Randall Wray: Bankuak, FED eta monetarismoa

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well ironically the Fed was founded to try to prevent Financial crises but in

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the post-war period what it does is it causes our financial crises so the Fed was created after a financial crisis in

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1907 and the fed’s purpose was the lender of Last Resort much later this

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notion that the Central Bank could control the money supply was developed

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and then finally it morphed into this belief that somehow magically the FED

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could control inflation we don’t really know how the FED would be able to control the money supply or why control

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of the money supply would somehow prevent inflation but we finally evolved

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into this view that the FED controls inflation by getting you to expect there

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will be no inflation so it’s come down to nothing but fairy dust

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yeah [Music]

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this is the mmt podcast with Patricia Pino at Christian Riley

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hi I’m Christian Riley and welcome to the modern monetary Theory podcast you

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big thank you to all of our supporters so far and thanks as ever for the time you put into understanding mmt let’s

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dive in welcome one and all to the mmt podcast I’m Christian Riley and I’m Patricia Pina and we are delighted to

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welcome back to the show primary mmt academic and author of many Works including why Minsky matters and I’m

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sure we’ll be talking about why indeed Minsky continues to matter in 2023 so

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it’s our pleasure to welcome back Professor L Randall Ray hi Randy hi good to be back as we record this you have

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two recently published articles out about the recent bank collapses and the extent of the fed’s culpability in those

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collapses and in one of those articles which you wrote with Professor Stephanie Kelton you write that the Silicon Valley

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Bank collapse was a case of history repeating would you mind walking us

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through that history okay well if you go back to the 1950s the Fed God it’s

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independence from the treasury in 1951 during World War II the FED had sort of

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been put under the treasury and its job was to keep interest rates low so that the government wouldn’t spend a lot on

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interest on in the bonds that it was issued during World War II which of course is also a very interesting topic

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but the FED started raising rates gradually during the 50s

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and it began to take on an Ever bigger role for macro economic management sort

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of management of the economy the first really big rate hike was in 1966 and it

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led to a financial crisis our first financial crisis of the post-war period

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and those crises become more and more frequent and more

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and more severe as we move up to the present day if you look at every one of

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our recessions since 1958 the FED has been raising interest rates going into

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the recession and many of these also had Financial crises so the FED began

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sharply raising interest rates over the past year the interest rate went up by 400 basis points which is four percent

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in one year and that has led to tremendous problems in the banks in the

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article you wrote for the hill with called the collapse of svb shows why

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monetary policy is the wrong tool to fight inflation you mentioned that in fact the FED wasn’t even established to

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control inflation some people might be amazed to hear that tell us about that well ironically the Fed was founded to

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try to prevent Financial crises but in the post-war period what it does is it causes our financial crises so yeah it

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is very ironic so the Fed was created after a financial crisis in 1907. we did

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not have a central bank so we were nothing like Britain which added Central Bank since the 17th century we created

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the central bank because that 1907 crisis had to be resolved by the private

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Banks themselves and they did JP Morgan stepped up and

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The Story Goes that he got all the biggest Bankers in a room locked the door and said you are not leaving this

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room until you all commit funds to save the financial system and so they saved

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it but they didn’t want to do that again so they pushed Congress really against

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its will screaming the whole time to found the fed and the fed’s purpose was

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to make sure that the next time a financial crisis rose up the FED would

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be there and it could be the lender of Last Resort which was a principle of

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Central Banking that by that time was more than half a century old and that

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that really is why the Fed was created only gradually did the FED come to play

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the role that other central banks had played for a long time which is to be the banker for the treasury and so that

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was its second role to make and receive all payments for the treasury and to help the treasury Place bonds into the

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economy much later this notion that the Central Bank could control the money

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supply was developed and so then gradually over time this sort of became

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the role of the central bank to try to control the money supply so that private

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Banks wouldn’t create too much of it and lead to Too Much lending possibly too

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much spending and also possibly building up too much risk so controlling the

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money supply and then finally it morphed into this belief that somehow magically

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the FED could control inflation and so we we had that magical thinking and

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that’s in the title of the pay with Stephanie for a reason we had that magical thinking we don’t really know

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how the FED would be able to control the money supply or why control of the money

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supply would somehow prevent inflation that was magical thinking but we finally

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evolved into this view that the FED controls inflation by getting you to

