Rates up, and another bank failure. May 5, 2023

28:21I don't think the internet has improved productivity in an aggregate sense. Well, I guess I would challenge anyone who holds that viewpoint to go start a business and decide not to use IT. I mean, good luck. If you think that there's no incremental productivity boost to you in your organisation to turn your back on all of those things, if you can do that and still be as competitive as everyone else, have at it. Have at it. All right. Let's move on, mate. Because speaking about the pub test, oh, mate, I have almost run out of rantiness and anger, but I've got a little bit left, which our listeners are going to have to suffer through because God love our politicians.

29:05They have never found a problem they couldn't possibly blame someone else for while at the same time feeling absolute sympathy and empathy for us poor voters who deserve so much more and we're so hard done by and they are just, they bleed for us, mate. They cry for us. They are so, so sorry. but it's that guy's fault. And that defines this week in, I was going to say economic commentary. I'm going to call it political commentary because it's not like economics coming to bear. Adam Bant, the federal Greens leader this week, said the RBA was using households as cannon fodder. And Daniel Andrews, the Victorian Premier, said the RBA was very wrong.

29:40They made mistakes, mate. They shouldn't be putting rates up. Everyone knows they shouldn't. And as much as I value Daniel Andrews and Adam Bant's commentary on all things economic. I am therefore now going to completely devalue it because I don't value it in the slightest. Look, politicians are going to politic, right? It's what they do. And I get that and you get that and our listeners all get that. What I actually really hate about it, mate, is the fact that it's really, really detrimental to economic literacy. And it's not new and it's not the first time. And for those who have written this this week, for those who want to say, well, I'm a liberal stooge or whatever, the Libs left an absolute basket case of a budget deficit when they left how they implemented or legislated state tax cuts were going to make the budget deficit worse so i'm an equal opportunity critic in this case i'm not standing for anyone's particular set of rubbish i just really really really and by the way there's also some political commentators and not so economists but economic commentators over the last week who are doing similar things and i just find the i just you know what i really hate is when democracy is undermined by stupidity and lack of taking advantage of people like the pub test is a good example mate because it's easy to say the rba is killing mortgage payers yeah okay so let's get the rba yeah but that's not the whole conversation that's just a very cleverly constructed part of a conversation where you say the only two elements here are rba and households one versus the other and then therefore it's bad and i just really gets up my nose mate because there is monetary policy, there is fiscal policy, there is inflation, there is frankly a cost of doing nothing as much as there's a different cost of doing something and none of these conversations are being had by people who frankly I probably shouldn't expect more of them because politicians are going to politic as I said.

31:31I just would like to expect more from serious people who could say actually I have a policy that I think is better. Here's why I think it's better. The RBA is not the devil. Here's the circumstances that we're in. We're going to have to find a way through this. here's a nuanced thoughtful conversation which outlines the pros and cons and gets us somewhere and i just am bashing my head against the proverbial brick wall mate because it's it's just it's just dumb and it's it's not right and it's it shows either a willful disregard for or a complete misunderstanding of or lack of understanding of economic reality and economic theory and i don't think it's it's not even unchallengeable but have the conversation about the assumptions and the decisions and the interactions and the outputs don't just do the demonize that guy.

32:14I mean, Chalmers loves it right now. He gets to blame Philo for all the problems. Then he'll sack him and say, you're welcome, Australia. I solved the problem for you. Phew. Glad we got rid of him. Now we can get on with things. I just, mate, I don't know. It's driving me very, very, very nuts right now. Oh, yeah. I mean, what do I say to that? Yeah, you're right. I mean, the incentives are going to lead to the outcome, right? Yeah. Good example here might be what Albo did on the weekend with a certain wedding that he attended, right? Now, a lot of people advised against that. That must be a focus group to hell, mustn't it?

32:50No. Look, I think the calculus, it seems like why would you do that for where is the political upside on doing that? And I actually think the calculus makes sense if you want to take a really sort of cynical view at it. The people who are going to vote for Anthony are not voting for Spud, right? Like you'd have to see something pretty extreme for them to sort of switch over. Yeah, right. So they're kind of like thinking you're a bit of an idiot. At least on the extremes. There's a swinging middle, of course. Yeah, yeah. Okay. And you think maybe that sort of changes things. But then I'm going to go kiss the ring of the emperor here because there's 140 ,000 people that listen to this guy every week.

33:28Almost. I mean, he's even challenging our audience, right? So this is how influential he is. and you think, well, does that offset whatever I might lose over there? Now, it's very craven. It's very cynical, but there's a certain calculus to it. So whenever you see things that don't seem to make sense, there's probably just a different framework that you need to look at it through. Now, I could say in the case of what you're railing about, and by the way, I shake my fist at the sky as much as you do on this, but the poly that comes out with a nuanced, complex answer that talks through all the trade-offs doesn't win.

34:05Remember John Hewson tried to sell the GST? He got our birthday cake. I mean, he was a super smart guy. I got a lot of time for him, right? And I really like him today still as well. But it was politically, it was a nightmare. What he needed was a stop the boats kind of little mantra, a nice little sound bite that the media can pick up and run with. People can interpret it as itself. Now, which one's more satisfying to anyone with half a brain? Well, it's obviously a nuanced, complex answer. It just doesn't work though. And that's not being critical saying half a brain. People are just busy and dealing with their own stuff in life.

34:38To really be across everything that's happening in politics and then to be an expert in all the subject matter that politics influences, it's just too hard a hill to sort of climb. So we trend. We trend towards the basic. We trend towards the easy. And in terms of what matters for the incentives for the politicians, it absolutely makes sense. So there's your answer. It's a really unsatisfying one, but that's the reason, right? So one of the things that obviously is true. Either past politicians were stupid or it actually does or could work again. I don't want to do the rose-coloured glasses nostalgia, get off my lawn when I was a kid stuff, but I will because, and pick your political adversary, pick your political hero.

35:23Paul Keating, Bob Hawke, John Howard were conviction politicians who made difficult changes by convincing people those changes were worthwhile, had the discussion, had the debate, won the argument, put their policies in place. And I would argue in almost all those cases, the country is far better off for it. And I have to believe either they were lucky or stupid because the opposition didn't do enough, and opposition's plural, not the current opposition or the current opposition party, opposition didn't do enough undermining and financing. So maybe it was that, maybe oppositions were just more generous.

