Free Money Is Never Free – Understanding The Banking Crisis – with EJ Antoni – [Ep. 161]

Linda J. Hansen:  Welcome. Thank you for tuning in to this episode of the Prosperity 101® Breakroom Economics Podcast. My name is Linda J. Hansen, your host and the author of Prosperity 101®- Job Security Through Business Prosperity: The Essential Guide to Understanding How Policy Affects Your Paycheck, and the creator of the Breakroom Economics Online course, the book, the course and the entire podcast library can be found on Prosperity101.Com. I seek to connect boardroom to break room and policy to paycheck by empowering and encouraging employers to educate employees about the public policy issues that affect their jobs. My goal is to help people understand the foundations of prosperity, the policies of prosperity, and how to protect their prosperity by becoming informed, involved, and impactful. I believe this will lead to greater employee loyalty, engagement and retention, and an increased awareness of the blessings and responsibilities of living in a free society. Listen each week to hear from exciting guests and be sure to visit Prosperity 101.Com.

Thank you so much for joining with me today. By now, most Americans have heard the news about the collapse of Silicon Valley Bank or SVB. Several other banks have faced similar fates with the banking system in the US and around the world, teetering amidst unstable currencies, disastrous fiscal policies, woke ideologies, and leadership that is not only poor, but that promotes a globalist agenda, cashless society and privacy eliminating digital currency. What does all this mean for you, the average American, or for your business? My guest today is a listener favorite, EJ Antoni, EJ is not only a returning guest, but he is a friend, and he's been a wonderful advisor as he worked together with economist Steve Moore to provide economic policy information for my books and online course, which are available on my website, Prosperity101.Com.

EJ is a research fellow for Regional economics in the center for Data Analysis at the Heritage Foundation. His research focuses on fiscal and monetary policy. His work has been featured in a wide variety of news outlets, and he is also a regular guest on many podcasts and radio programs, including WMAL's Vince Coglianese Show, heard in the greater DC. Area, where he is the in house economist. EJ's research has also been featured with numerous think tanks and institutes, including the Committee to Unleash Prosperity, where he is a Senior Fellow. Previously, he was an economist at Texas Public Policy Foundation, an economic Consultant for Freedom Works, and he has taught courses ranging from labor economics to money and banking. EJ holds masters and doctoral degrees in economics and frequently speaks at colleges and financial institutions and it's always an honor to have EJ Antoni on the podcast. Thank you, EJ, for returning and for sharing your wisdom with me and the listeners.

EJ Antoni:  Well, Linda, thank you for having me back.

Linda J. Hansen:  It's always great. Like I said, you are a listener favorite. There's always a lot of downloads when I have you on because you have such wisdom and you provide such great information for the listeners. So as we look at this bank collapse of Silicon Valley Bank, as I talked to you before, we were recording, I said so many people are asking me, what does this mean? What does this mean for the average person? And we go through our daily lives. People go to their jobs, they take their kids to soccer practice, they take care of elderly relatives, and all of this comes and goes in the news. And I don't think people understand the earth shattering effects of things like this. So could you explain a little bit of what caused the collapse and then what it means in terms of the rest of our banking system?

EJ Antoni: Certainly I'd be happy to. So SVB, we have to understand, was not your typical bank, both in terms of where it got its money and then where it allocated its money and basically a confluence of different events are what caused this bank to collapse. So what made this bank unique, right? Why was SVB different from your typical big bank, like a Wells Fargo or a JP Morgan? And why was SVB different from a typical small town or regional bank? Let's say, the vast majority, over 96% of depositors at this bank had very large deposits, over $250,000. So there were a lot of millionaires, even some billionaires, who either had their own money or money of companies that they own at this bank. So it had a very unique clientele, but it also had a very one dimensional clientele as well. These depositors, for example, were dis-proportionately tech startups, venture capitalists. So this is a depositor base that is hyper dependent upon interest rates, specifically on low interest rates and the reason for that is because you're talking about firms and individuals that are constantly relying on the ability to roll over debt. What does that mean? Imagine if you have some very large credit card balances, and what you do every month is you simply make the minimum payments on those cards, and then instead of actually paying down the balances, you just transfer the balance to a new card. Now, as long as interest rates are low, that actually is a very viable strategy. The problem is that interest rates never remain low, right? The fact that we've had rates as low as long as we have has been basically an abnormality. And so now that rates are finally going up, what a lot of depositors at Silicon Valley Bank found was a situation wherein they couldn't continuously roll over that debt because the interest charges on their debt was just prohibitively expensive. So now, instead of just rolling over the debt, they actually had to pay down some of their balances. Where were they getting the money to do that? They were withdrawing deposits from the bank.

