Episode 116 – The FDIC, Infinite Insurance, and Moral Hazards (feat. Rohan Grey)

The FDIC, Infinite Insurance, and Moral Hazards (Feat. Rohan Grey) Crypto Critics' Corner

Today Bennett and Cas are joined by Rohan Grey to discuss how the government could provide unlimited deposit insurance against banks collapsing. This episode was recorded on March 15th, 2023.

Cas Piancey and Bennett Tomlin are joined by Rohan Grey to discuss how the government could provide unlimited deposit insurance when banks collapse.

This episode was streamed live on October 13th, 2022.

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English Transcript:

00:00:05:03 - 00:00:11:07
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:11:07 - 00:00:12:20
Bennett Tomlin
I'm doing well. How are you Cas?

00:00:12:20 - 00:00:29:26
Cas Piancey
I’m great. We have our first third time guest appearance, Mr. Rohan Grey, the professor at Williamette University, the research director of the Digital Fiat Currency Institute, and a much longer list. You can go back to our other episodes if you want to hear the multitude of other things that he's responsible for. Professor Grey I think we've had quite a week here.

00:00:30:01 - 00:00:51:11
Cas Piancey
We were already going to discuss today the idea of unlimited depositors insurance offered from the FDIC. I was going to take the opposite side of this argument. I was going to battle you on this and say there's no way this is actually a thing that anyone can do. Lo and behold, here we are, all of Silicon Valley banks and signature banks deposit depositors have been fully insured.

00:00:51:11 - 00:00:56:05
Cas Piancey
Even if it's billions of dollars, they're all good. Can we talk about that? What the hell happened this past year?

00:00:56:05 - 00:01:00:08
Rohan Grey
And look, you know, I've been working on it for months and they just tweeted it out. You know, I don't know what to say.

00:01:00:08 - 00:01:00:15
Cas Piancey
Like.

00:01:01:07 - 00:01:22:01
Rohan Grey
Really, really. There's not much work for us to do. No, I mean, it was it is a kind of incredible moment. I think there's a couple of different things. I was talking to my colleague Nathan Tank about this. So many of these economic crises happen in a very kind of large multi industry multisectoral way. You know, you're talking about a lot of pain for average people doing their mortgages.

00:01:22:01 - 00:01:41:20
Rohan Grey
You're talking about sort of broad based economic decline. So often the banking regulatory part of the story is still there. It's still an important part, but it often kind of comes limping after the protecting the people. And, you know, what went wrong overall? Where was this sort of fraud or whatever else was going on? But this is such a kind of surgical problem.

00:01:41:21 - 00:02:08:18
Rohan Grey
You know, it's limited to a number of banks. They've got a very particular kind of depositor base. There was a very particular kind of problem with government assets in the regulatory treatment of long term bonds. And the response was also surgically targeted. So what we're seeing now is this kind of very short, sharp moment where the ideological and regulatory implications for banking in general, I think are kind of at the forefront of everyone's mind.

00:02:08:18 - 00:02:29:03
Rohan Grey
And there's no other distractions. There's not a kind of four month period for the people to get in and out of the the conversational flow. By the time people got into it, by the time even the initial narrative started solidifying, it was over. You know, it's happened. And so I think this is a very rare moment where all eyes are on the sort of same very narrow set of banking regulatory questions at the same time.

00:02:29:04 - 00:02:41:22
Bennett Tomlin
Can you talk to us a little bit about what a system with unlimited deposit insurance would look like and how that would contrast with our current system, which ostensibly has the $250,000 cap per account?

00:02:41:22 - 00:03:02:26
Rohan Grey
Yeah, and I mean, I think the first thing is sort of the difference between implicit and explicit guarantees, right? I would say for a long time we've had basically implicit unlimited deposit insurance. Certainly, you know, you look at the vast majority of bank failures, they get put into receivership. You know, the depositors get sold to another bank. Very rarely do you see depositors actually lose any money.

00:03:02:26 - 00:03:18:14
Rohan Grey
And certainly with the big banks, the sort of recognition that they're too big to fail, that if one of the top four banks kind of collapsed, that the government would probably want to step in long before you got to the point of distinguishing between uninsured and insured depositors. So I think that's the first thing, is we've had this for a long time.

00:03:18:14 - 00:03:35:06
Rohan Grey
We just haven't made it explicit. And there's two things about that. One is obviously the politics of it, the moral hazard of it, when we keep not acknowledging what we're doing, we don't actually work out how to regulate things probably on the upswing when things are going well and we don't sort of think about the broader systemic implications.

00:03:35:06 - 00:03:55:02
Rohan Grey
So if we are going to guarantee your deposits, then what is the asset, you know, activity that we are actually implicitly saying is allowed to happen that we will backstop in a crisis moment, therefore taking out any kind of market discipline, market risk out of it. And I think the other part is the legal aspect, which is it's one thing to say, Oh yeah, I know I'm going to get bailed out.

00:03:55:09 - 00:04:23:11
Rohan Grey
You know, it's another thing to say nine times out of ten we get bailed out. But if you're a money manager with fiduciary responsibilities, right? If you're a bank with fiduciary responsibilities, you can't rely on that as an explanation for why you're putting your funds in an unsafe instrument. You know, unless you're circle and you just lie about it on your website and say, Oh, it's all backed by cash, you know, and you just sort of quite conveniently unintentionally elide the difference between insured and uninsured deposits for your customers in your marketing materials.

00:04:23:11 - 00:04:40:12
Rohan Grey
Unless you're doing that, then you have to find something else. And so it's kind of funny. Someone was saying, Where's Zoltan Pazar in this crisis? Because in 2011, you know, when he was first writing about shadow banking, one of the articles that really sort of struck me was one called Can Shadow Banking be addressed without the balance sheet of the sovereign?

00:04:40:26 - 00:05:04:14
Rohan Grey
And his basic point was, you know, this is in part at least a safe asset shortage issue. We have a lot of actors that would love to park their money in a safe government account, but because of deposit insurance con and so they're going into treasuries and then treasuries have a limited amount. And, you know, because of that mismatch, there's pressure to create, you know, safe asset like instruments that give the appearance of being safe.

00:05:04:14 - 00:05:30:03
Rohan Grey
And he identified that as a big driver of sort of shadow banking and and shadow money in general. But we're also seeing now that this is also a function of the way that we treated bonds. You know, we had this system where these banks were expected to hold onto high quality liquid assets and we devalue those bonds at holds maturity prices rather than mark to market prices, which was fine as long as you didn't actually need liquidity.

00:05:30:04 - 00:05:46:02
Rohan Grey
Right. As long as you didn't actually need to sell those bonds at any point. And I think what we're seeing now is a recognition that even though they are safe in the credit risk sense, they're not safe an interest rate and duration risk sense. But the central bank is basically saying we don't want that to be a problem anymore.

00:05:46:03 - 00:05:55:28
Rohan Grey
We're going to take that off the balance sheet. We're going to make the whole bond structure part of a safe asset system. And I think that's a kind of pretty transformative moment.

00:05:55:28 - 00:06:15:13
Cas Piancey
Sorry. And I just want to just jump in here because I don't like I assume that everybody is familiar with what exactly what we're talking about here, just because it's been such crazy news over the past week. But in case anyone doesn't know exactly what we're talking about here, Silicon Valley Bank and Signature Bank and to a lesser extent Silvergate, which voluntarily liquidated.

00:06:15:13 - 00:06:42:19
Cas Piancey
So that's a different story. But two other banks failed. These were the first bank failures since 2020. And these bank failures have been backstopped by a joint statement from the FDIC, the Treasury and the Federal Reserve, essentially committing to securing all of these deposits that were going to be in trouble because of two bank runs. Now, these bank runs occurred because of a mismatch in assets, I think is what we're seeing has been suggested.

00:06:42:19 - 00:07:04:17
Cas Piancey
We're talking about a rate hike from the Fed to the extent that some of these safe bonds and treasuries that Silicon Valley Bank held were no longer valuable or worthwhile. And then they also, from what I've heard, had some mortgage backed securities that they hold on had to hold on to for a long time that were essentially worthless because they had to hold them for ten years.

00:07:04:20 - 00:07:33:04
Cas Piancey
The concern right now and so and feel free to hop in here, Rohan. But I think the concern seems to be that there is a moral hazard now that some of these people are essentially getting promised all of this money. They're getting promised that their billions of dollars is secured and insured, even though some some people I think the last bank that failed before this was in Kansas, some small state bank, they didn't have the kind of insurance that these people were offered.

00:07:33:04 - 00:07:45:20
Cas Piancey
Perhaps their bank was sold like you're suggesting. Perhaps the depositors were sold and they were all made whole, but they weren't given the same protections that that was offered for these two banks right now. How do you address that moral hazard?

00:07:45:26 - 00:08:04:03
Rohan Grey
I mean, so first of all, I think you could describe I saw it probably the think it was maybe more than Rick or someone describe it basically, you had three tiers, right? The big banks were always going to get bailed out. The small banks were going to get sort of left to be eaten. And then these these regional banks, they sort of mid-sized banks, because silicon Valley Bank, I think is sort of 200 billion in total assets.

