Is The Banking System Safer Than It Was in 2008?

hi everybody this is open to debate welcome I am John donvan and as life is always moving and things are always changing situations Etc there are times when to us at open to debate it makes sense to debate again a question that we have looked at in the past so in 2018 when we were at that point 10 years out from the 2008 financial crisis we held the debate asking whether the banking system had become safer over those 10 years it was a good debate some good arguments so I recommend you check it out but now we're in this moment again when huge headlines are being written about the failure of some significant Banks seemingly out of nowhere Silicon Valley Credit Suisse and with a lot of alarms being sounded like by the head of JP Morgan warning that the crisis is not over yet and he says it's going to be felt for years to come so we thought let's ask this question again weren't there guard rails put in place after 2008 that were supposed to keep things systemically safe are they working are they not is it the case after all as we are asking in this debate re-asking the banking system is it safer than it was in 2008. we're having this one argued by two veteran Debaters by which I mean they've been our guests many times before we like them a lot because they are players in the world we're going to be talking about and they're both excellent Debaters so let's meet them arguing that yes the banking system is safer than in 2008 former chairman for the Council of economic advisors Jason Furman Jason thanks so much for joining us on open to debate great to be here and arguing know that the banking system is not safer than in 2008 edits are at large for the financial times U.S Jillian tet welcome Jillian welcome back great to be here and particularly great to be here with Jason so let's get to it we want to give each of you a chance a few minutes to use that time to explain your position why you're arguing yes and why you're arguing no in answer to the question so Jillian you're up first with the no you're answering no the banking system is not safer than it was in 2008 please tell us why well thank you very much indeed and it is indeed fantastic to be back here and fantastic to be back here at A Moment Like This when we've just had the March Madness a period of backgrounds drama and scares and this is Illustrated really two or three key points the first point is as you're going to hear from Jason in a moment in some respects the banks are indeed safer than since 2008 because after the 2008 crisis what we saw was governments rushing in to increase the capital base of the banks to force them to get slightly better at managing their liquidity and you saw the government itself introduced a series of measures which made sure that it could respond faster to a banking crisis such as having the Federal Reserve discount window more flexible more effective such as having say the FDIC expand the amount of insurance it gives to depositors so that is a good news here is the really bad news what happened with Silicon Valley Bank and the others was a symptom not a cause of a bigger problem in finance let me say that again it was a symptom not a cause of a bigger problem in finance and the bigger problem in finance is that for the last 15 years we've had quantitative easing which has Unleashed extraordinary amount of cheap money into the financial system and cause extraordinary dislocations all over the place the reason why Silicon Valley blew up was because as a result of getting used to cheap money it had gone out and bought a lot of Treasury bonds long-term treasury bonds which are very very stupidly had not hedged against the chance of interest rates going up you can look at that and say that was unbelievably dumb it was under believely dumb and in some ways it was idiosyncratic because most banks haven't been quite so dumb however there are many many other financial institutions which have also developed strategies in recent years to cope with a super low interest rate world maybe they haven't done so in such a visibly stupid way in many cases the cost of those strategies has not yet become clear because they're private rather than public and by their minutes in private Equity it's an other institutions like that it's particularly in private Capital which isn't in the traditional core banking world that many of the really dumb bets have been made but the key problem is this as interest rates invariably stay high they may come down a bit but they're going to be higher than they have been for the last 15 years we are going to see more and more chain reactions in my view as people begin to realize that actually these bets have been done and just to make it worse after 2008 there were many reforms which increased the ability of the government to act but some of the reforms that were introduced actually stopped the Federal Reserve from doing sensible crisis beating measures that it used to Quail the 2008 crisis so bottom line is this yes maybe parts of the banking system are safer than they were in 2008 but no I think the financial system as a whole has not been healed because of these massive dislocations because of easy money and what really worries me is that back in 2008 when policy makers were rushing to try and deal with the crises they weren't dealing with sky high levels of debt at quite the same levels as today they weren't dealing with Rising inflation they weren't dealing with geopolitical tensions they weren't dealing with a population that was already very fed up with all these crises they are now and their room for nuva where the next one explodes is going to be a lot smaller thank you Jillian tet so that's the argument for answering the question no to say that the banking system is not safer than in 2008. now let's hear from Jason Furman Jason you are arguing the