Silicon Valley Bust: Bank Failure’s Causes, Cures, and Culpability

Please excuse typos.

This is Hubwonk, I’md Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. Following rumors of potential insolvency and an attending run to withdraw uninsured deposits on March 10 the Federal Deposit Insurance Company FDIC stepped in and took control of Silicon Valley bank the 16^th-largest bank in the United States. This bank failure nearly 15 years to the day after the collapse of Bear Stearns, the bank failure that trigger a global financial crisis, followed by a comprehensive raft of regulations known as Dodd-Frank, to limit the risk of future bank failures. In the week following Silicon Valley Bank’s collapse politicians exploded the public anxiety to either create narratives of greedy executives exploiting lax oversight or else blaming capricious bank board members concerned with social justice than with financial prudence. However, the actual causes of Silicon Valley bank failure appear to be manifold having some features unique to its investor-focused business model while other systemic causes are shared by the entire banking industry. What were the causes of Silicon Valley bank collapse who will pay for the losses incurred, what are the implications for the entire banking sector and its depositors, and what is the proper policy response to reestablish trust in our banks? My guest today is Dr. Norbert J. Michel, vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives, where he specializes in issues pertaining to financial markets and monetary policy. Dr. Michel has written extensively on banking industry health, from the regulatory regimes following the global financial crisis through different administrations and regulations, and now as banks face the challenge of remaining solvent during rapid interest rate rises. Dr. Michel will share with us his views on why Silicon Valley bank failed, what vulnerabilities other banks share at a time of high rates, and what investors and depositors should know when they trust their money to an institution. When I return, I’ll be joined by financial market and monetary policy expert Dr. Norbert J. Michel.

OK, we’re back. This is Hubwonk, I’m Joe Selvaggi, and I’m now pleased to be joined by vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives, Dr. Norbert Michel. Welcome to Hubwonk, Norbert.

Norbert Michel: Hi, Joe, thanks for having me on.

Joe: A pleasure to have you on. It’s now, we’re recording a little more than a week after the collapse of Silicon Valley Bank and Signature Bank, and I know our listeners are concerned that where smoke there may be fire. Most of our listeners were adults 15 years ago when the financial crisis of 2008 happened and they’re worried perhaps that we may be on a precipice of something similar, so what I want to do is have you come in and explain to us what is perhaps similar, what’s different, what makes SVB a special case perhaps, but what kind of stresses are on all banks as we speak today? So, before we get into the weeds I want to start very basically—for our listeners, how does a bank make money?

Norbert: Well, typically a bank gets funds from somewhere, whether that be depositors or other securities or other investors, rather—or borrowing it—and then they lend out money, and the difference in the money that they pay to get those funds and the money that people pay them to borrow funds is how they profit. So, they’re looking at that spread, that difference.

Joe: So, in very basic terms of, you know, oversimplify, I go down and I make deposits at the bank and they pay me— it’s a little more these days but one or two percen—, someone comes in the other door up and they say I want to borrow money for a house and they’re gonna charge them 5, 6, 7 percent—difference in there is where the profit is made.

Norbert: That is it, that I mean obviously we’re oversimplifying this but that is basically the idea, that’s it.

Joe: So, what our listeners you know SVB, Silicon Valley Bank as its name perhaps suggests a different kind of depositor and frankly different types of assets. So what is different about Silicon Valley Bank?

Norbert: What’s different about them or special about them is that they were highly concentrated in one area in one industry and that that by itself is a little bit unique in that most banks are much more diversified, most large banks are much more diversified whether it be geographically or through different industries, but Silicon Valley Bank was not and it looks to be the case that a very large proportion of their depositor base also all came from—all looked very similar—it was a lot of venture capitalis guys, a lot of VC guys, a lot of tech guys and that is also not the norm, again is usually a broader base of depositors than what you saw there.

Joe: So, contrary to my model where it’s ordinary guys going in and dropping off their hard-earned money in their paycheck and borrowing, these are different, these are as you mentioned investors, venture capital guys with 10s of millions of dollars many of them know each other but these guys seem like they be they’re wealthy they know finance and investing how does that profile compare with let’s say a bank that has ordinary you know run-of-the-mill investors?