00:08:04:03 - 00:08:24:10
Rohan Grey
And it was a mid-tier bank. Right. 20th 10th largest, which is still pretty large, but nowhere near as large as the top handful. And so I would say that that kind of receivership structure that we had in the past, plus the kind of large scale bailouts in crisis moments were were a kind of de facto government guarantee. But they worked in different ways.

00:08:24:10 - 00:08:40:23
Rohan Grey
Right. You have a be exposed to bail out emergency facilities. And the Fed, on one hand, you have the receivership on the other. And then what we had here was was a crash that happened so quickly that the government wanted to get in very early. They want to get the, you know, nip it in the bud before it could spread.

00:08:40:23 - 00:09:01:05
Rohan Grey
And for other depositors, because to your earlier point, my understanding is that part of the reason that they were holding onto those bonds and mortgage backed securities to an extent is that they were allowed to treat them for regulatory purposes as high quality illiquid assets. So if you're holding reserves, earning, you know, 2% versus bonds and 4%, why would you why would you put your money in reserves if the regulatory treatment says they're the same?

00:09:01:11 - 00:09:17:03
Rohan Grey
Well, you've got to manage liquidity. Okay. Well, do we really think we're going to have a run on the bank? Probably not. There you are. That's it. That's it. That's the sort of simple analysis now shouldn't have happened, especially when interest rates start going up. You should have known that your bonds are going to go down. But the other question should be out there is what the hell are the regulators doing?

00:09:17:17 - 00:09:33:25
Rohan Grey
Allow you to treat it that way right. And so then there's this question about, you know, restrictions and things that come up in 2018 and lobbying that was done by banks and things to to weaken those liquidity requirements. But I think the bigger question is, what the hell do we want bonds to be? Do we want long term Treasury bonds to be liquid or not?

00:09:33:25 - 00:09:53:05
Rohan Grey
We've been doing QE. We've been making them kind of as close to liquid money for a while. And then because of quantitative tightening, because the Fed's rolling off its balance sheet, it is trying to to get away from that again. And the question to me is always why, you know, what are we gaining from that? It's not like we had any problem raising long term capital in the through those bonds.

00:09:53:05 - 00:09:59:13
Rohan Grey
So it's not like, you know, we kind of worrying that we're not going to be able to sell enough bonds for any reason, not that we even need to.

00:09:59:13 - 00:10:22:29
Bennett Tomlin
Well, and I just want to get one of the things you mentioned earlier in terms of adding this unlimited deposit insurance is that it might change the way we think about what assets we want these banks holding and what that looks like. So I imagine part of any unlimited deposit insurance scheme is going to be like an increase in the premiums that these banks have to pay or on the other side is changing what counts as these types of assets and what they're allowed to hold and how they're allowed to market them.

00:10:23:06 - 00:10:30:18
Bennett Tomlin
So in terms of that, like how it changes the assets the bank holds, what would this look like? What what's one way this could look like?

00:10:30:19 - 00:10:49:23
Rohan Grey
Yeah, I mean, I think first of all, you want to get rid of the distinction between all these different kinds of government guaranteed assets. In my opinion, I don't see any value to making 30 year bonds less liquid. But yes, I think the big question and to Cass's question, the big way to deal with the moral hazard there is simply to give up on a failed regulatory approach.

00:10:49:23 - 00:11:24:03
Rohan Grey
Leave the liability side, leave it's money. Just call it money. Just move on and focus on the assets that focus almost exclusively on the asset side. And I would say actually one of the ways to deal with this is not even through liquidity requirements, it's through a more explicit use of the discount window and collateral scheduling night. So what we're seeing now was the FDIC insuring things, insuring everything up to 100%, but also the Fed's collateral process being expanded in quite kind of dramatically, not lending at a discount.

00:11:24:19 - 00:11:48:00
Rohan Grey
Historically, almost all collateral lending is done at some haircut, and this was done at par, Right. So suddenly you're in this system where if you create a loan asset, you can pledge it. And they they're starting with open market eligible instruments, but you could do the same thing to any bank asset on any bank asset that needs equity can be pledged to the central bank out of acquisition price and then that money just gets advanced.

00:11:48:11 - 00:12:05:22
Rohan Grey
So you're taking liquidity restrictions off the table entirely. But in doing so, you're saying, well, we got to look at the assets now. We got to look at all of them because we get to assess them. We get to see the whole balance sheet, we get to keep them with us as collateral. And I think the second order implications of that are quite transformative.

00:12:05:22 - 00:12:29:16
Rohan Grey
Take a moment. Think about it. Right. You can't hypothecated, you can't securitize, you can't resell in the secondary markets right loan to originate to distribute model dead right What you are talking about is a system where every time a bank makes an asset, it gets put in price basis at the central bank and then gets turn into money and that's the actual secret that the actual moment that we should be focusing on.

00:12:29:21 - 00:12:45:07
Rohan Grey
If you do it that way, you don't need liquidity requirements. The assets themselves are liquid, right? You don't need all these other things, all these other secondary kind of ways of trying to regulate the quality of these things because you're doing it directly. You're literally getting all of the assets available to the Fed to inspect at any point in time.

00:12:45:22 - 00:13:01:04
Rohan Grey
And then the only other thing about that is just whether you're actually whether you're doing this or not. I think it's important to note that the FDIC, its insurance fund, is backed by the Treasury. And if it runs out, it gets recapitalized by the Treasury. That is to say it is backed by the full faith and credit of the United States.

00:13:01:13 - 00:13:17:03
Rohan Grey
So is it a good thing to tax banks? Sure. I don't hold banks with tax them. All right. Take them out of existence and nationalize the whole damn thing. It's fine with me. I oppose public banks in other contexts. Right. But this idea that we have to sort of fund it with an insurance premium, I think it's the wrong model.

00:13:17:03 - 00:13:34:22
Rohan Grey
It's a tax model. It's a subsidy plus a tax. We don't need to think of it as insurance or anything, but as a fund, Right. This is all accounting fictions to give the impression that there's no public guarantees. There's no public risk behind it. Meanwhile, the Fed is lending against all this collateral. You know, I think it's a fiction to keep up this distinction.

00:13:36:01 - 00:13:41:22
Cas Piancey
So can I can I ask a question here? Because I think we're talking as though all of this is going to change.

00:13:41:22 - 00:13:41:29
Rohan Grey
Yeah.

00:13:42:06 - 00:13:53:27
Cas Piancey
And I think what I'm actually believing right now is kind of the opposite of that, where like at this point, having given Silicon Valley bank and signature this I mean, let's call it what it is, right, like essentially a.

00:13:53:27 - 00:13:57:23
Rohan Grey
Bail bail in bail to the insured deposit system, Right. Yeah.

00:13:57:25 - 00:14:28:28
Cas Piancey
So the bail in, they provided this for them and I don't think they're going to change the entire regulatory regime and I don't think they're going to implement entirely new system of control for these banks. And that's actually like really depressing to me. Like we've this is, as someone pointed out online to me a different underscore, if pointed out that this has been something that the FDIC, the Treasury and the Fed have been doing since the SNL crisis, like this is not a new.

00:14:28:28 - 00:14:47:05
Cas Piancey
Yeah, this is not a new thing in it. And just to get anyone else up to speed, there was a bank called the Bank of New England in 1990, 1991 that had a run on its bank. It was basically utterly insolvent. And the FDIC came in and said, Don't worry about it. The limit at the time was $100,000.

00:14:47:05 - 00:15:02:17
Cas Piancey
They said, Forget it, it's fine. All of your deposits are totally backed. Right now is a crisis. We're going to change the rules. But when a crisis happens four or five times in someone's lifetime, like is it even a crisis anymore or is it exactly what you're saying? Do we need to upend the entire.

00:15:02:17 - 00:15:08:00
Rohan Grey
System just before? What am I continuing to do? What have I done again? Come on. You know.

00:15:08:16 - 00:15:31:05
Bennett Tomlin
Well, and I think I think to add to cast this question here, when we had you on to discuss the stable act, one of the things we talked about how was like with the Reserve Primary Fund and the money market funds in 2008 when the liquidity started to come out, the federal government had to come in and basically insure these absolutely uninsured assets because the broader risk was too much beyond that.

00:15:31:05 - 00:15:48:02
Bennett Tomlin
And when we were talking about the stable act, the context was that these money transmitters would end up with basically these Fed master accounts and keep all their money there, which is effectively fully guaranteed by the faith and credit of the United States. And it was, I think, a lot of this same argument you're getting at here, which is that we've effectively done this for a long time.

00:15:48:02 - 00:15:52:14
Bennett Tomlin
But in a structure that doesn't actually support doing this like explicit.

00:15:52:28 - 00:16:07:13
Rohan Grey
Yeah, it might. That has this old line, which I've just started saying more and more. It seems the only thing that matters anymore. There's never time to do it right, but there's always time to do it again, right? And so we just in this like Groundhog Day scenario. And so what I'm always trying to work out is what is changing?

00:16:07:25 - 00:16:24:22
Rohan Grey
What is changing the narrative, what is the what is the direction where we cannot do it again, What are we breaking where we literally cannot repeat the same cycle? And I think something has broken this time. And to Cas’s earlier point, there's definitely moral hazard, right? There's definitely a bail in situation. There's definitely a bunch of people that are getting money right now which frankly, fuck them.