opposite position yes the system is safer than 2008 please tell us why great um and it's just terrific to be here and terrific to be as part of this relaunch couldn't be happier than doing this discussion with Jillian Tet like she began by acknowledging some of the points she thought I would make I'm going to begin by acknowledging some of her points is the financial system completely safe of course not is the financial system as safe as it should be of course not we just had the second biggest bank failure in American history but we should have some perspective on this in the last three years we have been through two enormous events the covid shock was the largest and sharpest decline in economic activity that we've ever had and the banks were completely fine over the last year we have had the fastest increase of interest rates in the last 40 years the biggest increase in inflation in the last 40 years and the main bank that has collapsed as a result was one that I think Jillian said something like somewhat idiosyncratic I would say extremely idiosyncratic off the charts in terms of the fraction of its funding that was from uninsured depositors the degree to which those uninsured depositors all came from the same ecosystem and the degree to which on the asset side of its balance sheet it was doing um just one thing with it and so I think it's a real Testament to the reforms that we put in place in the wake of the financial crisis as well as the behavioral change on the part of financial institutions that we've gotten through these two massive shocks with something that might be less than what I might have even thought um a year ago a year ago it was very common to say when the FED raises rates this rapidly something will break in the financial system there weren't a lot of people saying don't worry nothing will break in the financial system it wasn't necessarily that they predicted it would be the banks in general or this particular bank but every time you have this type of change in monetary policy something breaks along the way the FED in advance said if this happens we're going to use our tools to try to clean up the mess well we keep driving towards our objective of bringing down inflation and that's precisely what they did they deployed some of their Tools in terms of lending facilities in terms of declaring Silicon Valley Bank systemic and guaranteeing its deposits and they have effectively stopped what seems to be a bank run I'll conclude this opening by acknowledging again that there are continue to be problems with the model of banking High interest rates as Jillian said are negative for the asset side of bank balance sheets the value of bonds for example goes down when interest rates go up it is a positive for the other side of their balance sheet they tend not to have to pay depositors quite as much as they themselves can get from New interest historically when interest rates went up it didn't actually hurt Banks it was roughly neutral for them I think now we're in a somewhat new world but not a 100 percent radically new world and so on balance those High interest rates are more of a challenge than they are a benefit but the degree to which those two sides of The Ledger and how they balance out is a little bit of an open question we're going to have to see Bank business models evolving in the digital world that we're in we're going to see some consolidation and we may see some more problems along the way but I for one am very glad that we put in place the rules that were put in place of the wake of the financial crisis and think in part because of those we are not confronting anything like the financial crisis we went through 15 years ago despite the two huge dislocations the economy has gone through thanks very much Jason um Jillian you're acknowledging that in some regards the system is safer than it was in 2008 but you're saying not in a sufficient number and Jason you are making the argument that yes indeed it could be safer and things need to be reformed but to bring it back to you Jillian who who you you are sounding more pessimistic by far than Jason if the question were put to you this way do you see the risk being there for a crisis as Broad and deep and profound as in 2008 being repeated now for the reasons that you suggested in other words could you see do you see a house of cards stacked not the same way but as dangerously as in 2008 and is that the position that you're arguing um well what I'm argue in some ways is that we ought to broaden the lens a little bit and get Beyond just the banks because if you're just talking about the big Banks um you know I think that a lot of what Jason has said is correct what concerns me though is that we're also talking about the non-banks and about private Capital partly because as a result of the reforms that people like Jason put in after 2008 a lot of the risk-taking activity was taken out of the core regulated banking sector and pushed into the private Capital markets and other aspects of the capital markets the problem though is really twofold firstly that a lot of the risk-taking activity now is in the non-backing set to the private Capital markets which we can't see because guess what they're private and secondly there is no Safety Net in place for those private Capital markets um because guess what they're private and they're not regarded as utility and they're to a large extent outside the Federal Reserve purview now you might say who cares doesn't matter they're private let those silly hedge funds have blown themselves up every so often it doesn't really affect the bigger system newsflash these days Finance is not only so globalized that shocks kind of Ricochet around the world it's also so integrated in unexpected ways with a core banking system that in practice it's really hard to ignore a blow up in the private Capital markets in just