(Bankugintza: gordailuen ateatzeaz)
#162 Warren Mosler: Anatomy Of A Bank Run
(https://www.youtube.com/watch?v=Cl_VdNKpjB0&t=62s)
Patricia and Christian talk to MMT founder Warren Mosler about the recent collapse of Silicon Valley Bank and more.
Transkripzioa
0:00
you can eliminate your interest rate sensitivity you can eliminate the risk to changing in rates if you’re back you
0:05
know how to do this not only can you eliminate it but The Regulators require that you eliminate it it’s part of the
0:10
regulations the acronym is camels C is for capital A is for asset quality M is
0:16
for management The Regulators can get rid of your management they can fire everybody at the back if they don’t like what they’re doing he is for earnings L
0:22
is liquidity and S is interest rate sensitivity they have the banks do test or self-testing but they audit it where
0:29
they say if interest rates go up one percent two percent five percent what happens to your earnings if they go down
0:34
what happens to our earnings and if it’s asymmetrical and you’ve got risk in One Direction or the other you are not in
0:40
compliance and you have to show what you’re doing to your portfolio to get in compliance and so if any Bank does have
0:45
that kind of residual risk at the macro level large enough to threaten your ability to cover your insured deposits
0:52 Warren Mosler: banku baten diru ateratzearen anatonomia
the regulations are obligated to shut you down
0:59
[Music]
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Christian Riley hi I’m Christian Reilly and welcome to
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the modern monetary Theory podcast you can find us on Twitter at mmt podcast
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big thank you to all of our supporters so far and thanks as ever for the time
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you put into understanding mmt let’s dive in welcome one and all to the mmt
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podcast I’m Christian Riley and I’m Patricia Pino and joining us today once again is our pleasure and a privilege to
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welcome back to the show mmt founder Warren Mosler hi Warren hello hello good to be here so Warren it’s been quite a
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week in Bank news and we’ve had the Silicon Valley Bank collapse and the silvergate bank collapse but just to set
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the table if banks create quote unquote money how can they run out of it right
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why can’t they just bail themselves out yeah okay so when Banks make loans what they
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do is they approve the loan and then you sign the load document and then they buy that document from you
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by crediting money to your account and that is the creation of a new balance at that bank so now the bank has a loan and
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you have the deposit you’re the client of the bank with the deposit and the bank is not in trouble at that point
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okay what then can happen is what you want to do then is pay somebody make a payment to somebody who’s not using nut
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Bank who’s using another bank so you write a check give it to somebody they deposit it in their bank account at
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another bank right how does that deposit get from your bank to the other bank right that’s the problem there’s no way
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for that to happen unless both of those banks have an account at a Third Bank in
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this case called the bank of England right we’re talking about England today so the two banks have Accounts at Bank
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of England so your back has to count and the bank that’s going to be receiving the deposit that person’s bank has an
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accountant at the bank of England so when you write the check the back of England takes the money out of the you
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know reduces the balance in the first Banks account at the back of England each bank has a bank account just like
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you have a bank account but they have it at the back of it they get their account at the back of England reduced that’s
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called debited the number goes down and the bank of England credits the account of the other bank okay for
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further credit to whoever you gave the money to and that’s how funds get transferred between Banks the banks have
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a common Bank the back of England where they both have a cow so the money gets transferred between those accounts
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within the bank of England so again balances which we call money can only be transferred within a bank or uh that
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could do it on your behalf they have accounted another bank so the problem is what if your bank doesn’t have any
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balance has a zero balance in its account at the bank of England all right now your bank has a problem because you
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want to transfer you know your pounds over to the other bank and it doesn’t have any in its account at the bank of England so if he can’t get some pounds
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in there one way or another it is now insolvent and the back of England has to come in and do its thing so we have this
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bag svb is out of us to look at Valley Bank yeah depositors who had 43 billion
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dollars in their Accounts at that bank no problem want to shift those dollars to another bank svb doesn’t have 43
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billion dollars in its account at the fed and the other Banks won’t when those
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dollars back to sbv back so and the FED won’t lend them 43 billion dollars so
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they can’t find new deposits to replace those and so they’re shut down now that doesn’t mean they’re in solvent that
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means there will be a liquid they could have a very large net worth hold assets worth many times what their liability
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abilities are but they can’t affect the payment because they don’t have the balances to do it they don’t have the
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ability to borrow balances to do it why can’t exchange those assets for liquid
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assets with who the fed maybe there’s no such thing there’s no Arrangement you know the FED will not accept below as
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collateral for you know loans from the fed the FED lends money to the banks but it requires government securities
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government mortgage-backed securities that type of thing it does not allow just your normal loans to be considered
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as collateral to fund you not that it should one of my proposals is and of course it should include those why not
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but it doesn’t when you say normal loans you mean the loans extended to Silicon
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Valley Banks customers right somebody bought a house somebody bought a car somebody bought a business you know
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there’s business loans for payroll there’s once receivables there’s all kinds of
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you know they have 300 billion dollars of assets which are loans of some type some of them are securities but a
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security is just alone in a different form so they’re all funds that have been lent to someone and those are their
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assets because whoever they lent it to has to pay it back with interest over time and that’s your financial asset
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that’s what a financial asset is promise to pay something okay so this brings us to something you’ve said at the past
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you’ve said the liability side of banking is not the place for Market discipline we’re talking about assets
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and liabilities so could you remind the listeners what you mean by that so what
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has been proposed and what actually exists under for whatever reason is that
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Banks should have to go out and compete for deposits and depositors not that