Now, this process started months ago when interest rates started to go up. We talk about SVB or at least the news talks about SVB as if the collapse just happened overnight and that's simply not the case. This has been a bank that was bleeding literally for months now, and both the regulators and more importantly the management at the bank did absolutely nothing to try to stem that bleeding. Now, on top of the risk in terms of the depositor base that this bank had, where the bank put its money also had a lot of interest rate risk. So what banks can do to offset certain investments that are considered risky by the regulators is they can invest in other things which are considered not risky, which are considered safe in the eyes of the regulators. But this is all in terms of what we call default risk. So imagine if you have an investment, you buy a bond, let's say, and there's a certain chance that the borrower is not going to be able to pay you back. Maybe you're investing in a business and there's a chance that that business is going to go belly up before they can actually get you your money back, right? That's a risk of default. You're not going to get your money back. So you can make those investments and then you can offset that risk by simply investing somewhere else that is considered very safe, such as United States Treasury bond bill or note, because in that case, at least in the eyes of the regulators, that's seen as a perfectly safe investment, you will get your money back. And SVB engaged in this behavior in spades so that they were heavily invested in United States Treasuries. Now, from the standpoint of, again, a default risk, getting your money back, there's no risk there. But in terms of an interest rate risk, there was a tremendous problem that was brewing and it was this, if you get a bond that is, let's say at 1%, right, and then you want to sell that bond in the future, you are competing with new bonds that are being issued today. So let's give an example. Imagine I bought a US Treasury bond at 1% and I want to sell that bond today. Well, I'm competing with the United States Treasury that's offering the exact same product, but at 4%. So now how on earth do I convince somebody to take my bond, which again is the same product, but is going to give a lower return, a lower yield? I have to basically sell it at a discount to make up for that reduced yield. And so SVB had to literally sell bonds at a loss in order to raise the money they needed to pay all of the depositors that were making withdrawals, again, also stemming from the fact that interest rates were going up.

Now, this brings us to an important realization though, and it's a significant problem with the way banking is conducted today, and that's the fact that banks don't actually keep your money on deposit. So when you make a deposit at a bank for $100, let's say they immediately lend out almost all of that. And you may say, well, but how is that possible? Because when I go back to the bank and I withdraw my $100, I still get my money. So how can they give me my money if they've already given it to someone else? You're not getting your money, you're getting other people's money. So what the bank relies on is that not everyone is going to come ask for their money at once, because if they did, the bank would expose itself for what it is, which is a perpetual state of bankruptcy. Banks are constantly underwater, it’s a very scary realization, but sadly, it's the way fractional reserve banking operates. And so what we saw in the case of SVB was the fact that all these people needed to get their money, and SVB was unable to actually get those people their money back. And as soon as word got out that this was the case, everyone rushed to get their money, and it only accelerated the problem. Now, I do want to point out that the problems at SVB were not your traditional bank run, where it was panic that induced the collapse of the bank. The bank was already collapsing and it was already going to collapse, and there was nothing that was going to stop that. The rush for depositors to get their money just accelerated that. But it was not a case of a relatively sound and healthy bank where a panic just induced a run and that caused everything to collapse. This was a bank with severe structural problems.

Linda J. Hansen:  Well, it reminds me of the statement, things happen slowly until they happen all at once. And we can see that in cultures, and we can see that in educational programs and things that are seeking to change cultures, but we can see it in a banking system like this or in a banking culture like this. And so I'm so glad you mentioned that it was not necessarily your typical panic induced bank run. It was something that was really systemically wrong with how SVB was operating, and so it caused this collapse. Could you explain to the listeners what is the government now attempting to do? Because really, when people hear, oh, should the government bail out the banks? A lot of people think, yeah, of course we should keep these banks healthy. But actually, I tend to want to go to every person I meet and say, so how much money out of your pocket did you want to actually give so that that bank could survive? Like, how what does that really mean to you? Because it's actually taxpayer dollars. So could you explain to people what is happening in terms of what the government is attempting to do here and why it's really not as good as the mainstream media would have us believe?