35:56Maybe the politicians were stupid to try, they should have just said, oh who cares let's just do the easy thing anyway but they didn't right there was a there was a time when when serious policy conversations were had and serious outcomes were achieved it wasn't that they weren't populist in their own ways of course they were that's that's politics but you know we had some serious policy implementation serious policy conversation um you know selling the gst against an opposition who said the gst sucks you will pay more this is a horrible horrible policy i mean you know just just again i don't care whether it's Howard or Hawke or Keating, which party it was, or even which policy it was.

36:28Just that idea of here is a policy, it is a sensible policy, it's a worthwhile policy, we are going to implement it, we would like you to vote for us, please. And we did. I mean, man, has that much changed, mate, other than the lack of vision, effort, guts, gumption, conviction of our politicians? Our opposition is just more cynical and sarcastic and effective? I don't know. I don't know. I think I may have mentioned it in a recent pod, but I think it's the changes to the media landscape that are to blame. Back in the day when there was a much more centralized media, the media's incentive was to shoot for the middle because you wanted the biggest audience possible.

37:09The bigger audience, the more ad revenue. It's that simple. Now we're on the internet and now you get to curate your news. So aiming for the middle isn't the better strategy media-wise now. It's aiming for niches. It's aiming for various different verticals within that. Fox is the absolute classic example of that. Say what you will about their reporting, and I don't like to be sued, so I'm not going to say much. Go on. But the business has been - No, don't. It's on our podcast. Do it yourself in your own time. No, I'm not going to do it. But business-wise, it's been a pretty successful strategy.

37:49right? They sort of own that sort of space. And so I think that you, I think that's a big part of the equation. It is how a single person or a party communicates with so many is through the fourth estate. And now that is just a very different machine with different, again, incentive mechanisms. And I think that's a big part to answer your question. Not everything, but I suspect it's a very big part of that. And you're seeing, I mean, this is after the last election, right? What was the calculus? What was the analysis, the prognosis after the fact? It was actually we need to go more to the right from the opposition.

38:29Yeah, yeah. Now, that's counterintuitive, but I can see where they're coming from. I mean, I don't agree with it, but I can see where they're coming from, right? Yeah, it's all very depressing. It is, mate. It is. I don't know how we fix it other than I will keep ranting because that's what I do and hopefully some of our listeners will pay attention. Hopefully you'll tell your friends. Not because I'm right actually but because I could be entirely wrong just because sensible, thoughtful discussion is worth more, hopefully, to you and to us than soundbites and Kyle Sandlin's wedding as much as always too.

38:59Love you, Kyle. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

39:10Let's move on, mate, to, well, So we're talking about rates here. Rates in the US went up overnight. We're recording this on Thursday morning, another quarter of a percent. The US Fed did remove the reference to future rate rises. They're not promising a pause, but they did remove that reference, which is new for them. Jerome Powell, the US Fed chair, also said that he now thinks there is a chance of a mild recession. And I think it's worth calling that out because, was A, some honesty from a central banker. B, and I'm going back to the well a little bit here, but we've said before, central banks believe, and I think they're right, that sustained high inflation is worse than a recession.

39:55And we've been conditioned to believe that a recession is the worst thing. I mean, it should have been depression. Recession is the worst thing. Everything else must be better than that. And so every other policy will be calibrated to avoid a recession. And I just think I've been saying for, is it a year now? Maybe more than that, actually. I don't believe it. It's not true. Not only is it not true objectively, but the decision makers don't believe it's true, in which case they're going to make decisions accordingly. A recession is not worse than sustained high inflation, believe it or not. It sucks.

40:24People are going to lose jobs and businesses. Some will lose houses. It is awful, but more awful, more widespread, more significantly painful is long-term high inflation. I just thought it was... For the first time, I think we have a really clear... He didn't exactly say those words. By the way, I think Phil Lowe has almost exactly said those words. Listen to Phil Lowe as well. But Powell saying, I am increasing rates and there's a chance of recession at the same time, should be the last thing we need to say on the topic, or at least the last argument needing to be made. That not only is it likely true, but that's exactly what the central banks are thinking.

40:59Yeah, it's horrible. I really have an issue with it. You need to lose your job for the greater good of society. It's something that sticks in my craw. I find it a very – I know it's a blunt tool on the rest of it, but that's what's being said. Yep. And it's generally the less well-positioned that have to suffer there. So I find it a really horrible kind of thing that needs to be done. Is it just reality though, do you think? I mean, isn't that – It's the reality under the system we've got. Absolutely. I mean, these are all driven – But the system is capitalism, right? I don't think there is a – I don't think there is another alternative, Matt.

41:34I guess I think our job is to make sure we look after people who are impacted by it. I don't think there is a world in which everyone has a job who wants a job permanently without inflation, for example, almost by definition. Because if there are more jobs to go around than people to fill them, guess what happens? Wages go up, wages go up, price go up, price go up, wages go up. Eventually that creates the recession. That then makes people lose their jobs. Even without the activity of, again, go back to pre-central banks, right? Go back to pre-Keynesian economics. Later in the 1800s of Australia, balanced budgets, no central banks.

42:03big booms big busts i just i don't think i think you're absolutely right i i guess my my pragmatic uh thought is just that for all of that we haven't just created this where that happens the system created itself where that happens we now try and manage it well or badly to to minimize those impacts but it's not like someone said so what we're going to do is create central banking and keynesian budget so we can put people out of work i think that to my mind is the the only alternative is you have a somehow have have a circumstance where we can have full employment forever with no consequence i i don't see i don't i don't i don't think we've created that system i guess is my argument i think system happened well i mean we as a society have by the by the iterative realities of of the world we've created it's that the world that's come about is through human action so we have collectively i don't think we've systemically created anything it's it's it's been with us for as long as the profit motive as long as specialization as long as speculation i don't think we undo those things short of communism i think it's often positioned that the there's a problem in the economy and the rba comes in and tries to fix it they don't do a perfect job but they've got the right intent yeah i guess i would zoom out and say well actually i would put a lot of blame towards central banks for creating the problem in the first place ultra, ultra easy.