the way same way by the way that with svps at a value bank until recently people used to say well who cares about small Banks they go bust the reason we only regulate the big Banks is because the small ones are tiddlers but in today's world things are so interconnected that if you've got a shock in one part of the system it ricochets and there's at least two things that could potentially cause a very nasty shock to Ricochet by the entire system which people have not prepared for which we need to think about one something really nasty happening to the treasury's market treasury bonds Market not impossible to imagine given we're coping with the debt ceiling crisis potentially coming down the tracks and if something broke there that could have really nasty systemic implications the second thing I'm concerned are about apart from you know acts of God or you know shocks like cyber hacks and things like that is something very unexpected happening in China again that is interconnected to the Global Financial system and if something suddenly broke in China that could create a very nasty shock in the same way so if we broaden out the purview of what we're talking about to go beyond strictly speaking the conventional banking system to include the financial system more broadly and those interrelationships you're talking about to return to my question you are saying that you could see the potential for a financial crisis on the on a similar or Worse scale to 2008 that that's still potentially in the offing absolutely and I think you know it's something called Sovereign bonds treasury bonds we reevaluated the system since 2008 has been building as a function that government bonds are super safe and yet government debt has gone up and up and up and up dramatically increases 2008. go figure okay I'd like to let Jason respond to some of what you just said yeah first of all let me concede that last point if Congress is insane enough to default on the U.S debt for the first time in history we will have an epic financial crisis I hope that doesn't happen I don't think that'll happen um but if it does happen and and I agree it is more than a zero percent probability which means the probability of it happening is way too high uh it would be terrible but let's just take that rather extreme event off the table I also agree that there is more risk outside the banking system that that is harder to detect and regulate now it doesn't all go one way 15 years ago the problem we were worried about was what are called money market funds which are supposed to be incredibly safe you put a dollar in you get exactly a dollar out plus interest all of a sudden there was a run on them and they started to be worth less than a dollar and it looked like it might um you know that whole system might collapse now of course we're seeing the exact opposite people are putting their money into money market funds and those money market funds today are much safer and do um deserve the trust that people put into them so there are things outside the banks that have moved in both directions the other thing I'd say is there have already been many many trillions of dollars of losses in both equities and in Bonds in fact it was the worst not that your hedge funds aren't typically a 60 40 portfolio but I think last year was something like the worst year for a 60 40 portfolio in a long time or maybe forever and a lot of these institutions have essentially withstood that shock I don't think the shock is over central banks around the world may continue um to need to raise interest rates to tackle inflation there may be more shoes that drop but they've been through a lot already and the fact that they're still standing I think says something again about the resilience of the system yeah so so you have a different perspectives on on what it means that the thing has not Fallen apart already um Jillian Jason saying the fact that that it's that the that the borgs have held suggests that the system is going to be resilient enough that we have we have the evidence there that that in 2008 repeat is extremely unlikely because of what we've just been through I'd like you to take on that point well I'd like to take a couple of things first of all you know turkeys don't vote for Christmas and you're not going to get somebody who helped to create the 2008 reforms say oh we think it wasn't a good idea and it didn't work you know that's natural incentives um you know I think the reality is that 2008 reforms did some really good things they missed a lot and they also had some unintended consequences um one of which by the way was the fact that um it's become harder to find market makers in the treasury bond markets which means that when a crisis hits um there aren't people to act the lubricant to keep the wheels of the system going and you'd only get a much worse crisis in the treasury bond market as we saw in March 2020 and before and that to my mind that's a very very serious issue that we've not seen play out properly yet but we could see play out quite soon but the really big issue is this if you're arguing that the fact we've not had anything more than Silicon Valley break in the last decade is a sign that the system is fixed and or safer then I think you're ignoring the really obvious point that we've had the Fed provide this extraordinary safety blanket putting foam on the wrong way as Tim geinler used to say on a massive unprecedented scale in the last 15 years and that has in many ways protected the system from many of the bigger shocks I mean we've had you know the FED balance sheet has increased tenfold that is a big big number and that's not even counting what the ecb's done what the bank of England done or most critically what the bank of Japan has done and is still doing and I should say by the way we've not really had proper quantitative tightening yet because