00:16:25:00 - 00:16:44:10
Rohan Grey
But if that's the price to pay to actually change the system once and for all, fine, fine. You know, it's not like we haven't been bailing people out for decades. It's not like this isn't a large standing problem. Even people like Hyman Minsky were talking about uninsured depositor runs, you know, being the primary source of a shadow banking risk.

00:16:44:10 - 00:17:04:07
Rohan Grey
And to your point, Ben, we spent so much time trying to maintain these fictitious distinctions between different kinds of money, right? Oh, don't worry. This is a this is backed by 100% collateral in a money market account. Oh, don't worry. This is not government money. This is a claim on money. It's fine. Whereas in practice, people just use this as money.

00:17:04:22 - 00:17:22:14
Rohan Grey
They use this shit in very similar ways. The level of like information processing that the average consumer with a money market account versus a bank account is doing is not particularly high. They're not going, Oh well, this one's risky and this one is and I have to be really careful. They are allowed to be marketed to, right. That these things are safe, right?

00:17:22:14 - 00:17:40:24
Rohan Grey
They're allowed to create all these regulatory things to give the impression that it's safe or they feel safe enough. And then when it all breaks, we go, Oh, I can't believe we let it all break. Well, why did we create this ridiculous set of things in the first place? We can look at why there's a deposit insurance cap, you know, all the politics of it, blah, blah, blah.

00:17:41:12 - 00:18:01:24
Rohan Grey
It's arbitrary. It's an arbitrary number, and it creates a two tiered depository system that causes this fiction, that causes this delusion, that allows people to keep talking about market discipline in a place where it clearly is not. So I think that this is a this is a moment where the kind of the fiction, the myth has been completely exposed.

00:18:01:27 - 00:18:03:16
Rohan Grey
And that's what is valuable.

00:18:04:13 - 00:18:27:00
Bennett Tomlin
I think. Your point about market discipline, there has been one of the things that's really been sitting with me, with Silicon Valley banks, specifically, many of the people banking there at least nominally and in the view of our society, are supposed to be intelligent people who have a far higher than average understanding of finance. We could debate how true that perception is, but that's like the expectation for the individuals banking there.

00:18:27:09 - 00:18:51:12
Bennett Tomlin
And like apparently most of these individuals weren't using insured cash sweeps, which for people who don't know insured cash sweeps are a service some banks offer where they can effectively give you almost unlimited FDIC insurance by taking the money you deposit and then sweeping it to other FDIC insured accounts at other banks. And so you could access greater than the $250,000 insurance by using products like this.

00:18:51:20 - 00:19:00:19
Bennett Tomlin
But like very few of the companies banking at Silicon Valley Bank were doing that partially because of the terms of the loan Silicon Valley Bank we're giving up. But that's a separate issue, too. Why do you want.

00:19:00:20 - 00:19:02:03
Rohan Grey
To make those loans? You know what?

00:19:02:03 - 00:19:17:03
Bennett Tomlin
That's exactly exactly like silicon Valley was like structured to be vulnerable to exactly this, like across multiple their decisions, not just like the duration risk they took in some of their securities, but like across the way they were having their depositors deposit.

00:19:17:04 - 00:19:17:24
Rohan Grey
Yeah, large.

00:19:18:00 - 00:19:41:04
Cas Piancey
But I want to pause on that. I want to pause on that insured sweep that insured sweep product that almost every major bank offers, because it's exactly what Bennett just said is essentially an enormous loophole that allows wealthy people to completely avoid the $250,000 limit that is placed on an individual holder at like an individual depositor at a bank.

00:19:41:04 - 00:19:46:28
Bennett Tomlin
Well, I think I think more importantly than just like helping wealthy individuals do that, it helps corporations who need to have cash.

00:19:46:28 - 00:19:47:13
Rohan Grey
Balances.

00:19:48:05 - 00:19:48:29
Bennett Tomlin
Before kind of thing.

00:19:50:14 - 00:20:00:27
Cas Piancey
Of course. But then as as Bennett said, not only did Silicon Valley Bank have a I think it was what was it, 97% of total cash was not insured. So under the.

00:20:01:10 - 00:20:01:19
Rohan Grey
Current.

00:20:02:13 - 00:20:34:01
Cas Piancey
Rules, 93%, 96, whatever it was. Right. So we had this crazy amount of cash that was not insured, but that it absolutely could have been insured under these rules and regulations that most people who were involved in major business and involved in this stuff understand and know about and utilize. So the fact that all of these venture capitalists were not doing that and we're not doing any proper risk management for decades seems to be like, again, we're we're in a moral hazard minefield.

00:20:34:01 - 00:20:55:05
Cas Piancey
Yeah. Like, I don't know. I don't know how we get away. I guess my point here being it doesn't seem like they're going to change the rules. It seems like they're going to do the same thing they did in oh eight or 91 or whatever, where they said this was an extraordinary circumstances, like we don't intend to ever let this happen again, even though it will, and we're not going to change the rules just because this crisis happened for a little bit.

00:20:55:10 - 00:21:00:28
Cas Piancey
And like, don't you think the public loses faith if they don't change the rules?

00:21:01:00 - 00:21:21:00
Rohan Grey
I mean, they should. They should. And, you know, not to be an acceleration of that, but I think that's what this is in a sense. This is heightening the stakes. Right. Is heightening this contradiction. And certainly, I think if you look at my colleagues in the banking world, people who advised Democrats even more than Republicans, people who would consider themselves progressive or their maybe more moderate, you know, probably more moderate than I am or self-identified that way.

00:21:21:26 - 00:21:40:09
Rohan Grey
I think for a lot of them, this is a kind of existential crisis moment, right? They had been committed to the idea of market discipline. They had been committed to this model of private insurance, which, again, can we take a moment and stop and ask, Do you think banks feel better about the idea that deposit insurance is framed as a private fund, that all the banks have to pay into that it's on their back?

00:21:40:09 - 00:21:55:21
Rohan Grey
Do you think they actually hate that versus the government provides all the money and we are actually making you a quasi public entity. Do you think that when they think of the long term political health of the banking industry is independent from government, that it's the former old in that lot of narrative that's likely to keep them more insulated?

00:21:55:21 - 00:22:18:08
Rohan Grey
I think it's actually a boon to them that we give this impression that they are funding themselves. I think they actually benefit from the experience that they are most days of the week, self running, self-governing and self-funding. I think it's a fiction and the Fed is the obvious point of that fiction, but I think it allows them to hide behind the idea that most of the time they are mostly in charge.

00:22:18:08 - 00:22:42:00
Rohan Grey
And that is the biggest, in my opinion, politically impediment to real change. But to your earlier point, something like 43 or some number like this percent of all deposits in the banking system are uninsured. Right? So even though these products exist, like the insured cash rate you're just describing, it's not like everybody's using them. Right? We still have the two tier uninsured depository system, which even at just an architectural level, I come in with my digital currency on.

00:22:42:11 - 00:22:58:06
Rohan Grey
And that's a whole separate conversation we can talk about in a second. But the big concern there is what if depositors leave? You know, what if there's not enough liquidity and blah, blah, blah? And part of that is because we still have this distinction between deposits and government money. We're not thinking about them in the same category. Why?

00:22:58:06 - 00:23:17:11
Rohan Grey
Well, should we insure them? But they're private first. You know, that's that's the narrative that we are maintaining at the moment. And then the other question about insured cash rate. I think the big point there is if we aren't providing these sort of workarounds, then we're already admitting that we want people to have access to more than the $200,000 cap.

00:23:17:11 - 00:23:33:28
Rohan Grey
Right. This is so all you're saying is that we should have unlimited deposit insurance, but it should be kind of convoluted and hard to understand and easy for people to not kind of have scrutiny. That's what you want. What what are you talking about? Right. Like, at a certain point, it becomes an excuse in search of a justification.

00:23:34:07 - 00:23:58:19
Rohan Grey
Like they don't want it first, you know, they don't want that other thing and then they backfilling specific reasons and it doesn't actually mesh onto reality. But to your point, like if we don't change these rules, it's a huge problem. And maybe it's just the great little defeatism that I'm coming in with this, although I like to think of myself as someone with doesn't really like to, you know, keep shouting at the wind and raging in the machine, is that at this point I can't even get my colleagues to agree that I'm limited deposit insurance is good, right?

00:23:58:19 - 00:24:22:16
Rohan Grey
You put five financial experts advising them in a room, you'll get four of them saying, No, it's fine, and one of them saying it isn't getting to the point where all five are saying this is bad and needs to be changed. Indefensible gets us that little bit closer to pressure on the politicians. Because if there's one thing that I've learned doing this work is that politicians actually don't really like writing these kinds of bills, and they need to find some expert willing to validate them.

00:24:22:16 - 00:24:44:22
Cas Piancey
But I spoke with Frances Coppola and she she said the problem is, is that banks always have to leverage deposits somehow. If they won't do it by lending, then they'll do it some other way. And I think that presents a good problem because if that is indeed the case, which I believe her, I think that is right. Like banks generally are about making money on the deposits that they hold.

00:24:45:00 - 00:25:02:20
Cas Piancey
And if that is true and we use public funds to build up this insurance fund for depositors, don't you think that the public might get the impression that public dollars are being used to benefit banks?

00:25:02:26 - 00:25:22:11
Rohan Grey
I mean, first of all, they are they're being used to benefit banks right now. All the all the beneficial liquidity access, all of the implicit guarantees that insurance turns your money into money, and not only the explicit guarantees of the 250,000 cap of the implicit guarantees beyond that means that uninsured depositors, insured deposits still have a special place in the liability structure.

