Make Me Smart March 15, 2023 Transcript

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Kimberly Adams 

Okie dokie I’m ready to go!

Kai Ryssdal 

I forgot to turn off my heater. Sorry, it’s cold and raining in Los Angeles. I had the heater on in the shed. I apologize, everybody. Hi I’m Kai Ryssdal. Welcome back to make me smart where we make today make sense.

Kimberly Adams 

And I’m Kimberly Adams. Today is “what do you want to know Wednesday,” the day in the week where we get to answer your questions. And questions do we all have. Of course, it’s about the collapse and the ongoing ripple effects of Silicon Valley Bank. But before we get to the questions about Silicon Valley Bank or SVB as everybody started calling it. Let’s do some SVB related news fixes. Although can I just say that every time I say that I think of SWV. Just it’s inexorably linked in my head. Just as I’ve been like listening to their album.

Kai Ryssdal 

Do you? I guess I do get SBF mixed up in ther. I get mixed up with Sam Bankman-Fried. SBF, SVB, SBF.

Kimberly Adams 

Oh yeah, so many acronyms with the Ss. Well, you go first Kai, you were just all over this on the show.

Kai Ryssdal 

Sorry. I’m just letting Bonzai out. So look, I mean, it’s a huge story. I do not believe it’s a crisis. I think the global banking situation right now is a situation which we should keep an eye on. But hang on. I’m going to close the door now, because otherwise it’s gonna get cold. But here’s what I wanted to point out. When people get antsy in global finance, they go to American treasuries, Treasury debt, right? Bonds and bills and all that jazz because it is the safest, most liquid debt instrument in the world. The problem is that sometimes too many people want to buy American debt, too many people want to buy bonds. And when that happens, this thing called liquidity in the bond market suffers. That is to say there aren’t enough bonds to go around, or there aren’t enough bonds being sold to meet all the buying demand. And that is what has happened. And I will quote from an article in the Wall Street Journal today where it says “liquidity in the market for 10 year Treasury futures” Right? And that is the benchmark 10 year Treasury debt, “has been less than half the levels recorded before the SVB collapse.” That’s currently the data from quantitative brokers. That is amazing! That’s amazing. The people who have American Treasuries are holding on to it, the people who don’t have it want to buy it. It’s a big deal. It’s not like the market’s gonna break. It’s not like it’s going to collapse, but it does kind of give out weight influence to one trade. It’s kind of a big deal. It’s kind of a big deal.  And I think maybe it’s worth explaining a little more what you just said there about the people holding them don’t want to sell because it’s not it’s not just the US government that sells these bonds.  Oh, yeah, sorry. That’s a very good point, right. So the US government is of course, the originating dealer of US debt, right, that the Treasury part. But once you have… there is an active, thriving, multi trillion dollar business or market in US Treasuries. So they get traded all the time, every nanosecond, 24 hours a day, right? By banks, by people to hold them by retirement funds, by companies, what have you, right, because they are easily tradable. They’re incredibly liquid most of the time, they’re as good as cash fundamentally. And the idea that people who have them don’t want to sell them now is remarkable. It’s remarkable. It’s the flight to quality sort of personified.

Kimberly Adams 

They would usually be sort of, just as in the normal operations of the market, a certain number of people selling treasuries because maybe they’re in somebody’s retirement fund, and now they’re starting to cash out on the retirement fund. And so they’re selling off those treasuries, but now retirement funds are like “actually, we’ll get that money from someplace else. We need to hold these treasuries.”