much of what the FED has been doing has been offset by the fact that bank of Japan is still going for quantitative easing and so if you look at it globally you've not really had yet a proper quantitative tightening period for any length of time in a global way that really carries teeth so my critical point is this we've not had a proper test yet because we've had so much foam on the runway we cannot keep putting foam on the runway indefinitely they're trying to take the foam off the wrong way because they know how badly it's assorted the financial system and by the way field inflation so what is going to happen when the foam is no longer on the wrong way and the planes coming in to try and land Jason I think that was more than a rhetorical question named at you yeah home saved everything so I think there are some places where Jillian and I have somewhat different emphasis and then there's at least one issue where she's completely wrong and I'm totally right you need to distinguish between two very different things the FED does one is in March 2023 they stood up emergency lending facilities because Banks were potentially going to have runs and run out of money and they said we're willing to lend to you in ways that maybe we shouldn't even lend to you but we're sort of desperate enough that we need to do it that was done for financial stability I think that meets what Jillian's test was of throwing a lot of foam on the runway to prevent problems there's a second thing that they've done on and off and far more on than off over the last 15 years which is called quantitative easing and that's where they buy long-term treasury bonds and buy long-term mortgage bonds with the goal of keeping their interest rate down that actually isn't about helping the financial system and in fact in many ways that actually hurt Bank profits and made it harder for banks that wasn't foam on the runway for financial system they needed to do that for a macroeconomic reason that they have a goal of Maximum employment a goal of price stability and the inflation rate was too low and they were trying to provide much needed stimulus the reason they did all that quantitative easing I don't think is because they were trying to help the financial sector in fact I think it might have hurt more than it helped but they were trying to do what they needed to for the economy because things shifted in the economy and lower interest rates were required to achieve the same goals that was the case before so I don't think that was a mistake I don't think that played a huge role though it played some role in where we are now and they'll keep that balance sheet large for as long as they need to and they can keep it large forever there's not really much cost or harm to that because they're paying interest on one side of it collecting interest on the other side and it roughly washes out that's the difference between between emergency measures to try and support the financial system in times of Crisis and regular quantitative easing to try and help the economy however it actually did end up feeding through to the financial system the second sort of QE um for two reasons firstly by keeping money super super cheap to help the economy what it did to finance is turn everybody into someone who's going to play the carry trade and so almost every aspect of financial institutions have been engaged in borrowing short and borrowing cheaply to invest in higher yielding assets with duration I.E longer term and that's created a massive mismatch across the entire system point one point two is by essentially having interest rates super low for the best part of 15 years what you've done is stop defaults in the real economy and the credit losses have been tiny across the financial system and that of course has helped Banks now you start raising interest rates you start taking the phone off the wrong way in terms of economy because it's not just firm on the runway for the financial system but also for the economy you start taking the firm off the wrong way of the economy and guess what you're going to have a lot of defaults going forward and that's another example of essentially realizing you can't keep the frame on the wrong way forever and when you take it off it's going to be harder to cope with problems going forward and that last Point matters enormously because the only part of a shock we send to the financial system so far in the last year has been an interest rate shock we have not seen a credit shock because we've not had a credit shock yet that is what's coming as interest rates go up and you start to see maybe consumer defaults but almost certainly risky corporate loan defaults Jillian I've seen you in interviews talking about a vulnerability to the system that was not evident in 2008 and therefore not addressed and that was in the case of the Silicon Valley Bank Run the role of social media the way that we're connected now and I was expecting you to bring that into this conversation is it not relevant to the point we're arguing about 2008 or not um I think it's relevant in the sense that what you're getting through social media is an accelerant um I believe um we don't actually know yet because people haven't really discussed this very much yet but you know the enhanced information that everybody has on what's going on and the speed of information where that travels and the degree to which you can get what I call fiber flash drops people coming together and collectively panicking and herding I think is accelerating some of the reaction processes in finance in ways that we don't fully understand um and two points to make of that one the Federal Reserve needs to get out of the 20th century and start actually being able to respond to these 21st century um digital Bank runs um and that means doing things like keeping its emergency measures open for more than a few