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expect there will be no inflation so it’s come down to nothing but fairy dust

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that’s all it is we will act in a way that gets you to believe there will be no inflation and then magically there

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will be no inflation to me it’s puzzling is that that requires people to believe that the FED has other mechanisms for

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control and inflation right and it has none it has nothing but the fairy dust and so

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it works when it’s working and it doesn’t work when people won’t get in line so what was very interesting is so

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we have the global financial crisis and we moved into this new very low

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inflation environment in fact even deflation in some countries deflation in

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some of the Euro area deflation in Japan in the United States we had a one

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percent inflation and so the problem for central banks was that that was too low

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they for some again magical thinking two percent is the magical number how was

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asked about this in Congress and he just said well this is what central banks do you know it’s two percent there is no

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justification for this whatsoever but anyway two percent is the magical number and the actual inflation rate was below

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this okay so they’ve got to get it up how are they going to get it up well Magic thinking where first they went to

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zero interest rate policy okay that should lower interest rates but why would that increase inflation

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well it never did and since inflation wasn’t going up then they moved on to quantitative easing which meant that

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they would put trillions and trillions of dollars Euros yen into the banking

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system somehow magically that would cause inflation to appear it never did

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let’s just jump in and say it was injecting reserves into the banking

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system into the payment system right and I think at a very basic level a lot of

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people were told the governments around the world are printing money central banks around the world are printing

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money and missing out the key detail that Banks don’t lend reserves to their

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retail customers that’s right the reserves are all locked up at the FED actually they’re not even in the banks

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yeah they’re locked up at the FED it’s just the bank’s checking account very

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often when Q ue’s questioned people say okay let’s follow the money where did that money go

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but from what you’re saying is the money went nowhere it’s just it’s not a mystery as well you know because money

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is accounted you could see where it went it sat there right yeah all that the central makes did was they debited the

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bank’s savings account which is treasury bonds and credited the bank’s checking

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account which is reserves reserves are only used for banks to clear payments

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that’s all they’re used for so Banks can clear payments with each other they can

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also clear payments the for you with the treasury when you pay your taxes but

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that’s all they’re used for banks do not lend them they’re not the basis of lending in any way whatsoever so they

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don’t encourage Banks to lend they don’t encourage anybody to spend they have no impact on the economy but it did pose a

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bit of a problem because when the central bank’s balance sheets just exploded because of this they go to

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trillions and trillions of dollars they are holding the government bonds and

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there weren’t enough of those so they bought mortgage-backed Securities too so the central banks are holding all of

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these assets why weren’t there enough of those bonds was it the case that the

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central banks are buying Bonds in the secondary market and they’re still not getting inflation up so they’re

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targeting by Price not quantity right and so they’re like well we need to find another way to put more reserves into

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the system and mortgage-backed securities was the next thing they went to am I way off base there I think

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they’re also it was an attempt to prop up the mortgage-backed Securities Market

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it could be they were overpaying for mortgage-backed Securities whose value

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had fallen and this was a way to protect the banks although I don’t think they will say this in public and we don’t

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really know how many of those mortgage-backed Securities were really trashy assets it’s possible that some of

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that also explains why they were buying that I’m not sure but anyway so then it

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was funny because they say well our balance sheets are so huge and this is very unusual central banks are not

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normally these humongous financial institutions we should try to sell them

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back and every time they tried to sell them back the markets crashed and the interest rates went up so that was a

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strange thing but yeah they never were able to get inflation up no matter what

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they did and they couldn’t get expectations up either okay so this is a

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problem for their Theory because why on Earth wouldn’t the markets expect in

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inflation when the central banks are telling you they’re doing this to cause

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inflation the market simply did not believe it they did not believe the central banks could cause inflation so

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they actually can’t even influence the expectations so that is a weak Link in

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their story then just skip forward when we got the covet pandemic

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actual inflation started increasing now it had nothing to do with too much demand or Larry Summers arguments it was

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mostly supply side inflation and if you watch the expectations they did not rise

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nearly as much as actual inflation did which meant the markets also thought

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this is not too much demand this inflation is going to go away and the FED kept telling them that too for quite

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a while and I praised the FED for doing that because that was the right thing to

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do to just say look it’s transitory inflation we don’t need to do anything it will gradually come down as the

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supply chains and everything else gets back into place it took longer than I

