0:09:03.120 --> 0:09:05.800 of an annual percentage rate. Right. And then one of 0:09:05.840 --> 0:09:07.840 the other reasons if you've ever looked at a house 0:09:07.920 --> 0:09:12.079 or gotten a a mortgage, um, there's a big difference 0:09:12.120 --> 0:09:14.560 between the rate your charge for a fifteen year and 0:09:14.600 --> 0:09:17.800 a thirty year not just because there's a longer chance 0:09:17.840 --> 0:09:20.400 for you to default on the loan, but also because 0:09:20.400 --> 0:09:23.240 over the course of thirty years, inflation is going to 0:09:23.280 --> 0:09:25.959 actually eat into the amount of money you pay that 0:09:26.000 --> 0:09:29.800 bank back because it's going to depress the value of 0:09:29.840 --> 0:09:32.640 the dollar over time. Right, So when that bank is 0:09:32.679 --> 0:09:36.640 getting your hundred what's left on your hundred grand years 0:09:36.679 --> 0:09:38.840 from now, it's not gonna be the same as the 0:09:38.880 --> 0:09:41.480 value of that dollar now. Right. So there's actually two 0:09:41.559 --> 0:09:44.320 types of interest that you pay on say like a 0:09:44.360 --> 0:09:47.560 thirty year mortgage, or even a fifteen year mortgage, and 0:09:47.600 --> 0:09:51.600 that is the nominal rate, which is the rate you 0:09:51.640 --> 0:09:54.840 agree to, say ten percent, which is astronomical. It don't 0:09:54.880 --> 0:09:57.800 ever take a homeland out with a ten percent mortgage 0:09:57.880 --> 0:10:01.200 interest on it, right, Okay, Um, that's just a that's 0:10:01.200 --> 0:10:06.240 just a tip from me. Um. But over time, as 0:10:06.280 --> 0:10:10.440 inflation grows, um, let's say over that that fifteen years, 0:10:10.800 --> 0:10:14.760 inflation grows a total like four percent, you're actually paying 0:10:14.800 --> 0:10:17.360 the bank bank back, or they're actually getting back the 0:10:17.480 --> 0:10:20.600 value equal to about six percent of what they lent you. 0:10:20.720 --> 0:10:24.679 And what's that called? That is the real interest rate? Right, 0:10:24.760 --> 0:10:31.160 that's right, okay, I remember wake up everybody. By the way, 0:10:31.440 --> 0:10:33.679 all right, and by the way, Jerry's eating over there, 0:10:33.720 --> 0:10:37.679 and that's there's just nothing more normal and relaxing than 0:10:37.760 --> 0:10:40.360 us sitting in a room and Jerry chomping down next 0:10:40.400 --> 0:10:42.640 to us. I just want to acknowledge that it's kind 0:10:42.679 --> 0:10:45.160 of nice. It is nice. She's not eating me, so 0:10:45.240 --> 0:10:47.360 though this time it's the only thing missing from this. 0:10:47.480 --> 0:10:49.720 You know, most people fall asleep to like white noise 0:10:49.800 --> 0:10:51.840 or the sound the ocean. I have wanted just Jerry chewing. 0:10:53.120 --> 0:10:56.520 Let's be right to bed. All right, So I guess 0:10:56.640 --> 0:11:01.200 that's like just the basic over view of how regular 0:11:01.280 --> 0:11:04.200 interest rates work. It's really easy. It's very basic. It's 0:11:04.240 --> 0:11:06.520 the price you pay to borrow money rather than saving 0:11:06.559 --> 0:11:09.160 up to spend. Yeah, but no one cares about that 0:11:09.200 --> 0:11:11.720 stuff because you you know, you try and get your 0:11:11.720 --> 0:11:14.200 credit card rates down, you try and have good credit, 0:11:14.480 --> 0:11:16.040 and you buy a house, you try and get the 0:11:16.040 --> 0:11:18.120 best rate you can, and then it's all kind of 0:11:18.120 --> 0:11:20.920 said and done. But what everyone sits up and takes 0:11:20.920 --> 0:11:25.680 attention is when the Federal Reserve. And by the way, 0:11:25.720 --> 0:11:27.920 if you ever want to just send me into traffic, 0:11:28.000 --> 0:11:29.880 we should just do a whole podcast on the FED. 0:11:30.080 --> 0:11:34.000 I don't understand why they talk the way they do, 0:11:35.160 --> 0:11:39.160 like they're purposefully obtuse. I think like it's probably hard, 0:11:39.600 --> 0:11:41.880 like you can just read their game in the whole system, 0:11:41.920 --> 0:11:43.720 so they just want everyone to be even nice and sleepy. 