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A History of Major Financial Crises and How Taxpayers Pay the Price - Kathleen Day #5819 · Financial Survival Network

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  The two seven to two thousand and twelve crisis. There were plenty of laws
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  in place that could have prevented that, but people didn't have the will to
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  do it, and regulators in particular, and Alan Greenspan unfortunately, very smart
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  man who's been absolutely wrong about everything, along with Larry Summers, very smart
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  people have just been repeatedly wrong about many, many things. You were listening
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  to Carrie Letts's Financial Survival Network, where you get valuable information you just can't
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  find anywhere else to thrive in today's trying times. You need the Financial Survival
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  Network now more than ever. Go to Financial Survival Network dot com and get
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  your free newsletter and gift. Financial Survival Network now more than ever. And
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  welcome you are listening to watching the Financial Survival Network. I'm your host.
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  Carrie Letts got a special guest for you today who's written a book that you
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  definitely want to take look at. It's entitled A History of Major Financial Crises
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  and how Taxpayers Pay the Price, And taxpayers always pay the price for everything.
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  That's one thing I've learned in my short time on this planet. Their
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  name is Athlete Day, faculty member over at Johns Hopkins University. Hey,
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  thank you, I got a little buzz there. Let me just say the
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  absolute correct title of the book. It's called Broken Bargain, Bankers, Bailouts,
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  and the Struggle of the Tame Wall Street. And it is a history
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  of financial crisis actually going it's a history of financial crisis in the United States,
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  going back to the founding the country, but with a real focus on
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  the modern ones. So bank crisis, bank failures is nothing new that it's
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  been going on since some guy came up with the idea that you could put
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  all your money. Everybody puts their money in a bank for safekeeping, and
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  then we trust the people who are supposed to be watching the money for us.
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  And then you know, out west, they'd history of the US,
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  they'd go take off and they'd wind up in another country or whatever with all
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  the money they were supposed to be watching. Nowadays, they just take it
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  and they don't worry about anything. Well, it is not quite as simple
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  as that, and banks and would all be looking at and criticizing of finance
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  and the many ways in which it has gone off the rails in the last
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  two hundred and some years. We also need to remember that finance is a
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  is a integral and key component of the economy and finance and the many ways
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  even dat dat borrowing, lending, insurance, there's many ways in which finance
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  is a key cog in the economy. Hamilton understood that, Jefferson understood that.
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  The difference was that and they both knew it was dangerous. The difference
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  was Jefferson thought that it was overly dangerous and that we should we shouldn't have
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  it. You know, banks weren't overly dangerous. Hamilton recognized that they were
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  dangerous. We just need an oversight. And it's the failure to oversee.
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  And and it's broader. It's really Wall Street now, it's really the financiers
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  are are It's a little bit broader than just commercial banks, right, And
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  going back to the Great Depression, it was found that one of the major
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  reasons for the collapse in finance and banking was that the commercial banks had kind
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  of merged with the merchant banks the investment banks, and they split them up,
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  and you know, we go, we wait seventy years, and then
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  we're back to where we started from again. You always have to remember there's
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  two components of regulation. One is the rules one's the oversight. Now,
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  some people will say, we have what going on now because we deregulated and
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  you have. It's true, but really, and Silicon Valley Bank really points
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  to this. You can have deregulation, you can have fewer rules, you
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  can say banks can do more things or bankers can do more things, but
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  you then have to have more oversight time and again it's a failure of oversight
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  that the regulators just get too cozy. So before the nineteen thirties we had
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  basically no rules, and the precursor to City Bank today City Bank, there
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  was a guy who led it. His name was Sunshine Charlie and because he
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  had outrely such an optimistic look, and he's the person who really pioneered the
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  idea of bringing investment banking and commercial banking together and getting the regular rank and
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  file person to buy shares in the stock market. So he brought that component
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  of investment banking to mainstream America, and of course there we're all and he
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  there was no regulation, so it went haywire. So he was head of
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  a company that both went money to buy stock in the company, and then
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  it was just a can of worms, rife with conflict of interest. Then
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  the thirties come along and you have Congress say, let's separate investment banking from
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  commercial banking. Let's put a cap on what they can pay depositors, and
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  we are going to create the Securities Exchange Commission. We're going to start having
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  accounting rules. There were no accounting rules before the nineteen thirties. Then you
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  fast forward to the nineteen eighties, really and that starts coming apart. The
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  separation becomes meaningless for a variety of reasons which I can go into, but
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  I don't know if you want to do that. Right, So, but
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  we have a history. No matter what regulations are in place, no matter
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  what laws are put in place, these banking crises crop up at regular intervals,
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  right, Is it a sickly No, they do. They absolutely do.
