The end of banking as we know it? April 21, 2023

30:01Secondly, what - Not by the RBA. Not by the RBA. Yes. Sorry. Yes. But that's, I mean, that's, that's shocking, I think, to modern ears, right? And it's 30, 30 years isn't that long ago. The second point is, is that what we measure on inflation or consider inflation is up for grabs. We can change that. And this is a professor saying this in good faith, right? And he's got a point, like, why does it have to be this one specific measure that we use? And then the target that we do is, is arbitrary. It, it just, it, it, the more I've thought about, it's really been the last couple of years that it's just started to like, just slap me in the face is that it is, it is the status quo, but it is, it is not, and I'm not saying, Oh, it's terrible necessarily, but you could come up with a dozen other equally sort of plausible metrics, benchmarks, methodologies, et cetera.

30:49But this is the one we've got. And, and it, it, it strikes, it just, it, it strikes, I guess I'd like to think, and I would assume that most people tend to think that we've got this very robust system that's been operation for decades and decades and decades based on very, very analytical science and results. And it's not. And it's not. So I'm really glad that Chalmers was putting forward a review of the bank. I think it's something that we should look at. I think it's something that we should consider. I mean, it's probably more politically motivated because Lowe made a stupid forecast and now everyone's baying for blood.

31:28So maybe that's where it all sort of came from. But again, I just want to make that point that we, at the end of the day, have a centrally planned monetary system. And the people who control that system aren't necessarily the people you would expect. And the mandates and the frameworks that they operate in are very arbitrary. It's curious. I'm just making the observation. It's curious. yeah i yes i think i should say mate i don't this not i don't embarrass you uh professor fry mckibben is actually female it's renee fry mckibben i'm just i'm sorry apologies no no no that's really isn't that isn't that just revealing how i assume i'm so mate can i can i tell you it no every time someone says doctor i think bloke and i can't stop myself doing it and i know it's and it really is i just and someone says nurse what do you think you think female right you just do and it's anyway there's a whole different conversation a whole different podcast um so i my thought of this is a couple of things mate firstly i i think i think the rba is a political fall guy fellow particularly the political fall guy for mistakes that everyone around the world's made there's not a single central bank in the western world that got rates right now maybe low was slightly better or slightly worse than others but if you're looking for heads on pikes for getting it wrong i personally think very very very sure about this even though people disagree um looking heads on pikes just gives us a feeling of vengeance and revenge and somehow we did something right the need for humans to do something rather just sit there is is overwhelming yes and so phil loge probably loses his job the rba bill gets changed jim chalmers says see that problem i fixed that problem i think happened it was bad i fixed it uh i'm far he hasn't fixed it at all or won't fix well also if you look back through history right it's like the people who make mistakes then go on to bigger and better things and you go So what if we had, I don't know if Napoleon ever lost a battle, but you know what I mean?

33:14That idea of, you know, if you said, you know, let him cast the first stone effectively in every role. If you said no one gets to be a CEO who's made a mistake in their corporate careers, no one gets to be a CEO. They're under CEOs, right? I find the whole thing just a bit, it's theatre and, you know, it's Christians in the lines. I agree with you, mate. Literally is that, right? I agree with you. And by the way, he's going to fail, right? Anyone's going to fail. Put me in the chair. they're definitely going to fail like you're given an impossible task we make the point all the time you've got a handful of buttons in front of you and you've got one of the most complex entities ever created by humanity which is our global network civilization and can you control that please so we all have full employment and prices are stable we just you've got these three buttons to press go worse than that human nature is always impossible to forecast exactly we're talking about economics in this instance but the crystal ball's never worked it wasn't like it worked in 360 year 8 to bc but now it doesn't work it's always been broken you can't know what the future brings you make your best guess so so there's that i think the second thing for me is three people did this review now if those three people have been a different three people they probably have a different review fund 100 and so you go hang on so we're saying that the entire uh the 1400 people you know you talk about at martin place are getting it really really really wrong because three people and they're experts i don't doubt their credibility or their intent or their views at all.

34:38These are very well-credentialed, capable people giving their opinions. But you check out anything else, other written media from other experts who say this other thing should be done. I tempted to think the politicians, you know, the old thing, don't hold a review unless you know the outcome. You pick three people. If those people said something different, would Cherry Shumler have said, okay, fine, I'll do that thing instead. So I find that really, frankly, grossly difficult to get my head around it and be okay with because it was a three-person view. If you pick another three people at a very different outcome, with any more right or wrong than the current lot no not at all so that's that that's to my mind really important and then the next one for me is just that that interest setting board i'm i i think probably your original point about having some more economists on the board makes sense we because you and i know that academic investment theorists get it wrong so badly because of the assumptions they make i'm far from convinced i want only econocrats on interest setting board that somehow they're more expert than other people again not saying the current board's right or perfect no i totally agree with i want to i want to state that very clearly for the record there's a lot of shonks when it comes to economics 100 and i just like you know the efficient markets hypothesis that's been out there 50 years it simply doesn't exist and buffett's proven that for 60 odd years and yet if you said let's have an investment board you'd put all of those emh experts in quotes on the board and say we've got a new board now that these are the real experts not just business people like buffett it's crazy experts on the board right i'm just not sure i don't i'm not convinced that the change is necessary i i don't i'm not convinced there's a better outcome i should say in in defense of the review and of of treasurer chalmers the bank of england and the royal bank of canada do exactly this they have two boards so it's not unprecedented it's not necessarily wrong i just think we are so caught up with the need to do something anything and for the politicians to be able to say, look, he is the bad guy.