EJ Antoni: Certainly first, I want to draw attention to the fact that banks are the only industry where we actually allow these businesses to operate, not only in a state of perpetual bankruptcy, but then when they do fail, we immediately rush in to bail them out. And if that was not the case, then people would learn not to do business with these risky institutions, quite frankly, but because we perpetually bail them out and have virtually for the entire history of our nation, this problem continues to this day. Now, what is the government actually doing right now? In this instance? They basically have said that we are going to guarantee all of the deposits at SVB. Now, that's a problem for a couple of reasons. The first is the fact that deposits are already guaranteed up to the first $250,000. Now, again, the vast majority of deposits at SVB, as we said earlier, were above that amount. But if you do have a deposit above that amount, you have a couple of options. One is you can simply just allocate your deposit among several different banks so that every bank balance is below that 250 threshold or you can also just buy private insurance. So this is the equivalent, what's happening right now of me saying, you know what, I don't want to buy flood insurance for my house. Then I have a flood, the house is destroyed and then I go to the government and say, you need to cover my losses. Absolutely not. You had a product of which you could avail yourself and you chose not to. What the government has done is basically announced we are going to subsidize risk taking and we, although we have privatized the gains, we're going to socialize the losses. But despite the fact that the Biden administration had announced that we are going to cover all deposits everywhere in the wake of the SVB collapse.

Then Janet Yellen in testimony in the United States Senate the other day when she was pressed on this point, admitted, well, actually, I'm going to walk that back here and say, no, we're not covering all deposits everywhere, just those at banks, which we consider to be systemically important. Now, what does that mean? Basically, if a bank collapses, right, if that domino falls, how many other dominoes is it going to knock over? And then how many dominoes will they knock over? So what is the system wide impact of this bank's failure? And if that is considered to be severe enough, then that bank falls into the category of what we colloquially call too big to fail. But if this bank's collapse would not induce that kind of system wide stress, then we're just going to allow that bank to fail and we're not going to cover those large depositors at that bank. So what was the effect of that? A massive flood of large deposits out of the small regional banks and into the large banks. Why? Because the large banks have already been designated as systemically important banks. In other words, too big to fail. But if your money is in a regional bank and you're a large depositor, Janet Yellen just left, everyone scratching their head, wondering, oh, I don't know if my deposit is covered. Maybe it isn't. Maybe it is. Who knows? We'll have to wait until the bank fails to find out. Because if you go back to SVB, that had previously been declared to not be a systemically important bank, but then all of a sudden, once it failed, it was declared to be so. And we hate to think this way, but SVB had a very large amount of money that belonged to political donors. And you wonder, was that part of the calculation as to why those depositors money was saved?

Linda J. Hansen:  Well, the political donors, too, were largely slanted toward one party. Your question is valid when you said personalized gains and socialized losses. I feel like that's such a great way to explain what is actually happening and when we socialize losses, we're really taking it upon the American people and making them carry the burden of this. So if you're talking to your average business owner in the Midwest or the Southeast, and they have a small business where they will have deposits larger than this, or maybe their personal funds are larger than this, as you're thinking about this system that we're dealing with and what's happening in our banking system right now. What would be your recommendation to those people as far as what they should do with their funds?

EJ Antoni:  Well, in a case like this, my legal counsel is always advised that I not give advice. But all I can do is point out that given the treasury secretary's comments, there is an obvious risk to having large deposits again above that $250,000 threshold in a bank that has not already been declared to be systemically important. But what's really scary is that the rules of the game are just changing on basically a daily basis, right? Deposits that were not covered at this bank all of a sudden were covered, like, in the snap of a finger, and then deposits that we thought were covered everywhere, and now all of a sudden aren't. There has been no clear guidance from this administration, and any clear guidance that has been issued is then followed up with vagaries so that we're still not really sure, again, what the rules of the game actually are. I just have to reiterate that, at least according to what the current rules are, the most recent version that's been articulated by this administration is that there does seem to be a very clear risk of having large deposits in a bank that has not already been declared to be systemically important.