hours a day um one of the things that happened with Silicon Valley Bank was that it went to the fed you know late on Thursday and said we need cash or we go bust and the FED window was closed and of course they have Mobile Banking 24 7 so it got worse worse um the second thing that needs to happen if people need to think about how digital Finance changes um our reactions and the financial Systems Operations and that's really the realm of Behavioral Finance and just as one of the key things that drove the 2008 crisis was that there was a subtle shift in America in terms of the acceptability of defaulting on a mortgage which hadn't historically been acceptable but became acceptable and that really mattered in terms of the cultural patterns and the default rate so too people needed to use befavorable Finance analysis to look at what social media is doing to finance now after 2008 we saw reforms put in place as particularly I'm thinking of the Dodd-Frank Act which put requirements on banks to to maintain certain levels of liquidity certain Capital requirements as well to submit themselves to stress tests if they were significantly large enough and then in 2018 some of these reforms were loosened so some of these restrictions were loosened and I would just like to get the take from each of you on that on number one how impressed are you with the the requirements of Dodd-Frank as a safety net and and what do you think has been the impact of those that safety net haven't been loosened why don't you go first Jillian well I think Jace is the best yeah so the 2018 reforms the central thing was saying that instead of banks that were had 50 billion in assets and above being potential systemic risks so needing to fall under stronger rules that threshold was raised to 250 billion well when Silicon Valley Bank failed I think it had about 215 billion dollars of assets and it was definitely a systemic risk had nothing been done it could have brought down a bunch of the banking system so clearly those 2018 reforms were a mistake I'm not sure how much of a causal role they played in it there were rules that already applied to Silicon Valley Bank that had the supervisors effectively monitored and implemented them they probably could have flagged and prevented they did flag um but they probably could have done more to stop this behavior and so yes we should basically go back to something closer to what the rules were in 2018 but the bigger issue was the way that the discretion was being wielded and there was an effort out of Washington that started um in the Trump administration of basically saying let's be very LAX in the way we supervise these Banks and that was a mistake that I think is being undone now and should be undone now was it a mistake that moved us closer to the risk of 2008 it moved us in that direction yeah it increased the risk in the financial system again I think still quite far from where we were in 2008. Jillian you mentioned in your opening statement that in some ways the measures that were taken to make the system safer in 2008 actually have tied the fed's hands to be on the spot to address issues that might come up but you weren't specific about it so could you go a little bit more into depth on that yeah when the 2008 crisis happened the Federal Reserve in some ways had a lot of freedom to intervene and so things like the AIG policy response which was you know pretty important in trying to stop a complete full-blown run across the entire Financial system were things that the FED could do it had the legal power to do at the same time the FDIC was able to act with a lot more freedom at that stage about trying to extend Deposit Insurance when he felt it needed to since then however the legislation has been changed and the fed's hands have been tied to a certain degree about how much it can and cannot step in to try and bolster Financial institutions it's one reason why it's now using the discount window and the lending facilities instead and the FDIC has this rule that although the limit of the insurance for individual accounts that it can step in and protect and guarantee have been raised 250 000 per person or 500 000 for a couple um you know the FDIC can't suddenly wake up one day and say we're going through this you know tremendous period of risk and turbulence because interest rates are rising um we you know let's have a deposit Blanket Insurance for everybody for a short period of time while there's a stresses the FDIC can't do that so one of the problems that erupted around Silicon Valley Bank was that because so many of its deposits were uninsured there was initially um the assumption that actually they may not be protected if the bank went down no one knew in fact the FDIC then determines that Silicon Valley Bank was supposedly systemic um and protected all the accounts at the cost of 20 billion dollars it then did the same thing for Signature Bank at the cost of 2.5 billion dollars but it did that you know after the event and by slightly twisting the rules to Define these as systemic no one knows going forward what will happen so one of the things I would add to the to-do wish list um is to basically give the FDIC the power if it feels like it to extend insurance for a period of time in a blanket Manner and to ensure that the FED are a lot more leeway to act as well just to give a little bit of the glasses half full case because I think that's the side of this debate um that I'm on there was a concern after the financial crisis that limiting some of the powers that the FED had one of them was this blanket guarantees for FDIC and sure that the fed and the financial Regulators had one of them was lifting the insurance levels for banks another one was that you couldn't do a program that was just for one institution you had to if you rolled out a new program it had to be available for everyone and