00:25:22:21 - 00:25:39:29
Rohan Grey
I would say, and maybe I'm misunderstanding of Francis's thinking and what's in her mouth, but I would say that deposits are usually a cost, right? You know, you try to keep it down, know what kind of stuff is the reserves or the cash that you get when depositors deposit funds that might you might sort of earn interest on if you if you invested or something.

00:25:40:23 - 00:25:58:14
Rohan Grey
And certainly you can charge fees and fines on having depositors and having a sort of sticky source of funding means that you don't, you know, as susceptible to interest rate adjustments in the breeze if you're borrowing everything from the money markets and things. But my view on this would be to give all the banks an unlimited overdraft of reserves at 0%.

00:25:58:24 - 00:26:20:27
Rohan Grey
And that sounds like a big handout, but once you do that, you take every rock to hide behind on the field away, right? You take every possible market fiction away, and then it's just left with this idea of we are giving you government money to extend loans. You are making loan decisions on behalf of the public and you're taking a cut of that.

00:26:21:00 - 00:26:39:00
Rohan Grey
That's it. That's the only thing are doing very boring. In fact, underwriting. You're like, yes, man with Jim Carrey. Right. That moment is a very different moment from one where every time there's a financial crisis, every bank is responsible. The payment system, depositors are the hostages in front of them, the bailout, all that kind of thing. You want more loans?

00:26:39:00 - 00:27:02:16
Rohan Grey
We can make more loans. You want more credit. We can create all sorts of credit entities. And hey, you know what else you can do? You can just spend money instead of lending it. Like that's putting all of that in the same category and taking the payment system in the deposit system out of it entirely. I don't think it's as much of a subsidy because we're actually on the cusp of being able to issue a government digital currency that renders the deposit layer obsolete.

00:27:02:28 - 00:27:16:02
Cas Piancey
Yeah. So it sounds yeah, it sounds like you're saying your suggestion is banks like and correct me if I'm wrong, but it almost sounds like your suggestion is banks shouldn't necessarily be constantly profit seeking. Am I getting the banks?

00:27:16:03 - 00:27:43:01
Rohan Grey
I mean, private commercial banks are profit seeking. That's what they do. I'm saying that we should not make them systemically responsible for issuing the core monetary instrument in the payment system. And that is an anachronistic thing that doesn't need to happen if we want banks to be responsible for doing credit allocation and underwriting, which again, you know, reasonable minds can disagree, I suppose topple a socialist, whatever I like, I would spend all of my time on public funding first and then public banking second.

00:27:43:01 - 00:28:06:11
Rohan Grey
And then you kind of go down the list all the way down here is how well I care about commercial private banking. But at the moment it's all messed up with the depository system. Well, one of the biggest things that people are having concerns about at the Bank of International Settlements around and central banks around the world, and they're talking about a central bank, digital currency is not that it will fail, but that it will work too well and everyone will take their money out of the banking system.

00:28:06:26 - 00:28:30:28
Rohan Grey
And so you're hearing all these, in my opinion, absolutely ridiculous suggestions like, well, we'll just pay no interest on it or we will just cap the amount that people can hold or we'll make it really hard to take funds out so that people keep most of their funds in the deposit system. And you're going, wait a second. So you're building this whole digital currency and then you're going to design it to be as undistracted as possible to limit its actual applications.

00:28:30:28 - 00:28:47:10
Rohan Grey
Because while you're concerned that deposit will flow out of the banking system, yes, it's going to make lending so much more expensive, it's going to cause a liquidity crunch. Well, I've got a liquidity cannon here that I can lend it zero interest. So stop, stop doing this. Can we get back to a real conversation about how to build a good digital currency system?

00:28:47:22 - 00:29:05:13
Rohan Grey
And one point mark from that is that if you look at the current debate right now around kind of serious stablecoin regulation, what the Treasury and others are talking about, which, you know, who knows if anything is going to come out by the end of this administration. But one of the things that they are talking now, one of the big things they're talking about is tokenized deposits, Right.

00:29:06:05 - 00:29:27:04
Rohan Grey
What can banks use this new technology for? Well, screw stablecoin, screw crypto. But some sort of common platform where the deposits can essentially freely transfer between all the different banks in an enclosed environment. That sounds good. They're saying, well, what I'm hearing is we are finally appealing one little block, which is the fiction that each individual bank deposits are different.

00:29:27:07 - 00:29:46:04
Rohan Grey
All right. We are getting closer to one common depository product, and it's only a few steps from there to the government digital currency that I'm talking about. But they're all in the same direction. They're all acknowledging that this idea that a deposit is an individualized liability of an individual bank is not actually the way to think about the monetary system.

00:29:46:08 - 00:30:13:04
Bennett Tomlin
One thing that I've been ruminating about, I think in terms of the Federal Reserve, these bank failures and insuring these deposits is like and I know you have somewhat heterodox views on monetary theory, and so you may object to the framing here, but like part of the reason the banks ended up in this situation is because the Federal Reserve had been raising rates to try to reduce inflation, causing this duration mismatch that these banks had failed to adequately hedge.

00:30:13:04 - 00:30:13:12
Rohan Grey
Yeah.

00:30:14:01 - 00:30:29:12
Bennett Tomlin
Does insuring all these deposits and effectively guaranteeing at the very least, even if these banks failed, the depositors will be safe, allow the Federal Reserve to be more aggressive in their rate movements by reducing the potential impact on the banking system.

00:30:29:27 - 00:30:49:24
Rohan Grey
Yeah, I mean, so if you do have fully insured deposits, then you certainly have less need for liquidity coverage ratios and all that kind of stuff, right? Your liquidity concerns go down. But the way that you actually do that is not on the liability side and it's not on the FDIC insurance side unless you want to be constantly dealing with kind of that scenario.

00:30:49:24 - 00:31:08:16
Rohan Grey
What you do is you allow the banks to pledge the assets for liquidity and you change the collateral pricing for them. Right. And so the real question there is, if the Fed is going to raise rates, is it going to do so in a way that punishes existing bond holders? Right. Is we going to have a are we going to have a punishment for being holding in off the run?

00:31:08:26 - 00:31:28:02
Rohan Grey
You know, 30 year Treasury bond that's been around for ten years versus buying a brand new 20 year bond because the rates are higher now than they were when the study was issued? Or are you essentially adjusting that right as we go along? Are we essentially creating something that is even though they have individual maturities, they're really more like a class of consuls where we're just constantly updating the rate, moving it around, right.

00:31:28:04 - 00:31:45:00
Rohan Grey
So all of them are just moving the yield curve around on all of the government liabilities. Now the question then gets pegged, what the hell is a 30 year bond? Right. I call it Nathan said, Hey, if you been pledged 30 year bond at the discount window with no haircut, what is maturity that he is a one hour?

00:31:45:03 - 00:32:08:19
Rohan Grey
Right. I think that's actually a very fundamental question. I wrote a paper that hasn't been published, but I was pretty proud of it. The Orthodox economists looked at it in the review process wasn't, but it was called the inherent presentism of monetary policy. And my point with that is that we have all these words like 30 year bond, ten year bond stuff, but for 98% of how we actually use them and how we treat them, regulatory speaking, they're just different categories in the present.

00:32:09:05 - 00:32:26:04
Rohan Grey
You can change the ten year bond rate today. You can change the five year bond rate today. Tomorrow you could switch them around and it wouldn't change anything about ten years from the future. It would just change that rate every day. Right? Every day we have a yield curve and that matters for the relative distribution of interest and all that stuff for these different assets.

00:32:26:04 - 00:32:44:20
Rohan Grey
But over time, what we are saying today about what's going to happen in 30 years has nothing to do with what's actually going to happen in 30 years. It's our conception, the present of the future. It is not actually the future. And so we can change that. We can move that around. We can in the yield curve even and then inverted back again.

00:32:45:05 - 00:33:06:21
Rohan Grey
So what I think is interesting is if you are moving towards something where you're guaranteeing all the deposit is step one, that means you have to focus on the assets. That too. And part of that means when you do let them hold some sort of safe asset that you are not letting them incur. Duration of maturity, risk, you know, interest rate risk as well.

00:33:06:21 - 00:33:23:13
Rohan Grey
That is a fundamentally different structure than we have now that we can put certain regulatory scrutiny to bed and focus on other things. And I think that's the that's the sweet sauce that comes out of this is that we stop having useless conversations and start having much more productive ones.

00:33:23:15 - 00:33:43:18
Cas Piancey
I'm quite interested in this discussion because I think what you're what you're suggesting is totally upending the entire banking structure, the system at large, like you're talking about changing bonds, you're talking about changing insurance, you're talking about changing the way banks interact with one another, how they interact with the Fed, how they interact with the Treasury. You're talking about changing everything now.

00:33:43:28 - 00:33:48:09
Cas Piancey
That's part of why I don't suspect they're going to pursue this method.

00:33:48:09 - 00:33:48:27
Rohan Grey
Of, yeah.

00:33:49:13 - 00:34:15:03
Cas Piancey
Deconstruction in construction. But I want to compare this to the kind of vitriolic debate going on around venture capital, because obviously Silicon Valley Bank has the name Silicon Valley, and I think that has been optics mentioned as part of the optics. The optics were great, but also they generally are the bank of choice for venture capital like these sophisticated investors.