43:24I mean, this is why we had all this malinvestment. This is why we've now got inflation. It was money just sloshing around for any kind of stupid business idea or meme coin or NFT or God knows what rubbish that was kind of out there. That was all, I think you can draw a pretty straight line between central bank policy, ultra easy money, relaxed standards, all the rest of it and the problems that that inevitably caused. And would that happen in the absence? Would there be cycles in the absence of that? Yeah, I think there would be. But I think in trying to avoid them, we end up making them worse.

44:07I'm very much of the view that there's naturally always going to be these kinds of things. But if you're going to fail, Fail early, fail small, fail often. Don't wait until it's too big to fail, quote unquote. It's systemically important banks, quote unquote, which get to that way because of these policies, maybe directly or indirectly. But I think that's where it sort of sticks in my crawl. I don't know. Maybe I'm being unfair. I don't think you're being unfair, mate, but I think I'd best you make the argument for it being unnecessary but probably no worse to the best of my... I mean, we don't know what happens next, right?

44:47We will know in five or ten years the answer to the point you just made because we're kind of assuming that we're making things worse than they would otherwise be. We don't really know how bad they otherwise would be, but I also would say over the last 20 years, we have far, far lower unemployment than we would have had net net or per unemployed person per hour or not worked or whatever the right metric. I guess I'm thinking about the plain seat miles. It's kind of that, you know, if you measure the number of lost days of work over the last 25 years, I'm reasonably sure we've got fewer of those than had the GFC actually blown up unfettered and caused large unemployment.

45:23Had COVID taken unemployment to 15%, which was the kind of forecast by not just the knucklehead banks, but the central bank and treasury and others. I think we know that – well, sorry, I shouldn't tell that. I believe that the damage has been less than would have otherwise been the case had those things played out without safety nets and support. Yeah, but those things start – I mean, you've got to go back even further, right? Like the GFC was, again, a consequence of failures elsewhere. so yeah I mean I think it's it's this is the natural thing with with capitalism we we need what's called the term is creative destruction you know it's it's it's when things fall away because they're not economically sound you know they deserve to sort of follow and they'll be replaced by something better and so on and so forth and we the progress sort of gets made that way so we have very good intentions but no we don't want that it's like trying to protect the horseshoe makers when the car's just been invented or something like that it makes sense right we don't want them to fail think of all the jobs etc etc but it it's it's as i keep coming back to is it's not that i disagree with the intent it's not that i'm a absolute free market free will and every anything goes capitalist i'm not there needs to be guardrails that that are put out there but i think the the just the irony of ironies is is that is that in trying to wrap ourselves as a society in cotton will we really only just make things worse i mean it's like raising kids right You can shield your child from every kind of challenge in life and they're going to be happier for it.

46:59And guess what? One day they're out in the real world and they're going to get the shock of their lives. You need a little bit of, you know, what does Munger say? It's like capitalism without failure is like Christianity without hell, right? It doesn't work. I agree. You've got to have that fear of failure. Will failures still happen? Yes, they will. But, you know, people will be far less reckless going into it. people will be far more cognizant of the downside. So this is, you've got to embrace, you know, the bigger philosophy here, not just cherry pick it for the parts you want. And it's why we do, we get the capitalism on the way up and the socialism on the way down.

47:36We get a lot of distortions and these distortions can be good for a time for certain people, but ultimately I think we all suffer as a consequence. Except that I don't know. We'll probably wrap it up because we're probably in the end of repeating ourselves. But I just, I'm not sure that, I think for better or worse, well, let me try and, I would speculate that humanity is very, very good at, so let's go back to pre-Central Banks, pre-Keynesian budgets, right? So Keynesian budgets, for those who are not up with the nerdy economic terms, Keynesian budgets were surplus and deficit budgets, right?

48:18You spend a bit more in the bad times to cushion the blow. You recover a bit more in the good times to slow things down and to pay back some of that debt. That's generally Keynesian economics. And monetary policy works kind of the same way. Lower rates when things need to push, higher rates when things need to be restrained. That idea of the counter-cyclical in budgetary terms, they call them the automatic stabilizers because they kind of kick in when things are bad. So income tax collection goes down, social benefits go up, and the reverse happens when things get better. So they're automatic to some degree.

48:47and the monetary policy is more, it's a choice rather than automatic, but for the same reasons. I would speculate, mate, that at best, but also at worst, those things smooth what is the eventual long-term result anyway, just as there were pre-both those things. And I picked the late 1800s and I know a little tiny bit about that, having done a bit of economic history, but not all that much. I'm absolutely not an expert. So don't take any of my views on 1890s Australia with too much confidence. Go and do your own research. but I guess so my general thought is you know forever to whatever extent they move stuff around I think at worst they make it no different they just they just move the the dominoes I don't think there's an argument to say that we would collectively have been worse off overall had central banks not been there or frankly better off overall had they not been there their job is to fill in the troughs and kind of top off lop off the peaks a little bit and I guess I you know for all of the I think at my argument I think you make you entirely disagree I think the worst that the anti-central bank or the anti-Kanji policy people can say is you are playing around for no benefit but no cost and I think you can argue there's a net cost to that in the same way that there's no net cost to a late 1800s recession it's just the size of the problem how long it lasts and how long it takes us to get back because the booms are bigger and the bus are smaller and add those two together and you kind of end up in the same place I would argue because money is money is money and let's not get into that but uh but in terms you know but in terms you know the offsets are the offsets, right?

50:12When there's a bad risk, no one spends. When there's a boom, everyone spends. The total amount available to be spent short of capital creation is not that different. So I guess I'm just arguing that over time, that's kind of the point that there's only so many resources to go around. We can price them however we want, but I get my share, you get your share, or this is get their share. I don't know. I can't find an argument where it says central banking is a net negative over an extended period of time. It may be positive. At worst, I think it's a not net negative and maybe at best it's no net positive.