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thought it would but I still think that it would have done that on its own

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but anyway when you watch the expectations they remain very low and so

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the FED is supposed to be operating on the base of expectations but the expectations told US inflation is going

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to be low so there was no need for the FED to raise interest rates to try to

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get expectations down because expectations were down you just spoke about things that the FED doesn’t

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typically talk about and I remember recently seeing Elizabeth Warren’s

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question in Jerome Powell on the whole notion of using monetary policy and I

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felt that was quite an important conversation because despite the fact that we have criticisms as to whether monetary policy is effective or not but

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the fact is that at the moment is based on the notion of creating unemployment and generating a recession effectively

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and she mentions something that she questioned jerem Powell on the fact that every time that the FED has increased

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rates in this way it has always resulted in recession what do you attribute that recession to is this the financial

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instability that was generated in every case or is this the demand that monetary

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policy is working as intended I think that most of those recessions were

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already baked in they already were going to happen and it is not the monetary

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policy that was pushing us to recession it was the fiscal balance so what

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happens when we have a long period of growth is that the now I’m talking about

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the United States okay I don’t know that I can generalize this to other countries because I am study them in the United

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States what happens over the course of an expansion is tax revenue starts to

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grow very fast the federal government is pulling income out of the economy the

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budget starts to move toward a surplus and of course that is what happened in

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the Clinton expansion they went into a surplus usually it doesn’t get into a surplus but we were moving toward a

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budget surplus before the FED started raising rates and so watching that I was

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already thinking a recession could well be on the way because that’s what usually pushes us into a recession and

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then what happens is they fed has been sitting there watching an expansion go

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on for several years they’ve watched the unemployment rate go down and so their

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normal reaction is to raise rates as we move into a

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recession and I think that explains the correlation between interest rates and recession

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very well so it’s not really the monetary policy that pushed us into

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recession it was the tightening of the fiscal stance that moves us toward

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recession and the FED with just almost perfect foresight

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raises rates going into a recession and then they start reducing rates after the

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recession hits that’s the typical pattern now if the FED also manages to

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produce problems in the financial system then we also get a financial crisis a

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recession plus financial crisis is what gives us the really deep recessions so

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when we get both of those things the recession because of the fiscal stance

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and then the financial crisis because of the rate hikes then we get in worst case scenario

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Global financial crisis while we’re on this topic I’m reminded you also wrote in the recently published mmt key

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insights leading thinkers book the contrary to popular opinion when it comes to government spending central

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banks cannot and do not take away the punch bowl could you unpack that a little bit okay well there’s this belief

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that our elected representatives so Congress in the case of the U.S they’re

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always focused on getting re-elected and so what they want to do is to pump up

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the economy before elections and so they increase spending and maybe give tax

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cuts and that causes the economy to be overheated and they’re willing to make that trade

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off because they get reelected so that’s the political business cycle theory that

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is commonly believed actually doing this dastardly tactic of trying to content the people in an acting to get

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re-elected what you mean politics right so are you letting people get jobs and

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it’s the central bank’s job to prevent that from happening so the people bank

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takes away the bunch bowl and prevents them from doing that and that’s come to

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be believed as an essential Central Bank function now sender bikes can raise

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interest rates so I think it’s our mistake that we allow them to set the

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interest rates I think that should be taken away from central banks I would prefer a mandated permanent interest

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rate so this is the opposite of Friedman’s rule instead of money supply growth I would have the interest rate

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said permanently at some very low rate sort of like Friedman I don’t care that

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much doesn’t have to be zero does it have to be one could it be two I don’t

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think that is the critical question isn’t the number but setting the

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interest rate and then the central bank’s responsibility is to make sure that they stabilize that rate at

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whatever Congress has said it to be that is what central banks ought to be doing

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and don’t give them this the discretion to raise rates but many people think

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that somehow the central bank can prevent the government from deficit

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spending that is what I’m saying they don’t have that power and Congress

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doesn’t have the power either so we we have crazy politicians who want to have a constitutional amendment to require a

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balanced budget this cannot be done the budgetary outcome is not determined in

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the spending and taxing bills it is an exposed outcome it depends on the

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economic performance so when the economy does well the deficit exposed is going

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to be lower when the economy does poorly exposed is going to be higher you can’t legislate it it is not discretionary but