Linda J. Hansen:  When I think about that, I think of a funnel. Like, they're trying to funnel us into these big banks where there can be more control. It's just like funneling people from rural communities into cities. It's just funneling people into a global agenda. And if they have these big banks where there's more government control, we have less privacy, we have less autonomy for our ways that we use our money and our access to our money. So in my kind of anti big government mindset, I'm thinking that we should all go put money into these small regional banks and just make sure it's maybe spread out so it's not in these large deposits and stuff. But we can help make sure these banks are strong so we're not relying on just the big government favored banks. And is that sensible?

EJ Antoni: Well, one of the ironies Linda, that's happening right now is that because banks are so interconnected and that includes the smaller and mid sized banks, regional banks, and the big banks, they are all so interconnected that the large banks have a very strong incentive to make sure that those smaller banks don't fail. And so one bank that's gotten in a tremendous amount of trouble recently, first Republic Bank, and it as far as we can tell, does not seem to have any of the severe systemic problems that like an SVB or a signature bank had. For example, two banks that just collapsed recently with First Republic because the large banks have determined that this bank actually seems very sound. These banks, large banks, have taken $30 billion and placed it back on deposit at First Republic. In other words, there was a flood of people leaving First Republic and they put their money on deposit at the big banks. And then the big banks just took that liquidity and put it right back in First Republic in an attempt to keep the bank solvent to keep the bank going, because they know that if a domino like First Republic falls, it's going to cause such systemic stress in the system that it could cause severe problems for those big banks as well. And so I suppose you could say one positive to the interconnectedness of these banks is that they have an incentive to keep each other strong. And we saw a very powerful vote of confidence when those big banks made that $30 billion move.

Linda J. Hansen:  Well, I appreciate the fact that you brought up the interconnectedness and I have a friend who just recently refinanced their home. They kind of wanted to get away from a very big, almost woke ideology type bank and wanted to get into a more regional, small, family owned bank. And so they refinanced their home through that small bank and within a week they were sent a letter that said their loan had been transferred to a very large bank that this person really didn't want to do business with. But now the loan was transferred to that large bank. So this interconnectedness is something that people need to be aware of and things aren't always as they seem to the consumer.

EJ Antoni:  Right? And we also have to remember that banks today do not actually keep loans on their books that long. Banks aren't really in the business of making loans. Banks are today more so in the business of being a middleman. What they do is they find people who can borrow the money of large investment houses and essentially what happens is, yes, the bank does initially make you the loan, right? But then they sell that loan as fast as they can in order to get all of their capital back so that they can make another loan. So banks are not really living off the interest, for example on your mortgage because they may only have the mortgage on their books literally for a couple of months. They are living off of the origination fees for example and so your mortgage is then as fast as possible bundled with other mortgages into a Tradable Security, what we call an MBS or a mortgage backed security. And we do this not just with mortgages, we do it with auto loans, with student loans, with even credit card debt sometimes. So there are all kinds of financial instruments that we create out of debt. And the idea that you can do business with your local hometown bank and that all of the business is going to stay there, I mean that's just not a reality anymore because that business model hasn't been profitable for quite a while.

Linda J. Hansen:  Exactly. And so as we move into this whole different facet of our banking system and what's happening globally with banking we can see it like Credit Suisse and different things happening. How what is happening now different than what, say Iceland did with their banking system when there was a collapse in 2008? And how can we learn from that in terms of how we can approach things now to make sure we have a strong economic system for our nation?

