Odd Lots - Is It Time For Public Checking Accounts at the Fed?

Episode Date: March 23, 2023

When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size. But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School. She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby. That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly "out there" view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.See omnystudio.com/listener for privacy information.

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slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Al-Away. So Tracy, there's still tons of dimensions potentially to explore. So much. With regard to the Silicon Valley Bank collapse. But one of the sort of simple questions that a lot of people are asking is from here on now, do we just assume that every deposit in a bank is insured, even if officially they only promise up to 250K? Yeah, well, I mean, that was kind of the implicit takeaway from the weekend announcement. And I know we spoke with Dan Davies and he made the point that historically, it is rare for depositors in modern financial

times to lose a bunch of their money because normally bond holders and equity holders lose all their money when a bank fails and some of that gets taken away to pay the deposit holders because deposits have seniority over bonds and equity. But I still think this is a pretty big change. It feels very major or at a minimum, it feels like the implicit has been made explicit in a way that's before. Because, yeah, maybe in the end, even without any intervention, SVB's depositors may have gotten whole.

We don't know that. There was no fire sale or anything like that. They just announced everyone is getting their money back, signature bank too. And then that raises a second question, well, if depositors are really always implicitly or explicitly guaranteed by the government, what is the point of having like private retail banking, for profit retail banking? Why not just let everyone have a checking account at the Fed? And then you never have to worry about any of those stuff. That's right. So we touched on this a little bit when we spoke to Lev Menend, but if you think about banks as providing an important

public function, you know, not only do they provide a safe place for people to actually put their money, but they also create money, you know, in the system. They lubricate the economy with credit, but they also tend to fail sometimes repeatedly, as we're saying. And they also tend to get bailed out, right? Because the argument that you see time and time again is, oh, you can't let this go because it would be bad for the financial system as a whole. You don't want to publish these particular people or this group of people because then, you know, what happens if the little guy is in trouble next time? What if it's a farmer's credit union? There's always a farmer at the end. It really says something about, I think, people's moral intuition still, that like the thought experiment is

like, like, replace Silicon Valley with like Kansas Farmers Bank or something. But it's true. The point is true that a lot of people like, A, people can't be expected to do due diligence like on a bank. That's not realistic. Most professionals can't do that. But B, it's also true that like there are a lot of, quote, innocent people who did not take like some crazy risk who think they have money. And then the idea that they're told they don't. Like, I mean, the point is like, the points are legit. Well, we should get into them.

But I do think like overall there is this question of, and I think we're going to see even more of it. people are still digesting what's happening. But there is this question of, okay, if we're going to keep supporting banks in quite dramatic ways, then why let them be private entities? Or why not give them, I guess, like, a closer relationship with the government in one way or another, whether that's a regulatory function or something else. Right. There's all kinds of questions.

I think we should get to our guest because our guest, I really do believe we have the perfect guest, someone who's been warning about a lot of these exact issues for a long time has anticipated a lot of these debates that people started having over the weekend and who also has ideas about rethinking the banking system and what it means when some of these implicit guarantees become explicit. We're going to be speaking with Saleh Omarova. She is a professor of law at Cornell. She also had been President Biden's original nominee to head the Office of the Comptroller of the currency. Because of her perspective, she came under very sort of like vicious attacks, some by some more moderate Democrats, a lot of attacks by sort of like the community and regional bank

lobby. And all the Republican senators, it was a pretty awful affair. There was a lot of red baiting, basically accusing our guest of being a communist very publicly because of wanting to have different thoughts about how the banking system works. But I kind of feel like some vindication over the weekend and people are sort of like rethinking a lot of what she's written about. So Professor Omerova, thank you so much for coming on Oddlots. Thank you so much for inviting me today. Yeah, absolutely. You know, we're going to get into all of your thinking about how we can rethink the banking

system and so forth, but just like sort of like very simply to start. As an almost regulator, what does the SVB disaster say to you about flaws within the existing regulatory structure of bank? This is exactly the kind of questions that I like to think about or cannot help myself thinking about. So while, of course, there are many immediate reasons for the failure of SVB in particular, there are also this sort of more deeper structural issues here that are on display. First thing that we've learned is that the systemic risk in the financial system is actually a very complex and dynamic phenomenon. We are used to thinking about systemic risk caused by banks because

banks invested in particularly risky assets, which they've done before. This is how we got the 2008 crisis. But in this situation, the assets themselves didn't seem to be quite so risky until the monetary policy tenor changed, right? So what it tells us is that past policy choices actually shape future policy constraints in this particular area. Another thing that sort of became really obvious here is that there is a lot of political economy involved in bank regulation and the banking sector in general, right? Just like Joe, what you said about how the rhetoric changes depending on who's asking for a bailout in a particular situation, right? And our perceptions change when people drag out the farmers, suddenly everybody feels sympathetic. This time around its venture capital industry, Silicon Valley.