Norbert: Well, theoretically it’s different in that you have much more sophisticated finance guys and you know there’s a lot of controversy over this right now but I would still until I see definitive proof otherwise, those depositors are more sophisticated and in tune to finance in general and hopefully to what their bank is doing and you know then and I’m a finance guy from way back and this isn’t anything new in that large institutional type investors, people or companies with large sums of money, those are the ones that are most likely to run at the slightest sign of trouble as opposed to say you or me with  maybe a couple hundred or a few $1,000s in the bank. We’re covered, we’re insured we know that; they’re not covered and insured over you know a very small amount for them and they know that. So, you know, this isn’t really surprising as far as that goes.

Joe: So, you mentioned a term called insurance. Our listeners have heard this term FDIC insured it’s on the back bottom of our statement I think we’re sitting at the teller little sign on the on the desk that says FDIC insured what’s between an insured deposit and uninsured deposit?

Norbert: Well, before last week you’re talking—

Joe: Talking about how is it posed to run—

Norbert: So, yeah the way it’s supposed to go is that if you have an account you are covered provided you’re fully insured you will not lose a single penny, provided that that account is up to $250,000. If you have multiple accounts but you’re in multiple banks but each one of those accounts you’re covered up to $250,000 if you have more than $250,000 in that account, the FDIC does not stand behind it. It is not insured so if the bank fails there’s a chance that you’re not going to get all of your money whereas if your money if your account is below $250,000, you will get all of your money.

Joe: So, as many as we said many of these depositors have far in excess of $200,000, $10 million,  $25 million, and all that money is at risk if the bank fails. So, we have established that they are sophisticated investors, or deposits, I suppose, that are in a common industry, they may know each other, they’re not insured, so when rumors and I think rumors around for several weeks that there may be some trouble with SVB, what was the reaction of these depositors what precipitated this collapse ?

Norbert: So, they ran. Basically, another piece I guess maybe I left that out, another thing that makes it looks as though as SVB is a little bit unique is that they had a lot of unhedged exposures to interest rate risk, so when—and again there’s a lot of fog here so I don’t want anyone to take this as gospel—but what it looks like happened is that as more people recognized there was more of an unhedged risk than they thought, that’s when there was a panic and people said OK we’re gonna come in and you know banks losing money and it’s going to go down we’re not sure we got to get money out of there so they panicked/ran, ran by taking their money out and moving it somewhere else so they could make it safer.

Joe: OK, so you’re touching on two elements I’m not sure how in which order I want to take them, but when I drop off my bank deposit it goes I think into a vault, but actually it’s not like we see on It’s a Wonderful Life George Bailey is not sitting there with a safe in the back it actually gets invested, so as you mentioned,  protected against you know the ravages of inflation but it also wants to invest in very safe way, so they want to get some return in a very safe asset. Describe to our listeners SBV took the money that they held in in reserve and invested it, and how they invested it and why were the depositors so concerned in this current environment.

Norbert: OK, like many banks, I would say like most banks they put a lot of that money they invest a lot of that deposit money in treasuries and many of them long-term treasuries and also government backed mortgage-backed securities or Fannie and Freddie’s mortgage-backed securities, so they had you could consider it a big bond portfolio and that by itself is not unusual and generally you know just broadly speaking not particularly risky you know in and of itself, but, but when interest rates go up the value of all those bonds goes down, and that’s it works in the opposite way, too. If interest rates go down those bonds become worth even more money they go up. So, right now, interest rates are going up, the value of those bonds are going down. And as people started getting nervous about what the bank was really worth, you know and because of the market value of those bonds going down, they wanted to get their money out. Well, then, the bank had to sell some of those securities to get the cash to pay off their investors. Well, interest rates are going up, the value of the bonds are going down, so when they sell them they’re taking a loss and you’re taking a loss that means your capital cushion is going down. Now you’re becoming even riskier, so you sort of get into this dangerous kind of spiral environment where you’re, you know, if you, on paper you’re losing money and if anybody wants their money out now it’s not just on paper you’re losing money, you’re literally losing money. And then that makes the bank more fragile and even riskier, and that’s what we saw happen here. So, instead of hedging with other bonds so that you had a strategy where your losses would be equalized by gains, you know sort of like with—I hate to say derivatives, but you could use derivatives—and you can use other bond-buying strategies so that if you do have to sell some of those bonds at a loss when rates are going up that you’re OK on the other side and you offset some of those losses automatically. I’m not sure why Silicon Valley Bank didn’t do more of that but it looks like they didn’t do very much of that, at least for this recent period of time, and it’s again, not clear why, but it looks like that’s what happened. So, with the unhedged losses, that was worse, that was the worst case scenario for them. And that’s what panicked people.