36:30They were the problem. I've fixed it. You're welcome. While, as I've said so many times, they're running a massive structural budget deficit, back to the fiscal policy we talked about before, I just think it's... I want to be careful, but I don't know how in any good faith, politics aside, you can actually say the problem is the Reserve Bank board, not our structurally badly imbalanced budget and or our inability to find other ways to solve the problem. When you say, yeah, all this stuff over here hidden under a massive big carpet if you know it's a mile high but we'll point over this at that guy and make you look at him rather than rather than our own backyard i i find again current government didn't create it they inherited most of it from the last lot so this is a bipartisan rant i really really really struggle with the headlines will say new reserve bank new future great changes all fixed and we'll go oh good okay thank you solve that problem good let's move on i find that really really really difficult to swallow from a political sleight of hand perspective yep i i 100 % agree I mean, it's even more diabolical for the RBA because like, what are we, 2 % of the global economy?

37:31I was like, maybe the feds, you know, you can have more expectation and then doing things. But we are such, you know, in the current of far stronger waters than what's happening domestically alone. So, yeah, I agree with all of that. And again, it's never going to happen, right? So this is purely an academic consideration and chat. But I really would go back to first principles. I've yet to have someone satisfactorily answer the question as to why we even need a central bank who sets an official interest rate. I really don't get that. We never used to. I mean, why are we a free market system in everything except the most important thing, which is money itself?

38:19It just strikes me as a bit crazy. I don't know, mate. I think it sounds crazy because it is so out of the box. But again, let's go back to first principle. I'm just saying what would happen if the central bank didn't exist? I think we know that. I mean, partly we know that that's why booms and busts have been less severe and recessions have been less frequent in the last 100 years than they were before that. I take your point about the free market cost of money thing. But if you – I mean, you can wind it back and say, get rid of Keynesian economics as well because why should governments run deficits and surpluses?

38:50because they should let the market decide. And at some point, there's a lot of ideological discussion at the very root of it. I think we talk about cost of money in absolute terms. I'm 100 % with you. In relative terms, when it's used to accelerate or break, I think it clearly has a defined role which we would be worse off without. Now, it doesn't mean other tools can't be used for the same purpose, but the cost of money, we know. We've seen milk run and a million other small businesses go broke in the last 12 months because rates went up and the VC money went away. I mean, we know we can see the effect of rates through the cycle.

39:25I think that in itself, it's funny, and then neither of this is right or wrong. But I think if you either can start with what should the right theory be or what should the right outcomes be? I'm just probably pretty firmly an outcomes guy, which is if rates work, and I think they have been largely proven, you can't prove it empirically because there's no double-blind trial. I think they've been, well, I think they've been shown to slow and improve economic activity. Used correctly, that should be a net positive for a society that doesn't want massive booms and massive busts, which are more, back to the social thing we started with, more socially damaging than not having them at all.

40:06That's my starting point. I guess that's where I disagree. I would say we've had plenty of booms and busts under this framework. Oh, absolutely. And I would actually go further and argue that they're getting more severe because we do what we're able to do via this system, which is kick cans down the road. The stuff that we're dealing with now in 2023 was seeded in 2008 and that was seeded in the.com, right? And so my view is I think we love the idea as humans that we can control a lot of stuff and that we should do everything we can to sort of minimize pain. It's like a really great starting point, right?

40:41Like how can you argue with that? But the trouble is that the reality of the cut and thrust of capitalism is that there is going to be, some people are going to make poor investments, some people are going to start bad businesses, and they need to fail. They need to fail for the benefit of all of us. And if you're going, and look, put it one way or another, you're going to fail. You might grow to the size of Tesla before you do because of all of this perturbation of the system, but it's much better to fail early and fail small. When we have these big, too big to fail issues, these big systemic risks to go, Just at the start of this year, like with Credit Suisse and Silicon Valley Bank and all of it, we have existential risks in the system because we have piled it on and on and on and on and delayed.

41:27Now, if these banks had failed when they were tiny little entities, it would have sucked for depositors. But maybe we still could have had an insurance scheme that bailed them out. It would have sucked for the shareholders of those banks. But it doesn't risk the entire global economy, right? So it's just like, and the argument that these are really useful tools if used correctly, I agree with. But just I don't think they have. And what you really need, I think, and this is where you get really extreme, is we had society, I think, did much better when we separated church and state. And I think we should separate money and state.