00:34:15:03 - 00:34:33:25
Cas Piancey
We're going to Silicon Valley Bank to get their loans, to get their capital to do to do things. This is the bank of choice for them. So when they so when Silicon Valley started to fail and collapse, the general public was like, it should eat shit, libertarian assholes, we don't give a fuck. They'll lose all your money. We don't care.

00:34:33:25 - 00:34:44:09
Cas Piancey
But the concern became right that this is especially because you have people like Jason Calacanis, David Sachs, Chamath, the All in podcast and a bunch of these other venture public venture capital.

00:34:44:09 - 00:34:44:26
Rohan Grey
Friends of mine.

00:34:44:29 - 00:35:16:13
Cas Piancey
Causing causing bank runs, causing actual bank runs like inciting this stuff and saying you guys go to your bank, go to your bank, run to your bank and get your deposits out right now, which definitely doesn't help at all. And for what it's worth, I think all of them should get subpoenaed and get anything they want. But but regardless, so we have this this oh, it looks like venture capital has been operating not well for a few decades now that they've been taking advantage of loopholes, that they've been not doing proper risk management.

00:35:16:24 - 00:35:40:12
Cas Piancey
And the response from the public was, fuck off, we hate you. The response from the from the governmental agencies was more along the lines of, Oh, well, this looks bad, but we're going to save you because this is a systemic risk. What I'm not hearing is how we're going to change venture capital, how the rules and regulations around venture capital are going to be altered to ensure that this doesn't happen again.

00:35:40:27 - 00:36:00:11
Cas Piancey
But in the meantime, this banking structure also seems to be this massive issue. And now people are just saying it's the government's fault. It's we need to we need to, you know, the FDIC sucks. It's horrible. Even though the FDIC didn't fail at all. Right. Now, like, I'm convinced, I'm confused why everyone hates the FDIC suddenly. Okay, so here we are.

00:36:00:11 - 00:36:21:21
Cas Piancey
Right. But I don't know, it kind of is disheartening to me because I'm usually quite I'm a cynic in some sense, but I'm quite optimistic about the future of humanity. And I think that moments like this make me reflect and go like, do these systems and structures just seems so monolithic that we're never even actually going to try to alter it.

00:36:21:21 - 00:36:27:13
Cas Piancey
Or do you or are too many people just incentivized to keep it going the way that it's going right now?

00:36:27:15 - 00:36:36:23
Bennett Tomlin
I think we really also need to accentuate that. Elizabeth Warren asking questions about Silvergate Bank is clearly what killed Silicon Valley Bank. Don't forget that. Yes.

00:36:37:17 - 00:36:53:29
Rohan Grey
Yeah. I mean, I think, first of all, you know, we should be to not let this crisis go to waste. Right. We need to keep the narrative up. We need to keep the narrative focused where it really matters. And I've learned a lot from those people, as I'm sure you can tell, as I'm sure you guys, it's not like I walked through the crowd.

00:36:53:29 - 00:37:11:15
Rohan Grey
You deserve to take a few eggs for doing the uncomfortable work of trying to fix the structural problem at this point, even if it means building these people out in the short term, I'd be quite happy with an investigation. I would kind of be breaking them, you know, accountable. My big view on that is ultimately the way to render these people powerless is to make them obsolete.

00:37:11:29 - 00:37:30:01
Rohan Grey
The way that they are benefiting here is through that complexity, is through those loopholes, is through a system that puts a different set of rules to them than it does to you and I in a bank. Right. It is through the idea that they can bank at a bank that is allowed to invest in 30 year bonds and call it liquid.

00:37:30:01 - 00:37:50:03
Rohan Grey
Right. That is actually the complexity of the system that benefits those actors every day. And so simplifying it down, even if they get a little bit on the way up in the long run, makes them so much less powerful, just like saying, hey, we have unlimited deposit insurance in the collateral schedule where any bank can pledge any loan that they make for no discount.

00:37:50:21 - 00:38:10:25
Rohan Grey
You know, that's a massive subsidy. Yeah. For 5 minutes, right. Was 5 minutes. What's what actually happens to the public's understanding of what that system is? On the other side of making it back clear? And if it was such a subsidy, I wouldn't be getting the vociferous opposition from the banks. I suggest now to your question about how, you know, you deal with big change and where they're actually coming.

00:38:12:01 - 00:38:28:07
Rohan Grey
Part of this is you push the open window stuff, right? You push the big thing, you get some sort of little change along the way. But part of it is also sometimes change. There's a lot of things that happened very slowly mean all at once. And part of the vantage point of someone like me is I am looking at public banking.

00:38:28:07 - 00:38:46:05
Rohan Grey
I am looking at crypto, I'm looking at government digital currencies, I'm looking at banking regulation, I'm looking at the collateral schedule in the Fed, you know, liquidity provisioning process as well as the FDIC insurance. So when I'm thinking about these different things are already moving. There's already stuff happening. There is already a debate about central, digital, Central bank, digital currency and deposit outflow.

00:38:46:11 - 00:39:04:06
Rohan Grey
There is already a debate about public banking. There is already debate about stablecoins and whether they're safe and all that kind of stuff. Right. Saying, hey, this should be one thing that we just call money in an account and it should be fully guaranteed and that guarantee should be explicit that you're issuing public dollars. That's through circle pretty aggressively.

00:39:04:06 - 00:39:24:23
Rohan Grey
Right? This is a relitigation of the stable act, amongst other things. In the middle of all of this, because circle lost its peg, Right. Circle was suddenly exposed to the uninsured deposits of the bank after claiming it's all the same, blah, blah, blah. Well, if you got the point where they're literally just holding 100% government insured deposits and that's the only thing that they can realistically hold, then what are they?

00:39:24:26 - 00:39:41:00
Rohan Grey
They're just an intermediary for the government again, Right. They're just a better payment interface. Then they actually can be looked at that way rather than always taking on private actors. We get to invest and make money off the float or whatever else it is, right? So I do think, you know, you want to keep your eye on the ball.

00:39:41:00 - 00:39:55:18
Rohan Grey
You don't want to let these guys get away with anything. But in the grand scheme of things, the big win for me is the structural change that renders these actors less powerful and less able to use complexity to obfuscate the grift.

00:39:55:23 - 00:40:04:02
Bennett Tomlin
Personally, I just want the guys at the in podcast to lose their money, which is always a bad thing, but just like, look at that.

00:40:05:09 - 00:40:24:02
Rohan Grey
So he's he's a good example, right? When we talk about the FDIC insurance fund, how are we talking about assessments on banks in all this? It is a sort of sub variant of the taxpayer money chirp, that all the money comes from the private sector, right? That we can bail it out as we put the money in and we can take the money back out again or everyone's happy versus, hey, there's a thing called the infinity sign.

00:40:24:12 - 00:40:41:20
Rohan Grey
And that's where we actually are funding all this from. And we are going to tax on apples because we don't want them to get a boon out of it. Fine. But if you just say we're always going to fund 100% and then there's a tax, I can write that in two sentences. I don't need some convoluted fund and all these different premiums and assessments and all that kind of stuff.

00:40:41:20 - 00:41:03:08
Rohan Grey
And so even the very act of having the FDIC fund is reinforcing a a narrative about how the economy works, that people like Silicon Valley end up winning with all the way to taxpayers that fund the economy. Right. The money comes from somewhere. It comes from mostly the value creators. That narrative is actually lurking in the background, this whole conversation as well.

00:41:03:14 - 00:41:22:14
Rohan Grey
And I think you render them obsolete by be able to say we could tax 100% of you well, hundred percent by the old Laffer Curve, which is bullshit economics, but is political gold, right? There's some optimal tax rate between zero and 100%. If you tax zero, you get no revenue. If you tax 100%, you get no revenue. All right.

00:41:23:03 - 00:41:43:22
Rohan Grey
Somewhere between those is the Goldilocks number that maximizes the amount of revenue. So if you want to fund welfare programs, you need to find that beautiful number. Now, Reagan comes along without laughing and says, we thought it was 40 is probably to 25, right? There is no magic number to maximize revenue. We don't need revenue. We need people to be less rich, less money in people's pockets.

00:41:43:22 - 00:41:50:27
Rohan Grey
I want 100% tax. Well, then no one would become a billionaire. Good, good. Correct. Correct answer.

00:41:50:27 - 00:42:10:28
Cas Piancey
I'm going to I'm going to pause you here because even though and I think a lot of people probably know my views on billionaires, which is that pretty much none of them need to exist. We don't need billionaires as the class that needs to exist. Yeah, I agree with you on that. But that doesn't really matter that I agree with you on that, because most of our listenership, I will say, is one very pro cryptocurrency.

00:42:10:28 - 00:42:29:05
Cas Piancey
I believe, even though we are skeptical and to quite libertarian in a lot of sense. Yeah. So they're going to hear your argument and there's two things that are going to come up for them. One, the state shouldn't be involved in this stuff. That's absurd. Why should the state be involved, even though they're already involved? Definitely. But okay, they're going to want to remove the state info from this stuff.