Joe: I want to drill down on this particular idea because a lot of, again, the partisan narrative is that these banks fail because of undue risk. What you’re describing to me is a bank that, not atypical, but actually did quite the opposite. These assets were invested in a way that were so safe that their return wasn’t able to keep up as let’s say prevailing interest rates went up. In other words, they’re their bonds—let’s do a little lesson for folks who don’t understand how bonds work. If I buy a $100 bond that pays 2% and I you know, hold it to maturity, that’s great, it’s always $100 when I sell it, but if I want to sell before that and interest rates gone up to 4% or something like that in order for my bond to be worth 4% yield I have to discount the bond, I have to sell it for $98, so my bond which I bought for $100 is now worth $98. If I’ve got billions of dollars of these bonds, that’s a huge loss. Can you describe that situation for our listeners a little more carefully?

Norbert: Well, you just did. You did a really good job there, Joe. I mean, that’s it. You  know if you or I lost $2 I would imagine, you know, we’re not going to like it, but we’re also not going to you know have a heart attack over it, right? But if you’re holding you know billions of dollars or hundreds of millions of dollars’ worth of bonds and all of a sudden we’re losing small fractions, you know we’re talking about losing millions of dollars. And if we were in a position that we had that much money, we wouldn’t like that at all. You know, you don’t you don’t acquire wealth by not caring about losing large sums of money, so it is a problem. The unhedged part, you know, that I’m just not clear on why and on exactly why that transpired here, but it looks like it did, because you can take, you can get involved in all kinds of different swaps and derivative trades, very safe interest rate futures and stuff, that, you know, if the rate environment does change, whereas you’re losing money on one part of your portfolio, you’re gaining on the other side of your portfolio, so you offset some of those or most of those losses, and my understanding is they used to do that more regularly, and I’m just not clear on exactly why they didn’t all the way.

Joe: Well, far be for me to be an apologist for SVB, but my interpretation of the narrative is that this this bank very recently it’s deposited exploded and this was during the time we had near-zero interest rates and venture capitalists, as you say, want to get return on their money. So, if money is free they borrow a lot, they deposit a lot, and everybody makes a fortune. As those interest rates start to rise, two things start to happen. One is as we mentioned the bonds that are held in reserve become less valuable but also money is deployed elsewhere and those deposits start to leave, so at the same time deposits are leaving the assets left behind are worth less. so we’ve got this almost perfect storm. I don’t want to put words in your mouth, but do I have it about right?

Norbert: Yeah, no that’s, I mean, that’s it, really. I hesitated to give a different explanation because you nailed that one that’s it. You know this isn’t some kind of like crazy idea that the bank would put all this money in treasury bonds right, I mean this is basically what you have here is that the typical look for all banks now especially after 2010 is that the regulatory framework—regulatory regime for lack of a better term—it pushes every bank to do this. So, you know, the idea is that government bonds are safer so you get into government bonds, mortgage-backed securities are safer, get into mortgage-backed securities. So, that in and of itself is a policy outcome, too. We should also point that.

Joe: All right, so we say this is not necessarily business as usual perhaps they were there’s some carelessness or lack of sensitivity to the risk of rising interest rates but let’s talk about who is making sure my bank doesn’t fail, let’s get into the regulation element of this. We all hear about the Fed, but I think this may imagine the Fed is just one large national entity. It is broken up into little Feds, each one has its own president and does its own research and work, Tell our listeners, you know, who was making sure bankers aren’t asleep at the switch?