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should but if there is no deposit Insurance then what happens is depositors people with money before they
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put their money in a bank will check to see if it’s a good Banker now and this was called Market discipline only the
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banks that depositors think our good credits will be able to attract money and so the market will decide which
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banks good and which banks bad by how much money they can attract how many dollars in deposits they can attract and
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that’s fundamentally flawed because with no deposit Insurance you know you get
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yourself uh you know a couple hundred dollars and you are put your money in your checking account you have to decide whether that
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bank is safe and the system is relying on your checking to see that it’s safe
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so that only the safe banks will attract deposits and the banks that aren’t safe walk but you can’t do that you know you
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don’t have any idea where the city back is safe and JP Market is in fact if you take the top 10 Wall Street analysts
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they’re going to disagree over which bank is safer which bank is so to expect anybody to do that is nonsense they
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can’t they never have and you know historically that’s never worked out even so they were rated in Forbes as
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like one of the top 19 banks in the world as well svb so it doesn’t work no it’s never worked okay and the problem
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with doing that is if people get worried about if you have your money in a bank and you get worried about it for any
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reason you know you see the wife of the back president of Bank America with a Wells Fargo
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credit card paying for dinner and suddenly you panic what’s wrong with this bank and so you run out you tell
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all your friends and you all rush to take your money out the bank would fail go over something like that you know it
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doesn’t serve public purpose to run a banking system that way the banking system is set up by Congress through the
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Federal Reserve Act to serve public purpose and that doesn’t serve public purpose it works against public purpose
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it’s an absurdity and that’s their starting point for understanding banking that the depositors could somehow give
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valuable information as to which bank should be there and which banks should not and so they’ve always limited
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Deposit Insurance otherwise you wouldn’t have any depositors who were at all concerned about whether the back was
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sound or not and my point is they shouldn’t have to worry about that that doesn’t serve public purpose at all if
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you buy a treasury security that’s just a deposit at the Federal Reserve Bank that’s guaranteed by the government the
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point is there are commercial Banks which are part of this system what I’m saying is just what best serves public
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purpose is to have full Deposit Insurance on all the bank deposits so that depositors don’t have to think about that they just put their money in
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the bank based on the rate and the bank should all pay the going rate which is the policy rate and so you should not
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use that side of banking that’s called the liability side because the deposits are back liabilities so your assets
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depositor’s asset is the bank’s liability that should not be where you try and discipline Banks alone quality
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or anything else so what you do is you just say okay we have full Deposit Insurance everybody’s guaranteed which
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is exactly what they did after the fact that SBB because there’s no other way to do it and then you regulate what the
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banks can do with their money by you know regulation by regulations by supervision and you do it that way you don’t do it
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by asking the depositors to chime in as to what the bank should be doing with their money you do it directly through
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regulation which we also already do okay so we have a banking system that’s already does all the regulation
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through regulation and supervision but they’ve left this other thing hanging out there to just cause problems once in
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a while with no benefit to the operation of the system so it’s put a button on it
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if we are going to allow the liabilities side of banking to be the thing that
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market disciplines the banks what’s going to happen is well obviously
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you’re going to need every time the economy shakes out a bad bank there’s going to be a bank run it necessitates
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the possibility of Bank runs happening all the time and like you say unless you can say that there’s some kind of public
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purpose to bank runs we should have full Deposit Insurance yeah well it’s important for the FED to understand
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whether you know Joe the plumber is our partitions column the city banks are better back than Bank of America I don’t
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think so I don’t think that’s valuable information that we should worry about you know cater to and set up a whole
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system so that Joe the plumber decides whether the banks fails or not you know if it makes no sense whatsoever and
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nobody thinks it makes any sense this stuff’s left over for it’s just an anachronism of gold standard and other
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times where you didn’t have Deposit Insurance and you regularly had these kinds of collapses I think out of 8 000
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Banks four thousand of them failed in early 1930s something like that and that would happen periodically because under
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a gold standard then you don’t have that kind of Deposit Insurance and um that’s exactly what happens the market
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discipline comes from the herd running one way and running the other you know you run one side of the boat that all
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tips that way and they run to the other side and they’re all tipped that way and since we’ve got to flooding exchange rates we’ve gone off the gold standard
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it’s just an anachronism that’s just a problem it needs to go once again we’ve proven that the liability side is not
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the place for Market discipline to the point where the FED actually agreed to pay all the deposit even one said worded
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shirt okay which is even more peculiar to have the system in place and then pay the uninsured depositor full value when
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if they’d actually gone through the numbers they might have only got 99 cents in the dollar or something like that they’re working to lose all their
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money but it would have been some small haircut and they decided not even to do that because it doesn’t serve public
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purpose so the problem is if they were going to insure them all so they didn’t lose any money that’s fine but the
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regulation of svb back would have been different okay one of the reasons regulation was what it was is because
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only two and a half percent of deposits were insured and that’s what the Regulators need to protect they’re protecting quote taxpayers money