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the point is the central bank has to clear the checks they make the payment for the treasury once Congress has

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allocated the funding that allows the treasury to spend there is no mechanism

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there is no part of the process of government spending that allows the central bank to not allow the treasury

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to spend that is make payments for the treasury in they have to do it last week I believe we asked Warren Mosler this

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question and I’m interested in your perspective we take for granted that inflation is a bad thing and we’ve

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decided on this arbitrary figure of two percent that we’re going to Target can you maybe give us your version of why is

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inflation bad or how much inflation would be acceptable in your view so

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inflation because we’re talking about the prices at the level of the economy

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as a whole so we’ve got millions upon millions of goods and services that are

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sold and each one of those has a price we’ve got to come up with some kind of

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an index to give us an overall price level every price index is a human

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Construction there’s nothing natural about it at all we decide how we’re going to measure it

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and the decisions that we make have a huge impact on that price level and the

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way the price level moves through time which is what inflation is okay but we

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can come up with any number of different ways to measure it and all of them are

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going to give us different numbers I would say that when inflation is at a

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low rate most people say even at two percent I would say maybe even at four

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or five percent we cannot be sure that prices are actually going up because

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there are so many idiosyncratic things about the indexes that we’re using

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there’s a measurement error yeah and 20 years ago Papa dimitrio and I wrote

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about this for Levy Institute Publications going deeply into the indexes that are use and how bizarre a

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lot of the components of the index are so at low rates you cannot be sure

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whether prices are actually going up or going down now what people claim is that inflation right now it’s really hard on

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low-income workers on low-wage workers well hold it what is the problem there

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is the problem that their wages are low or is the problem that prices are going up I think the problem is that their

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wages are too low that’s why they are struggling and we should be raising

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wages and I think that when we had supply chain disruptions that affected

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particular components of the consumer basket so for a while it was oil and

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heating and so on and in Europe maybe that’s a problem right now then subsidies are always possible we did

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that with some of the pandemic relief weakened Pride subsidies and we can Target it to lower income people they

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got to fill their car to get to work let’s get them subsidy so that they can afford to fill their car food and so on

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right now in the United States it is rent because we didn’t build any houses for a sense of global financial crisis

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we have a severe housing shortage what do we need to do well we need to

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subsidize rents but more important we need to build as quickly as we possibly can to relieve the shortage meantime we

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need to subsidize rents so that people don’t get kicked out of the units that

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they have right now so I think that that’s the answer it’s not let’s don’t raise the unemployment rate because low

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wage workers are having trouble paying their bills that makes no sense at all some people might see that subsidy of

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rents is benefiting the rentias effectively the housing problem is always framed as an issue of lack of

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Supply but is also an excessive demand issue way too liberal in the way that we allow people to simulate property in the

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United States we do have a problem that the rental units have been bought up and

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yes there is a big problem of I guess private Equity that bought up rental

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units and with Monopoly power they’re able to charge whatever they want and so

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they are raising for a while we had rent control with the part of the pandemic

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relief and we need to do something about that too but again that’s completely different

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from trying to cause unemployment to bring down inflation which just means

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we’ll have more people sleep on the streets as our solution to the inflation problem that’s not a reasonable approach

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yes tackling the rent gouging and providing subsidies I think is what we

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need to do so back to the banking crisis let’s call it that in the piece she

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wrote with yeva and the one you wrote with Stephanie you go through historical examples of whether the FED kind of

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hikes Until It Breaks something and one of those breakages was the Savings and Loan industry in the U.S and I was

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looking up for Edie Brits listening a savings and loan Association or a thrift institution is similar to what we would

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call a building Society here at the UK Randy can you just tell us what differentiates an SNL from other similar

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financial institutions okay did we mention Jimmy Stewart’s movie last time

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I think we may have told right so you know that is showing you what they were

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like so we had thousands of these around the country so they are mostly small

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local savings and loan associations that focus on providing savings accounts and

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checking accounts the deposits are insured and making mortgage loans so

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that’s what they did and in the United States I think we’re pretty unusual our mortgage laws are 30 years at a fixed

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rate so this protects the homeowner the borrower from any interest rate hikes

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their mortgage is going to be fixed but of course there is the danger to the savings and loan that if the FED goes

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crazy and really raises rates they can get into trouble now if we go back to

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the 1970s the thrift business wasn’t very risky because the FED didn’t raise