50:39I think its job is just reallocation on temporal lines, really. Yeah. I mean, I made the comparison last week. It's communism, right? Because it works great on paper. Yeah, that's right. So I get the argument. This is what we do. But again, I'll just come back to the facts. It's like they don't do that. The governments do not go into surplus when times are good, structurally. It doesn't happen. And when authorities step in, they're stepping in generally to save the the best position generally what happens right the gfc was i mean the big short was just such a brilliant movie but they really just nailed it at the end and they're saying oh what's going to happen with all of this like well nothing bankers will get their bonuses one dude in wall street went to jail for some stupid thing you know no one copped anything for that except the working class they they copped it so where's where you You know what I mean?

51:34It's sort of like I get what you're saying in theory. So if we had some super advanced AGI that could do this, could look at everything, could make the proper correlations and act with absolute impartiality, I think, yeah, okay, now I'm a little bit more interested. But we don't. We have fallible humans doing it. We have humans that are subjected to various, again, incentives. We have people who have far more access to those people with their control. And it just tends to be that when there is suffering to be had through the excesses of the economy, whether or not that's fuelled by central bankers or not, there's one group of society who wears it all and there's another that just sort of watches a nominal sort of paper loss on a portfolio for a little bit of time before that's re-inflated again.

52:21It's just a nice theory. I get it. I haven't seen any evidence for it working. I just haven't. I'm not sure that the alternative is possible though, mate. I mean, you talked about the fact that some people have to be unemployed for the system's sake. That's going to happen. If you remove central banks and Keynesian economics tomorrow, there is still a bust that's probably bigger. There's still a boom that's probably bigger. People will still lose their jobs because businesses will fail. We don't... Even if you're critical of the way that monetary policy and fiscal policy is implemented, I don't think there is a solution which is not the same outcomes for the same purposes short of, as you say, the perfect paper system of communism or some sort of socialist utopia.

53:00For as long as we let market forces do their thing, we don't, you know, it's a bit like interest rates and inflation, right? Inflation just happens, but a man makes interest rates happen, so he's the bad guy. Inflation doesn't just happen, though. What I mean is we don't have a person to blame for inflation. We don't say, it's your fault, you stop doing that thing. Whereas we say to Phil Lowe, you're making my home loan more expensive, can you please stop? I mean, just in that context of we somehow, as a society, except inflation because it's disembodied. I guess I'm just making the argument that if we say, well, it's the current system says you have to lose your jobs so the rest of us are okay, all I would say is the alternative system is you will lose your job and the rest of us will be okay.

53:39You know, there may be fewer people to blame in air quotes for that outcome, but we're not going to change the outcome. There is no system to change the outcome. But the blame in that instance, in that scenario, will be from an economic model or business. You lost your job because the business isn't viable. That will always be the case because we've always had - That's fine. That's fine. But what's the difference? Other than a moral superiority, the same number of people still lose their jobs. I mean, it doesn't matter who we blame. Because that viability can be masked a lot longer under the current system and has been.

54:09Let me give you a very topical example. I can't believe, by the way, this is, you know, this - Gosh, I'm looking at the clock. This is dangerous territory. And you're about to start something else, which I always appreciate. Go on. Like one of the biggest things that's happened in the world recently, just getting zero coverage, which is the collapse of First Republic, right? Yep. So we have had, and this is really nice dovetail into what we were just talking about. So we have had three of the four biggest bank failures in US history happen in the last three months. It's a big deal. There was a lovely chart I saw on Twitter which just plotted all the bank failures in the US.

54:50And there's a couple of things that stand out. Obviously, there was a lot in the GFC, but there were a lot of sort of smaller ones with a couple of big ones thrown in. These three that have happened more recently are bigger than all of those combined. It feels like it should maybe make it into the top half of the news. I don't know. Call me crazy. It feels as though that should happen. But the other thing that stood out from these analyses analyses is that actually bank failures, regional US bank values are a very common thing. Happens every year. I think there's a background rate of four to five, six kind of all the time.

55:26It's a good thing. And they're all little dots on this chart. So like big deals for the shareholders at the time, they all got wiped out. And frankly, that's the risk of investing and my heart feels for you, but that's what should have happened. Now when things happen, they happen on a much grander scale because we have tried to stop those things from happening so again we we this is your point right there will always be failures yes there will what do you want massive systemic structure things that risk the structure of everything we've got or that some shareholders for a small regional bank in the u.s got it handed to them and it both sucks but i know which one i would prefer and i know that i don't want to have to wear the consequences for poor risk policy in utah from a board of 12 people you know it just it it just seems it just seems as though it's that is is the issue you tend to see these things sort of centralizing getting more dominant more structurally important and guess what were the solution to the first republic problem was jp morgan gets to buy the assets at a song cents in the dollar.

56:33They had to come out afterwards and said, yeah, we're going to make, what is it? $500 billion this year off this trade. And there was a law in place that said, if you hold more than 10 % of national deposits, you can't acquire, right? There's too much power here. And you know what? The first thing to go in emergencies are those kinds of restrictions. And that's gone. And the other thing is that bubbling, what I don't think many people realize is that all of these issues are kind of the same. Whatever bank you want to sort of point to, they're failing for the same kind of reason. There's a regional bank ETF in the US, which is down something like 35 % year to date.

57:17It's down 50 % in the last year. They've all got the same problem. They have all 100 % got the same problem. And the scale of it is frankly really, really, really scary. So again, were these always going to fail? Yeah. Now in hindsight, when we sort of look at how they were structured, what they were investing in, who they were taking deposit, all of these kinds of things, it seems super obvious. And we kind of, in trying to fix it, which I suspect, we're going to make that worse at some point. The classic analogy here is we've been drinking all night, hangover's starting to come on, well, let's drink some more and we'll push it off.

57:58And it tends to work, right? You know, hair of the dog kind of thing. But ultimately that hangover is going to come and it's going to be a pretty nasty one, I would suspect. Yeah, I don't think we're ever going to agree, mate. I'm more than happy for First Republic to be absorbed and stop another GFC. We saw what happened back then and I think if we can resolve it and we resolve it, is the solution perfect? No, I think it's just less imperfect than letting people hang for it because I think that's the reality, right, is for all of the bankers who didn't go to jail during the GFC, and I completely agree with you, for all of the auto bailouts that weren't deserved by the investors and the management teams, I agree with you.