0:11:43.880 --> 0:11:47.480 I guess, so when they're talking, it's just nuts. So 0:11:47.520 --> 0:11:50.400 when the chairperson of the Federal Reserve sits up and says, 0:11:50.440 --> 0:11:55.000 all right, we think we're gonna raise some interest rates. Uh. 0:11:55.040 --> 0:11:57.680 And by the way, banks they try to know before 0:11:57.679 --> 0:12:00.760 they even make that announcement because they're always watching the 0:12:00.840 --> 0:12:03.000 chairperson of the Fed and like, what they have a 0:12:03.040 --> 0:12:07.559 breakfast this morning, right, how are they feeling today? Um. 0:12:07.679 --> 0:12:10.280 Then that's why the recent point five percent adjustment was 0:12:10.320 --> 0:12:12.640 just such a big deal because it can have a 0:12:12.760 --> 0:12:16.920 really immediate and long term effect, which is kind of 0:12:16.960 --> 0:12:19.640 weird because immediately like stocks are going to do all 0:12:19.720 --> 0:12:22.360 kinds of crazy things, and then it's got this long 0:12:22.480 --> 0:12:24.720 term effect that they hope is going to work out, 0:12:25.160 --> 0:12:27.800 but it doesn't always because it's not an exact science. Yeah, 0:12:27.880 --> 0:12:32.400 really good example. That goes back to um bank mortgages. Right, 0:12:32.840 --> 0:12:35.400 So banks, I'm sure they carry out their own research 0:12:35.440 --> 0:12:37.880 as well to predict what's going to happen in the future, 0:12:37.960 --> 0:12:40.320 because they want to set their mortgage rates, their thirty 0:12:40.360 --> 0:12:44.120 year mortgage rates today with this close a forecast of 0:12:44.120 --> 0:12:47.600 what's going to happen with inflation over the next thirty 0:12:47.679 --> 0:12:50.319 years as they possibly can, because they wanted to squeeze 0:12:50.320 --> 0:12:53.320 out every real penny that they can from you from 0:12:53.320 --> 0:12:55.800 your loan. Right. That's like crystal ball stuff though you 0:12:55.840 --> 0:12:57.960 know it is, but I mean it's I think they've 0:12:58.000 --> 0:13:00.120 gotten kind of good at it, but it's still the 0:13:00.160 --> 0:13:02.720 end of the day, just an educated guess one of 0:13:02.760 --> 0:13:04.800 the things they do is watch what the FEDS doing. 0:13:04.880 --> 0:13:07.480 Is the Fed raising interest rates? Are the raising interest rates? 0:13:07.760 --> 0:13:09.920 Does that mean that they think inflation is going up? 0:13:09.920 --> 0:13:11.800 And the inflation is going up, then we need to 0:13:11.840 --> 0:13:16.120 adjust our mortgage loans. Right, that's pretty simple. But it 0:13:16.200 --> 0:13:20.040 just keeps going from there. So if mortgage rates increase, 0:13:20.440 --> 0:13:25.720 home buying slows, housing prices drop, that means new houses 0:13:25.880 --> 0:13:29.280 are being built less frequently, which means there's fewer carpenters 0:13:29.320 --> 0:13:32.800 being put to work. That means there's fewer lumber mills 0:13:33.000 --> 0:13:36.240 creating lumber for those houses. So those people are out 0:13:36.280 --> 0:13:38.680 of work. Those people are out of work, they're starting 0:13:38.679 --> 0:13:42.120 to default on their um their rent or their mortgages, 0:13:42.640 --> 0:13:45.960 and foreclosures start to go up, which further depresses