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rates that much and so it was described as 363 you pay three percent on deposits

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you charge six percent on the mortgage loans and you hit the golf course at 3

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pm that’s the life of someone who owns a savings alone it’s very simple they

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never failed and homeowners never defaulted on their mortgages it was absolutely safe okay

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but then in the early 70s we started deregulating them the original threats

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were mostly actually owned by the depositors the depositors actually had

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shares not technically deposits they had shares in the savings month saving loan

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was operated in the interest of the depositors they were the owners in 1974

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we started relaxing the rules on ownership until eventually one person could own a thrift and that’s

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when the drug Runners the mafia all moved in and bought thrifts

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which is a whole nother story that’s Bill Black’s story best way to rob a bank is to own one so that was part of

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the problem in the Savings and Loan crisis but also even the ones that were

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not run by Crooks when volcker raised the interest rate to 20 percent think

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about this so they are holding 30-year mortgages that earn six

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and the interest rate is 20. that’s the FED funds rate so that’s the very

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short-term safest interest rate out there they are in big trouble their cost

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of funds at least in theory is going to be 20 and they’re earning six you can’t

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stay in business very long suddenly their assets are essentially worthless now back then they always held the

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mortgages so they weren’t selling them anyway they’re stuck for 30 years with these low earning assets when that

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happened these supervisors so these are the government supervisors went around

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country telling them what on Earth are we going to do they said well make lots of new loans

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at the new higher rates and so some thrifts did that and they were growing at like a thousand percent per year

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making every kind of crazy loan they possibly could make to try to grow

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really fast to have enough assets that potentially could earn enough to make up

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for all the low earning mortgages they were stuck with and that’s what blew the thrifts up so it was raising the

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interest rates that then encouraged extremely risky lending that blew them

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up I bring this up because while I was trying to find out more about thrifts I ran across Wikipedia’s entry-on Banking

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and pretty near the top of their overview of what a bank is it says quote most countries have institutionalized a

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system known as fractional Reserve Banking and when you click into that it reads fractional Reserve banking is a

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system of banking operating in almost all countries worldwide under which banks that take deposits from the public are required to hold a proportion of

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their deposit liabilities in liquid assets as a reserve under a limit to

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lend the remainder to borrowers so in spite of us being refuted by many if not

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all mainstream sources the fractional Reserve banking myth is still seems to be debunking could you just clear that

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up for us well yeah I mean of course it’s illogical because the depositors

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can’t create funds so there’s there’s no way that the source of funding for banks

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comes from depositors because the depositor’s deposits are the liabilities of the banks they’ve got to come from

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the Banks Banks have to issue their liabilities to the depositors so the cause Asian has to go the other way

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around there’s a bit of Truth in there which is Banks do need some liquid

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assets so that’s on the other side of their balance sheet deposits for the bank are what they owe and they need

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some liquid assets in order to be able to cover withdrawals because when you

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have a deposit at your bank that’s the bank’s liability but the bank is promising you that you can withdraw cash

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or that you can make payments which then lead to your bank losing reserves to

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some other bank that’s how most deposits lead we’ve been talking about Bank runs and I said I mean in general I was

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talking about the bank runs that led to Silicon Valley Banks failure and a lot

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of people probably have the Jimmy’s Steward film in their head where its

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depositors running they’re trying to get cash out modern runs don’t occur that way what people were doing was moving

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deposits to Banks they thought were safer so it’s moving deposits to another

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bank and then svb has to come up with the reserves to cover that movement of

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deposits that’s why they need the liquid assets so that part of the story was

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right the other part’s not so I mean yeah bring it to the Silicon Valley Bank collapse in your piece with yeva you’d

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note that the Silicon Valley Bank did make mistakes I guess on on their asset side right and I know the dust’s still

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settled at the time of recording but what would you say those mistakes were with the information we’ve got at this

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point well the mistake was listening to The Fad The Fad if you go back one year

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ago the Fed was projecting inflation would be three percent and the interest

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rate would be two percent right now that’s the fed’s projection if you took the FED seriously you are now dead

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so I don’t know if the management of sbv was paying attention to the FED but it’s

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a bit funny now to blame them for taking on all the mortgage-backed Securities

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and government bonds that would be perfectly fine if the interest rate was