Norbert: It’s supposed to be the San Francisco Fed and you’ve got multiple federal regulators, so if you’re a federally chartered bank the controller also regulates you and if you’re a state chartered bank the FDIC could also regulate if you have FDIC insurance which all banks do the FDIC can regulate you, so if you’re state chartered bank you got a state regulator also looking after you, so you’ve got examiners from the San Francisco fed based on where SVB was headquartered. You’ve got FDIC regulators as well and state regulators all looking at the bank and what they’re doing, so they’re supposed to you know make sure they’re supervising the bank, they’re making sure that they’re abiding by the rules, and people like me have said for a very, very long time now that we all we’ve been doing over the last century is coming up with more and more and more rules. They all amount to more capital restrictions, more liquidity restrictions, more boxes to check. So, if you have this much capital you’re OK, if you have this liquidity, you’re OK, so that’s what you do. And you know you can look at the financial statements—the recent ones available at least through ‘22 for SVB—and yeah they check a lot of boxes. Now, there’s more to it than that, so I’m not just, again I am oversimplifying it, but they have—we have—all these different federal and state regulators going into the bank making sure they check all the boxes, and somebody os supposed to be looking at that and saying ‘Hey, you’ve got a lot of risk here,” “Hey there’s a lot of risk over there,” “Gee, it really looks like you’re over concentrated in one area, let’s talk about that.” That’s supposed to be happening amongst all three of those regulators.

Joe: So, again, I want to challenge some of the dominant narratives that we hear in the news. One, primarily from let’s say partisans on the left, regard banks now as wildly unregulated, that the narrative I think is after the collapse of the financial crisis in 2009 we had Dodd-Frank which imposed all these guardrails so it could never happen again. And then a new administration in 2015 had different regulators who somewhat watered down the barriers or the rules that constrained banks, and, you know, all five years since 2018 we’ve had a ticking time bomb and this collapse was inevitable. Was this in any way related to the change in regulation that occurred in 2018 or anytime in between when Dodd-Frank was passed and today?

Norbert: I have a very, very difficult time seeing how, I really do, for some of the reasons I just mentioned, as well. But, this is a long-term trend. You can go back to the Doidd-Frank stuff. You hear people in Congress saying “Oh well, we deregulated the banks well we didn’t that’s just not true, and then in 2010 they passed Dodd-Frank and they say we’ve got all these new protections and we’ll never have this problem again. Well, you should probably know that that’s not true. And in 2018, yes we did amend the Dodd-Frank law but if you look at that bill, the bill is S2155 long economic growth something named but you can look at that bill and the sections that amend Dodd-Frank which are I believe in Section four, title four of that bill, it’s give pages long there’s just not much there and what the biggest thing that it did was change the threshold for what we would call enhanced supervision but a couple of things there one enhanced supervision really again only means possibly slightly higher liquidity and capital restrictions that’s for the most part and then on top of that they did change the threshold from 50 billion to 250 billion but there were a lot of exceptions to that, so it’s really more like they changed it from $50 to $100 billion—the regulators always had discretion in what they did with those thresholds and the other really big factor here is that these are holding company restrictions. So, they’re not the operating company itself, the insured depository institution itself, still had to meet the Basel 3 requirements, so these are not impacted by Dodd-Frank or by the law that amended Dodd-Frank, and some people have also pointed out that they had less stress testing because of the 2018 law, and again that’s not what stress testing was for. Stress testing is supposed to be for adverse economic scenarios. We’re looking at the last crisis the ‘08 crisis and can we stop that from happening. The stress test wasn’t supposed to look at, you know, sort of individually idiosyncratic if you will screwups at the bank, you know, what if your own investments went bad, it was to be a macro-prudential view. Supposedly that was the only blind spot in our regulatory framework, and Dodd-Frank had supposedly fixed that and this is not a macro issue that went down here, so it it’s just incredibly difficult to see how those 2018 changes had anything to do with this. Banks have always been highly, highly regulated—before Dodd-Frank, before 1999, after Dodd-Frank, after 2018. You know it’s just really, really difficult to see how that any of those changes did anything that that would have brought this out. The last piece I’ll say about that, yes the threshold has changed and we can debate about whether that was good or bad or exactly where the extra regulations kicked in and how much discussion we had, but if you look over the last several years last decade or so, you can see SVB moving over those thresholds and it doesn’t really change very much it being its capital position and security position so it had checked all those boxes even for larger banks, in some cases they had higher capital and liquidity ratios than even the largest, most restricted banks. So, again, incredibly difficult to see how any of those changes had anything to do with this.