the 0:13:45.960 --> 0:13:49.800 housing value or the housing market because a flood of 0:13:50.000 --> 0:13:52.640 houses start to come on the market because of foreclosures 0:13:52.679 --> 0:13:55.559 because banks want to offload them. Just from the FED 0:13:56.760 --> 0:14:00.920 saying we might increase by a quarter of a percent 0:14:01.400 --> 0:14:04.160 our interest rate. Yeah, yeah, that's the kind that's what's 0:14:04.160 --> 0:14:07.720 at stake when they're speaking out in public or even 0:14:07.800 --> 0:14:11.839 like making moves, yeah, like with without speaking at all. Yeah, 0:14:11.920 --> 0:14:15.640 it's it's pretty scary and precarious. Um, the FED itself, 0:14:15.720 --> 0:14:17.600 and like I said, maybe we'll do if I guess 0:14:17.640 --> 0:14:19.840 we have to at some point on the FED. But 0:14:19.960 --> 0:14:23.040 just as a broad overview of the Federal Reserve is 0:14:23.120 --> 0:14:26.640 the central bank of the US. There twelve regional Federal 0:14:26.720 --> 0:14:29.800 Reserve banks and a seven member board I talked about. 0:14:29.840 --> 0:14:32.240 I don't know if I said seven people, but a 0:14:32.320 --> 0:14:35.360 seven member board of governors in d c UH. And 0:14:35.400 --> 0:14:38.560 it was created in nineteen thirteen too, you know, ideally 0:14:38.640 --> 0:14:41.920 stabilize and secure our economy because at the time it 0:14:41.960 --> 0:14:44.640 was sort of the wild West when it comes to banking. Yeah, 0:14:44.640 --> 0:14:46.680 there are a lot of bank panics actually, where people 0:14:46.760 --> 0:14:48.680 would no good make a run on a bank and 0:14:48.720 --> 0:14:50.400 the bank would be like, we don't have any more money, 0:14:50.440 --> 0:14:52.480 and they would go under and like people would lose 0:14:52.520 --> 0:14:54.920 their entire savings. Yeah, I mean, it was a pretty 0:14:54.920 --> 0:14:57.560 brilliant creation. Uh. And one of the things the FED 0:14:57.640 --> 0:14:59.200 does a lot, But one of the things the Federal 0:14:59.240 --> 0:15:02.920 Reserve does is it has a lot of cash and 0:15:02.960 --> 0:15:05.640 it helps supply the banks that you and I bank 0:15:05.680 --> 0:15:10.280 at with cash reserves. And um, maybe let's take a break. 0:15:10.280 --> 0:15:13.440 That's a good Cliffhanger, and we'll talk about the fact 0:15:13.520 --> 0:15:15.680 that banks, by law I have to keep certain amounts 0:15:15.680 --> 0:15:18.240 of money, and it gets even more boring. I can't 0:15:18.280 --> 0:15:50.040 believe that Cliffhanger. Okay, Chuck. Before we get into um 0:15:50.160 --> 0:15:55.040 the reserve requirements of banks, I have a pretty neat 0:15:55.120 --> 0:15:58.560 little story. Actually, we're talking about banking panics, and there 0:15:58.680 --> 0:16:02.240 was one in two or at least there was one 0:16:02.240 --> 0:16:05.080 bank that went under UM and they had a branch 0:16:05.080 --> 0:16:09.080 in Sacramento that a guy named Louis Remy I'm gonna 0:16:09.120 --> 0:16:12.640 say UM went to go get his twelve thousand dollars 0:16:12.640 --> 0:16:15.160 that he'd saved up. It's about like three hundred and 0:16:15.240 --> 0:16:17.800 fifty thousand dollars in today's money. It was like his 0:16:17.960 --> 0:16:20.480 nest dagg right. He went to go get it out 0:16:20.520 --> 0:16:22.240 and was told that the bank had failed and they 0:16:22.240 --> 0:16:25.120 didn't have his money. So you know what Louis or 0:16:25.160 --> 0:16:28.520 Louis Remy did. He got on a horse and he 0:16:28.640 --> 0:16:34.200 rode from Sacramento to Portland, Oregon, six hundred and sixty 0:16:34.200 --> 0:16:38.880 five miles in six days. He rode for a hundred 0:16:38.960 --> 0:16:42.760 