some of the people involved in the response to the last crisis really warned that when the next one comes along we're going to find that our hands are tied and we're going to face a greater set of risks we won't be able to respond to it the way we did to the financial crisis I think the events of the last couple of months have proved that those hands weren't tied particularly tightly yes you couldn't do the simple straightforward FDIC guarantee but you could do it for these two Banks if The Regulators wanted to go out and say we can't do a blanket guarantee but we promise that for the next year if any more Banks run into problems they're going to get a guarantee too they could do that they could go out and say that tomorrow they could bring certainty they've chosen not to but that isn't because of the rules themselves and then you can't do things for particular institutions but you can create a set a program that's available to any institution that's a little bit designed with one in mind so that they can take advantage of it so yeah I wish The Regulators hands were tied a little bit less that makes me a little bit nervous but frankly I've been relieved that those hands were tied less strongly than some people had feared they might be okay well we are honored to have some journalists joining us who who cover this area closely and have some questions of their own I'm going to bring them in one at a time but I want to start with Victoria Guida from Politico Welcome to the conversation and we would really welcome your question thanks so much for having me on um so my question is really for both of you as part of Dodd-Frank it seems like one of the ways that it was supposed to help things is by putting in place a structure under which a mega Bank could be Unwound in an orderly fashion and if you look at svb um you know it was a big bank but but obviously just a small fraction of what a mega bank is and there was a systemic concern because of contagion because of concern about panic and so my question is uh maybe this is more for Jason than for Jillian but for both of you um how can we say with a straight face that we can conceivably unwind a big bank without causing considerably more Panic uh Jason why don't you talk I can't say that with a straight face we can't Victoria and in that sense the system is equally unsafe to what it was before we mostly been talking about the United States but let me use Switzerland to make to make this point and the rules in Switzerland and in Europe and in Japan they're all reasonably similar in this regard on the Swiss National Bank did a report in 2022 as they do every year looking at the risks in the financial system and they correctly said Credit Suisse is a big risk in the financial system we're really worried about it they then said but don't worry we have a plan in place that we've worked out with them that if there are any problems we're going to follow exactly this plan and that's how we're going to deal with it well when Credit Suisse ran into the problems that weren't a complete surprise to the Swiss Regulators they threw that plan out the window they didn't use it they just spent a weekend doing a shotgun marriage with BNP and throwing money in and doing all sorts of stuff that wasn't part of that plan so I think those so-called they're called living wills as you know I think the so-called living wills I knew people a decade ago that were telling me if push comes to shove we're never going to actually use these and I think those people were right so I think we've made the system safer in a lot of ways I don't think the living wills is one of those ways I to that I mean even this not even but especially the Swiss Chief regulator herself came out and said this doesn't work um or sorry the Finance Minister it doesn't work you know this kind of calm dismembering of banks in a crisis and if you go from the Mega um situation or something like Credit Suisse to your Silicon Valley Bank you know one of the really interesting things about Silicon Valley Bank is that the FDIC has had this very very well-worn playbook for a long time about how to basically kill a bank calmly and I remembered going to talk to them in 2008 and they have all their systems in place you know small little bank and some middle of nowhere is going down they pretty much got the template press release they've got the whole fire drill I used to joke with them it was like going into the ER department at a hospital it's like okay four more patients coming in bing bing bing killer will off Friday night boom done and I remember joking once they said you know they had to remember to sequence the press releases in the correct time zone to make sure they didn't kill the West Coast Bank before they killed the East Coast Bank on a Friday night and that was a Playbook it worked really well as we saw with Silicon Valley Bank it doesn't work in a word world of digital backgrounds because in the case of Silicon Valley Bank not only did the money go out so fast that they had to go in and kill it in the middle of the day I mean Friday morning late Friday morning which has never been seen before but the normal process for very calmly pitching the assets to other Banks who might come in and buy it or absorb it or take it over broke down too because they had the weekend in any other situation 20 years ago they would have actually sold the whole thing to somebody else they simply couldn't organize any kind of beauty parade or any kind of sale situation that fast and so the thing dangled and limbo and you saw the same thing with the other Banks too so again one of the problems with this living world situation is it doesn't necessarily work in a world of it's hyper accelerated backgrounds our next question is coming from uh Gregory Robb and Greg is with MarketWatch and Greg why don't you jump on in let's I wanted to talk about