00:42:29:05 - 00:42:50:00
Cas Piancey
They're going to want to deregulate as opposed to regulate more. And then to the infinity number that you brought up. I think that is a another minefield because we're talking about even though you're right and I don't disagree with you, it's almost like when you acknowledge it, you start encountering some issues. It seems like when you start acknowledging like, yeah, we can just fucking print money guys.

00:42:50:00 - 00:43:05:08
Cas Piancey
We can literally just print as much money as we want. Well, no, you can't write. No, you can't just print as much money as you want, because at some point, if people start to lose faith in your money printing, the value of the money goes down significantly. Do you think we're flirting with any of that right now?

00:43:05:09 - 00:43:22:26
Rohan Grey
No, not really. I mean, say, on the first point, I think you you can't really get out of the government being involved when you're talking about the US dollar, Right? You're talking about something denominated in the government's currency. If someone wants to deal with gold, they can try. I mean, that is a contractual dispute. I'll take you to court, and court will make you pay in dollars.

00:43:23:04 - 00:43:50:27
Rohan Grey
So you live in a dollar denominated world, first of all. Second of all, I'm you know, I can have debates with high school libertarian forces if you want, but you get to this point where property rights themselves are a public, enforceable thing, right? Oh, I just want the government to stay away from it. Yeah. You and what you in the plot of land that's like half of Montana that you want to have the cops protect, like this idea of a libertarian philosophy that doesn't acknowledge the huge sort of logical hole around property rights I think is just a nonstarter.

00:43:50:27 - 00:44:07:12
Rohan Grey
And it's why libertarians only get 3% of the vote every year because they want to pretend like they hate the government, but they're the biggest statist out there. They just want the government to protect all their property and then let them do whatever they want with it. We have a version of the state that it was the white supremacist that ran the South until we beat them in a war, right?

00:44:07:13 - 00:44:24:12
Rohan Grey
That the price of living in a society and having private property is that you're subject to taxation and regulation and you work in a monetary system. To your second point about the infinity sign, I mean, again, the statement we can print as much as we want is correct. The question of how much we want is the interesting question, right?

00:44:24:14 - 00:44:42:13
Rohan Grey
Do you want to deal with 10% inflation? If it means you have 25% nominal growth, maybe, maybe not. You can have reasonable minds can disagree about that. You can print as much money as you want. The question is, do you want to print that much? Now, is there some mechanical relationship between printing money and inflation? Not necessarily at all.

00:44:42:15 - 00:45:05:15
Rohan Grey
Not spending money, maybe, but we just talking about banks making credit every day. Banks are printing money and nobody's signing anything. So if you have a problem with money, you should have a problem with everything from commercial banks to money market funds to crypto that are essentially printing demand. Because just because I can make a coin that's got some value or that somebody thinks has some value doesn't mean I'm doing anything to the supply of eggs.

00:45:05:25 - 00:45:32:00
Rohan Grey
So if I make a coin that has some value and then people use that to buy eggs, that's pushing up the price of eggs, just like issuing new government dollars is pushing up the price of eggs, you can make a rationale why that's okay. You can say all this value added another way or whatever, but when it comes to actual prices, when you're looking at not inflation as some concept related quantity of money, but actually the prices in the economy, which is how we use the term inflation today and we haven't used inflation or the quantity of money since the 19th century.

00:45:32:12 - 00:45:50:13
Rohan Grey
And then it isn't to do with how much money is you just do is what money is being used to do what and what is going on in those industries and the pricing power, etc., etc.. And so if you want to be dealing with that seriously, yes, we should deal with that. And there are limits on how you can use the money cannon if you want to maintain stable prices.

00:45:50:13 - 00:46:12:08
Rohan Grey
But we are having that conversation. We're having ridiculously misleading conversations about whether the quantity of money is too high or not when the thing that we are defining as money is so narrow, it's not even working on its own terms. We're not even looking at all the sources of demand in the economy. So I think, you know, whether people like the infinity sign or not, it's there.

00:46:12:18 - 00:46:37:16
Rohan Grey
It was there in 2020, was there in 2008, been there since 1935 and that 1971 and 1963. Right. We've been doing the infinity sign in different ways all the time. And unless you want to say I don't like this entire system at all, I want to move to a murray Rothbard system of roving gangs and enforce, you know, nominal private property through a choose Your own judge adventure, which sounds definitely not corrupt at all.

00:46:38:09 - 00:47:01:07
Rohan Grey
Then what the hell are you talking about? Right? We know what we know what that looks like. It's terrible. He didn't get to the point where he says, Yeah, people should be able to sell children. I respect his intellectual consistency, but he's, you know, he's an absolute lunatic. Unless you're that person, then you're Milton Friedman and you're saying, yeah, we do need a state, we do need property rights, we do need a police force, we do need, you know, private property enforcement and contracts.

00:47:01:13 - 00:47:06:13
Rohan Grey
And in that world you've got a dollar, you've got a thing that gets issued. So there is no such thing as a privately issued dollar.

00:47:06:16 - 00:47:23:20
Bennett Tomlin
Do you think having this collateral schedule and having these banks basically pledge their assets at, the Fed, does it give the public more influence or less influence over like banking regulations? And like, does it make them more or less responsive to the public?

00:47:23:20 - 00:47:45:07
Rohan Grey
I mean, I don't know about you. I used to be an elementary school teacher. I find this stuff convoluted as hell, and I'm a professional working in it all day. Right. Secondary market securitization, very high qualification reading the first time finding out that you can sort of take a single Treasury security and have like multiple actors in a day use it as their own collateral, like on an ongoing basis blew my mind.

00:47:45:07 - 00:48:06:07
Rohan Grey
Like what this asset is in 15 places at once on, on 15 people's balance sheet. And the only and the the assumption is that everyone's going to unwind that perfectly. And God forbid, if they don't like what this is, what the public is supposed to understand. What I'm saying is you make the loan, you make money, it gets given to the person you make the loan for.

00:48:06:11 - 00:48:22:09
Rohan Grey
And then we look at the loan and we see whether we like it. I can explain that to a five year old. All right. You have an IOU. You get the you to the bank. The bank gives the idea to the government. The government gives the bank money. The person gets the money. If the IOU is good, everything's fine.

00:48:22:09 - 00:48:25:07
Rohan Grey
If the idea is bad, the bank goes under. That's it.

00:48:25:22 - 00:48:41:28
Cas Piancey
Yeah. Yeah. Even trying to explain, like. Like if we go to something more basic, like the sweep accounts that we were talking about, it's like, okay, so where to start? Let's start with the FDIC. First of all, the FDIC used to insure $100,000 that that limit got changed after the great financial crisis it got moved up to a $250,000.

00:48:42:04 - 00:48:45:11
Cas Piancey
Why? I don't know. It just did. Okay, So anyway, we have that.

00:48:45:17 - 00:48:46:21
Bennett Tomlin
Off the top. Yeah. Yeah.

00:48:46:27 - 00:48:53:08
Rohan Grey
Look, frankly, politics, you know, don't worry about it was 100,000 and then we change whether we change it. Well there was a crisis in the nineties, blah, blah, blah. What.

00:48:53:23 - 00:48:58:14
Bennett Tomlin
I didn't want to waste a good crisis so we didn't move to the rebooted us and.

00:48:59:10 - 00:49:18:20
Cas Piancey
We moved it up to 250 and but then also, oh by the way, like that's just for an individual account. You can spin up multiple accounts at multiple banks and then you're covered. Oh, and also if you don't want to do that, I like the idea of opening 40, 50, 60 account. Sounds horrific to you. Don't worry. We have a specific set of rules for the banks where they can do it for you.

00:49:19:00 - 00:49:22:03
Cas Piancey
What the fuck are we talking about right now? What the fuck are we talking about?

00:49:22:05 - 00:49:37:16
Rohan Grey
It's the. It's the. Can you explain this to a five year old without them looking like you're the problem, right? Like, right. They'd be like, this is what the adults are handing me, You know, like, this is what you've given us to work with. Yeah. Look, I'm sorry. You know, it's hard to change stuff. Is it? Have you been trying?

00:49:37:17 - 00:49:56:14
Rohan Grey
Really? You can let me be. I know you've been trying to make it work. It's the same reason I. I'm into trillion dollar coin, right? It's the same political logic, right? Oh, well, you see, what happens is you issue a bond, and then the Federal Reserve buys existing bonds to put extra reserves in the bank account, which the men then use to buy those bonds from the Treasury and then the Treasury, the Treasury securities.

00:49:56:14 - 00:50:05:27
Rohan Grey
It gets purchased. It can be sold on the secondary market if they need to get liquidity back later. But that's okay because the Fed will backstop it and then the Fed will take all of its profits and limit it back to the Treasury on ongoing basis. You know.

00:50:06:20 - 00:50:10:04
Cas Piancey
What was such a headache? All right.

00:50:10:08 - 00:50:29:00
Rohan Grey
And who wins? Who wins? People who've got large legal department, people who've got the ability to pay for $10,000 a month financial newsletter. Yes. Yes. The complexity is where the power really begins. Right? You look at the history of money going back 5000 years, the Michael Hutchence of the world, the David Weber's of the world. And a lot of it begins with scribes.

00:50:29:06 - 00:50:48:21
Rohan Grey
It begins with the technocratic elite around the warlord, using their power as a bureaucracy to formalize a bunch of relationships into standardized systems. That is, to me, the starting point of all of this. The Catholic Church telling you you can't read, right? That's the actual thing that we begin with.