42:05Money is, I think, at its foundation, the basis of civilization. It's like the wheel and fire. It's really up there with that invention. It allows me to interact and cooperate with people I've never met and have no basis of trust in. It's crucial to everything. When you start manipulating that, you're tarnishing the transmission lines. The system, the information doesn't flow. We're going to have bad things. We're going to still have recessions. It's not like, oh, we moved to this system and it's just this beautiful nirvana where nothing ever goes wrong. We're still going to have all of the challenges that we always have because we're flying through space on this rock, none of us knowing what we're doing with all these kinds of crazy, unpredictable events happening to us.

42:53But I just think by starting from a good point and trying to fix things, I think we end up making it bad. And if it doesn't make it bad, it rests entirely on a very, very tiny selection of people getting it right in impossible situations. And so, again, it's a first principles view. It's never going to happen. And we don't really have a great counterfactual to sort of argue it. But I just feel as though from a reasoning standpoint, from a logic standpoint, it makes more sense than it might seem at first glance. And I realize that it sounds crazy, but only by virtue of the fact that it's just so outside of the box.

43:28I just argue that the box we've got we're very comfortable and familiar with because that's where it's sort of been for all of us and our parents generate. It's that status quo effect. It's a recency bias effect. So when I colonise Venus or somewhere and start my new civilisation, I think I'd do it without central banks, frankly. I'd probably have some mechanism, a national insurance scheme to sort of help backstop depositors in case banks make mistakes and you'd have failures and you'd have mistakes but they'd be more frequent, but smaller and less broadly damaging. Yeah, I'm going to absolutely take the other side of that.

44:04I reckon if you look back at the pre-1910 years, the years I've done a little bit of economic history, not a heap, but the 1800s were horribly, horribly boom and bust years. In fact, the 1890s recession is considered by some to be worse than the Great Depression, but because you speak about living history and memory, no one was alive now that was alive then, and the recency bias means that 30s was the focus. uh i am i am again as sure as you are in a very different direction which is exactly the point of the fact no one knows right and that's that's why it's so hard so it's an interesting chat too if you yeah totally totally but if you look at the history of that i i am i am very very sure and again as i said i'll say that not saying i'm right because you're very sure as well um that we are far better off having had those i think if you look at the last 70 years post great depression right the fact we've avoided any significant recessions of that size and shape what i do agree with you by the way is um and again speaking of church and state money and state the i'm not sure we want to give governments back monetary policy i know you want to all together but but if you oh god no yeah i agree with you there yeah well accept that i was gonna say accept that um because you let the rba governor or the central the u.s fed chair be the bad guy and you can do whatever you want to buy votes part of part of the kick in the can problem is actually that governments have said great he can deal with it we'll go over here and play our own game our own way i'm not sure the answer the problem the answer to the problem is actually monetary policy right so your point about banks what did we learn from from the gfc well things for a few years and then we remove regulation on on banks like silicon valley bank and funnily enough it blew up and you kind of think okay so where was the you know is that a failure of monetary policy or a failure of regulation or fiscal policy and probably all three right but part of the problem with the separation of monetary fiscal policy is exactly that you get the government gets to say you're gonna have tax cuts and he'll put the rates up when he does i'm gonna blame him so well that seems pretty rubbish to me i think that that's in my mind ironically and it doesn't go as far as you want it to do but some element of you know a fiscal responsibility to match the monetary responsibility would go a long way to actually genuinely we might know by now that you're right we might know by now that you're wrong because we would have seen the governments actually do the right things that's the right point over the last 20 years to avoid exactly the sort of problems we're in now you go oh it turns out Andrew was right or gee turns out Scott was right because we've got governments who are doing their own thing that makes it very very hard oh by the way we're never going to resolve this there have there have been very long-standing debates in the in the field of economics for 100 years over all of this stuff right it does and it evolves yeah we had we had monetarists and we've had you know Keynesians we've had everything else by the way the anti-Keynesian team tend to be more monetary policy than not it's a really it's a fascinating combination and fascinating and you to your point about first principles made and starting from scratch we're all poisoned by the status quo and so it's really really hard um it seems safer to stay with what we've got it may be safer by the way because any experiment could go horribly badly we can't do this in a you know double blind controlled trial somewhere in venus then say if it works we'll bring it back to earth we say let's either not uproot anything and hope it works or let's uproot everything and hope it works uh neither is necessarily safer It's just some is more comfortable than others, right?

47:08Yep. And there's a whole bunch of noise that hides the signal as well because I think you have other forces that are at play that's going to have big impacts on the economy and society as well. And so you could make small changes. So case in point, right? So these changes that are going to happen with the RBA, maybe we have a really great period for the next five years. Was that because of the changes or were there other things going on as well? So it's really hard to sort of connect A with B. 100%.