Kai Ryssdal 

We’re just gonna hang on, we’re just gonna hang on. It’s kind of wild. It’s kind of wild. What do you got? Um, mine is about sort of the global ripple effects of this. Credit Suisse is in a mess over in Switzerland. You know, basically, this is another bank that because people started freaking out, confidence in the bank just like fell like today. And the fact that the banking crisis might spread, and I’m reading from the Journal here “before the regulator’s announcement,” and this is the oh, sorry. Backup. Because it was such a bad situation this afternoon, our time or evening, their time, Swiss regulators have said that they will step in to provide some extra liquidity, because this is the thing that everybody needs right now, to Credit Suisse because basically the Saudis wouldn’t bail them out. Which is hilarious given how much money the Saudis have sitting in various Swiss banks but that’s a whole other thing. Prior to the regulator’s announcement, shares in Credit Suisse fell 24% to a new low, prices on its bonds fell to distress levels. And its US listed shares, of course, went back up. But, some of this is real and some of it is the panic, right? And I think this is… you know, we’ve been telling everybody, if you don’t have more than $250,000 in the bank, you really have nothing to worry about. And even if you do have more than $250,000 in the bank, lucky you, you probably still don’t have anything to worry about. Nevertheless, people hear bank run, people hear bank failure, people hear, you know, about major government regulators stepping in. And, you know, Savannah had that great piece on the show today about all of these regional bank managers trying to calm their customers and say, “We’re fine, really, we promise.” But this, this is what people were worried about is the contagion effect. Right. Right. It’s real. It’s real. Now we’ve got our actual questions. Right. So first up is a question from Nick in Sonoma County. He wants to know more about the FDIC insurance limit. He writes, “the FDIC has covered $250,000 for as long as I can remember.” Me too. “And with that not being enough to cover most company’s payroll, why hasn’t this amount increase? When was it originally set?” Go for it.  You want this one? Or do you want me to do this?

Kimberly Adams 

No you can go ahead.

Kai Ryssdal 

Okay. So I’m confused by the word payroll. But we’ll get back there in a minute. Very briefly. So the FDIC right was an, it’s an independent federal agency established after the Great Depression, to restore confidence in the American banking system, which had been shattered by the Great Depression. It was originally $2,500. Since then, has been raised seven times most recently in 2008, or 2009. 2008, I guess, when it went from 100,000 to 250,000 because of the damage that was done in the financial crisis. Obviously, as you can tell by the dates of when this stuff happens, FDIC limits get raised after there has been a crisis. Nobody ever goes, “Oh, yeah. Okay, now let’s raise it proactively.” That’s not what happens. And I think it’s a fair bet that now we’re gonna see a whole lot of discussion about either raising that limit, or actually just carte blanche, backing all deposits in all institutions. Okay? Well, we’ll see. But but there is going to be that debate. Why does it do this? Well, honestly, it wants to maintain stability and confidence in the banking system, right? Because as Kimberly was talking about earlier, once a bank run gets going, it is Katy bar the door right? You fundamentally cannot stop it until the lender of last resort and or the federal government, right? Lender of last resort being the Fed, the federal government being the federal government comes in and says, “we got it.” Or to quote Mario Draghi during the great financial crisis, “we will do what ever it takes.” When you say magic words like that. Everybody goes, “Oh, okay, it’s fine.” Now, what’s going to be interesting to see is whether people say “$250,000 is fine” or “you need to bump it to 500,000. A million?” I don’t know. We’ll see. Here’s where the money comes from. The money comes from a tax levy, a fee, a tax levied on banks, right? Banks pay a premium and all their deposits to pay into that insurance pool, which is now like 128-ish, billion dollars. Of course, that was before SVB. So so that’s the deal with the FDIC. Let me just just super quickly, though, on the actual question about payroll. FDIC limits, were not supposed to back payroll, right? They backed company accounts, but not necessarily and not specifically for payroll. So that’s kind of a whole different challenge, Nick.

Kimberly Adams 

Well, I think the question might be like you, in theory, a company is going to keep enough cash in the bank to meet its payroll. Right? For that pay period.

Kai Ryssdal 

And there was a lot of talk about that. Right? And there was a lot of talk about that, and sorry, when SVB went under. That was the big Friday conversation, right? These companies aren’t gonna be able to make payroll. That’s true.

Kimberly Adams 

So if $250,000 isn’t enough for an average company that needs to keep enough cash in there to pay payroll, doesn’t the logic follow that the limits should be at least enough so that your average sized company can keep enough to meet payroll in the bank at any given point in time?

Kai Ryssdal 

Yes, it does follow. I don’t know the politics of that money follow, right? Because what’s the average size business in this economy? Right. 50 people? 75-ish, right? That’s a lot of money. That’s way more than $250,000. I don’t know. I’ll do some research. I’ll figure that out.

Kimberly Adams 

Exactly and that’s where you get to that million dollar limit? $2 million limit? Yeah. Because I mean, I can imagine that being like, the metric or something. Like, let’s at least make these limits enough so that we don’t have people freaking out whether or not they’re gonna meet payroll if a bank fails.