EJ Antoni:  Well, I mean, basically what we're seeing right now is the result of the central banks around the world trying to keep interest rates too low for too long in order to finance massive amounts of, I mean, just record breaking amounts of government deficit spending. And the result of that has been gross mis-allocations of capital which in turn are causing these bank failures. There was no reason that banks would have plowed trillions upon trillions of dollars into these low yield government securities had that situation not been made possible by the Federal Reserve flooding the market with newly printed money. And not just the Federal Reserve. Again, this has been central banks around the world. Now that gross mis-allocation of capital is coming home to roost in the form of this financial calamity, these bank panics. And essentially you now have to ask the question was it worth it? Was it worth it to provide all of these cost savings to governments? Because that's what happened right? When you artificially reduce the borrowing costs for government you are saving the government money that's absolutely true. There's no doubt about that. But there are catastrophic results that stem from that, not the least of which is that you get these governments addicted to that cheap credit, which they never seem to be able to wean themselves off. And so the spending levels don't go down, even though interest charges eventually go back up.

We are on track in only a matter of a few years, see interest on the debt be the largest line item in the entire budget and that's true not just for the United States, but for several countries around the world. So you not only are going through that fiscal shock, but you're also going through, again, the current banking problem of all of these institutions becoming insolvent. I mean, the Swiss government, for crying out loud, basically just had to bribe UBS with $100 billion to take the toxic Credit Suisse. So again, all of these costs add up. The idea that you can somehow square the circle on this and create free money for the government without negative consequences, I mean, I'm sorry, but there's just no way you can have your cake and eat it too. At the end of the day, the sins of the past always catch up to you, be they moral or monetary and I don't know when we forgot that you can't spend, borrow, and print trillions of dollars without negative consequences.

Linda J. Hansen:  Well, free money is never free. You explained that quite well. Free money is never free. And you would think that we would have learned from the crisis in 2008 and that whole era, 2008, 2009. You think we would have learned something then, but it seems like we've just escalated into another realm of dysfunctionality.

EJ Antoni: 

I think we did learn something. What we learned was that if you mess up badly enough, the government will just bail you out. Right?

Linda J. Hansen:  Not what I was hoping we would learn.

EJ Antoni:  Right. What we learned was exactly the wrong lesson. We didn't learn that fractional reserve banking is problematic. Instead, we learned that if you do it on a large enough scale, and again, if you mess up at a large enough scale in terms of your investments, then government is going to jump in and bail you out. Because we don't want to take our medicine. We don't want to face the negative consequences today. We'd rather kick the can down the road and have a bigger problem tomorrow. Just so long as it means not dealing with the problem today. I mean, if you wanted a working definition of immaturity, I'm not sure you could find a better one than that.

Linda J. Hansen:  Good example and a well-defined definition. As we think about how all of this affects the average American, the average business owner, and I mentioned in my intro about the push towards a digital dollar cashless society, how is this promoting that and putting us through that funnel? Where then we'll be funneled into this privacy eliminating cashless society, and maybe we'll be suffering under the credit score system like they have in China and how can we as citizens or business owners prevent that?

EJ Antoni:  I think taking your last question first, I think everyone has to be reaching out to their elected representatives at both the state and federal level. Not just federal level. We need to have a full court press here against central bank digital currencies. I really cannot overestimate just how Orwellian these things are and you don't have to take my word for it. There are plenty of publicly available memos from central bankers and other government officials from around the world who are very above board about all of this, right? They're not trying to hide the fact that central bank digital currencies would give bureaucrats an unprecedented level of control. They're not trying to hide it because they see that as a good thing, right? They see, for example, attempts to change people's behavior through the tax code as being very inefficient. So, for example, if we want to force everyone to buy an electric car, we can provide massive tax incentives for you to do that, right? And we can also impose additional taxes on traditional internal combustion vehicles and the result of that is, you will get the marginal consumer to switch from a traditional gas car to an electric car, but you're not going to change a lot of people's minds.

However, with a central bank digital currency, what you can do is you can allocate a portion of someone's income. You can literally earmark certain dollars to only be used on an electric vehicle, whether that's buying it or charging it. And you can essentially ban dollars from being used at a gas station or again, at a car dealership where you're trying to buy a traditional gasoline powered car. All of this is possible because in a central bank digital currency, every single digital dollar has a unique fingerprint, and every dollar can be traced, can be tracked, and can be taxed. And so, again, the level of control here is truly unprecedented and it's something that a lot of these bureaucrats are deeply desiring, and it's something that we need to do our best to prevent, because if that gets implemented, frankly, it's game over.