47:46100%. Capital gains tax has been mooted as something that might be changed in the upcoming federal budget. At the moment, we know that if you hold... No chance. No chance. If you hold it for less than 12 months, you pay capital gains tax at your marginal tax rate. If you hold it for 366 days, you get to pay half of your tax rate. I'm going to put some numbers on that for you. So I bought some shares. I spent$10 ,000 buying some shares. I had a really good year. I sold them for$20 ,000. Hey, well done. Yay. So I've made$10 ,000. And whatever my marginal rate of tax is, I'm paying that on the$10 ,000.

48:23Yes. Yeah, that'll do. And yeah, but if I hold it for more than a year, I'm only paying tax on the$5 ,000, half of the capital gain. Correct, correct. And that's actually, by the way, the official definition. Most people would say it's half the rate, which is kind of the same thing. But you're right. From a tax perspective, half the gain is tax-free, half the gain is tax-free, half the gain is tax-free, your marginal tax rate. So instead of paying three grand tax on your 10 grand profit, you're going to pay $1 ,500 tax on your 10 grand profit. If you sold it on out of 364 days, you pay three grand.

48:52366 days, you pay$1 ,500. You literally halve your tax bill by holding it for an extra day. Now, there is some talk that, and by the way, this is not, I don't think this is as possible as you do for one important reason we'll get to. Back in the good old days, or the bad old days, depending on your view, that discount didn't exist. Instead, what happened was you were given credit for the rate of inflation while you held the asset. So if you bought that same thing for$10 ,000, and inflation was, I'll make my life easier, it was 10%, your cost base would be assumed to be$11 ,000 when you sold. And so you only pay tax on the nine grand profit rather than the full 10 grand.

49:30You were given effectively tax credit for uh for the inflation rate over that duration and there is some real question about the right approach i'm not sure at all there's any justification for the 50 discount other than it bought some votes and people liked it i don't know that if you said hey capital gains at 364 days should be full freight 366 well obviously that's half because um because I was, have you ever heard anyone convincingly answer that question? The one thing I heard was it's to incentivize longer term investing. So to remove the more speculative. Those extra two days. Yeah. I mean, look, I'm not saying I agree with it, but I'm sort of devil's.

50:13I'm poking fun at it because, you know. It's case in point. It's the theme of this podcast, right? It kind of, it is because it is, because it is, because it's always sort of been that way. And now that it's gone, I'm right. Again, first principles. no there's no there's no good reason i don't think as to why it would be now is it a good quote-unquote reason for me personally yes it is and for anyone who's got assets right like it's it is it is good from that perspective but i think we're talking about it's like good from a uh fanist perspective or or revenue raising perspective or just yeah yeah so i again you're status quo there is and here's my issue i guess and by the way like this is you know choose your politics first thing is most people listening here are like but that was going to have to make more tax that's a terrible idea to which i say sure fine don't necessarily disagree except that the question for governments to answer is what is the right combination of collections across our economy to fund the things that we all agree we want to spend money on so capital gains tax being higher or lower is not in itself a good or a bad thing neither is income tax neither is welfare neither is gst neither is whatever there are there are some absolutists out there who say you know government is theft texas theft and if you you're probably listening to this podcast by now if you if that's your view um others out there say we should be nordic and collect 80 tax rates and fund everything and and again that's a different economic view i don't i'm not with that one either somewhere in between is the reality so the question is simply we run a massive structural deficit right now we can't afford things we want to spend money on we can cut spending that's a conversation or we can find out find ways to to increase the revenue i just don't think you can make a reasonable case for capital gains being taxed more generously than income i don't i just don't i don't think there's a again self-interest aside uh i don't think is there an argument to to tax investment gains at a different rate in your mind mate than uh than earned income um No, I don't think so.

52:10I mean, there are some things I find annoying where I've got a certain pool of capital that I'm investing with. And sometimes I sell because I want to not spend it or have it, but I just want to invest it somewhere else. And I always feel like that's a bit sucky as a tax event because I'm not – Yeah, right. Yes, I'm liquidating that position. Yes, that is – Yeah, but you're changing. But really, I've just got a pool of capital here that I'm just sort of like sliding things around. so there there is some aspects to it that i i don't by the way i've got no easy solutions for this kind of kind of stuff yeah you know for sure um but yeah no i i think you're right this is remember what happened with the franking credit debate yes you know it got so emotional and this by the way i laughed when you first brought it up because there's no chance it's gonna they're gonna get this through like zero chance oh this is gonna get through why i think they might get it through oh yeah why because inflation is so high so so so the old indexation system let's let's take your ten thousand dollars but let's say you made ten thousand dollars became twenty grand over forty years right let's say it's a terrible rate of return just for fun of it all of a sudden that tax rate your cost base you're getting a half a 50 discount right in 40 years time yeah over that period of time inflation might have actually been higher than the gain you made in which case you pay no tax at all oh yes the indexation thing because it keeps up with inflation i do like that benefits right well that and that's why i i you know again speaking of selfishly if you're a genuine long-term investor not 366 days but 3660 days there's a circumstance particularly your view mate which is inflation will be higher for longer there's a circumstance in which the true long-term investor is actually far better off with indexation than with this arbitrary capital gains tax yeah but no no one is though and that's why it's going to be politically it's So I get your point.