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two percent and inflation was three percent now all of those are perfectly fine assets for going ahead and holding

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those when even the FED believed that we would be at two percent and three

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percent right now okay so they didn’t make a mistake any different from the fed’s mistake at that time it’s just

34:16

that now they are the ones who are stuck holding the Assets Now I think they did make some mistakes but the fault here is

34:23

The Fad the fault is not banks that decided to buy perfectly safe assets I

34:32

think I think in our conversation with Warren I think he had it the other way around if I remember it Christian that

34:38

there was this idea that these institutions should have tested their

34:43

assets for potential changes in the interest rates and that’s the FED wasn’t

34:49

acting outside of those expected tests is there any truth to that so there was

34:54

a change in the regulations that allowed Banks like sbv as they got bigger and

35:01

bigger to escape extra supervision that was put in place after the global

35:07

financial crisis so the bigger banks are more risky for the system so they’re

35:14

systemically important bill black says they are systemically dangerous institutions they are sdis and that the

35:24

ceiling used to be 50 billion but they raised it at 250. so that svb could grow

35:30

up close to that and and escape the extra supervision but the FED isn’t even

35:37

stress testing on interest rates the systemically dangerous Banks the big

35:43

ones so the FED isn’t doing it even on the big ones there’s no reason to believe that these smaller Banks should

35:49

have been doing it on their own the FED isn’t testing even the big Banks the FED apparently didn’t believe that raising

35:57

interest rates was in the cards or if it was in the cards that it was going to

36:03

hurt the banks so again I think that this is a failure of the supervisors not

36:08

to force a relatively big bank to do this kind of testing now should the

36:14

management of taking it on themselves I think in the paper with yea but we said you’re always going to find errors when

36:22

you do a post-mortem why did a bank fail you’re going to find a bunch of errors but you shouldn’t lose sight of the

36:30

major mistake which is the fact raising rates so quickly and by so much so the

36:37

low estimate is that the long-term bonds and mortgage-backed securities have

36:43

fallen by 620 something billion dollars of value but there’s a couple of

36:49

academic papers I haven’t had a chance to read yet that say that actually it’s more like 1.7 trillion

36:55

well even that lower figure is one-third of Bank Capital the upper figure is a

37:02

hundred percent of the capital so it’s somewhere between one-third and a hundred percent of the banking systems

37:09

Capital has been wiped out by the FED just while we’re on this topic Randy would you mind just laying out why it’s

37:15

the case that when a central bank raises rates the value of government bonds goes down well if you are holding a bond that

37:24

pays five percent okay and I say you paid a million dollars for

37:30

you have a million dollar Bond and it pays five percent and then the FED raised interest rates

37:37

and bonds paid 10 percent your million dollar bond is now worth five hundred

37:43

thousand dollars because you’ve got to earn the same amount of interest on that million dollars in order to compete so

37:51

the Bond Falls in half when the interest rate doubles that’s the problem and the

37:57

interest rates have gone up by 400 basis points so that wipes out the value of those older bonds that were issued in a

38:04

low interest rate environment was it always the case that mortgage-backed Securities were governments what would

38:10

you call it underwritten by the government government guaranteed did that happen after the crisis we have had

38:17

government guarantees on mortgages for a very long time not all mortgages would

38:24

have had government guarantees even if you go back to the good old days when

38:29

thrifts were pretty safe so the mortgages had to be qualifying mortgages and there’s also a racist history here

38:38

that is really sad so typically it is a white suburban houses would qualify and

38:46

then you have government insurance on those mortgages now the whole move to securitizing

38:54

mortgages which means that you take a whole bunch of mortgages and package

39:00

them together to act as a collateral underlying a security that can be sold

39:07

that got its Boost after volcker killed the thrifts so what thrifts and Banks

39:14

Learned was that you can’t trust the FED to keep the interest rate low they might

39:19

go crazy again like volcker did and raise rates so you cannot hold mortgages

39:25

that’s the lesson they learned so I think in our piece Stephanie came up

39:30

with the idea you treat borrowers like one-night stands and you treat mortgages

39:36

as toxic waste you get rid of it as quick as you can you try to sell it off

39:42

on it to some dope dumb enough to want to hold them this is a difference between originate to hold and originate

39:49

to sell right yeah and it turns out it’s the Pension funds that are dumb enough so anyway that’s