the U.S housing market I mean every home in DC costs a million dollars now it doesn't used to be that way and I was and I was wondering if you know some people are talking about will home prices fall in the United States at some point and and I was wondering if there was a big drop in home prices wouldn't that be a big shock for the for the banks do you think the banks get through that kind of a crisis Jason I was you know it comes back to my point about moving from an interest rate shock to a credit shock and fault shock um and the answer is it would be extremely nasty I mean I you know what some version of that is already happening in the commercial real estate world and the news is tightening it's getting it's starting to have nasty chain reactions um in the financial system Jason yeah the problem we've had so far is the interest rates going up we have not yet had a problem of commercial real estate borrowers not paying their loans back I think we will have that problem but I think it is a little bit more of a garden variety anticipated problem not that that's going to mean it's going to go perfectly fine when it happens and Greg we have time if you wanted to to do a follow-up question um thank you I guess um I'm reading a lot of what people say about the crisis and it's interesting a lot of people seen a lot of experts seem to think it Rhymes more with the Savings and Loan crisis than with the 2008 and I was wondering if you could talk about that Jillian um I think that's a really good point and I'd say in lots of ways you're right because a lot of what happened with the SNL was indeed about an interest rate shock um not just a credit shock um it's worth remembering we've not really had you know a nasty interest rate shock in the US economy for a very long time and you have to go back arguably to 1994 in the whole sort of you know derivatives crisis and things like that with Orange County to look at it last time it's one reason why people weren't paying attention to it um so in that respect there is a parallel the other parallel of course is you're dealing with a lot of small Banks some of which had Fairly concentrated business models svb had a very concentrated business model um you know a number of the smaller banks in America have got concentrated business models not just geographically but around things like commercial real estate so that's another parallel um the other issue to think about though is what's different this time around what's different on the good side is that you do have things like the FDIC but it's had Decades of experience of killing off small Banks as I've just mentioned earlier the bad news though is this interconnection problem and when these snls went down basically you first of all didn't have a large proportion of uninsured depositives on those days so you didn't get this massive flight and you also didn't get quite the same level of contagion risk from extreme information transparency today you have this last chunk of uninsured depositors it seems although as Jason says maybe the FDIC will come out and say it will actually de facto support everyone but you also have this propensity for panic and contagion so the reason they stepped in for Silicon Valley Bank and signature was precisely because of this contagion risk in a digital world and that's where it's different and potentially more alarming Jason same question as usual I agree and that was that was really well put I mean I I think the issue that is similar to the saving loans first of all that involves a lot of Institutions not just you know one or two huge ones and that there's going to have to be you know a change that happens over time um I think we used to have something like 5 000 banks in this country now we have about three thousand five or ten years from now in part because of these digital Bank runs that Jillian's talked about I don't think there's a business model that is going to work for 3 000 um separate Banks the issue though is is the form of consolidation we're going to see that you know every fifth weekend for the next year there's a banking crisis and a new bank some new shotgun ad hoc Arrangement and all of this adds up to you know taking the unemployment rate up to 10 percent that would be the financial crisis version or is this over the next five years you're going to see you know two Regional Banks merging one larger Bank buying up a smaller one and other Banks figuring out new lines of business that they can make more money from in a world where the model of paying deposit or zero when interest rates are five and hoping no one notices um just doesn't work as well anymore and I can't tell you for sure which one of those two the rapid financial crisis version of consolidation versus the more orderly gradual one I absolutely Grant one of those the status quo is not sustainable I tend to lean though towards this will be a more you know orderly process that plays out over many years Greg thanks so much for your question uh we have time for one more question that's coming through the chat box um and it's from Alexis Glick who was a Wall Street um executive it doesn't specifically address whether we're safer than in 2008 but it's tangential to it so I'm going to take the question and the question goes like this in hindsight we know that the CEO of Silicon Valley Bank was also a director of San Francisco's Federal Reserve when that bank was receiving multiple citations when the bank failed he was removed but how do we ensure this kind of conflict of interest doesn't happen again with other Banks I'm guessing you're going to agree again on this one Whatever you say but I'll let you go first Jason well I mean I think this one makes my case a little bit in that this happened with Duke Fuld and Lehman Brothers on the board of the New York fed in 2008 after that there were some reforms that dramatically