53:58I think we always talk about incentive structures, right? This is a better incentive structure. It's not just that you get this arbitrary discount at a point in time. It's like actually the longer I hold it, the better it becomes. That's a powerful incentive. I really get it. But to say to the average voter, hey, you're going to be better off after 40 years? I might as well say I'll be better off in the year 3280, you know? I mean, I deliberately used a ridiculous time to make the maths definitely work. No one could argue with. But yes, I take your point. Yeah. I guess I'm just making the argument that, you're right, people will always, and economically we should prefer money sooner rather later.

54:34That's the economic theory of one, right? Dollar's day is worth more than a dollar in a year's time. Yep. I'm just making the point that people who would cite, even intellectually self-interest, say, I want the 50 % discount. I don't know if you, and to your point, if you genuinely want to incentivise long-term investing, that's exactly how you do it, by the way. You don't do it with a 50 % discount after one year. You say, hey, guess what? We will look after you. We will cover you for inflation forever from a tax perspective. When you sell the asset, eventually, personally, mate, I would be stoked that they change this.

55:05Again, public policy aside, I'd be stoked if they change it. I'm happy to hold some assets that will pay me a dividend in 40 years' time my kids can have. And if I'm going to sell it in 40 years' time, I'm all up for this. Purely selfishly, I'm all up for that. I think it's better policy, but i also think it's better for me yeah uh yeah i just i add that one layer for me though because there's there as much as i certainly have the intent for as long as possible the reality is i will be shifting things around just because you know some opportunities come up others you know just sort of like for me it feels an unfair tax event because i'm not i'm not withdrawing the funds i'm just yeah but anyway that's again if we're being selfish and what what we would what we would prefer no it's a fascinating idea i mean it's almost it's almost you're almost back to structure or then to your point if you if you had it within a company structure or maybe on trust i'm not i'm not sure i'm not sure you're i'm not sure your view isn't wrong what what i would worry about with that policy wise is the ability to leave you know if you're particularly well off right now you never need to take that asset out for for you know for spending you never never never spend that asset right um you have enough income you do whatever that asset stays there and compounds for years then decades then potentially goes to your kids and their kids and their kids, those profits never get taxed.

56:19And yet you're compiling huge amounts of wealth compared to someone who's earning money on, you know, not so minimal wage, but a decent wage who doesn't get to save much of their income at all. You're generating massive amounts, seven, eight, nine figures of compound wealth. And, you know, the person working is paying 35 cents in the dollar. That's the bit I kind of struggle with. I think they could say, I'm not going to spend that money. I'm going to waste, I'm not going to pay more on tax for food that you're going to, you know, not get to take out and reinvest. and generate even more wealth.

56:47Inherited inequality is my biggest long-term concern economically, I have to say, across the board. I'm not saying I don't have a solution necessarily, but if you save well and I save well, I think you and I are reasonably good wickets. We hope to leave some money to our kids, at least I do. They're going to get a better start than the person who's not able to leave money for their kids. Take that forward another generation, generation after that. I don't know. It doesn't strike me as the best way to create a sustainable a long-term society if we don't take some of that inherited wealth or compounded investment gains out to help fund some of the society's costs yeah no i i agree with that i benefit from that by the way if if i'm right i i you know i can actually save money and give it to the kids i'd be far better under under your proposal which is i'm just shifting assets around i should be taxed on i'd be i'd be far far far better off yeah yeah yeah i mean it's also arbitrary isn't it it's not none I don't know if it's going to happen.

57:39Well, I don't think. Okay. Well, I was just a bit, in the closing minutes, let's not go into a Bitcoin conversation because it'll go for another half hour. But I did want to get your opinion on what Apple did this week. Did you see the news? That's where I was going to go. They partnered with Goldman Sachs. They've now got a savings product, an account. So you can, with Apple, by the way, there are 2 billion active device users out there. Yeah, yeah. One in four people on the planet have an Apple product or an Apple phone in their pocket. Okay, so that's interesting. Now, I'm going to take it from a US perspective because it's only available in the US at this point in time.

58:21But if you put your money in a bank, you might get half a percent on your savings. I'm talking about what they call checking accounts. We've got a different terminology for it, but yeah, just day-to-day transaction account. that apple is saying there are no fees there's no minimum deposits and there's not even a minimum balance we're going to give you 4.15 on your savings that's 10 times the national average oh by the way these these deposits are fdic insured now why is this fascinating well it's sort of died down a bit but we've had all of this drama at the start of the year was basically a flight of capital with depositors withdrawing their money.