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  Because people have amnesia, they forget, they start thinking that won't you
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  know, it's a new era. That was That's often that was a mantra
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  in the nineteen twenties, it's a new era, wealth without work, and
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  we had that again in the run up to the two thousands with the Heck
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  bubble. People said, you know, recessions are over, it's a new
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  era. So there's that, and then there is just plain old fashioned yeah,
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  doing things they should. And so the two thousand and seven to two
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  thousand and twelve crisis, there were plenty of laws in place that could have
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  prevented that, but people didn't have the will to do it, and regulators
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  in particular, and Alan Greenspan, unfortunately, very smart man who's been absolutely
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  wrong about everything, along with Larry Summers, very smart people had just been
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  repeatedly wrong about many many things. So he could have been prevented, but
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  people didn't have the will that either. I think Alan Greenspan was blinded by
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  ideology. He just thought, oh, the markets would never do anything that
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  would put themselves out of business, and of course in the short term they
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  did, because people are thinking of their short term compensation, so they're not
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  really worried if they're doing something that long term is going to torpedo an organization
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  as long as they get their compensation for that quarter. But in any case,
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  sometimes it's caused by amnesia, and sometimes it's caused by people just there's
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  so much money being made that they convince lawmakers there's no problem, even though
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  there obviously is. Yeah, And so what about the concept I think now
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  we have little or no reserve requirement. Once upon a time in the world
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  of fractional banking, it was ten or twelve percent, then it went down
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  to seven to five. What impact does a reserve requirement have unprevented but there's
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  no requirement. But the ideas look if if if people tend to be more
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  risk averse, They tend to take less risk when their own money is at
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  stake, and they tend to take more risk when other people money is at
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  stakes. So if I lend you a lot of money, you won't necessarily
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  go out and do silly things with it, but you're more likely to do
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  silly things with borrowed money than if you had your own savings at stake.
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  And so the idea of a reserve is to have a capital cushion money money
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  they are to absorb losses or problems before you then have to tap taxpayers.
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  Because banks have deposit insurance that is a guarantee by US taxpayers, even though
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  banks pay an insurance premium into it. The problem is when the sun is
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  shining those premiums, you pay the premiums. We have the deposit insurance.
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  People are happy, but on a rainy day, when people are worried about
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  the safety of their funds, they will tend to withdraw funds in larger amounts
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  than the bank anticipated, so they don't have the cash on hand, and
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  so the bank then either has to liquid and it goes through it. It
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  can go through its capital cushion very quickly, and so it will then have
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  to liquidate its assets, the loans that it is made and those people who
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  weren't expecting to pay their loans so quickly, so they typically will have to
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  pay them back for sense on the dollar. That's called a Wall Street taking
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  a haircut. So the bank has to take a haircut on those loans,
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  and that depletes its assets on its books. So if you have a liquidity
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  crisis at a bank, the reserve is supposed to help protect against that,
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  and it might for a while, but if the run or the demand for
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  deposits continues, the bank's going to have to go into its assets. And
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  the point is a liquidity crisis can cause a bank's liabilities to exceed its assets,
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  and that pushes the bank into insolvency, and then the bank has to
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  closed and then taxpayers have to pay off whatever shortfall there is because we've promised
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  depositors we will. So in terms of today bringing good current, we've got
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  other banks that are on the roofs in a We just had First Republic quote
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  unquote be acquired by JP Morgan Chase. How is this banking crisis? Is
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  it different from the others and is it going to end cataclysmically or will the
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  regulators be able to put out the fires and bring everything back to normal.