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which in this case was a very small percentage the rest of it is just private money you know speculators
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support note holders uninsured depositors and they’re you know they’re out there making Investments based on
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their risk assessment and there’s winners and losers so those weren’t subject to regulation but
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yet they went and paid them off as if they were subject to regulation now it wasn’t a lot of money in this case but
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it’s just you know the kind of I don’t know what the word is but it’s a peculiar thing to do and it’s a
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troubling thing to do and it puts a bad taste over the whole thing and a cloud on how they’re doing your regulation
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right now I think I read via the way you were interacting with some people on
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Twitter that they had svb had their customers agree to exclusivity Clauses
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or exclusivity Arrangements which means they couldn’t spread their risk they couldn’t spread their money around other
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Banks is that right yeah they had contractual agreements that they would lend or fund them in one way or another
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and before the money was spent in operation to the company it would be kept at SVP yeah in order to do that you
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know why would anybody do that well it had to be because the loan was on better terms and any other bank they would go
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to because if they could get a loan without that condition it would do it and so SPV was lowering the price of
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loans to them which could mean lower quality or lower interest rates right and may cause and others wouldn’t make
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because in return they were getting these deposits locked in now what happened on Thursday is people with
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these deposits had a decision to make do they move their money to another bank because they’re afraid they’re going to lose it or and take suffer the penalties
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or do they just leave it there and not suffer the penalties under that contract so I think the penalties were probably
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something that the loan would be considered to be in the fault if you didn’t have sufficient balances that’s
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your normal type of penalty and so they decided look I’m less worried about whether this Bank declares my loan and
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default that I am about losing the money so they all tried to move their money out which they couldn’t do and that
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could cause a fact to be shut down for liquidity purposes right because it could make payments got it and as you
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wrote on Twitter the exclusivity closes this is a backdoor way of a Bank quote
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unquote paying up to get deposits right right so they were using this to attract
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deposits they’re giving them something you know and you say well why not just pay a higher interest rate to attract
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deposit so The Regulators still allow that these are all particularly government guaranteed deposits it’s
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government credit they don’t want Banks paying up you know five six seven eight percent using government’s guarantee to
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get money you know I used to have a small bank and if you pay a little bit more than the going rate of fed funds
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are for and you pay four in an a it’s a four and a quarter they maybe slap your wrists and nodded or something but you
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don’t pay five or six you don’t pay a lot and so it’s very difficult to raise deposits independently giving away
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something on the other side when I first was in the banking business at my savings bank give away a toaster somebody made a deposit and this fact
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decided to get a set of toasters are going to give you favorable terms on the loans well that also violates the regulatory spirit and it is something
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that the FTC on a look back would not allow which brings me to my larger point which we probably should have started
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with that regulation tells you what you cannot do it doesn’t tell you what you can do and then you’re limited to that
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it tells you what you cannot do and if it’s not in there presentable you can do it so it doesn’t say in regulation you
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can’t offer attractive loans in order to attract the process okay now if it said you know if the rule said you can only
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do what you can do well it doesn’t say you can do that either then you’d not be allowed to do that without getting permission so they’ve got the whole
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regulation thing I think backwards where they should be stating what you can do which is narrow and then if a bank wants
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to do anything else you know like open up a barber shop or it has to go ask permission you can’t just do it because
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it’s not prohibited right so right now if they want to open up a barber shop they can go do it because it is a
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prohibit a back cap by equities because they are prohibited yeah they might have to take a haircut right but they can buy
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a participation through a loan which is not prohibited you know so it again this
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whole idea of having a book you know 18 000 pages long and what you can’t do rather than just telling you what you
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can do in one page you know isn’t my idea of how to regulate the banking system but I mean that whole premise
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seems to me it takes away one of the main mechanisms by which banks compete with one another yes right so in my head
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I’m thinking why do we even have competition between Banks why don’t we just have the One Bank ideally I don’t
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know government owner or you know or something in between and well we do and consider the commercial Banks as like
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branches of the Federal Reserve so the Federal Reserve could just say the commercial Banks you could run Unlimited
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overdrafts in your clearing account so that would svb this has to make a payment they just negative at the FED 43
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billion and the other bank who got paid is positive 43 billion at the fit it wouldn’t matter you know if let’s say they were all insured deposits it
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wouldn’t make any difference at all if they did that rather than have a speed be compete for deposits trying to iron
17:56
from other Banks where nonsense to go through now because they’re regulated now if you look at the FDIC the Federal
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Deposit Insurance Corporation they ensure deposits which is the same functionally as lending the bank’s money
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you know Federal guaranteed money it’s the same as giving them taxpayer money so to speak to call it that and so what
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they do is they look and they say your total assets are 300 billion and your total deposits are 250 billion so you’ve
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got 50 billion of your own money in there we call that capital and we looked at your 300 billion of assets And We examined every loan and
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they look good they qualify they pass our standards so we’re willing to guarantee 250 billion of deposits
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against loss because we think your assets could cover those if there’s a problem so they’ve already said that the
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FDIC so if those deposits leave and want to go somewhere else what’s the problem