59:00Now you've got a system where I've just got a thing in my pocket already and I can transfer some money there and I'm going to get 10 times the interest and I'm going to get all the transaction services and everything. This did not get as much news as it should have. And then you've got to ask yourself, again, you think it right through and it's like, wait a sec, what's Apple going to do with all of those deposits? Is it going to get into lending? I don't get it. I think long-term probably, yes. I mean, and I'll come back to that point. But think about it right now. The federal funds rate in the US is 4.75 % to 5%.

59:38So here's what I do. By the way, Apple has$5 billion on its balance sheet, right? No doubt. It's a monster. It's a fortress balance sheet. So by the way, I'm doing this because I want more people to come into my ecosystem. I want to get into banking. Tech have been trying to do this forever. and all I'm going to do with the deposits is just lodge it with the Fed. It's the safest. It's like, it's one of the, I was going to say the safest there, but I had to catch myself. But it's one of the safest. It's one of the safest places to quote unquote invest it. It's just held on reserve at the Fed, and they're still making a margin on that.

1:00:17It's the classic Bezos play. Your margin is my opportunity. Banks can't, banks cannot lift, cannot match that offer without most of them going out of business. So we've already got a capital flight. Everything's moving into money market funds, which is just these managed funds that give you access to treasuries and et cetera and the higher rates that are already happening. And that's probably more at the commercial corporate kind of sort of level. But now you've got retail with this kind of thing as well. It's just sort of like – and we can sort of as old fuddy-duddies think about whether that makes sense.

1:00:52I guarantee you a 20-year-old who does everything on their phone already and doesn't blink twice so they're just like correct correct apple i know i trust them the deals you know miles better why am i why am i going to a bank so that they are yeah anyway i think this is the first serious crack that we have had of silicon valley that that poses a genuine longer-term risk to the banks it's a pretty big statement right mate i know i think you're right i i have i have a couple of different thoughts on it i i think we are seeing the continued growth of the new railroads in terms of monopoly power so my honestly my first thought i'm not an apple shareholder but i'm an indirect shareholder through berkshire hathaway which i own um i i find this deeply troubling from an economic perspective because apple is paying you more than they can afford on your savings to buy your business now no not more than they can afford They can afford - Sorry, more than they can justify purely from the banking operation.

1:01:54That's cross-subsidizing the interest rate with their corporate profits. No, I don't - But I'm getting 4.75 on deposit at the Fed and I'm only paying you 4.15. Yes, but they couldn't operate that business as a standalone business. If Apple operated Apple Bank - Oh, I see what you're saying. There's no chance in hell they could fund 4.15%. I see what you're saying. So they are cross-subsidizing the banking product using their current ecosystem, their current businesses and their current customers. Ah, yes. And while you're right, and maybe at some level, particularly given your thoughts before about central banking, maybe that's not a problem.

1:02:35But I have a very significant... So for example, Berkshire Hathaway itself is not allowed to own more than 10 % of a bank without being regulated as a bank holding company, right? Apple gets around this by using Goldman Sachs as the bank holding company. and they get to suck up the business from others. Now, I don't really care whether Apple wins or someone else wins. I don't really care whether banks go to business as traditional banks and get replaced with something else, except for the impact it has potentially on two things. One is financial stability. The other is the use of this sort of monopolistic power.

1:03:08and so i i'm i'm i'm pretty agnostic probably with a tendency to be slightly negative on this as a societal good now again it's not pro anti-apple pro anti-banks i have no love lost to the banks i don't own any shares in the banks i don't really care what individual banks but i do care about the solidity and otherwise of the banking system and i don't know i will ask frankly i'm not sure the fdic should be insuring a bank account run by the goldman sachs given what goldman sachs is largely an investment bank not a retail bank and and that's you know and on and on we go what we've said before in the past is you know the australian banks avoided the gfc's biggest impacts largely because they weren't trying to be too clever by half goldman sachs on the other hand the vampire squitters was called at the time was deeply deeply deeply involved in this and so i don't know again not so they're bad business people i made a lot of money for their shareholders over time.

1:04:02I don't know, mate. Great for depositors, great for Apple users. You get 4%, knock yourself out. If I was going to be in charge of the regulatory settings for the world's A, competition policy, B, banking policy, I don't know. I'm a big fan, mate. I'm not sure that... I don't care about the disruption of the bank system in itself as long as it's replaced by something that has similar or better levels of stability, security, you know, the... I've got a solution for you. Yes, I'm sure you have. The ability of the FDIC to pay out relies on not too many crises happening at the same time and being able to restore or retain the faith of the individual depositors.

1:04:46And so far, that's okay. Look, people use, you know... The other thing, by the way, I would bet that this doesn't stay at 4.15 % forever. No. It's like the cheap Uber rides. Right. And so, again, I don't know what it means for competition policy. I'm not sure that I want the – and I'm a Google shareholder, right? I don't want Google doing this either. When you say I've got the app, I've got the phone, I've got the bank, I've got the credit card, I've got the whatevers, these become the new antitrust concerns. I'm reasonably convinced over the next 20 years, we see these big guys broken up by regulators who look at the impact on the control – I mean, Apple controls the app ecosystem entirely, right?