Kai Ryssdal 

Yeah. Yeah. Yeah, true.

Kimberly Adams 

That’s a good question.

Kai Ryssdal 

Sorry I’m just Googling average business size. No, it’s a really good. It’s a really good question. Really good question. Okay. All right. Next one. SVB. Go.

Meslissa 

Hey, Kai and Kimberly, this is Melissa calling from San Francisco. Oof what a week it’s been. I’m just trying to try to understand better how these new programs that the government is implementing regarding the SVB situation will resonate throughout the financial industry as we continue forward. Because basically what they said is “hey we’ve bailed out all these depositors and made them whole. So if you make a mistake, we’ll do the same thing.” So what’s preventing banks from taking bigger risks and creating a more unstable future in the financial market? Thanks for making me smart.

Kimberly Adams 

Oh, such a good question. I mean, fear could be one thing, but what you’re really talking about is a moral hazard. And this is a term used in economics and politics and lots of other field to refer to an idea that taking a particular action increases the incentive to take on additional risk. So think about all the people who live on coastlines, despite climate change, right? If we have flood insurance, and all these other government programs that will help you rebuild your house at a reduced cost, you have very little incentive to do otherwise. In this case, you know, we’re potentially telling banks that, you know, there’s an incentive to take on these riskier bets, because you’re probably not going to have to absorb the full costs of it. Now, there’s a lot of debate about whether or not this moral hazard thing is really playing out in Wall Street right now. Because the fed, the FDIC, the Treasury, all these folks, they would not have stepped in, if not for the chaos and real potential serious knock on effects that would have happened, had they not done something. So now that, you know, they’re more aware of this, maybe the regulators and the supervisors are going to have additional oversight so not let it get so bad and you’d get caught a little bit earlier than SVB did. Or, you know, maybe, you know, intrepid journalists would notice it and report on it a little bit earlier. Also, because, you know, the people in power at this bank and other banks that will be in similar situations are not coming out, okay. All of the bank’s leadership got fired, the shareholders are not going to get their money back. And you know, there that’s costing people. So if you’re an executive at a bank, if you’re a leader, if you’re a shareholder voting on something that they’re doing, and you know, voting for the board, you have a very strong incentive to not let them take on silly risks because that means you’re going to lose your money. So in terms of what might prevent banks from being, you know, taking bigger risks in the future, there’s the fear of losing all your money, but also potentially additional regulation, which, you know, Congress, in theory might be looking at. But, you know, as you said in your show today, Congress.

Kai Ryssdal 

Congress is, you know, Congress.

Kimberly Adams 

Congress, yeah. All right. That’s all we’ve got for today. Please keep sending us your questions. You know how to get a hold of us. We’re at 508-U-B-SMART also at makemesmart@marketplace.org. I know that this is a super complicated topic, and it’s, it’s easy to freak out about it, but I think some of this is just, it’s the shiny exciting thing to feel fill time on on cable news at the moment.

Kai Ryssdal 

Oh my lord. Yeah.

Kimberly Adams 

And so, you know. It seems and these could be famous last words to be under control and so at least I’m not running to pull my money out of the bank.

Kai Ryssdal 

No and I think we should be clear and I said this on the show yesterday on marketplace yesterday. The banking system is stable. Your money is safe. Do not panic. That’s it. Yeah. But one more thing before we go because we have to, it’s Wednesday, we are 25% of the way to our $150,000 goal. That is what we need to stay on track for the year. Our fundraiser ends Friday. So you know, two more days. Producing a show like this doesn’t come cheap doesn’t come easy, it takes people. Kimberly and I gets in front of the microphone but there’s a whole squad of people behind us doing everything. And that’s why we need the $150,000. It’s not going to be the total for the year. It is what we need to stay on track because the people at corporate headquarters who track this sort of stuff keep a very close eye on how they are doing. Marketplace.org/givesmart if you can. The link will be in the show notes of course.

Kimberly Adams 

Please and thank you!

Kai Ryssdal 

Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Our intern is Antonio Barreras. Today’s program was engineered by Drew Jostad.

Kimberly Adams 

Ben Tolliday and Daniel Ramirez composed our theme music. Our acting senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy  is the executive director of Digital. Struggling to say words today.