reduced the power that these board members have and so I do think the fact that the Silicon Valley Bank CEO is on there probably didn't matter and probably isn't why this happened but it looks awful it looks terrible and there's no reason it should be governed this way these are public institutions they shouldn't be governed by our bank so I think we do need another round of reforms although I think most likely those reforms will help on the Optics rather than the reality but either way they should be done all right well that concludes the free and open conversation part of the program um Jason you'll get to go first again you are arguing that the banking system is safer than it was in 2008 one more time why are you on that side yeah so a lot of the reforms that Jillian and I agreed on in many cases are doing more of what we did in 2008. so um you know we didn't discuss this one but the amount of capital that Banks needed to hold was increased I would increase it um even more in some cases there were things in those reforms that introduced unintended consequences for example telling Banks to go out and hold treasuries or reducing some of the powers of The Regulators we should undo those um some of the things were well intentioned but turns out they didn't work out and probably they could never work getting Banks um to write living wills but I'd step back and remind ourselves of the big picture right now the unemployment rate is quite low consumer spending is quite High businesses have a lot of access to credit and all of this is after two massive shocks to the economy first covid and second a very rapid rise in interest rates and it's a testament to the fact that the system is a lot safer today than it was 15 years ago that we were in the position to weather those shocks with some problematic side effects side effects that we might even have been able to avoid if we had just kept uh and enforced those rules a little bit better but even if that's not the case they pale in comparison to just the enormously unsafe system with the huge consequences that we all lived with 15 years ago and Jillian one more time why you are arguing no on this question I would argue no for precisely the reason that actually Jason just finished with which is that yes the real economy right now is actually pretty good in lots of ways we're not living through a massive massive economic shock right now what is going to happen when things get worse in the future because they invariably well it's not just the fact that you haven't really seen Rising interest rates feeding through to the real economy at all we act properly that is going to happen over the next year and you're going to have a wave of credit losses it's also the fact that you've got a very uncertainty political landscape and energy shocks are still entirely possible going forward so at some point we're going to see in the next year or two a situation where higher rates in the US are going to feed through the real economy raise the vaults we may or may not see inflation coming down I think the fed's certainly currently signaling that it doesn't see a dramatic drop in inflation at the moment we are likely to see Japan and everyone in the US sends ignore Japan but it matters enormously right now for financial conditions Japan beginning some kind of tightening program too and the weather in financial and economic terms is going to be very different so I'd go back to what Jason said yes the bank parts of the banking systems are indeed safer because of the reforms that he put in and I agree with him they shouldn't have been rolled back but it's a wider picture that really worries me and if we get a nasty shock from somewhere the fact that we've already used up most of our fiscal space the fact that central banks have already massively loosened and done quantitative easing and all kinds of ways to try and help the economy and put foam on the wrong way and the fact that basically you have an increasingly interconnected Financial system all of that adds together when you look at the risks in private capital and things like that to potentially risk your world thank you very much and that wraps our debate I also want to thank Victoria and Greg and Alexis for your questions I especially want to thank though Jillian and Jason I hope it's clear to everybody who's listening why we keep having you back as Debaters we just think that you shed a lot of light you explained complicated stuff to people in ways that they understand you disagree robustly but with respect for one another which is the whole point that we're trying to get across with our program Open to debate which means debating with an open mind and being open to debate in the first place and for everyone else I want to thank you for tuning in to this episode of open to debate you know as a non-profit our work to combat extreme polarization through civil respectful debate is generously funded by listeners like you and by the rosenfranz foundation and by supporters of open to debate open to debate is also made possible by a generous ground from the Laura and Gary Lauder Venture philanthropy fund Robert Rosencrantz is our chairman Claire Connor is our CEO Leah Matthau is our chief content officer Julia melty and Marlette Sandoval are our producers Gabrielle yannichelli is our social media and digital platforms coordinator Andrew Lipson is head of production Max Fulton is our production coordinator Damon Whittemore is our radio producer Raven Baker is events and operations manager and I'm your host John Don van and we will see you next time thanks everybody [Music] thank you foreign

Channel: Open to Debate

Views: 847

Keywords: Intelligence Squared, IQ2, IQ2US, Intelligence Squared U.S., debate, live debate, I2, nyc, politics, conservative, liberal

Id: hO3XTDDDOHo

Length: 50min 0sec (3000 seconds)

Published: Fri Apr 21 2023