and forty three hours. Ten of those was to stop 0:16:42.800 --> 0:16:44.760 to sleep. I thought I was going to say, to 0:16:44.800 --> 0:16:46.640 get a new horse, because he had to do that. 0:16:46.760 --> 0:16:50.040 He did that like in an instant, right, So for 0:16:50.040 --> 0:16:52.400 for six days he slept ten hours to ride to 0:16:52.440 --> 0:16:55.960 Portland's got there before the steamership that was carrying news 0:16:56.000 --> 0:16:59.840 of the bank collapsed Sacramento. So he was racing the steamer, 0:17:00.160 --> 0:17:02.920 got there an hour or two before the steamer got 0:17:02.920 --> 0:17:05.480 his twelve tho dollars out of the Portlands brand to 0:17:05.520 --> 0:17:09.040 the bank, and like within an hour or two of 0:17:09.119 --> 0:17:11.840 that bank collapsing, finding out that there was no more 0:17:11.920 --> 0:17:16.200 bank anymore. Isn't that amazing? I'm glad his flex capacitor 0:17:16.240 --> 0:17:19.520 was working. Basically, that's basically what he did. But the 0:17:19.560 --> 0:17:21.879 horse version of that man, yeah, he said, oh I 0:17:21.880 --> 0:17:24.120 should give myself an hour. That should be plenty of time. 0:17:25.080 --> 0:17:27.280 I never understand that in time travel movies. I don't either. 0:17:27.359 --> 0:17:29.640 It's like, go back the week before time. Just take 0:17:29.680 --> 0:17:32.000 it easy, maybe get like a snack. You have time, 0:17:32.440 --> 0:17:36.960 all right, So we promise the scintillating details of the 0:17:37.000 --> 0:17:39.320 fact that banks have to keep a certain amount of 0:17:39.359 --> 0:17:42.760 money in their reserves. And that is because you know, 0:17:43.320 --> 0:17:45.679 if every I mean it's not the eighteen hundreds, not 0:17:45.720 --> 0:17:48.120 everyone's gonna say I gotta go to that Chase bank 0:17:48.160 --> 0:17:50.440 and withdraw every penny all at the same time. But 0:17:50.480 --> 0:17:53.080 they got to be protected against that. Oh, it could happen, though, 0:17:53.240 --> 0:17:56.959 there's still sure. But the problem is once a panic starts, 0:17:57.480 --> 0:18:00.840 it spreads like wildfire, because that means, well, if these 0:18:00.840 --> 0:18:03.480 people are panninging, even though I'm not panninging, I better 0:18:03.520 --> 0:18:05.360 go to the bank anyway to get my money out 0:18:05.359 --> 0:18:08.560 before it collapses, before more of these idiots panic and 0:18:08.600 --> 0:18:11.719 take their money out. Right, So, whether you're panicked or not, 0:18:11.840 --> 0:18:14.359 it actually makes sense if there's a panic and a 0:18:14.440 --> 0:18:16.800 run going on in your bank to go withdraw, and 0:18:16.840 --> 0:18:19.600 it's just this chain reaction that starts. So the FED 0:18:19.920 --> 0:18:24.560 protects against that by by requiring that these banks have 0:18:24.640 --> 0:18:27.919 these reserves. Right, yes, so it's known as the reserve requirement. 0:18:27.960 --> 0:18:31.119 It's based on a percentage of all the deposits in 0:18:31.119 --> 0:18:36.240 that bank. It's very simple calculation. And then they they 0:18:36.320 --> 0:18:40.040 these banks have to have non intersparing accounts at the 0:18:40.040 --> 0:18:45.240 Federal Reserve to make sure the Federal Reserve can cover everything, right, 0:18:45.280 --> 0:18:47.320 to make sure that it's like, okay, you have to 0:18:47.320 --> 0:18:49.920 have this much, we're going to hang onto it. For you. 0:18:50.359 --> 0:18:53.080 That's right. So they're they're taking this average every day, 0:18:53.119 --> 0:18:57.000 but it's over it's an average over two weeks basically 0:18:57.080 --> 0:18:59.960 to determine whether or not it's meeting that reserve requirement. 