58:31The fact that we probably kept hundreds of thousands of people in jobs, I think that's, you know, I'm pretty pragmatic at that level. Is the system ideal? No. Would I change it? Yes. Am I pretty happy that governments and central banks make sure that there is no America-wide bank run because four banks went broke? Absolutely. I would take that every day of the week and twice on Sunday, mate. If JP Morgan can get a little bit bigger, it's the cost. I'm no bank fan. I don't own any banks. I don't think I ever have. I certainly don't own JP Morgan or anything else. I don't love bank competition, sorry, concentration, including here in Australia where it's a ridiculous or the gobbling.

59:02I think those things are all absolutely 100 % true. I probably just, not that you're not, but my starting point is just pragmatically, what's the best economic outcome for people? And I think, you know, while we say, well, little guy cops at the neck, he absolutely does. But if little guy also keeps his job in, you know, six figure numbers because they, you know, bought some of the bank, the water makers or let the banks merge, I'm okay with that. Again, the problem is that the regulations that should go with that don't. And so it's an imperfect solution, not because they bailed them out, but because like in 2018 when Trump rolled back the banking regulation that would have probably meant Silicon Valley Bank was better regulated.

59:40You know, I think the problems in the solution can be different things. I think it's also true to me. I think it's possible to say, you know, does it suck that it had to happen? Yes. Is it a perfect way to resolve it? No. Is it better than letting it fail? In my mind, 100 % yes. the missing piece is, you know, like post-GFC, what do we now do to make sure this never happens again? That question never gets answered because we all move on too quickly. Yeah. I guess my point is it's not over. Here's the other interesting thing too. So if you go back, history is just full of examples. And this isn't to say this is how it went down before so this is what's going to happen again.

1:00:15It's the whole history doesn't repeat but it rhymes kind of thing. Pick a major financial crisis of whatever choice, whatever flavour you want, modern history, and you will find examples of the most influential connected people with the ability to make policy and do that saying, oh, it's fine. Literally a month before things just we, like Ben Bernanke was there a month before Lehman Brothers went under saying that we might get a mild recession. Everything is fine. And the reason they look so spectacularly wrong is because you're up against forces that are just, they reach a point where it's just, you just can't do anything about it.

1:00:56And we kind of paint ourselves into this situation. And I think, you know, here's a very interesting data point. Take this as you want. But I think of all the people in the investment world who we'd say are pretty level-headed and long-term thinking, we've got Charlie Munger and Warren Buffett. Heard of them? Now, very long-term holders. They're selling down the banks. Charlie Munger was on CNBC, I think it was. earlier this week saying that there's a whole bunch of trouble brewing. He's not someone, Chicken Little, right? He's a very stoic individual. That's right. And he is saying, not only is he saying there is something to worry about, but we're taking our money out.

1:01:34And these guys don't sell often. That to me is like, that's an interesting signal. The other thing Charlie called out was the huge amount of commercial debt in these regional banks. I think regional banks account for 70 % of commercial debt over in the US. And these, as we said, I think, again, we're repeating ourselves here, but it's a very capital-intensive business to build a new shopping center or a block of apartments or office. And your income is your rent and your cost is a big part of your cost. Ongoing cost is interest. Well, your interest cost has just gone up five, tenfold, and no one's there because everyone's working from home.

1:02:12And the size of the liability on bank's balance sheet there. Now, it's not marked to market, so it's not as obvious. In fact, even the bonds that we can actually just look over there and say, that is what that bond is worth. A 10-year treasury bought in 2020 is now trading at 40 % of its face value. We know that. But it's not showing up on the books because of an accounting mechanism that says, well, no, this is salvage. We've talked about all of this before. But you factor in a flighty deposit base, which is very easy to leave these days, click of a few buttons. you factor onto that massive provisions needed and actual loss.

1:02:50Let's call it what it is. It's a loss, right? You can call it whatever. The money's gone at this point in terms of the bond portfolio. Only if you want to record a gain if they hold it to maturity. No, I just say I don't buy. I thought about that more. I don't buy. Let's say you bought a 30-year bond a couple of years ago and you say, no, it's fine. I'm going to get paid back. You'll get paid back. Yeah. So why is the market discounting it so much? because the reason is that no one's paying par for it because obviously they're not paying par for it. I can get better term. But you get par at the end of the term.

1:03:2430 is a long time and I'm not trying to dissuade it. Exactly, exactly. So it's no solace to say that. Unless that's a one-year bond and it's down 40%, but you still get your$100 back in a year's time. No one-year bond is trading at a 40 % discount. No, but you know what I'm saying. Okay, use 30 years, same thing. You're only back at the end of 30 years. There is zero chance you don't get your money back. You get your nominal money back. But that's what it's worth. So here you go. You can't take a - Here you go. Balance sheets aren't inflation adjusted. What's the value of that bond? The asset I hold, if I get$100 in my back pocket, I don't have to say I own only$97 because inflation happened or$93 this year because inflation happened.

1:04:01I mean, we don't inflation adjust assets on balance sheet. They're held at nominal value because that's exactly what they are. I completely agree with you that they're worth less if you sell them today. But if you don't sell them today, that's - I mean, you can take a loss now as long as you also let companies write up a profit and say, hey, look, I just made$15 million because I held it to maturity. And you would say at that point, that's not a real profit. They always held that. It was always the case. I'm okay with them marking down if we want them to. I'm just mindful you can do both at the same time.

1:04:26You can't mark down a market-based loss now and then not write up a market-based profit when you eventually sell it. Oh, sorry, you hold it to maturity and get your money back. The money is the money is the money at that point. I'll give you an example. So you've got – you own 10 % of a small startup. Your business. It's crossed certain hurdles. It's looking like it'll stick around. They've got a commercial product out there. They're growing, but they're capital hungry. Now, you own 10 % of the business. I'm going to borrow that 10 % off you. In 30 years' time, I'll give you that same number of shares back.

1:05:00Are you interested? Now, I would suggest under this scenario where it's a very high probability that there'll be – In fact, the company stated aim is to dilute, right? Because they need to raise extra capital. You might get your, whatever it is, 10 million shares back. But where you own 10%, you probably only own 2%, 1%, half a percent in 30 years time. Right. That is, it is, we can't gloss over that fact. The market's hyper aware of that. Anyone holding - That's a different thing. That's long-term inflation, right? Bonds aren't worth less now because of inflation. Those bonds are worth less because interest rates have gone up.