00:50:49:17 - 00:51:21:03
Bennett Tomlin
Well, yeah, Cass, I think your description of like trying to explain the complexity of like insured cash sweeps in the system as a whole was striking because I was reading a story recently not going to pronounce his name wrong, but Giannis Antetokounmpo, the basketball player from Greece, when he originally came over into the NBA, he set up like by himself 40 to 50 different bank accounts and had like his first couple of years contracts being deposited to each one and eventually the coach like set him up with a wealth manager who was then able to explain that you can get like a single bank account that'll sweep and do the same thing.

00:51:21:11 - 00:51:41:08
Bennett Tomlin
Because he had the cultural experience of the Greece Islands earlier. He had understanding, at least at some level, that deposit insurance does have a cap and you can avoid it by distributing it. But his coach was talking about how it ended up becoming like a compliance nightmare because every like month they had to switch over and send his payment for that month to a different account.

00:51:41:16 - 00:51:57:12
Bennett Tomlin
And and he had 50 different bank accounts he was managing and stuff like that, all because it is possible to get this effectively unlimited insurance if you're willing to jump through this set of prescribed hoops. But there are these hoops and steps that make it more complicated.

00:51:57:12 - 00:52:15:11
Cas Piancey
And the risk, just to bear in mind here, the risk that he's accounting for is something that happens so rarely. We're talking about once every decade or two, like the risk is below 1% that this is going to happen on any given day. Right. And yet you have to this is something you genuinely should consider, because here here we are.

00:52:15:11 - 00:52:24:28
Cas Piancey
This is the third time that I've been alive that this is happening. And it's just like, God, this is insane. Like, this is not about the way that we're doing.

00:52:24:28 - 00:52:42:26
Rohan Grey
And we do bailout half of these guys or we put them in receivership and sell the deposit. So even if you are holding on insured deposits, the chances that you will actually lose are relatively slim. You know, they aren't. There have been a lot of bank failures over the last couple of decades. The number of uninsured depositors who lost serious amounts of money is very, very small closing.

00:52:43:02 - 00:53:06:02
Rohan Grey
Right. So we are not actually even keeping this discipline serving the disciplinary function. If the whole point of this is that uninsured depositors are supposed to be a layer of oversight on bank behavior, I mean, are we really offshoring bank supervision to the Silicon Valley tech burst like that's that's the way that we are trying to keep discipline on the banking system is to hand it over to those people.

00:53:06:03 - 00:53:27:27
Rohan Grey
What we saw with the Silicon Valley Bank as well, as far as I understand, is that the bank was offering products to the CEOs and the founders of these companies to keep their money there. Right. You get a private wealth manager, you get a personal mortgage, you get a personal checking account with nice perks, and we'll give you favorable loan to your entity as long as you keep your deposits with us so that we can limit our liquidity outflow from any loans that we make.

00:53:28:15 - 00:53:44:04
Rohan Grey
Well, again, what? What? Yes, of course. You put a bunch of Silicon Valley guys in a room with a bunch of bankers and work out some creative way to make themselves both rich at everyone else's expense. Why are we trusting them? Why are you assuming that this is the best way to design a banking system? Oh, that's how we always think.

00:53:44:08 - 00:53:44:20
Rohan Grey
Okay.

00:53:45:14 - 00:54:23:08
Bennett Tomlin
I love that idea built into their banking structure. This like brinksmanship, where like in order for these startups to get these loans extended to them from Silicon Valley Bank, they had to keep their deposits there. And then all these people, when the bank runs started, had to decide in their very disciplined positions whether they wanted to pay back their entire credit line and tried to remove their deposits or hope that, like if they could keep their deposits there, keep their credit line open and continue functioning, they were like both of these entities, the bank and the the attempted alignment eventually reached a point where when it potentially broke, when they broke from alignment, it caused

00:54:23:08 - 00:54:26:28
Bennett Tomlin
these like cascading effects for all these depositors. It Silicon Valley Bank.

00:54:26:29 - 00:54:42:29
Rohan Grey
It's a pox on all their houses, frankly. And you know, the fact that the regulators set it up this way I want them to bear some of the pain here. People saying, oh, we want to make sure that it's the Silicon Valley investors that pay the cost of this. Going to make sure that bank shareholders. Yes. But also, if the regulators don't get embarrassed by this, they won't change anything.

00:54:42:29 - 00:55:01:13
Rohan Grey
Right. It's actually that moral hazard you describe, really, the fact that the regulators let that happen. The fact that they set this up this way is egg on their faces is going to put pressure on it to be changed. They can't walk into a room and say, we're doing our job anymore. They didn't they didn't. Letting it fail in some orderly process is getting them off the hook.

00:55:01:13 - 00:55:16:22
Rohan Grey
They say, well, it worked. The system worked, right. The bank goes under. That's what's supposed to happen. You screwed up. You should never be allowed to let this system operate this way again and to crisis point. Am I am I confident the Biden administration is going to do anything about it? No. But, you know, politics is fucked right now.

00:55:16:22 - 00:55:40:29
Rohan Grey
That's not the doesn't mean that we don't keep our eye on the good policy. It's just nothing is happening right now. We should have had stablecoin regulation a year and a half ago. I didn't know we were going to see that either. But it doesn't make me. Don't let me change what I'm advocating for. You know, there's still the good thing that we need to keep our eye on and the place that we're working towards, which is a simplified, safer, more boring banking system where you don't have pockets of complexity that people can grandma a grift through.

00:55:41:01 - 00:55:57:24
Cas Piancey
So I'm just going to go through unless. Bennett if you have more questions, feel free. But I'm just going to run through some questions that were dropped on a tweet that I put out suggesting that we are speaking with you, Rohan. So one is what are the moral hazards involved in the unlimited depositor insurance? We've gone over this, so I don't think we need to address that.

00:55:58:12 - 00:56:01:07
Cas Piancey
I'd like to know what banks would be using as collateral. I also think we've addressed.

00:56:01:07 - 00:56:20:28
Rohan Grey
That just a little bit. Loans, everything to expand the collateral schedule to everything a bank is licensed to issue get a price on. Oh, and I wanted to say to your point earlier about is anything happening in this direction, maybe not in the U.S., but actually for the last half decade in the U.K., they have been moving towards what they call pre-positioning accounts, pre-positioning collateral.

00:56:21:05 - 00:56:38:09
Rohan Grey
So that is actually something that Mervyn King advocated for in his book, The End of the I think it's called, But basically he described it as like a pawnshop, not not a power in, but a pay. And I have to be careful in America, forgive my accent, a pawn shop where you can go in and pledge any collateral and there is a price.

00:56:38:09 - 00:56:55:27
Rohan Grey
The pre-positioning is you don't get that price assessed before the crisis. So you go and you say, Here's a chunk of my balance sheet. If I were to pledge this, what would you give it for me? And then the Bank of England does an assessment and says, we'd give you this haircut, and then that becomes a legally significant price.

00:56:55:27 - 00:57:16:21
Rohan Grey
That's the liquidity price that you know, you can get. I would say make it 100% and then deal with what assets you're allowed to create in the first place rather than creating tiers of it, because that still creates more additional bank failure risk. But it's the same logic. We already actually have a working prototype in the world of an ex ante asset side regulatory discipline in this pre-positioning.

00:57:17:01 - 00:57:29:16
Rohan Grey
So, you know, it sounds crazy, but then you say, well, what if we just took what the UK is doing and imported it here with a few tweaks? Now it starts to sound a little more doable. Now it actually starts to get a little bit closer to viability or a little bit closer to the reality that we live in.

00:57:29:16 - 00:57:35:17
Rohan Grey
It's not some pie in the sky thing that's five steps down the chain. It's actually already happening somewhere. We just need to catch up.

00:57:35:18 - 00:57:58:13
Cas Piancey
How many times can they do bail ins bailouts before they can't anymore? It doesn't seem sustainable without causing hyper. This person says hyperinflation. I think they mean generally just issues. We had a friend of ours say unlimited times, which I said is correct, but also definitely not correct. Right. I mean, they they can't if this keeps happening, they cannot just keep solving it with the same debt.

00:57:58:18 - 00:58:20:01
Rohan Grey
There's never time to do it right. There's always time to do it again. All right. The beatings will continue until morale improves. But I think I think to that point, I don't think it's hyperinflation that gets caused. I think it's just an increasingly large chunk of overall investment and spending. And the monetary infrastructure remains privatized in a process called pro pre-crisis regime.

00:58:20:14 - 00:58:33:09
Rohan Grey
So one of the things that we one of the things that I'm interested in when I think about public investment in public spending versus bank credit and stuff is we don't have the green New Deal, All right? We don't get all the things we need to decarbonize the economy. Well, you want to build a school, you want to build a casino.

00:58:33:23 - 00:58:54:03
Rohan Grey
They both cost bricks. They both cost more to rent. They both cost laborers. The ability to get a loan to make the casino is competing directly with the real resources that the school wants in that particular town. Right. So bank credit as a source of demand is in competition with public investment as a source of demand, not necessarily all the time.

00:58:54:03 - 00:59:15:00
Rohan Grey
Sometimes the investments that you do with bank credit can actually generate productive capacity, etc.. I'm not saying ex-post it's always that way, but ex-ante, when you're making a choice between saying, okay, tomorrow is going to be $1,000,000,000 new spending happening, either that's because we invested with public funds or because we let a bank make the loan, Right? Both of those are putting claims on real resources.