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with having the FED make a deposit the FDIC can guarantee the FED deposit what do they care who the depositor is okay
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but they don’t okay they say you have to get somebody other than the FED to make a deposit the fed’s going to make a
18:54
deposit that’s called an overdrafted discount window they got a fancy name for it but it’s just a deposit then you have to put
19:01
up government securities or mortgage-backed Securities of some nonsense to be able to get that which means they can’t get so it the whole
19:07
thing has not been thought through clean sheet of paper logically as to what they would do and if it wasn’t much simpler
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much more direct serves public purpose and you know I would be making the big bucks for having this conversation with
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you I think you got to it right there when you said clean sheet of paper because yeah you know what that’s what
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we’re looking at is a system that’s just had bits bolted onto it and bits removed and you know it’s become a sort of root
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Goldberg machine but over time rather than somebody just go right okay should
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construct a bank system from the ground up I thought it may be a useful way of figuring it out or what went wrong for
19:45
svb I’m just going to throw something out there one of our listeners wrote to us his name’s Robert Hopkins and he
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wrote and he puts this out there for comment and correction he’s saying please correct me as needed it seems the
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FED must let Banks like these fail Equity holders must go to zero because of the moral implication bad interest
20:04
management must have a consequence and the adds to it it turns out that the CEO dumped stock as well so his words fit
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him for a striped suit so I guess Robert’s saying that the CEO should be done for insider trading yeah so let’s
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look at the word there he said bad interest rate management right okay but that’s not the reason the bank failed
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okay the bank did have from what I read of course I don’t have the numbers 15 billion dollars of long-term Securities
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it sold out two or three billion dollar loss to get money but that two or three billion dollar loss you know okay their
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earnings dropped or whatever but that wasn’t anything to do with this failure that might have caused people to panic
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and try to take their money out what caused the problem was people trying to take their money out you know let’s say that report turned
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out to be not correct that they actually had a three billion dollar profit well too bad if everybody tries to take their money out you’re just as dead as if
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either way right and so even if it was on a false report so it wasn’t that part itself now whether they’re other 300
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billion of loans had problems with interest rates I want to say probably not because most of those would be maybe
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floating rate wallets or they would be like loans you know maybe loans against what are really Equity positions which
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of course you can’t do with FDIC insured deposits but they didn’t have fds the insured deposits they had you know subordinate debt they had uninsured
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deposits you can do whatever you want with those it’s not taxpayer money and you don’t know how many of those
21:28
were locked in at zero percent rate as a condition to get a loan right you don’t
21:33
know how many were fixed rate five percent for 10 years or you don’t know the duration of the liabilities we don’t
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know what the duration of the assets were and neither did the people taking the money out okay and if they hadn’t
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done that you know we wouldn’t be talking about it if everybody had just left their funds in and said oh it’s
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only 2 billion loss on the Securities you know who cares then we wouldn’t be here talking about it there’d be no
21:55
issue and then the analysts would be looking at the bank and say okay their wall and wash reserves are going to have
22:00
to go up and their earnings are going to drop from 4 billion to 2 billion this quarter or they’re gonna have a billion
22:05
dollar loss with the current spread they’re going to make it next quarter you know there’d be some earnings forecast
22:11
and like it’s been happening you know for the last since they started with every Banks since Inception and with all
22:18
the other Banks just what goes on continuously in terms of analyzing their earnings and their assets and their liabilities
22:24
so the difference was that everybody decided to you know Run for the X’s at the same time and they just couldn’t
22:30
make the payment because we got an Antiquated payment system that doesn’t allow it the uninsured deposits the bank
22:37
could say to those people look you just have to wait we don’t have 43 billion to send out every Monday and it’s nothing
22:43
like wrong with that now it doesn’t inspire a lot of confidence it’s not illegal it’s not a default they don’t owe those people the money next day on
22:50
demand and if it is a default it doesn’t mean they can’t do it anyway and there’s some penalty maybe but it’s not like
22:56
it’s not something that the FDIC would use to declare them insolvent or even
23:02
illiquid technically it’s only if the insured depositors can’t move their funds that they would necessarily deemed
23:10
itself okay and somebody’s going to argue with me about that because of Prior policy and I’m not going to argue with that but I’m just saying at a
23:16
theoretical level at least and maybe even on a practical level if you’ve got subordinated debt and you can’t give the
23:21
guy the payment there are plenty of organizations that announce that they can’t make a mortgage payment and
23:26
interest payment it’s going to be delayed 30 days triggers different Clauses but it doesn’t trigger
23:32
insolvency and you know a ceasing of operations what are you making the CEO
23:37
dumping his or her stock yeah that’s another thing you know if they had inside information that would be a
23:42
problem but I mean there’s a enough for suspicion right yeah we can’t investigate all that there’s not Aren’t Enough investigators there’s more fraud
23:49
than there are investigators right now and what you have to do is not make that illegal and that might keep people from
23:56
buying the stock to begin with well fine you know but you can’t make something
24:02
illegal that you can’t enforce where you have selective enforcement right okay you know instead you just take away that
24:08
whole field of endeavor you know and I had a proposal for that also I don’t remember about the stock market so we
24:14
don’t have to worry about that kind of thing Insider info yeah like favorite everything Madoff did if that had been
24:20
legal then nobody would put money in those firms to begin with right yeah that’s what I mean they wouldn’t put
24:26
money on those firms but the firms would be encouraged to offer reassurances that there’s not
24:32
going to be Insider info and then do it anyway yeah but still if nobody puts money and they have nothing to do it with if
24:39
you’re dumb enough to put your money in a firm knowing that it’s outside the law you know look I’m not saying people
24:45
don’t put money in Chinese companies right where you know years ago probably still the case where the accounting was
24:52
all fraudulent and the whole thing I mean it still happens people put money in penny stocks not knowing anything about them except they say it’s always
24:58
pending maybe it’ll go to 10 cents so there’s plenty of people who do those things it’s funny how people get scammed
25:04
all the time but be a whole lot less if that stuff wasn’t illegal and everybody knew that these people were
25:11
was perfectly legal for them to lie cheat and steal and take your money then you just wouldn’t do it if you want your
25:16
money to be safe put it in a bank it’s all government shirt you’re gonna do anything else you know are you taking a big chance and all you’re going to hear
25:22
is horror stories about people who lost money you know there’s something to be said for that kind of a uh you know a
25:27
structure I’m gonna whoop something that I think Michael Hudson says which is you know a couple of rule is a debt that
25:34
can’t be paid won’t be paid I think that’s Michael husband’s lie right and so I think what you’re saying here
25:40
Warren is a regulation that can’t be enforced won’t be enforced what else did we get selectively enforced if it’s you
25:46