1:05:25There's a second one on Google, but really Apple's the one where the money's made, right? So how much control do you give them over competitors, suppliers, customers? I don't know. I'm agnostic too negative about what this means broadly for the economy and for the safety of cash. Is that too negative of you? Well, yeah. I mean, I guess you assume that they're going to be less prudent with the deposits under their care. Not necessarily, just they're not regulated accordingly. Well, I think that's the, yeah, that's the, look, this is - If Apple had about Apple Bank, and the Apple Bank was regulated as a plain vanilla retail bank like the US.

1:06:03Yeah. And it had the same degrees of, you know, whatever regulations apply to it. And Goldman Sachs has, so I'm not saying there's no difference here, except that Goldman Sachs isn't paying the 4.15, I bet you. Apple's tipping in to make this work because they can. You've actually got to take even another step back here. Has it been fascinating because with all of the disruption that tech and the internet has brought us, it's completely upended the media landscape. It's completely upended retail. It's completely upended virtually every sector and industry and the economy. Yet the big banks today are pretty much the same big banks pre-internet.

1:06:44Why haven't they been disrupted? And it's always been something that the big tech firms have coveted because there is a mountain of money in transactions and payments. Look at Visa and MasterCard are just some of the most powerful businesses on the planet and most profitable businesses on the planet. They want some of that. Why haven't they been able to do it? Is Google incapable of building a better payment experience app? Of course not. There's something else going on here. And the truth of it is, I mean, just like, I think just by inference, you can say, well, there's obviously some very big moats at play for the banks, mainly regulatory, also capital barriers that are also there.

1:07:23But they have this privileged access to the underlying sort of payment rails. And to be fair, the banks have actually developed. I mean, I use ComBank. The app's pretty good. You know, I'm not saying it's terrible and big tech could do better. But it is just noteworthy that they have avoided that. And I feel as though that was always something that wasn't going to last forever, particularly if some of those regulatory barriers become less high. And this just struck me as a bit of a early foray from the world's biggest, is it? I think, or at least, you know, one of biggest tech, biggest company, I was going to say biggest technology company, biggest company, full stop, that is not a bank.

1:08:02I think this is a noteworthy milestone. That's absolutely true. I totally agree. Now look at Twitter as well. So, so Musk is forever cryptic as he is talking about the x.com domain name and what's called the everything app. And you know, the big, the big, not so secret secret is it's all about moving into payments. He wants it to be more like WeChat, you know, where it's sort of like, yeah, okay, it's a social experience, but I can also send and receive payments. I can also set up a store. I can also do this. It's just like, again, literally the everything app. So he's basically said, that's what I'm going to do with Twitter.

1:08:39And so you've sort of got Apple paving the way, and I think they will do it. I think that it's going to be a very, very interesting development as to how all this evolves. I think ultimately it's good for the – as long as the government regulations are sort of sensible here, I think it's going to be good for the consumer because the banks – Yeah. The banks – you give the bank that unsecured loan, and they make a lot of money out of that. And I feel as though - But they don't really, mate. I guess that's my - I reckon the tech companies are mad to want to do this stuff. Now, Apple's smart. They're making the bank take on the cost, right?

1:09:15This is - If you genuinely be a bank company, banks here make a net interest margin of less than 2%, right? And the return on assets that Australian banks is much higher than overseas. I reckon Apple and others want to be really careful what they wish for. Like, it's large quantums of money because there are a few of them. But let's say we triple number of banks in australia maybe an interest margin to go down by what half a percent max yeah like that i just don't i just don't think the money's genuinely there if you're making a lot of money bank you've got to be massive because the margins are tiny and the risks are huge i don't know i i i get they see this pool of cash and go oh what's all that money the margins are so incredibly incredibly incredibly yeah but you've already answered it though it's It's why a calculator is part of every phone app.

1:10:02Like it's not what it does in and of itself. It's the aggregate value it puts onto the platform and the device. So a mobile phone is really cool because I can make calls without using a landline. That's really cool. Now I can also send instant messages. Now I can also do this. I can do that. It's a classic meme of a desk from the 90s with all this stuff on it. And then there's another picture of a phone. Like all of that has collapsed. Or the Tandy catalog. Yeah, exactly. It's all collapsed onto the phone. So Apple is taking a big picture of you. I read you loud and clear, and I think you're right.

1:10:37This is the thing that banks need to worry about because they have this profitability, and that's what they do, right? And now you've got another one here. Actually, we can afford to do it on much slimmer margins. And we're actually happy to not have the same exact unit economics in this one segment of our business because what it does is aggregate holistically to the whole. It is now we are just 10 times more stickier. It's already always on our phones and now there's another reason to be using an Apple or an Apple product. Yeah, it's a big deal. It's a big deal. Yeah, once you've got cash in the Apple bank, you're not going to probably move to a Google phone or whatever else.