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  Well, the regulators have already issued a report on themselves saying hey, we
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  did a terrible job. They're always beating their chest and say we did a
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  bad job, and yet they do it over and over account because when the
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  sun is shining, they start saying, hey, we don't need umbrellas anymore.
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  Let's reduce reserves, let's reduce how often a bank has to do a
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  stress test. Let's reduce the size of the bank that has to do a
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  stress test. So when the sun is shining, they say we don't need
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  umbrellas, and then it starts raining. I hate to keep using an analogy,
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  but it's very apt. It starts raining, and they say, hey,
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  what happened all those umbrellas we got? So today's crisis is strikingly similar
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  to what happened in the nineteen eighties. It was, but again it has
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  it. Every crisis has its own unique characteristics, but they also all have
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  they share characteristics. And the economist Kindleberger at MIT now DISSEAS was one of
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  the pioneers and chronicling that there is there are similarities, there are often similarities.
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  So what happened in the eighties there was an interest rate mismatch. Banks
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  were paying depositors more than they were earning on the loans that they were giving
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  to customers, and so today Silicon Valley Bank, which ignited this crisis.
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  What happened is that inflation went up and it was holding too many treasuries securities.
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  Not treasury securities are super secure. Oh they will be until we've default
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  on our debt, and then then they're going to be deemed not so secure.
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  And that's all the other issue, and that will cause its own crisis.
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  But for the moment, they are secure, and they were secure,
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  but they were holding too many of them as part of their capital cushion.
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  So when inflation went up, and that triggered a demand for deposits among some
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  tech industry folks who were also hit by inflation, they went and tried to
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  get their money out. And the problem with bonds, which is what treasuries
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  are, the principle is what people will pay for. It goes up and
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  down with interest rates because people will want to lower the price of the bond
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  so that their ultimate yield is their yield will be at today's yield. So
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  when Silicon Valley Bank went to redeem or sell its treasuries and get the cash,
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  because treasuries are thought of as near cash, but they're not cash.
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  They're near cash. So when they went to convert that to cash to meet
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  their withdrawals, they found that those treasuries had lost value because of inflation.
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  They were still safe in the sense that we had anyone to fault it on
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  it, no, but they were worth less like two I think it was
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  like two billion dollars less. So they had a big I forget, maybe
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  it's two point eight, I forget the numbers. But they had a huge
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  shortfall because they had too much money in bonds rather than actual cash, and
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  the regulators had let him do it. All right, So interesting times ahead.
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  So I don't know what I didn't answer your one question. Do I
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  think this is a going to be a huge crisis. I don't know.
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  It's it's it has It has similar characteristics in the nineteen eighties in the sense
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  that we had to do with inflation and interest rates. But I don't know
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  that this is quite as deep or prolonged as what was in the eighties.