know a guy who’s got can enforce it if he has lawyers and can come in but you know if you loan somebody money a
25:51
hundred dollars they don’t pay you back in theory you can go to small claims court and everything but you pretty much know that she doesn’t pay you you’re out
25:57
of luck and so at limits you don’t just lend everybody on the street 100 who asks you because you know it’s not you
26:03
can’t go collect it okay if it was government guaranteed sure then you go ahead and do it now the government has a problem trying to enforce front so by
26:10
not offering legal protection to pick things it’s a lot less likely by like
26:15
orders of magnitude that those practices are going to take place and be a problem so get back to the Rover’s question he
26:22
goes on to write cash at a bank is a liability they owe it to depositors I’ll just jump in and say I think he means
26:28
that a bank deposit is a liability of the bank assets the account holder that’s uncontroversial then he asks if
26:36
we can confirm or deny this and I’m slightly paraphrasing but he’s saying the asset side of the bank consists of
26:42
loans Securities and Central Bank Reserves all of these are interest rates sensitive so the FED raising rates
26:50
causes the asset side to drop in value and without appropriate interest rate
26:56
risk management a bank like SVP can go and solvent because its liabilities become greater than its assets yeah not
27:04
true okay number one if you have Reserves at the fed the rate is the policy rate and it changes with the
27:10
policy rate it’s not a fixed rate if you’ve invested if you have a floating rate mortgage that rate goes up and down
27:15
with interest rates so number one you can have assets that are adjustable rate
27:21
okay number two you can have liabilities that are fixed so let’s say I make a five-year loan at a fixed rate I could
27:27
then take in a five-year savings account at a fixed rate or I can borrow five years at a fixed rate from another
27:34
source let’s say or I can hedge it with Futures markets so I can you know by selling five-year worth of your dollar
27:40
strips or something and if you’re back you know how to do this to lock in your rate so you can eliminate your interest
27:46
rate sensitivity you can eliminate the risk to changing in rates not only can you eliminate it but The Regulators
27:52
require that you eliminate it it’s part of the regulations the regulations the acronym is camel c a m e l s c is for
28:01
capital A is for asset quality M is for management The Regulators can get rid of your management they can fire everybody
28:07
at the back if they don’t like what they’re doing e is for earnings L is liquidity and S is interest rate
28:12
sensitivity and they give the banks they have the banks do test or self-testing but they audit it where they say if
28:18
interest rates go up one percent two percent five percent what happens to your earnings is that stress testing
28:24
yeah such one form of stress testing that what happens to your earnings if they go down what happens to your earnings and if it’s asymmetrical and
28:31
you’ve got risk in One Direction or the other you are not in compliance and you have to show what you’re doing to your
28:36
portfolio to get in compliance and so if any Bank does have that kind of residual risk at the macro level large enough to
28:43
threaten your ability to cover your insured deposits The Regulators are obligated to shut you down to take over
28:50
to change management so rubber is right that those assets are interest rate
28:55
sensitive but it needs the proper risk management yeah you have to match your
29:00
assets and liabilities yeah if you have a four-year duration you know for your loans on your assets which would be the
29:07
duration or not I mean it’s a mix of terms could you just say what duration is because I don’t think a lot of people know what that is duration is the
29:14
average amount of time outstanding that your money is you know so if you make a four-year-old loan for a million dollars
29:20
how long targets at million dollars outstanding well if the guy doesn’t have to make any payments to the very end
29:26
that it’s outstanding for four years now would be a four-year duration but if he’s making payments all along the way
29:32
you’re getting some of your money back sooner than on average your money might only be out there two years so you would
29:38
say there’s a two-year duration okay so it’s a four-year final maturity but because he’s making payments your
29:43
duration is only two years because you’re getting a lot of money back sooner than four years because this is what I think is being said about the
29:50
mismanagement svb that was the thing that they didn’t seem to manage
29:56
correctly right but that would show up in their earnings because if their assets are only earning three percent
30:02
and they have to pay five percent for money now their overall earnings are negative with no chance of going positive but that wasn’t the case you
30:09
haven’t read that anywhere if that was the case you would have read about that that would have been the headline that they’re in solvent all they were was
30:14
illiquid there was no insolvency just to be Devil’s Advocate when it comes to the stress testing on interest
30:21
rates presumably you know they investigate potential scenarios of the FED raising
30:27
rates at a particular rate but at what point is there a limit you know should they prepare for all scenarios or is
30:33
there say a certain implicit promise from the FED that they’re not going to raise say interest rates by something
30:38
quite far above look it’s Federal Regulations Federal Regulation and you have the FDIC as regulators and you have
30:45
the FED as Regulators so they should know that because they’re doing it
30:51
so they know the scenarios to test four right because they’re the ones who initiate the scenarios of course they
30:57
know because they’re the only source of them there’s no other source of the scenarios so they wouldn’t carry out monetary policy that is outside those
31:05
scenarios that they expect firms to have accounted for they might but then it’s a failure of Regulation you can’t fault
31:11
the bank for them so yet the regulation wouldn’t have said you need to stress test this scenario where we raise rates
31:18
you know a thousand basis points in one go because it’s never going to happen right well but you look when I ran my
31:25
bag I did exactly that right okay really more than that I’d say all right what if rates go to 20 like they did in 1979
31:31
because I don’t wanna I’m a shareholder I don’t want to lose my money why would I take a chance like that but I guess
31:37
that’s probably something that needs to be in the regulation that you know once you as the bank owner have your own
31:43
money at stake all of a sudden things get properly stress tested well I can’t
31:48
argue with you there although plenty of people lose their own money on foolish bets right but you also advocate for
31:53
zero interest rates so that would eliminate this possibility right right
31:59
right and also better serves public purpose to have zero rates in any case
32:04
yeah a little lower inflation all kinds of good things so the whole idea is to pay a positive interest rate which we
32:10
know is just basic income for people who already have money it’s the most regressive policy you can imagine
32:15
you know in proportion how much they have you’ve got to convince me why that’s a good idea so if you look at any
32:21
of these things whether it’s banking most regressive you know Economic Policy you could
32:26
imagine I’ve seen where you go so I can’t see from any angle why you would ever want to rate anything other than
32:31
zero but again that’s you know so I put the burden of proof on you but here we are because they’ve got it backwards
32:38
right they think when they raise rates by paying the U.S ultimately they’re going to be paying over a trillion dollars a year at current rates and
32:44
interest which is part of the deficit the larger part of the deficit you can see it’s the military budget
32:50
spending this extra trillion dollars on interest that they wouldn’t be paying at zero and giving it only to people who have money in proportion of how much
32:57
they have is you know it fights inflation it’s like okay I mean it’s like how can you take that seriously yep
33:04
that’s what they’re doing with full support from every [ __ ] in the world except me and probably maybe you at this point how can anybody take that
33:10
seriously I’ll just jump in here and say that we’ll link to our episode with you Warren just for anybody that’s hearing
33:17
this for the first time the episode is called the natural rate of interest is zero and it’s unpacking at a paper that
33:25
Warren and Matt Forster wrote some years ago about why that is you know just
33:30
while we’re on interest rates I’m just going to say in a word or maybe in a few paragraphs if you want all the Fed rate
33:37
hikes to blame for the svb collapse we don’t know because we haven’t seen the details it but the immediate reason was
33:44
people decided to take their money on they could make the payment but when you raise rates you have winners of losers
33:49
right and loser or like some of the real estate people some of the mortgage people it’s temporary because that all
33:54
goes back up because you’re flooding the markets with deficit spending with money the deficit 6.2 percent I heard last
34:01
annualizing the U.S which is enough to drive any recovery very strongly we’ve seen strong GDP numbers but that doesn’t