1:11:15And it's all, I just said, and for them, I guess, I don't know. If you can make Goldman Sachs or Westpac or CBA or Wells Fargo take the risk on the banking thing, and you've just got to refer the customers for a cut of the fee, then there's zero downside for the tech companies. If that's what you're doing, then I guess you're right. There's no harm in it, and maybe it is super sticky. I don't really care. I guess at the end of the day, what they're currently doing is exactly what that is now. You use Apple Pay or Google Pay now. You're using a device to connect the bank account. The fact that it's an Apple bank account or a Goldman Sachs or a CBA bank account probably doesn't matter much more than from a consumer perspective or from a regulatory perspective.

1:11:52You're just a passer. But it's just the heart of that ecosystem, I should say. Yeah, exactly. Yeah, it is. But this is - It's branded Apple, but it's not really - Even at a smaller margin, it is still a margin, as long as it's positive and accretive. I just think it's better. It's like where for sale, I'm using my Google wallet where I've got my Visa card loaded up into it. But it's just the portal through which I have. The wiring behind that, by the way, is insanely complicated. but but this is like well why don't we just cut out the middleman here why don't we what you know why are we just the middleman here in fact why don't why don't we be the end source anyway do you not worry at all about the monopoly power of of these kind of new everything apps i don't know i said i'm a google shareholder right i'm not this is not me kicking out oh there'll be antitrust yeah there's challenges yeah yeah but i almost i almost feel like that's the the irony is the closer they get to that the more likely they are to actually be you know sowing the seeds of their own breakups like at some point when the everything apple whether it's google or apple or tesla twitter or twitter or something else i i don't know at some point at some point it is the end of its it creates surely its own destruction because someone says hey why should apple have all this trouble about all of my stuff yeah uh shouldn't they be shouldn't they be excluded from running a banking product and or shouldn't the app store be different from the phone different from the oh yeah it's a healthy discussion that needs to happen and will happen absolutely but let's say you do let's say you go to bigger than ben ho or you're already bigger than bigger than ben ho times 10 and then you get broken up and you still you still got you know you might have been sort of a score 10 and now you're you're there's two entities with score five inch it's still like the value is still being created there um yeah i that's right i guess if i mean it only matters it surely if you are the one who owns the bank accounts i mean you're talking about the monopoly of the banks and the concentration apple right using goldman sachs doesn't fix anything it's just it got it's just goldman sachs account right with it with it with a pretty apple picture on the front of it you know slapped on the front and jizzied up and someone like tim cook saying hey come and try my new product or google does it and they use wells fargo and you know afterpay does it uses westpac or whatever i mean i'm not even sure does it actually make a difference in the in the end i mean it's just a different distribution network for the same existing incumbents surely well you know where i'm gonna go man i would say there is a there is a third path uh but that's let's save that for another day but under the current environment to your point about the concentration stuff the disruption i'm i'm actually arguing it's not that disruptive i suppose i think yeah until until apple decides to bank its own money or google decides to open google bank and actually a subsidiary of google if all you're doing is the parser it's like mortgage brokers with the banks right they didn't really the mortgage brokers didn't help anybody aussie home loans and wizard were different for about three years then they got bought by the big guys all the brokers do is say let me be your marketing department for the existing players uh and send just as much business as you used to get yourselves through us because that's how we're doing it that's i i'm not sure i'm not sure it's as disruptive as it appears until those tech companies start to actually keep the cash on their balance sheets and that's i think because i'm going to also line up with someone else right google will now do a deal with wells fargo and someone will deal with someone else someone do someone else and then you kind of you know they'll change banks as they want to so apple will say well hang on uh nab's gonna be a better deal than goldman nab you can have apple business now and yeah i don't know i i guess i'm I'm wondering whether, for all the excitement, we're just seeing a different version of the same model, which is the same people with the same banking relationships, with the same margins, who just use different distribution platforms.

1:15:11Yeah, I guess that's where I differ. I think where it does is it shifts money more into the pocket of Goldman Sachs slash Apple and away from more traditional deposit services from those banks. Doesn't that make more concentration rather than less, though, if that is true? Yeah, I think that's always a risk. I mean, that is already, I mean, that's been the shape. What has happened in the US is that all of these smaller regional banks have had just deposit flight and they are all concentrating to the big ones because the big ones don't have a$250 ,000 FDIC insurance cap. They have an unlimited insurance cap.

1:15:48So when you're a megacorp, you know, limited, you put your money there, right? And now I've got even more reasons. So that deposit flight is already happening. It's just adding to that. And I just think it's not something that tomorrow is vastly different from yesterday. But I do think that it is another step on that journey towards a sector that has been incredibly resilient to tech disruption. I think there are maybe some cracks in the wall appearing. No, that's fair. I think that's absolutely fair. Hey, mate, we've probably overdone it. Would you like to come back on Sunday and have a watch?

1:16:20Yeah, let's do it. For sure. For sure. 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 Licence 400691.