Linda J. Hansen:  I agree, It would be game over and not only our privacy, but our productivity, because our ability to make choices and to ebb and flow with our business needs, our family needs, would be greatly inhibited. And the choice of driving across country, possibly on a cross country trip, or buying a gas stove in some areas, I mean, that's been something that's been brought up and proposed that people will not be able to buy. Gas stoves, certain washing machines, different things. So if we have this central bank digital currency and they're deciding what we can or cannot spend our money on, this is a very dangerous road to go down. The other thing that can happen is, like, with this credit score or social credit score, I should say, is like if they decide they want to limit our spending or buying power based on our political Ideologies or our speech, that can be very dangerous as well. So we should not give control to government bureaucrats or banking bureaucrats who think that they know better than we do how to spend our money. So listeners, EJ said we have to make our voice be heard at the local and state and national level. Really, I mean, all the way across the board we need to let our elected officials know that this is something we do not want for America. Do you have any other closing comments that you want to make sure the listeners understand or that employers could share with their employees regarding this whole banking crisis and the economic landscape we're facing in America?

EJ Antoni:  I think the biggest takeaway, Linda, is that we want to remember this entire situation was all made possible because we have central banks who are, instead of trying to keep prices stable, are trying to finance runaway government spending. And so you have a couple of ways to correct that, one of which is to just get the central banks to stop responding to government spending in that way. But all attempts to do so have proven pretty ineffective. The only thing that has really proven effective has been to simply remove the excess government spending, which is causing central banks to respond in the way they are by flooding the system with additional cash and so I think that really needs to be where we take this fight, so to speak. We need to get government spending down to reasonable levels.

Linda J. Hansen:  Absolutely. And we don't have a revenue problem in America. We have a spending problem in America.

EJ Antoni:  Right, exactly. If you look at tax revenue, for example, it doesn't matter how you measure it. You can measure it in just a nominal terms. You can measure it in real terms, meaning adjusted for inflation. You can measure it as a percentage of GDP. You can measure it as a percentage of income. Tax revenues have never been higher than they are today. You're absolutely right, we don't have a tax problem, we have a spending problem.

Linda J. Hansen: Right. And for listeners, something I say almost every episode, remember, the government has nothing until we give it to them first, and eventually they'll be spending more than we can possibly give them and that's when economies collapse and countries fail. And we don't want that for America or for any nation and so if we want America to be a strong economic leader, a strong leader for freedom, we need to really stand up against this type of policy that centralizes our banks, creates a digital currency and destroys the freedom and prosperity for business owners and individuals across our country. Well, thank you, EJ. If people want to get a hold of you, could you please share your contact information?

EJ Antoni:  Sure. Actually, the best place to find me right now is on Twitter. It's @realejantoni.

Linda J. Hansen: all right, @realejantoni on Twitter. And you can also find him@theheritagefoundationheritage.org. You can go there, and he is featured frequently in television and radio and podcast interviews. So if you just search for him, you will find much more of his wisdom available to you as you learn. So thank you. EJ. Thank you for sharing this and simplifying it for listeners and for the general public, obviously, but also for your dedication to promoting freedom and to promoting a sound economic system for our country and really to help the whole world. So thank you for your work and thank you for sharing time with us today.

EJ Antoni: Well, thank you for having me. Always a pleasure Linda.

Linda J. Hansen:  Thank you.

Linda J. Hansen: Thank you again for listening to the Prosperity 101® Podcast. If you enjoyed this episode, please subscribe, share, and leave a great review. Don't forget to visit Prosperity101.com to access the entire podcast library to order my newest book, Job Security Through Business Prosperity: The Essential Guide to Understanding How Policy Affects Your Paycheck or to enroll you or your employees in the Breakroom Economics online course. You can also receive the free e-book, 10 Tips for Helping Employees Understand How Public Policy Affects Their Paychecks. Freedom is never free. Understanding the foundations of prosperity and the policies of prosperity will help you to protect prosperity as you become informed, involved, and impactful. I give special thanks to our sponsors Matthews Archery, Inc. and Wisconsin Stamping & Manufacturing. Please contact us today at Prosperity101.com to let us know how we can serve you. Thank you.

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