34:08
mean there aren’t winners and losers and so you’re going to lose the occasional Bank made a bet they maybe shouldn’t
34:14
have made not that it was this Bank are you going to lose a mortgage Banker who you know lost Mortgage business because
34:20
of the high rates or something like that you’ll lose a couple of real estate agents so you’re gonna get victims but
34:26
with that much money flooding into the economy the rising tide is going to lift all the other boats much higher you’ll
34:32
see at the macro level the economy will be strong and inflation will keep up with the interest rate but that again
34:38
that’s not to say there aren’t going to be some losers but that’s not the same as saying the overall economy is like
34:44
going into recession I think quite important and very rarely talked about and I recently read a paper on it and I
34:51
wanted to know what you thought about it Warren but we always take for granted that inflation has to be one of the main
34:58
priorities of government policy in your view why is inflation bad and what level
35:06
of priority should it have so inflation is from an economic point of view per se
35:11
is not bad you know because with inflation everything adjusts up together that’s what inflation’s about prices go
35:16
up we just go up everybody’s the same it just said you got this upward spiral which I will say comes from prices paid
35:22
by government but more important to your question is there’s nobody’s like winning and losing people on fixed
35:28
income might be losing and uh you can make adjustments so people want Social Security the government can raise Social
35:34
Security the government can raise what it pays other retirement benefits it can raise distribution for child care or it
35:41
could increase his budget for Education you know so you can keep up and you can just have continually increasing price
35:48
level including wages and everything else and so you’re left with a distributional problem where again there
35:54
are winners and losers that are equal in size where borrowers are a little bit ahead of Savers because Sabers see their
36:01
value of their savings going down borrowers see the amount to have to repay and Realtors going down so they’re
36:07
ahead politically Congress can make adjustments to this internal distribution of real wealth it doesn’t
36:12
affect your real wealth your real wealth is every all the real stuff you produce domestically plus all the real stuff you
36:18
import minus all the real stuff you export and inflation doesn’t change that so it doesn’t change the overall
36:25
standard of living of the economy so from an economic point of view it doesn’t matter from a political point of
36:30
view it matters because the winners and the losers have different political power and they’re jocking to get their
36:36
way and the people who don’t like the inflation politically have a big political advantage over people who do
36:42
like it and so regimes will turn over if inflation is too high and they all know that and politicians need to mind
36:49
inflation or they’re going to lose their jobs so would you say that I think to summarize what you’ve just said is the
36:54
inflation per se if what we mean by it is a proportional increase in all the prices in the economy and all the
36:59
incomes in the economy then it doesn’t matter but right what the problems of
37:05
inflation come because these adjustments are not usually symmetrical they are imbalanced right while there are winners
37:12
of losers you know they net they net to zero but they’re winners who lose this year so they’re ballast that they’re net
37:18
to zero but they’re not an equal number of people on both sides yeah because as you know like we know that inflation is
37:24
universally disliked and I was wondering you know and you’re also aware of kind of the conflict theory of inflation you
37:30
know different parties trying to there is inflationary shocks say and immediately the response is you know
37:36
either trade unions want to bargain for better wages to compensate for that loss of income and and then you know you have
37:43
all these suddenly everybody gets politicized right in protecting their share of the output that’s right and I
37:49
think that the reason why this is so universally disliked is because what the workers consider to be inflation is
37:56
actually you know the increase of prices while their wages remain the same
38:01
whereas what capital is resenting is the increase of wages while their profits
38:08
diminish right yeah I was reading about turkey and what they do apparently is you know you see they increase to
38:13
minimum wage by 50 percent maybe more to keep up with the prices well that means the whole spectrum of lower income
38:20
people gets a real increase right in compensation and so they’re allocating resources from the bottom up that means
38:26
there’s less fewer resources to go around for the higher income people they have to somehow figure out how to deal with inflation but they take that
38:33
problem away from the lowest income people and keep raising this floor to keep them in line and apparently that
38:39
the political power is there sufficiently to keep these people in office so again it’s a political conflict and in that case it’s the
38:46
workers who are sustaining your real share of output through this minimum wage increase right but the Curious
38:52
Thing then is that both of these kind of groups they are referring to very different things but
38:59
they are calling it by the same name so everybody agrees they hate inflation
39:04
but everybody means different things by it that’s right and if any price goes up price of pineapples go up or that’s
39:10
pineapple inflation it’s like okay but you know when your wages go up we
39:16
don’t complain right that’s wages yeah yeah it’s what no it’s wage inflation when your wages go up when when my wages
39:23
go up that’s just a great thing yeah right well that’s that causes the spiral
39:28
but now here we’ve had wages going up less and a slower rate than prices so it
39:33
obviously isn’t causing because you know that’s what people look towards anyway I just thought that was really curious
39:39
because it’s like universally agreed in a technical sense but what we’re meaning is we actually dislike the conflict that
39:46
arises through this the social instability that it generates I guess yeah yeah so distributional issues
39:53
otherwise if we went from dollars to pennies so everything’s 100 times more expensive I mean nobody would scream
39:59
inflation because there are no winners and losers it’s the same price it’s just pennies instead of dollars so it’s a hundred times more if you switch from
40:05
pounds to Euro I guess based on the you know the prices would go up because of the exchange rate it shouldn’t be
40:11
considered inflation it’s just an exchange rate adjustment and because of that I guess particularly workers which
40:17
tend to be at a disadvantage they have to be very careful when they hear their policy makers talk about
40:23
addressing inflation because they may not mean what the workers mean yeah they address it by
40:30
paying people who already have money more money called interest rates and it’s over a trillion dollars a year why
40:36
isn’t anybody discussing this addition to the deficit where are all these deficit Hawks we’ve come to appreciate
40:42
you know the loyal opposition where are they you don’t hear from any of them do you complaining about the interest rates
40:47
as part of the budget problem I haven’t heard of it I guess I say if you want interest rates to be down you got to
40:52
bring inflation down to say it the opposite way but they don’t think that’s what’s happening right I mean they’re
40:57
wrong and then they don’t know what they’re doing really but their intention is not that much better two or three
41:03
years ago at least in the US they’re all screaming about the deficit because if we got too high the interest payments
41:09
alone would be more than the military adding to the deficit and now here we are then they stop talking about it you
41:16
don’t hear a word from any of them I mean we’re like we’re paying interest with borrowed money the way they see it they’re not talking about it why not
41:23
Something’s Happened the thing when I was going gonna say is that it’s the prescription as to what’s causing
41:28
inflation is key and at the moment we have a situation where for example we know that companies are
41:35
making record profits out of the energy crisis and all that but then when the
41:40
government talks about a wage price spiral they’re only really afraid of wages going up they’re not really afraid
41:46
of the other side of the equation that’s the export led growth narrative right that’s the exporters one it’s either
41:52
cost kept it so with wages lagging the exporters are winning and this and it’s
41:57
like that narrative has been adopted by everybody both parties it’s implicit in
42:03
their arguments that exports are benefits you know import your costs and it’s not discussed that’s never that
42:10
premise is never discussed it’s just understood and it’s behind all the economic models you know that’s what
42:15
you’re trying to do that’s your goal President Obama said we need to export consume less and Export more okay and
42:22
any names Jeff immel his chief economic advisor who’s head of General Electric our largest exporter it’s a very deep
42:29