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Joe: Indeed, as I say we’re always fighting the last war. The 2008 crisis was a function of the deposits or the assets that banks held were not worth what they supposed to be rworth, right? They were garbage assets so that was a credit crisis right, a credit quality crisis not a credit crisis. So what we have in this case is a bank’s assets met all the requirements of Dodd-Frank, the regulators had the prerogative to scrutinize what you characterize as idiosyncratic risk, which we covered early in the show. SVB is very idiosyncratic, it’s a very special bank that had unique challenges. Regulators had the prerogative but didn’t do it. This is beyond the failure of the bank itself to anticipate interest rate risk. Regulators failed her, too, because their purview allowed them to anticipate what seems to me, again, the wisdom of hindsight, to be an obvious danger you want to say any more?

Norbert: That’s right, no. No, that’s exactly right and you know everything’s obvious once you know the answer right so that’s—and the last thing I’ll touch on here is the kind of one of the things that you brought up there in the ‘08 crisis it was all these toxic assets the things that didn’t turn out to be what we thought so the idea after that was we’ll make them safer and you’ll have to have more government bonds well OK but they’re still bonds and you know interest rates don’t have to stay ultra-low and not move very much forever, and that’s probably unrealistic to think that they would, but that’s what we did, and that’s what happened, you know, rates started going up, so.

Joe: All right, so I’m sure listeners are wondering OK there were mistakes made, the regulators probably keep their jobs, what about the banks? Who loses money here? Let’s say I’m all three, I’m a deposit of SVB, I have a stake in the company, maybe I’m on his board. You know who’s going to suffer from this manifold mistakes?

Norbert: The shareholders, the board probably as well is going to suffer. It looks as though depositors, and I guess you have to say depositors were not shareholders or not board members, they’re going to be made whole here. So, it’s not a—we’ve been careful about this I think over the last couple weeks—it’s not a bank bailout in the broad sense and and you don’t see a lot of the kinds of things that you saw in 2008, but it is a bailout nonetheless in that you had a whole bunch of people whose money was supposed to be uninsured and at risk, and it turns out that it’s not. And that’s where we are now.

Joe: So, it’s a depositor bailout not a bank bailout, so everybody who owns a share of that bank is you know, is wiped out but the depositors even if they’re venture capitals with $20 in the bank their deposits are protected or supported by the federal government. OK, so we got we figured out who was at fault and who’s going to lose their shirt and but we also talked about the fact that now as of two weeks ago—prior two weeks ago—we were insured up to $250,000 now we think we’re insured up to perhaps $250 million—what is the risk now imposed there? If I now believe, I mean I can see why the government would do that, we don’t want everybody to panic, everyone to withdraw their money and have a global bank run, but if I don’t have to worry about the health of my bank, what are the, what we call the moral hazards, what are the knock-on effects of having everyone assured that all their money is guaranteed forever?

Norbert: Well, one of them is that you have more people with lower incentive to care what the bank is doing, right? And that means that you’re dependent on a smaller number of people to not screw anything up, and that includes a small group of regulators. You’re expecting them to sort of have perfect foresight and that’s just unrealistic, and, you know, you’re expecting things to never go wrong and that’s also unrealistic and basically what happens is you end up where people can who are running the bank and running the investments they—although they do have an incentive to not lose their jobs and not do anything crazy—but they have an incentive to take more risk they can take more chances. And if they meet more regulatory requirements, if they’re over and above minimums, for example, then they can get away with more risk, so that’s nothing new. So, there’s a moral hazard component there and you know we might not find out that it’s risky until we’re in a situation like we’re in now and it’s like well we should never let that happen. Well, OK, but nobody ever thought about that you know before THAT went wrong nobody thought THAT was so risky, but there is that risk there and then on the—I think what I would call like the broader long-term risk or downside maybe—is that somebody’s going to pay for all this, you know. So, you’re going to have the government step in and clean everything up and say well because we’re doing that now they’re going even more regulations and because we’re doing that we’re going to increase the assessment on deposits for deposit insurance so the fees are going to go up even if your bank didn’t do anything wrong, right. So, well OK, who’s going to pay for that well? We all are. You know, there’s an increased cost and it’s going to get passed on to depositors at—to some degree, whether it’s fewer employment opportunities in banking, whether it’s less pay in the banking industry and/or whether it’s higher account fees across the entire industry and higher interest rates across the entire industry, somebody has to pay for that. Those fees those higher fees are going to come from somewhere, and the higher regulation is going to make the system even more dependent on, for example, a group of regulators at the San Francisco Fed, and, you know, it’s again unrealistic to do that and hope really and depend on them never to mess anything up. You know, that’s not creating a diverse robust financial system that’s creating a very weak fragile financial system depending on one or two people to not screw anything up, and that’s not good.