39:54

reassuring yeah so you you can have lots of mortgages in there that are

40:01

government guaranteed and that will tend to increase the value of those Securities they will have a higher

40:07

rating than Securities that are based on mortgages that are not government guaranteed okay so we still have that

40:14

government insurance but no not all mortgages are government insured in your

40:20

Oscar with Stephanie because you touched on this you include a maxim from your old teacher Professor Jaime minski the

40:27

quote is that which can be securitized will be securitized what did he mean by that I remember that well Minsky went to

40:34

a conference of Bankers I think in Chicago in 1987 and he came back and

40:40

wrote this short piece with that quote right at the top and almost nobody outside banking had heard of

40:47

securitization at that point he was the first academic economics I know of who

40:53

wrote about securitization so he wrote this nice little explanation of what it

40:58

is and then he predicted that virtually everything can be securitized and what

41:04

has happened is that virtually all kinds of logs are securitized the student loans credit card debt Auto related debt

41:11

and even very exotic Things become securitized and so Banking and savings

41:18

alone business was fundamentally changed you’re not going to hold the loans

41:24

you’re going to get rid of them as quickly as you can and what that means is we’re not so

41:31

subject to the risks of the mortgages the Securities have to be rated by

41:37

ratings agencies but it turned out they were particularly incompetent at rating which helped to

41:44

create the global financial crisis they had no experience in doing it and they’re really bad at it but anyway the

41:50

bank or things alone that originates the mortgage isn’t subject to that risk and then that of course reduces the

41:57

incentive to try to determine the riskiness of the borrower and then if you’re willing to engage in fraud you’re

42:06

not only not evaluating it you are purposely misstating the risk of the

42:14

mortgages that you’re putting into the Securities so it leads to all kinds of incentives against doing good what we

42:22

call underwriting that’s a fundamental problem of securitization and then finally so the idea was you get all this

42:30

stuff off your balance sheets but then you have Banks like Silicon

42:36

Valley who decided to hold those things their problem does not seem to be the

42:41

quality of the mortgage-backed Securities but what came back to haunt them was the interest rate risk so the

42:47

interest rate the reason why they securitize in the first place was to get rid of the interest rate risk but it all

42:53

comes back if you start buying the mortgage-backed Securities which defeated the purpose of securitizing and

43:00

you wrote in the piece with yaiva Silicon Valley Bank’s first mistake was to sell the bonds before raising Equity

43:07

yeah so they knew they had a hole in their balance sheet okay because the assets had fallen in value

43:13

and it was wiping out their Equity so as your Equity declines then the chance

43:19

that the supervisors are going to step in increases and we know the San

43:25

Francisco Fed was worried about them and they issued them I think six warnings

43:31

red flags things they had to correct and they I think they corrected none of them

43:36

but as your perceived Equity goes down it’s very hard to measure equity and

43:41

different ways of doing it but as that declines the chances of Supervisors are going to step in and take over increases

43:48

so they wanted to raise more Capital which is a perfectly reasonable thing to do but they sold bonds that had fallen

43:55

in value first which means they had to recognize a loss and so the markets are

44:01

watching that and they say uh oh this bank is going to be in trouble and then they try to sell the equity and Goldman

44:08

Sachs couldn’t sell it so they should have done it the reverse way get the equity and then you can afford to take

44:14

the loss they took the loss first so that was a mistake of Judgment of either

44:20

the bank or goldma sacks one or the other or both they should have gone the other way around so in terms of where we

44:26

go from here Randy you round off both of your recent articles with some proposals

44:32

tell us about those okay well one and this was Stephanie’s idea that’s instead

44:38

of ensuring deposits insure the banks okay so FDIC insured bank would have all

44:46

deposits insured Okay so we’ve done that right now as an emergency Behavior the

44:52

fed and treasury have announced that even the uninsured deposits will be

44:59

guaranteed by FDIC but that’s an emergency Behavior so svb stood out as

45:06

having something 90 or more I think maybe more like 98 of their deposits

45:12

were too large to have FDIC insurance that makes it a prime target for Iran

45:20

but there’s a huge number of banks that have over 50 percent of their deposits

45:25

are uninsured so they also are good candidates for runs there’s lots and lots of them and short sellers might

45:33

start picking them off a short seller doesn’t need them to fail or anything like that all they need is for their