1:05:37If rates come back down again, those bonds will be worth more again. Yeah, but interest rates have gone up because of inflation, right? It's circular. Yeah, but they'll go back down again once inflation's over. And then we'll say, look how much money that made. You don't have to wait 30 years for maturity. Inflation is never over. When have prices ever gone down? They do not go down. Fact. When the inflation rate goes back down, interest rates will come down. When my purchasing power is down by 30 % and then it'll plateau at that point. Okay, are you going to let me claim that a bond holder in two years made money because interest rates came down.

1:06:08Because that's exactly... The bond price aren't down because of inflation, they're down because of interest rates. The inflation thing... Your point, I was saying, I meant when the inflation crisis is over. Inflation has always been here, always will be here, has always... Like, it's forever, right? Bond prices don't go down because of inflation. They go down because of interest rates. So it's the change in rate that drives the bond price down. When the bond... When the inflation crisis is over in whatever number of years, for whatever purpose or whatever cause, and the Fed says, we're done here.

1:06:35Rates that are now five to five and a quarter go down to three to three and a quarter. Bond prices will go back up. That's how it will work. Because that's how they're priced. And at that point, if you're happy for those small banks, say, look how much money we just made. We're genius. Is that clever? Are we? See, we're fine. And bank that as a profit, then I have no issue with your view. But you can't say - But they have made a profit. Versus what it's worth now. If you say they've got to mark it down, they will be making a profit. If the$100 is now worth 60, and in two years time, it's worth 80, they just made a$20 profit in that year when the rates move.

1:07:06And they can mark that up at that point if they've got to mark it down now. Yeah. Yeah. I'm no problem with it. I mean, it's just a mirroring of reality, right? That's what has happened. Think about what you own. All your balance sheet says is what you own and what you owe. And the thing that I own right now is worth this much. The market's telling me what it's worth. And that will change. What it's priced at. What it's priced at. But that's what, if I want to turn it into money, So there are no shares you own that are going to be worth more in the future because the market's right about all those shares.

1:07:36And so in fact, you're actually worth less than you were worth and you should liquidate it all now because that's what they're worth because that's objectively priced. No, I'm not saying that. But I'm saying if I want to turn around to my accountant this year and say, no, I haven't really made a loss because I don't intend to sell. Yes. You know, like they're just like, well, okay, well then you, but show me the money. Show me the money. Put the money on the table. I can't. It's not there. Oh, but it will be there. I mean, there are, you know, and don't forget, this is different for someone who is storing the deposits here.

1:08:12The virtually interest-free loans that we've all provided to the banks have been reinvested over to that. It's like, okay, I want my money back. This is what happened to Silicon Valley Bank. I want my money back. It's not there. Or it says on your balance sheet that it's there. Yeah, but it's actually not there. Like at that point, it's extremely real. Is the market right? Is the market wrong? Was the intent right? Was the intent wrong? It's gone. Correct. It's gone. It's not there. It's physically not there. And this is, as I'm saying, this is not one or two small, tiny regional banks. This is, as I said, some of the biggest collapses ever.

1:08:46People like Charlie and Warren worrying about this. The money literally today, anything could change tomorrow. Today, it's not there. It just seems like something that is to sort of say that, well, we brokered an extremely favorable deal to a very big political donor. Problem solved. Don't worry about it. Move on. I'm just less sanguine about that. And I feel as though you're going to get everything from the don't worry, it's fine to the we're all going back to Mad Max, you know, Fury Road type thing. and both extremes are crazy, and I'm certainly not trying to sort of be Chicken Little here and say the sky is falling.

1:09:26No, I'm not. I find it really noteworthy that when I saw that, I think I saw it on Twitter at first. I opened up the AFR. I was like, you had to really scroll to find it. That's in a financial publication. The news that evening wasn't even mentioned. It strikes me as odd. It didn't strike me as odd at all, actually. I got to say, I think I might have said in different forms. Maybe I haven't. I think I have radio or something. I'm actually not surprised because the size of any commentary on an event is it's novelty and the uncertainty and the risk. And I just, I got to say, I was kind of like, I think it is home home really honestly because given the market's response and reaction to it because the reality is there's no bank runs.

1:10:18There are no, the market is convinced, rightly or wrong, it might be wrongly, by the way, but I think everyone's like, okay, first product, sure, it went broke. Okay, well, that kind of sucks for those shareholders, but that's kind of what we expected to happen and the Fed's dealt with it. Jeff people were going to bought it. Crisis averted. There is no headline because there is no crisis. I think that's almost, to my mind at least, it's the same as everything. The first time something happens, think about even the COVID crash, right? First month, she has down 38%. it. Three months I was like, oh, COVID's still here, but economically we dealt with it.

1:10:47It's not as big a deal as we feared it might be. So not so much crisis averted as in there's no more shoes to drop, but the impact of those closures, the seizures by the Fed to take it over and effectively find a buyer in this case, JP Morgan. I don't know. I almost felt like it was not used because there's almost nothing to report. I mean, it was a thing that happened, but no one's hurt by it no one's worse off the problem was solved there is no crisis there's no run on as in literally a bank run there's no contagion i i kind of thought that was why it wasn't reported because it kind of like there's a bit of a okay another one down okay well we know how it works know what happens and we know how to deal with it so it is what it is i i and i don't mean that to sound flippant i just i kind of felt like yeah it happened but it just it wasn't consequential i suppose maybe that's why to my mind anyway that was why it wasn't reported and i didn't really think it was that big a deal that wasn't reported.

1:11:37Yeah, we get used to things very quickly. So in Silicon Valley, when it happened, it was a big deal. And then we said, oh, it's over now. It's finished. Oh, and then another, and then the second biggest bank failure in history. Oh, okay. Now it's finished. And then the third biggest one happened in history. And then, oh, okay. And then Credit Suisse, you know, and it's just sort of like, and now here we are at this same, and people just get tired and you're after clicks and again, it's about sort of what the media sort of does. And I kind of get that. But I just, and again, it's not to be Dr. Doom.