Joe: Indeed, yeah, I don’t think our listeners take comfort in those remarks. I wasn’t going to bring up the other bank that high profile bank Signature Bank also failed. One of its board members was one would think—understood banking regulations very well—Barney Frank, he was one of our congressmen, we sent him to Washington from the great Commonwealth of Massachusetts, but he’s on the banking regulation committee for a very long time, in fact, but the Dodd-Frank regulation we were quoting here he’s the Frank of Dodd-Frank and his bank failed. even though he was on the board. Again, one would think as a fiduciary on the board and one who’s a skilled regulator and understands the four corners of the Dodd-Frank regulations and the dangers of banking, wouldn’t one assume that Barney Frank on board would make you the last bank ever to fail for let’s say poor management you would be kind here.

Norbert: Yeah, I bet he’s—well, it sounds like he’s just as surprised as anyone, too, so— but I know less about the details on the signature side. It looks like there were, I mean I don’t want to say anything too strong about the signature side, because I am not as comfortable with the details, but it looks like a lot more controversy around exactly what happened and exactly what their status was but, as you say, you’ve got the Frank in the Dodd-Frank, he knows what the regulations are, he knows what the rules are, he knows what the warning signs are supposed to be if you take him at his word and yet, here is the bank that he’s on the board of going straight down. So, it is very unusual at least in my lifetime to see something like this happen.

Joe: So, going forward, our listeners I think they’re somewhat assured that the government stepped in and guaranteed depositors so those people with money beyond the insured level can take a little comfort at least for now in that, but going forward what are the likely reactions from depositors. Is everyone going to flee either to big banks or small banks or, you know, you mentioned there’s going to be some change in how banks are managed. Does this favor one type of bank over another going forward?

Norbert: Well, yeah it does it does at the moment favor the largest banks and you do see some deposit movements right now from what I understand, people taking money out of the smaller banks and moving them into the larger quote, unquote “too big to fail” banks. Lots of people, myself included, back in 2010 or around 2010 said that Title I of Dodd-Frank was a bad idea. If you want to prevent too-big-to-fail bailouts, the last thing you want to do is identify the banks that you already believe are too big to fail and formalize that in U.S. law. That’s a big warning sign, yet that’s exactly what Title I of Dodd-Frank did, so obviously you’ve got people looking at the situation saying I don’t care what you’re saying about the insured some people are saying that it’s not all covered some people are saying it’s only systemic risk if it’s covered I’m putting my money in the biggest banks I’m going to JP Morgan and city the quote UN quote “g-sibs,” globally systemic important banks, because they’re not going down we know they’re not going to the government not to let them fail so that’s why I’m going to put my money and that’s what you see happening right now.

Joe: So, effectively the government provides as I say an insurance subsidy, if you will—

Norbert: That’s right.

Joe: —that says, this bank, small bank you take your own risk, this other bank, you’re going to make sure that you don’t lose. So, what’s the downside? You said there’d be fewer banking jobs and perhaps no listener is going to cry over that, but we all know entrepreneurs who rely on these smaller banks for, let’s say, portfolio lending. They want to know your unique risk and your unique opportunities—that’s very difficult to go to a big bank and know anyone’s name, get your calls returned. So the small banks do play a role. How do you that will affect the American economy going forward, with fewer let’s say portfolio banks out there trying to invest in small business?