0:19:00.200 --> 0:19:03.120 And here's the thing that I don't know. I guess 0:19:03.119 --> 0:19:06.240 it's sort of surprised me. Is banks, depending on what's 0:19:06.240 --> 0:19:08.640 going on on a day to day basis, are borrowing 0:19:08.640 --> 0:19:11.680 and lending money to each other well to cover themselves. Yes, 0:19:11.880 --> 0:19:14.800 so that sounds frightening, but it makes sense. But so 0:19:14.840 --> 0:19:18.639 they've got like a pile of money, and whatever money 0:19:18.680 --> 0:19:21.080 they have, they can make more money if they lend 0:19:21.119 --> 0:19:23.520 that money out, if they put it to work, right, Yeah, 0:19:23.560 --> 0:19:24.879 I mean that's what they want to do, is just 0:19:24.920 --> 0:19:27.520 to get more interest. So if on one day they're like, oh, 0:19:27.680 --> 0:19:30.920 we've len out more than we we have in reserve, 0:19:31.800 --> 0:19:34.959 we go to another bank that has an excess and 0:19:35.040 --> 0:19:37.879 borrow it from them and then we put it in 0:19:37.880 --> 0:19:40.760 our FED account and everything's fine. We're within the legal 0:19:40.800 --> 0:19:44.480 limits for those reserve requirements. Right. But if they run 0:19:44.520 --> 0:19:47.520 out of you know, banks to trade with basically at 0:19:47.520 --> 0:19:49.159 the end of the day, then they can go to 0:19:49.200 --> 0:19:52.040 the FED and say big Mama, we need a little 0:19:52.040 --> 0:19:54.359 money from you, actually, right, And the FED doesn't like that, 0:19:54.440 --> 0:19:57.919 so they actually charge banks more for the UM for 0:19:58.200 --> 0:20:01.800 to borrow money directly from the BED for overnight requirements. 0:20:01.880 --> 0:20:04.840 That's right, but it's ironically called the discount rate even 0:20:04.920 --> 0:20:06.960 though it's the larger of the two rates. The other rate, 0:20:07.000 --> 0:20:11.520 where a bank borrows from another bank overnight to satisfy 0:20:11.600 --> 0:20:18.280 the FED reserve requirements, that's called the UM Federal Funds rate. Right, 0:20:18.480 --> 0:20:22.359 I answered my own right, I thought you're waiting on me. Uh. 0:20:22.440 --> 0:20:26.520 And within that discount rate, there are a few different tiers, uh, 0:20:26.840 --> 0:20:29.400 kind of just like you would scale or a tier 0:20:29.440 --> 0:20:32.119 any loan. You've got your primary rate, which is the 0:20:32.119 --> 0:20:34.960 lowest one, and that's you know, if you're a great uh, 0:20:35.000 --> 0:20:36.840 if you're a great bank and good standing, you're gonna 0:20:36.880 --> 0:20:40.280 get that rate. You've got the secondary rate. Uh. And 0:20:40.280 --> 0:20:42.359 that's if I think this is by the way, is 0:20:42.440 --> 0:20:45.600 Dave Ruse but from house works dot com. Uh, And 0:20:45.720 --> 0:20:51.080 Dave said, slightly less sound institutions Galloping Gulch State Bank. Yeah. Probably. 0:20:51.119 --> 0:20:54.120 And then you've got your seasonal rate. And these are 0:20:54.240 --> 0:20:56.760 very small banks with that are based sort of around 0:20:56.880 --> 0:21:00.800 seasonal economies. Like tourism or agricultural something like that. Yeah, 0:21:00.840 --> 0:21:04.240 because like and when when it comes time to bring 0:21:04.280 --> 0:21:07.000 in the crops for harvest, all the farmers come and say, 0:21:07.000 --> 0:21:08.720 I need some money to get this stuff to market. 0:21:08.760 --> 0:21:11.800 I need loans, and those banks get strained at those times. Yeah. 0:21:11.920 --> 0:21:15.120 Or there's lots of great I feel old timey heist 0:21:15.240 --> 0:21:20.520 movies where uh, someone will you know, like during crop season, 0:21:20.600 --> 0:21:22.600