1:12:08It's more just to sort of say, man, we're easily consoled. Oh, that's fixed now. Don't worry about it. Okay. Oh, but what about this other one? We're going to fix that too. Okay, phew, that's all right. Tell me though why it's a big deal. In the context, so systemically, right? I'm not about the bank itself or even its size. And by the way, feel free to comment that if you need to. I guess I'm just, I'm making the point that as an Australian investor, consumer citizen resident um the bank it was badly managed the bank gets you know the bank fails we find ways to deal with it we all get on with our lives without any meaningful economic damage to the system the capital t capital s shareholders get wiped out of first republic sucks for them i don't mean to be flipping that you know what i mean uh i mean at some level my really like i'm not being i'm not being um i'm not trying to look for a fight like i'm genuinely thinking to my mind the regulators have a solution it was dealt with again i'm we have a unity ticket on actually let's make sure this doesn't happen again but to the extent that we can find solutions um construction companies australia fail buyers by the by the developments it sort of sucks for people who are kind of caught in between but it'll get fixed will get finished um again not to make light of it but you know it gets resolved honestly i'm i'm not too concerned about it in the context of the ability of the system to absorb that.

1:13:34It is almost, I won't say it's a feature, not a bug, but I almost want to say it's a feature, not a bug, for those reasons. What's your take? Yeah, well, I think it absolutely impacts all of us. We're all wearing it right now for these similar kinds of things. Everything today in 2023 is, what, 15, almost 20 % more expensive than it was a few years ago. That's how we're wearing it. We're wearing it in that very real way, very real way. But that's the cause of the failure, not the result of the failure. No, it's not. It's all connected. And I think that is the problem. So what we are essentially doing is that we are, again, socializing the losses through an extra dilution of the money.

1:14:17So look at the debt ceiling debate that's happening in the US. Again, right? Again. And it's just like it comes back. Just square this circle for me like I'm a three-year-old here because I can't get anyone to explain it to me. But you've for decades been spending more than what you earn. You've been making up the difference with debt. The debt has now gotten a huge amount more expensive as well. You've got massive unfunded and off-balance sheet liabilities in the forms of all kinds of entitlements and the rest of it. Now, it's not a household budget, so those analogies aren't always helpful. But it's not a household budget because houses can't print their own money.

1:14:54It comes back to the money. It just does. Now, if I'm wrong on that, tell me how I'm wrong on that. And it's like we will fix the problem by poofing money out of thin air, fixing it where it needs to be, but that's where you and I suffer. We all suffer because we've just been diluted. And that is very real. To the extent we don't get wage increases that match inflation, that's absolutely true. To my mind, the gap isn't the money creation. It's the distribution of the value created by the creation of money. Yeah, but that's what money does. That's the whole point of money, right? But if I get paid 10 % more, everything costs 10 % more, then all we've done is change the denominator.

1:15:28It doesn't actually change my wealth or my income or my consumption. When there's a loss, there's a loss, right? You can't - That's not a loss of surplus though. You can't make that - No, if I made an investment and it's gone bad - Yeah, but you paid someone else more for an investment than they paid for it. I mean, the money doesn't go away or become created in that. In a transaction, governments aside, that aside, you or many goes to someone else. The loss you make is because you buy something at 50 and sell it at 25. But someone else bought it at 25 and someone else sold it at 50. The money is just transferred from you to somebody else.

1:16:02There is no loss without profit. Short of money creation, which is kind of what we started talking about, but there is no net loss to the system outside money being created or destroyed, which never is, but assuming that it could be. Your loss is my profit. My profit is your loss. That's how it works. So there is no net loss. Someone else has sold an asset for more than it's worth at some previous point, they were lucky, or they're buying an asset now for much less than it's actually worth, in which case they've done well. The fact you've made less money is not inconsequential to the system. Well, when the person who's taken the loss is a very large pension fund or an insurance company or a bank that looks after my money, then yeah, I absolutely feel it.

1:16:47Absolutely. I mean, yeah, someone out there on the other side of that initial trade is happy, you know, good for them. But there is, I mean, this, I mean. But that's a whole different thing to the inflation conversation we were just having. We were talking specifically about inflation. My point was, if my income rises at the same price as prices, the denominator changes, but nothing else changes as my overall wealth. Transfers' wealth happen all the time. That's a very different point. That's not inflation-related necessarily. Inflation can be a cause of that. But that's a very different conversation to whether or not inflation is a thing.

1:17:15Inflation is only a thing to the extent it changes the relative ownership of wealth. So why create money if we're all just going to square it off with higher wages anyway? Nothing changes, right? Yeah, it's temporal. I mean, it's inflation generally, right? Because what does inflation do? Inflation, again, similarly, transfers wealth from one person to another. If you have the pricing power, you get the extra money. If I don't have the pricing power, I lose the money. The money just gets redistributed. It doesn't get created or destroyed. Yeah. Where does it get redistributed to? Asset holders.

1:17:47Yeah, often. Yeah, always. Yeah. Always. So it leads to a concentration of wealth, right? So it's a system distortion, you know? It is. It depends though, right? Because it depends only if the asset holders are the net. We're getting pretty hysterical at this point. But yeah, if the asset holder is, it depends where the surplus of demand over supply sits. So, you know, there are IT workers out there who are getting paid 40 % more than they were two years ago. They are doing fantastically well despite inflation. There are nurses who haven't got a pay rise in three years. There are asset holders who've got a lot of money.

1:18:23There are asset holders who own First Republic bank shares that are crying into their coffee. So it does depend. But you're right, broadly speaking, that if there is money, well, it depends where the credit money actually goes. Again, to get really cut out in the weeds. No, it does. 100 % depends. That's called the Cantillon effect. That's exactly right. You're exactly – I agree with you. Yeah. But – It already goes to those with lots of assets and influence. It just has. I'm not making a political statement. No, no, no. It's a statement of fact, right? Yeah, yeah. And if we're happy with that, then cool.

1:18:59And I would be happy if I was in the top 1%. My pragmatism goes to that – again, back to the same point, which is if that keeps some people in a job at a bank or automaker or someone else, then there are ranges of outcomes which are the kind of factuals are rarely talked about. So if the bank gets saved and 80 % of those staff find jobs with J.P. Morgan and we know the bank run which destroys the system and whatever, whatever, am I kind of okay with J.P. Morgan getting a sweetheart deal? Yeah. Not because it's fair, not because it's right, not because it's appropriate, not because it's my preference, not because it's just sometimes the least worst outcome is the least worst outcome.