00:59:15:00 - 00:59:35:01
Rohan Grey
So the big cost of letting this happen over and over and over, it's not that we going to run out of money or it's not that the economy is going to collapse, is that we're going to continue to let these people dictate significantly large share of economic activity on the basis that we need them. And we don't on the basis that they're smart when they're not, and on the basis that it's the most efficient system when it isn't.

00:59:35:01 - 00:59:40:29
Cas Piancey
And I think just driving that full circle, yes, people lose faith in that system When that continues to happen repeatedly.

00:59:41:02 - 00:59:57:13
Rohan Grey
Politically, it may be unsustainable. Economically is attainable in a city wide. Right. But, yes, the hopefully hopefully the politics become untenable. And I think that's what we're trying to do here. People want to turn down the volume on the political implications here. Well, what if we just let Silicon Valley guys lose? What if we just let the shareholders, the bank, lose?

00:59:57:27 - 01:00:20:09
Rohan Grey
Or what if it's just this localized problem? What if it's one off to do with the specific dumb decisions that specific actors make? No, it's macro structural. It's always been macro structural. It is a big systemic failure in how we design the banking system. Until we fix that, something like this is going to keep happening. All these images saying Silicon Valley banks capital, you know, versus its held to maturity assets is sort of an outlier.

01:00:20:14 - 01:00:36:05
Rohan Grey
Okay. But they're going to be a different kind of out by tomorrow. There's a different kind of doubt tomorrow. And until we actually fix the underlying thing, which is we've created a two tier deposit system, we've privatized the notion of insurance, etc., etc., There will be another thing tomorrow there will be another. I can't believe this is happening.

01:00:36:05 - 01:00:37:01
Rohan Grey
Who could have predicted.

01:00:37:03 - 01:00:54:00
Cas Piancey
A last question that I got? And I. I might be the one to address this just because I think it's kind of a silly question, but I want to I want to bring it up anyway. Where do they where do I guess they're saying the FDIC, the Federal Reserve and the Treasury get the authority to cover more deposits than specified by law they've always had.

01:00:54:00 - 01:01:13:23
Cas Piancey
That authority is just what I want to say to this individual. They have always had it as long as they have existed. When there are times of crises, they do whatever they want. So I like I don't I don't know. It might not feel right. It might not feel okay. But I would I would suggest that when there are bank runs and there's collapses occurring left and right, they kind of have always just done whatever.

01:01:13:26 - 01:01:27:23
Bennett Tomlin
I feel like the answer to that is kind of like the trillion dollar coin. There's lots of laws with lots of different authorities and one might place certain limits, but often there's another one which if you read it carefully and use your intellect, you can come up with a way to achieve your ends.

01:01:27:28 - 01:01:41:27
Rohan Grey
Yeah. There's a great historian of the common law guy named Milsom who at this point that I always teach where he sort of says if the rules of property don't give you the answer you want, try the rules of contract. And if the rules of contract don't give you the answer you want, try the rules of court. If one quote doesn't give you the answer, try the other one.

01:01:42:03 - 01:02:09:09
Rohan Grey
This is how the common law works. You're always just finding a different station to hang your hat on. And I think the other thing about the authority here is they first of all, a little shout out to my old professor Caterina Pistol. He's got an article for back in 2013 called The Legal Theory of Finance. But she says one of the things about the financial system is there is this paradox at its heart, which is we design contract financial contracts under the assumption that they're going to be enforced, right?

01:02:09:12 - 01:02:32:11
Rohan Grey
That's how we write them. That's how lawyers draft them. That's how we think about when we write this money will be delivered on this day. We're seeing it's going to happen. But actually in moments of crises, there are unforeseen events that require us to go back and renegotiate those contracts. Right? We ex-post adjust them. But if we knew that they weren't going to be enforced the way that they're written, then we wouldn't hold as valuable when we're writing them.

01:02:32:19 - 01:02:51:18
Rohan Grey
So we have to keep this contradiction in our heads that we writing and thinking that it's actually going to happen with the knowledge that in a crisis it could all be completely renegotiate it from scratch. And that paradox is sort of where finance lives. This sort of we have to get up every day thinking it's all going to be the way it is, because the rules say with the knowledge that when it actually matters, the going to get thrown to the side.

01:02:52:13 - 01:03:19:28
Rohan Grey
And I think that's where, you know, the question of kind of where the authority comes in. Well, the authority comes out, we have to say the system first. All right. That's always the first authority, whether that's written down anywhere or not in this case. One of the interesting things and this is something that, you know, Fed lawyers are going to chew on for a while, is that the 13 three authority that they used in 2008, that was extremely broad and they defined it extremely broadly, even within an extremely broad definition, got narrowed quite a lot with Dodd-Frank.

01:03:19:28 - 01:03:37:03
Rohan Grey
And the assumption was that that narrowing it would make it a lot harder to be used unless it was a really super duper, you know, systemic event. Well, they use 13 three this time. They didn't use the discount window. They used the emergency window of facilities. And the justification for that was that this was a systemic risk to banks.

01:03:37:03 - 01:03:54:24
Rohan Grey
Failing was a systemic risk. Well, maybe you can make the case that the systemic risk was the high quality liquid asset regulatory classification that a lot of banks have that. So that's something that has contagion effects. Maybe the risk is just uninsured deposits are now the subject of attention, and there's a lot of them in the banking system.

01:03:54:24 - 01:04:02:24
Rohan Grey
Whatever the systemic risk is, it was a pretty it was a legal stretch, but it's happened now. You don't you don't unring that bell. You don't put Humpty Dumpty back together again.

01:04:02:28 - 01:04:07:26
Cas Piancey
It is funny that you bring up Dodd-Frank because Barney Frank has become embroiled in all of this.

01:04:08:02 - 01:04:08:26
Rohan Grey
Now, too tough on our.

01:04:09:00 - 01:04:31:14
Cas Piancey
Industry. Was responsible. Exactly. Mr. Tough on Wall Street. The man associated with Dodd Frank, the Frank and Dodd Frank was a board member on signature and made a pretty intense claim, suggesting that the reason that signature was shut down was because of its involvement with cryptocurrency and had nothing to do with its balance sheet or the crisis in depositors.

01:04:31:23 - 01:04:33:25
Cas Piancey
Any statement about that before we call it a day?

01:04:34:04 - 01:04:44:12
Bennett Tomlin
I also want to add he made that statement, walked it back later in that same conversation to say we don't actually know. And then the next day the regulator came out and said, What? No, that's not why we did this.

01:04:44:29 - 01:05:00:14
Rohan Grey
Yeah, look, Barney Frank is an expert at spinning. Barney Frank, right? Like the fact that people left the Dodd Frank conversations, thinking that this man was sort of really tough on Wall Street was kind of hilarious. Right. And then the fact that he's now working on a board of a financial institution should should show you where his commitments really lied.

01:05:00:27 - 01:05:20:23
Rohan Grey
So I don't trust that man and what he says very much at all. And I certainly don't trust someone is talking the book of the company they represent to to be honest about that. But again, why do we think that the 2000 page Dodd-Frank Act was the solution? They want to feel safer now. We feel like the banking system isn't fixed.

01:05:20:23 - 01:05:32:23
Rohan Grey
I mean, this guy had nothing yet, nothing of the sort to shoot, and he shot it and now he gets to be a bank executive. Congratulations. You know, I hope you're happy, Barney, but like the rest of us are still dealing with the real problem. And, you know, he.

01:05:32:23 - 01:05:35:14
Cas Piancey
Is making millions of dollars. So I think he is happy.

01:05:35:14 - 01:05:50:10
Rohan Grey
As a matter of fact, he looked pretty rough when I saw him in the pictures. But, yeah, you know, but this goes to the question you can take. There are people who are going to say, well, we've got to get something down. We got to do something, We go get Alvin. I work with those people all the time and always the people advocating some shitty half assed measure.

01:05:51:00 - 01:06:06:08
Rohan Grey
My view is it's always better to get something done now and then, you know, one day we'll get it fixed willy nilly. Where are you for that part of the conversations we've had? You always say that in one room and then I go to that other room for the one day we'll get it fixed. And you never that you're in your bank CEO's suite.

01:06:06:08 - 01:06:18:00
Rohan Grey
You know what? So yeah, I don't have much. I didn't have much love for Barney Frank. I don't think that the fact that, you know, Barney Frank, of all people, said it's a bank executive blamed the Fed for its problems. You know.

01:06:18:09 - 01:06:34:17
Bennett Tomlin
I will also add just right before we close this out on the topic of signature that Bloomberg reported today, that signature was under a Department of Justice criminal probe just for that added bit of context around their closure. So all of our audience is on the same page about Barney Frank's good.

01:06:34:21 - 01:06:47:03
Cas Piancey
And you go, all right, well, so thank you for joining us for the third time. Roland, it was wonderful to have you on to discuss this. I'm sorry I couldn't be more of a debate. You guys already. And here we are.

01:06:47:05 - 01:06:55:13
Rohan Grey
Academics only lesson. Next time, don't try to argue with bed at night. Thank you very much for having me. It was an absolute pleasure seeing the other side.

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