set Insidious narrative that’s driving things here that’s not discussed and
42:35
it’s there behind everything would you not say that maybe multinationals that operate domestically do have a
42:42
significant amount of power I mean can you think of Christian what are the biggest exporters in the UK well you
42:48
know I was just about to say if we’re going to talk about trade and industrial policy in the UK like Warren says like
42:55
we know that in real terms Imports are a benefit to the country receiving the Imports exports are realtors cost to the
43:03
exporting country and Warren when you point this out in your writer you’re often quick to follow up with the point
43:09
that there are strategic and security considerations to factor into the trade
43:14
policy and you’ve said oh a nation might want to say produce steel domestically now here in the UK the deceptively named
43:23
British steel is actually owned by a Chinese multinational jinya group
43:28
Britain’s biggest steel for produce a Tata steel that’s an Indian multinational and the same time these
43:36
companies are also as I would frame it are heavily subsidized by public money
43:41
there will be it offered millions of pounds I think 300 million pounds a piece I’d have to check that but that
43:47
money’s been promised to both of these companies to keep jobs in Britain right so my question is should British people
43:54
be concerned about that combination of foreign private ownership and domestic
43:59
public subsidy not necessarily but I mean yeah they should be concern but your military uses a certain amount of
44:06
Steel for example you know that steel should be in my the way I would see it I’d prefer to have that steel sourced
44:13
domestically entirely if he can and have stockpiles or whatever so that in the
44:19
event that you cut off you can get by for six months without Imports you know
44:24
whatever that takes or a year or whatever you think is strategically important and then beyond that just go for whatever gets to consumer that best
44:30
price and look it’s both parties in the U.S president Trump decided that Canada
44:36
wasn’t charging us enough for lumber okay don’t ever send that guy out shopping for you and so we put a 17
44:42
terrified Canadian Lumber President Biden comes in he decides they’re still not charging us enough he puts another
44:48
17 on top so we’ve had 34 tariff on Canadian lower then it’s like oh lumber
44:53
prices and housing went up we have inflation what are we going to do about it we got to raise it you know what these guys who are these guys you know
45:00
he just did this and so it’s a bipartisan product where they both have this export lead narrative and Lead
45:08
growth narrative and it’s deep down inside of them it’s not anywhere near the surface they don’t know that that’s
45:13
what they’re parroting but they all are and all their constituencies are there’s like 95 approval for retaliating against
45:19
China for not charging us enough why don’t you retaliate against somebody who doesn’t charge enough because that’s not the way it’s being presented okay it’s
45:27
not being framed that way it’s Being Framed as job loss you know as rather which is ridiculous because we’re
45:33
unemployment’s at a 50-year law but we’ve lost all these jobs so who would have been working every this doesn’t
45:39
make any sense so but their framing is subconscious or something and the whole
45:44
argument’s subconscious so it’s still there right now and it’s just 34 percent tariff on Lumber during an inflation
45:50
problem fed doesn’t mention it was a Fed doesn’t mention it so and you’re probably even worse UK is probably even
45:56
worse it’s because there’s this priority given to what is a you know to protect
46:01
exports but it’s not understood at that level it’s just a subconscious thing that Wells up into all these other
46:08
manifestations of this deep down adaptive trait of supporting exports over us so just to bring it back to back
46:14
roads and SVP in terms of like where do we go from here in the broad Strokes what should we be pushing for do we want
46:21
to see an end to too big to fail Banks because what happened here in the UK was
46:27
a small enough to fail Bank was through lobbying and special interest was bought and rescued by a too big to fail Bank
46:34
HSBC was that a just outcome well what difference does it make if the bank is
46:39
larger or small are first we have to decide that why is there a bias against a larger Panic they usually have lower
46:45
interest rates our local bags here charge percent more than the New York facts from what I’ve been reading the
46:52
idea is that in the states you’ve got a lot more Regional Banks and smaller Banks because you like the idea of competition over there but then at the
46:59
end of the day like you’ve said many times you’ve got to have 100 Deposit Insurance and then what does that even
47:05
mean you know there’s probably not going to be a category of too big to fail ever right yeah well the people who are
47:11
against the banks want post office to be back well then you only have one bag yeah sure yeah that’s a pretty big Bank
47:18
yeah we have fed Direct Federal Reserve well I have one back yeah so the idea of having small sort of insurgent banks for
47:25
one of a better word it’s like that’s not really what they’re gonna do there’s an argument that they’re better able to
47:31
win to small businesses locally but other how true that is and if it’s
47:37
determined that there is value in that okay and that’s how you want it served that’s fine you know so depends on what
47:44
serves public purpose but obviously the large Banks charging more than the small Banks I’ve seen charging less they’re
47:50
more efficient and yeah they’re hard to get through and hard to talk to but small Banks aren’t that great either I
47:57
think my issue with the big Banks and I don’t know if I don’t think this is related to them being big per se but
48:03
here Banks I mean I think we have like big five or something and all of them their biggest source of money has
48:09
nothing to do with providing loans right right right right that’s my idea where you tell Banks what they can do not what
48:15
they can’t do and then all that was stopped so there’s some talk that this Bank collapse might cause the FED to
48:23
stop hiking rates at the next meeting what do you think about that Warren well I think you should have drill power on
48:29
and ask him but I think what’s being said is that yeah that a lot of liquidity is
48:36
disappeared so rates are going up anyway so the FED doesn’t need to hike rates I think that’s what’s being said well what
48:42
they’re saying is now this smaller banks will have to cut back on their lending they have 30 percent of the lending in
48:49
the US so they’re not going to cut back to zero so let’s say they cut there ten percent that would be three percent drop
48:56
in lending and why would they cut back in their land I don’t understand that either their lung growth has not been
49:01
strong it’s not like they they’re short capital and they need to cut back on lending to gain Capital they all have
49:08
lots of capital uh they all have lots of deposits I’m not sure why they were cut back on lending except they’re saying
49:14
they’ll tighten lending standards because they’re afraid of people defaulting I don’t see exactly why
49:19
unemployment’s at a 50-year low corporate profits are strong now to your point that you started earlier some of
49:26
them have shifted from like tech companies to oil companies but the overall level of profits is high which
49:31
is in line with budget def since you get a high budget theft so you get high corporate profits High income for everybody including corporations and
49:37
income numbers are growing steadily personal incomes growing consumption’s growing what does a bank see that would
49:43
say oh this guy wants to buy a new television I don’t want to make the loan or this person wants buy a house he’s
49:49
got 25 down I don’t want to make the loan you know he’s willing to pay my seven percent interest rate I don’t see
49:55
them doing that because that’s how they make their money but you know I could be wrong maybe we’ll see a collapse of
50:00
backgrounding I don’t know a debate that seems to be raging is that did the American arm of Silicon Valley Bank get
50:06
a government bailout how would you characterize the Authority’s response to
50:12
svb’s collapse well the question is were the assets worth more than the liabilities and nobody really knows
50:19
right now they know that because they haven’t sold the assets yet and they’re trying to sell assets that were put on
50:25
at favorable terms which means less favorable for some other bank to buy them right and the terms were favorable
50:31
enough for people to contractually agree to leave their deposits there so maybe if another bank takes them they’re going
50:36
to want them at a discount to make up for them so let’s say they want them at a paid 90 cents on the dollar for the assets so to be about a 30 billion
50:43
dollar loss it’s not like a lot of money at the macro level in today’s Finance right that’s lost in the rounding and
50:49
the kids and losses every day in the stock market so per se it’s small however you look at
50:56
and if the assets are larger than the liabilities and there is no loss or bailout at all there’s just liquidity
51:02
provision which means that if we had had insured deposits from the beginning all
51:07