1:19:36And that just needs to be okay because I can be ideological and say, no, screw JP Morgan, screw the system. They should all die because they all deserve it. And then I've got to look at the 40 ,000 people on the unemployment line and say, and you have to be in the unemployment line because you lost your jobs because those guys ran the bank badly. But that's what we're doing this full circle. That's what we're doing right now. This is the exact raison d 'etre of the current policy setting is to force the recession so to get prices down. So we're able to do it for that. We're able to whack the mortgage belt.

1:20:05We're able to do that and that's okay. But in the other instance, it's not okay when it's an investment banker. I just don't buy that. Because they're going to lose it either way. Like if you can minimize the loss, if you can nurse it through, you can take the patient off the drug tomorrow and say, good luck with the withdrawals, dude, because it's going to really suck. Or you can say, I'm going to take you off the drug over two weeks and it's going to hurt a little bit for most of that time, but we'll get you through. You can choose either of those if you want. Maybe you might want the quick withdrawal and that's cool.

1:20:36Maybe you want the longer one and that's cool. But the reality is the impact you create is going to be of a size and shape. And I'm glad during COVID that we spent a shitload of money, excuse my language, to keep the economy afloat. Now, we spent it badly and recklessly. Spent it so badly. Right? But it had to be big, fast and ugly and it was because they needed to get the money in the economy. So unemployment went to 5 % rather than 15%. I will do that a million times over. Even with the bad stuff, right? if you said to me right then they could take an extra two months to design it properly or just get it done.

1:21:10I'm like, just get it done. Just spend the money. I'm no lover of Josh Frydenberg and Scott Morrison as our listeners well know. That one they got right because they did a big fast nugget to get the money out there to keep confidence going, to keep things okay. And I'm absolutely happy to say to those 10 % of people who otherwise would have less their jobs, I'm glad you kept your job. I'm glad we've got some fallout to deal with now rather than the alternative, which was I could have been ideologically pure and said, oh, really sorry, COVID's a thing. We knew it was coming. We didn't know it was coming.

1:21:37you're going to have to deal with it. I really can't help it. I'd like to help you, but it might cause some side effects and buggy if I want to cause any side effects in a year's time. So just in case I do, I'm doing nothing. I think it's easy in hindsight to say, obviously that was wrong. Obviously we're in a bad place. Now obviously we should have done nothing. I think going through that something at the time is very much well worth avoiding to live to fight another day. I would do that a million times over. Yeah. I mean, it's more than those two choices, but I hear what you're saying. Yeah, 100%.

1:22:04Yeah, 100%. I completely. And that's something we're aware of. And there were things that were obvious at the time. I mean, someone who's been on 400 grand a year for the last 10 years and has seven different investment properties, we probably – I don't know. I think it's hindsight to say that probably wasn't the person who needed immediate swift and very generous government support, right? Yeah, correct. That person's fine, okay? But again, it's just – oh, look, we're going to run out of – we're already running out of time. That point was a long time ago. This is the universe in the world that we live in.

1:22:39Bad things going to happen from time to time. It sucks. And the irony is that in trying to pretend that that's not true and in trying to make sure that we never ever feel any pain, we end up just feeling more pain. And you're right. It's absolutely in the execution. It just feels as though a lot of the things that we've seen in the past and a lot of the things that were happening right now in the world's biggest and soon to be second biggest economy, I just think are just massive strategic mistakes and that someone is going to pay the piper at some stage and unfortunately it's going to be the same people who end up carrying the can, I suspect.

1:23:19Yep, I don't think you're necessarily wrong, mate. I think that's, you know, there are going to be implications. I think where we're both, where we have a unity ticket is on the appropriate regulation to make sure these things are done with a little pain and what's the right word for a cynical side effect? Serious people without being driven by ideology or selfishness or lobbying or all that kind of stuff, you'd end up with a very, very different scenario. We'd probably have 50 billion less of government debt for starters out of the COVID support programs, which doesn't mean we didn't spend a lot of money, but designing these things a bit better is a disproportionate benefit, I think.

1:24:03Yeah, you can see some of these things coming a mile away. I mean, look at Albo's housing policy. I mean, for goodness sakes, what a joke that is. Didn't work the first 10 times, but let's try that again. Is this the one we could buy with the friends? Yeah, and also extra grants. Oh, yeah, good luck. Here's my call. Here's my call. within the year we will see apra reduce the serviceability buffer and reduce landing rate uh um condition and it will be done under the kind of banner that you're talking about it's like well it could be worse if we don't and they're right and they'll be right it was like yeah but that sucks right like it just it just does suck and it sucks not so much because at that point in time that will the the alternative is that that is probably the alternative to go for minimized pain, but we didn't have to be there and we didn't have to get there because of the decisions that you made in the past, that lots and lots and lots of smart people are saying, this is not going to end well, it's not going to end well, and lo and behold, it's not.

1:25:02And, you know, I just, I don't know, at this point, at this point, I'm just shaking my fist at the cloud, but we can always, I think these conversations are helpful because too many things are given to us as explanations. It's like, well, we have to. And is that true? Like, well, at this point, it's true. Okay, but that doesn't mean that we can't talk about how we got here and how we can seek to avoid things in the past. Having a really crappy but not the worst possible solution to a problem is one thing. But when it's entirely foreseeable and avoidable prior to that, that's the conversation that we need to be having.

1:25:41Should we do this or should we not do this? Yeah, I guess we should probably do it because what choice do we have? but we didn't have to be in this situation where we're making this choice. Yeah. And frankly, someone like Charlie Munger or Warren Buffett in charge said, hey, design the system for us. I think we'd be in a much, much better position than letting us know. Again, I'll just say, look what they're doing with their money. Yeah. Very good point. On that, following the money, shall we end this podcast that seems to be gone forever and come back on Sunday instead? Yeah. Yes. Oh, so much to talk about.

1:26:12Yes, let's do it. Oh, dear. Look forward to it. There you go. There's a tease from Andrew Page about what you may or may not hear on Sunday. Until then. Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.