45:39

stocks to collapse and we have a lot of banks whose stocks are collapsing so anyway it’s not likely that we will

45:48

continue to ensure all deposits but what

45:53

we ought to do is to have a segment of banks that are FDIC insured and their

45:58

deposits will be insured and then we could have a segment of banks that will offer uninsured deposits and depositors

46:05

will take their risk so that’s one way of going about it we touched on this

46:12

last time the idea of public banking let’s have a robust boring public bank

46:17

and that you could do it in the US through the postal system you could certainly do it through the postal

46:22

system in the UK as well but you know I often think of that idea as like the way

46:28

we talk about the mmt job guarantee kind of standardizes jobs no employer now in

46:33

the whole economy in the public or private sector can go below this standard in terms of paying conditions if you implement a job guarantee I was

46:42

thinking that a solid safe boring public bank would be like the bank guarantee it

46:48

would be it would do the same thing for banks as the job guarantee would do for jobs but this is like we’re putting a

46:54

floor under the minimum standards that you can expect from a bank actually at Willamette University we’re having a

47:01

three-day conference that starts tomorrow off on public Banks and that there’s a growing movement for these for

47:07

public banks for State Banks and an alternative to the private for-profit

47:14

banking system that leaves far too many people out we call them unbanked they

47:20

don’t have Bank deposits which means they’ve got to use pawn shops and these check cashing Outlets that charge very

47:27

high interest rates on loans and high fees to cash checks so I think we do

47:33

need a public option and in the case of the United States the easiest way to do it is to go back to the postal Savings

47:39

Bank but I’m in Minsky had a proposal for a system of Community Development

47:45

Banks that would provide a full range of services and they would be more of a

47:51

public private partnership with representatives of government sitting on

47:56

the boards and making sure that they serve the community’s interests so that’s another possible alternative way

48:03

to do it and the paper with Stephanie our main recommendation is to stabilize

48:09

interest rates so take the discretion away from the FED less mandate the FED

48:14

to stabilize interest rates and let’s move inflation and unemployment and

48:21

economic growth all back to its proper place which is fiscal policy and use

48:28

fiscal policy to manage our demand and to do things like the job guarantee as

48:34

our main demand management and in unemployment fighting and inflation

48:40

fighting policy a job guarantee is suited to tackle all those three 3 while

48:47

interest rate policies not at all for any of them and I’ll just underscore that the mmt policy proposal is the job

48:55

guarantee and I’ll link to our episodes laying out how it works in more detail we’ve had long conversations with

49:02

pavlina Geneva who’s done a lot of work on it as well so before we go Randy we

49:08

recorded this two days before your latest book money for beginners an illustrated guide is about to become

49:14

available through all good bookstores tell us about that book okay well it’s a cartoon book and it’s sort of a

49:21

companion to the book that just came out we talked about last time but it’s aimed at a younger audience or an audience

49:28

that learns better with pictures instead of words so it covers many of the same

49:33

themes but it lets the pictures do lots of the talking instead of words this is an mmt

49:41

graphic novel except that it’s describing the way things really matter so there’s no fiction there’s no fantasy

49:48

no magical thinking it’s just explaining how money really

49:53

works and a very basic level starting really with what is money where does it

50:00

come from can we have too much of it all of those kinds of questions are taken up

50:07

in the book and then finally it concludes with policy and how we can use

50:12

money to improve our lives I think more books like that is exactly what we need

50:17

and because you’re too humble around day I’ll just at the professor James Galbraith calls this book brilliant ad

50:24

Professor Steve King says it contains more wisdom on money than all the textbooks in the world so praise indeed

50:31

we’ll link to where you could get a hold of that book and also to where you could get Professor Ray’s other recent book called making money work for us which we

50:38

talked about last time which I have to say is a must read in our show notes along with a link to where you can get

50:44

free tickets to the book launch of mmt key insights leading thinkers which Randy also has a chapter it that’ll take

50:52

place in London on the 20th of April me and Patricia will be there we hope to see you there but for now thanks so much

50:59

for joining us once again today on the mmt podcast Professor L Randall Ray okay

51:04

thanks a lot foreign

51:10

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Christian Riley don’t forget you can support the show through patreon starting at a dollar a

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Patricia npino and you can email us at mmtpodcast outlook.com thanks for listening and we

51:47

hope to hear from you [Music]

51:58

please