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  Time will tell. I may be wrong, but you know, things have
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  surprised us, especially during COVID. The economy was much more robust than we
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  thought. Inflation is slowing. What will really cause a crisis if we to
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  fault on our debt? All right, well, hey, we appreciate that
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  insight. Our fingers are crossed that erstwhile regulators will be able to straighten things
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  out and keep it from the fire from becoming a conflagration. Obviously, the
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  markets investors are on pins and needle and hoping. You know. The one
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  thing that struck me about Silicon Valley Bank is that they let it get to
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  that point. The Fed had to have known that they were they were on
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  the balls of their feet, and that they were approaching insolvency or had already
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  crossed the line into insolvency, and they could have just closed that bank on
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  the weekend gone to one of the majors and said, you're now the proud
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  owner of Silicon Valley Bank, like they did with the Bank of America and
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  Merrill Lynch. They said to Ken Lewis, Ken, welcome to the brokerage
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  business. You are now the proud owner of Merrill Lynch. And he said,
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  what, we don't want to We don't want no. Ken, you
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  didn't hear us. You are now the proud owner. And he capitulated because
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  he has no choice. Why didn't they do that here? That is the
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  big question to me, because that fed the rest of the fires. Well,
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  the fact is there was no need for Silicon Valley Bank. Well,
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  dust hasn't settled completely. We won't know everything about Silicon Valley Bank. It's
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  always worse once you get in there. I'm quoting Paul Volker, former FED
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  chairman Paul Volker. It's always worse once you get in there. So we
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  don't know everything yet. But they it could have been prevented. They should
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  have been watching the bank better. There were a couple of things. It
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  was overly dependent on the tech sector. So it's just like banks of your
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  being overly dependent on the egg sector or the oil patch. So when that
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  industry goes down, they get in trouble. And secondly, again where their
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  capital cushion was was a little bit bonkers. So I'm not sure that it
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  was necessary. But there were two things that happened during Trump era. They
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  rolled back some of the safeguards that had been put in place post two thousand
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  and seven two twelve mortgage meltdown one and their common sense things these are the
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  umbrellas they so during Trump they said, hey, banks of Silicon Valley size
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  one of the biggest banks, and stays banks of those that sides don't need
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  to do a stress test. Bonkers. And oh and guess what these banks
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  are deemed? You know they can they can go into more exotic things like
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  hedge funds and crypto bonkers. So the bottom line is when you have taxpayers
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  as the safety net, and look, you could do away with deposit insurance.
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  I don't think we will, and I don't think it'd be very popular
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  for among voters of any political stripe. But if we got rid of the
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  positive insurance, you don't need the oversight. Banks can fail and people just
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  take their losses. I don't think that would be very popular. If you
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  have deposit insurance. You have taxpayers on the hook, you then need to
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  have the government coming in because people become indifferent. That's moral hazard, the
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  moral hazard that we talk about in finance, meaning that depositors become indifferent to
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  the health of the bank into which they're putting their money because they know they'll
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  get paid anyway, whether it's well run or not. And frankly, they
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  don't problem. Most people don't have the wherewithal of the time to really look
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  at the to really look and see if where they're putting their money is that
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  safe. They just don't have the time and whatever. But so if the
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  government has an obligation to go in and say you should not be gambling with
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  taxpayer guaranteed funds, and that's what banks were allowed to do when they're allowed
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  to go into that is what banks are allowed to do when they go into
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  exotic things like crypto and other things. It's just ridiculous. We need to
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  have stress tests for all sized banks. We should not be allowed. In
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  my opinion, I think that Paul Looker, the former Fed General, is
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  quite right that banks that are whose operations are in essence guaranteed by the US
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  taxpayer should be very conservative and how they're run, and they should not be
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  investing in exotic they should not be gambling exactly. Could not agree with you
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  more, I, paulheartenedly embrace that banks should be placed where they keep money.
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  They make boring loans, they make boring profits, everybody stays bored,
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  which banking is a very boring business until times like today when it's not so.
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  Thank you for the book again, Broken Bargain, a history of major
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  financial prices and have taxpayers like you and I. Hey the price and we
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  have a linked Kathleen's site in the show notes this interview on Financial Survival Network
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  dot com. Just click it and you can order the book and got any
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  questions for Kathleen myself, shoot me an email k l at Klotz dot com.
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  Kathleen, We're definitely going to follow up with you in the months to
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  come, because I think you've got a better insight into what exactly is going
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  on than most people out there. Hey, we wish you a good day
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  and we'll talk with you again soon. Thank you so much. I appreciate
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  it. Thank you, thanks for listening to Carrie Let's Financial Survival Network.
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  Your solution to today's trying times for the latest go to Financial Survival Network dot
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  com. Financial Survival Network now more than ever,