an open line of liquidity to the FED nobody would even be talking about this this never would have happened because that would mean there was never a
51:14
solvency problem it was only a liquidity problem only a specific payment on a specific day it had nothing to do with
51:19
the safety and soundness in the bank and but we’ll find out probably another two weeks we’ll know what price the assets
51:26
were sold out to who and whether there was an economic loss or not so we’ll link to your proposals for Bank
51:32
regulation in the show notes but if you wanted to bring people’s attention to what you think is the most important item on that list of proposals what
51:39
would it be you know it added Source you say why do you have banks at all if it’s
51:44
a loan based on the value of the collateral you don’t need banks for that private lending companies can already do
51:50
that and to a large extent SVP was a private lending company a shadow back it took in deposit cell had nothing to do
51:56
with the government they weren’t government insurance just like General Electric’s credit sells commercial paper and makes loans to buy their products
52:03
they took in depositors who were lending the bank money buying back Securities so that the bank could make other
52:09
investments in a spread so it was a shadow bank and you don’t need insured deposits for that and they showed that
52:14
you don’t need to bank for that so you need a bank for a payment system but apart from that why do you need a bank on the lending side and the answer is if
52:22
a bank only a bank or only an entity that has guaranteed liquidity which only
52:27
the government does directly or indirectly can lend based on credit worthiness and credit analysis and not
52:34
based on collateral value so these other companies like General Electric and what
52:40
svb was they were Land Based on collateral value meaning that if their investors or depositors the people who
52:46
bought their commercial paper wants their money back don’t want to roll it over you sell your assets and give them their money so you basic The Lending
52:53
based on the value of the assets because if they want their money back you got to sell your assets it gives it to them that’s what you call Mark to Market
52:59
Banking and so if all you’re going to have is assets that lend on an asset base you know based on our percentage of
53:05
assets then you don’t need Banks or guaranteed liquidity you can always give people their money back simply by
53:10
selling the assets okay however let’s look at the case of the loan for a grocery store so the guys
53:17
go to grocery store has an income statement he’s making you know a million dollars a year in his grocery store and he wants to borrow two million dollars
53:24
to finance his receivables he’s got to pay for the food as it comes in and he doesn’t get the money until he sells it he’s got a big inventory he needs
53:30
inventory financing for two million dollars to his grocery store and you look at it and you say okay it’s been a business he pays his bills you
53:38
know he qualifies for this loan that’s a bank owning one of the money but you can’t do that based on the asset value
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of the grocery store so if you’re in a position where you had depositors who might want their money back you’d have to say okay I’ll make the loan but I’m
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going to have to sell the grocery store somebody else if the deposits want their money back he can’t do that so you can’t
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just lend them the guy’s credit you have to lend out an asset that you can sell to give the depositors their money back
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if you don’t have insured deposits and guaranteed liquidity so guarantee liquidity allows you to make loans based
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on a mark to model based on the value of the store’s ability to pay it back and
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not on the value of it as something you can sell to give you the money back so The Regulators will come in and look at
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your loan to the grocery store and say okay the guy’s still making a million dollars a year he’s paying you 250 000
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they’ll have this paid off in a certain amount of time his sales are still good okay the loan’s still good we’re not you
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know you’ve got a good load on your books it qualifies for insured deposits they don’t look at it and say oh the
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market value of this grocery store went up or down and therefore you know you have to sell it to pay off your depositors or something like that so the
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public purpose banking serves is to be able to make loans based on what’s called Market to model what’s known as
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coming up with a valuation of the asset based on cash flows growth and ability
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to pay the loan back rather than you know out of that rather than ability to
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sell the thing and pay the loan back which would be Mark to Market Mark to Market that’s what collateralized
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Lending is about so Mark to market for banking is beside the point it shouldn’t even come up as an option because then
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you’re undermining the whole reason to have a public banking system which we have I know we have private packs but the system is publicly sponsored to
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begin with so the whole reason for publicly sponsored backing the whole rationale is a mark to model system
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which serves public purpose people can buy homes people can get business loans and you know things can happen that
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don’t require marketable collateral it’s at all required marketable collateral that it just doesn’t work I think that
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if you start from that point of view you’ll come up with a rational regulatory framework if you don’t it’s
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going to be convoluted and confused which is what we have great so Ward I thought you know before we go it might
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just be an idea to restate mosler’s law would you have to do the honors there’s
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no financial crisis that can’t be dealt with with a fiscal adjustment I bring
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that up because I wanted to before we bow out quote the journalist David cerose who wrote on Twitter yesterday
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the rescue of Silicon Valley Bank depositors is a reminder that the government can do big things very
56:14
quickly when it wants to so when it doesn’t do big things that are necessary or does them slowly that’s not some
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accident it’s a conscious Choice end quote I bring that up because I think he
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just stated mosula’s law without knowing it that’s right exactly I think that’s a great place to leave it we’ve been
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speaking to mmt founder and author of The Seven Deadly innocent frauds of Economic Policy Warren Mosler will link
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to where he can stay current with Warren and also to where you can get free tickets to the book launch of mmt key
56:44
insights leading thinkers which Warren has a chapter about inflation and the price level in that’ll take place in
56:51
London on the 20th of April and me and Patricia will be there so we hope you can make it before that Patricia will be
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at the scottonomics festival in Dundee along with many other mmt and mmt adjacent economists from the 24th to the
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26th of March the that’s also accessible online so I’ll link to where you can find out about more of all of the above
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in the show notes for this episode but for now thanks so much for joining us today on the mmt podcast Warren Mosler
57:19
thanks very much our pleasure to be here foreign
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[Applause] [Music]
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that was the mmt podcast with Patricia Pino and Christian Riley
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don’t forget you can support the show through patreon starting at a dollar a month and get access to Patron only
57:43
episodes you can do that by going to patreon.com mmt podcast you can also
57:49
find me on Twitter at mmt podcast and you can find Patricia on Twitter at
57:55
Patricia npino and you can email us at mmtpodcast outlook.com thanks for listening and we
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hope to hear from you [Music]
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thank you