Norbert: Tt’s not a positive impact. It’s not, I don’t—it will be difficult to measure but it’s definitely in the direction of harmful. You’re—it’s going to be harder to do capital deals—it’s going to be harder to just in general capital formation is going to become more difficult. It’s going to be difficult to get loans, it’s going to be more concentrated industry Banking is going to be more concentrated industry so it’s going to be much harder to be a small bank, and, you know—even bigger picture—all of this makes it much easier to say, well, what we need is more government support for these smaller and mid-sized banks, and we need to do more subsidies or they’re not going to be there. We need to have, you know, it becomes more of a government utility kind of operation, and again justifies even more regulation. So, you have a situation where you’re pushing all of the incentives to go into government funds as opposed to private funds. So, I mean that’s taking money out of the private economy and funding the government instead of what would otherwise be productive activity.

Joe: Well, we’re getting close to the end of time together. I appreciate—you I know your expertise is in demand these weeks more than they otherwise would be. I’d like to ask our expert guest, you know, it’s easy to criticize, but if you were given the keys to the kingdom and made king for a day or a week or a year, you know—you mentioned some of the things you would have done differently in Dodd-Frank 10 years ago—what would you do if you were ahead of the Fed or someone in Congress who really cared about the health of the U.S. banking system? What do we need to do, what do we need to change?

Norbert: Oh, wow, I would love that for a day or two—maybe more than two days, but I, what we need to do is the opposite of what we’ve been doing for the last roughly 100 years. We’ve been doing the same thing over and over again and getting the same result, and I’m not going to repeat what that is the definition of, but we’ve been doing more and more and more regulation, and we’ve been doing more and more and more federal backing that does not make the system safer. It makes it more fragile, and we just keep going through the same thing. We need to go the other way. We need to pare back. I would repeal Dodd-Frank. I would bring the deposit insurance limits back to the pre-Dodd-Frank coverage limit, which is still going to be about 10 times what the average transaction account holds. So, we’re not talking about hurting the little guy here at all, OK. That’s just not it. We would have a deposit insurance limit of about $50,000, whereas the average transaction account is only like $5,000. So, this is—any ideas to bring more market discipline in—and you’re not going to have a private market for deposit insurance and other risk-based, other risk enhancements for those uninsured accounts when you keep covering it with the government. There’s no reason to start a company to do that. So, those would be my biggest things. I would repeal Dodd-Frank, I would shrink the deposit insurance coverage limit, and I would also do some Fed reforms. I would stop letting the Fed do all these facilities. You know, they come up with special lending facilities. They have emergency lending, systemic risk exceptions. Well, if you repealed Dodd-Frank, you would repeal some of what was changed there. but I would take the whole thing out, Section 13-3 for the Fed, I’d get rid of the whole thing. You would make them a lender of last resort, but they already had a facility to do that,  that’s the discount window. If somebody doesn’t want to go to it that’s fine that’s their problem they didn’t really need it. So, I mean that’s those are the things that I would do off the top of my head.

Joe: So, I dobn’t want to put words in your mouth, but in a sense without all that regulation what manages banks, what disciplines banks is market discipline not regulation, is that a fair characterization?

Norbert: No, that’s exactly right. So, you’re still going to have minimum capital ratios and all that kind of stuff. You’re going to banks that are wanting to tell people “Hey, look, this is how sound we are. And it’s going to matter because if those depositors who were over the limit have their money in there, they want to see, they want to believe it’s safe, they want to know what you’re doing, and that’s the market discipline, right? And if we don’t do that, we end up where we are now, where everybody looks around like, well, I don’t know what they’re doing, and why would I care? My money’s covered.

Joe: Indeed, and so the cycle goes: More mistakes caused by regulation and guarantees, and we pile more regulations and more guarantees on top. So, OK, well we have run out of time. I hope I didn’t lead the witness too much. You were really great. Our listeners, I’m sure, want to learn more, it’s a complex topic and we maybe didn’t think about this since the global financial crisis. Where can our readers follow your writing and learn more about your perspective?

Norbert: Oh, thank you for asking. If they go to cato.org, you’ll see all kinds of things that my guys have written, me and my other my folks here in CMFA. Our blog is cato@liberty, and I’ve also got a Forbes column if you just look up Norbert Michel Forbes, Google that you’ll see all my columns I put things there, too, so any of those places would work.

Joe: Alright, wonderful, you’ve got I hope a few more followers now and keep up the good work we appreciate it, I appreciate your writing, and thank you for joining me on Hubwonk.

Norbert: Ah, thank you, Joe, I appreciate it.

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