It's sort of difficult to feel sympathetic, right, to these billionaires who usually are known for being quite libertarian and kind of not liking the government, generally speaking. But most importantly, and I think that's the point you've been driving at early, is that this particular crisis really exposed the public nature of the banking business, the deposit taking, the deposit money, right? And this is precisely what my scholarship has been about for many, many years. Banks are very special animals in our premarkered economy because their products are twofold. On one hand, they create money that we treat as equivalent to sovereign money. So we all basically use deposits as if that was the US dollars. But of course, there are liabilities of private banks, private firms. And the key about deposits at the bank is that they absolutely must be safe, must be perceived as safe.

We need our money to be free of any doubt so that everybody knows that when tomorrow I go to my bank or check my online bank account, the money that's been there is going to have its par value no matter what happens. And that is necessary because money is a public good. it is really essential lubricant to all economic transactions. So in effect, public goods like safety and security, national defense, you know, safety that we know that if there is a fire, then the fire brigade will come. You don't have to pay for it. Those kinds of things we traditionally perceive as public goods and they're provided publicly

and that's fine. But safe money is a public good exactly in the same way because it guarantees us the right to participate in economic exchange without being worried about the value of our money, the means of payment, right? And the funny thing about that particular public good provision is that institutionally, we have this system in which this public good is provided by private profit-making firms, banks. We regulate banks, we charter banks.

We try to kind of treat them as if they were franchises of the federal government. purveyors of this public good, but nevertheless, they are doing it through private risk-taking on their own balance sheet. In other words, we've coupled this money creation with their lending functions. Right. So banks create money when they extend loans. When they extend loans, they open deposit accounts into which they deposit this newly created purchasing power that didn't exist before. And that is kind of ingenious because it connected the deposit taking capacity, the money creation capacity, with the sort of the judgment of supposedly kind of on the ground, really attuned to the needs of the economy, private banks, that can judge which

business, which household, which individual deserves that kind of allocation of credit. And that creates the elastic currency. This is how we basically have just enough money in the economy to satisfy all the needs of the productive economy, right? And that also creates that monetary policy transmission channel. So that's what connects the Fed, our central bank, to the private banks that extend money, allocate credit, and in the process of doing it, actually expand or contract the amount of money that we treat as sovereign money available in the economy. So it's a very complex system. There's sort of a mismatch between the public money good and the private risk taking.

But just to play devil's advocate for one second, you know, one of the arguments that you do see going around is, okay, the FDIC insures up to $250,000 because the vast majority of people in the U.S. do not have, you know, more than $250,000 in their bank accounts. But if you're a company with a lot of cash, presumably you're more sophisticated, maybe you have a treasury function whose job it is to actually manage that cash. Is there an argument to be made that as the pool of money gets bigger, people should be more attuned to managing it and making sure it's not going into riskier banks? this is actually a very astute question and kind of the thick question that is on the minds of many people today and there is an argument for that and the argument one argument would be theoretical argument in a way to say that look let's just stop pretending that bank deposit money is not in fact public money because it is publicly backed so let's just dispense with this fiction by removing that that cap so that everybody, wholesale depositors as well as retail depositors, don't really ever have to question and worry. And it would definitely eliminate the incentive to run on the bank by this big money holders who are now able to orchestrate this runs faster than they used to do it before.

So it would be a systemic structural fix to this problem of bank runs. The problem that I have with this argument is that, well, In that case, if we completely eliminate the fiction of some kind of private risk management by the banks themselves on the assets and the liability side of its balance sheet by saying, look, all of the important liabilities of banks are, in fact, the federal government's liabilities, then we need to do one of the two things. One thing would be either we need to make sure that these banks really start acting truly as public utilities, on the asset side, on the investment side of their balance sheets as well.

In other words, we need to make sure that they are not able to abuse this kind of public subsidy, public backing, explicit backing of their liabilities to make investments that would generate higher private profits for them, but potentially increase the liability for the FDIC that is now direct. Or we need to basically say, well, you know what, we don't really need. private banks to intermediate this kind of money creation. Since all the money is public, let's just provide those accounts publicly and deposit accounts publicly. So that this particular public, just the means of payment, means of exchange, will be provided publicly. Everything else,

lending, investment services, everything else that does require risk assessment on the ground that is best provided by private firms, should be provided by private firms. But we would separate those two functions. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day.

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That's embarrassing. You know what's not embarrassing? Using fig for home improvement loan. A quick, simple, and transparent offer in minutes. Borrow Better with FIG. Visit fig.ca. Let me ask you a question. I mean, your nomination to head the office of the controller of the currency, the community banks, the regional banks, really were vociferous in lobbying against you. And of course, so now the first crisis that we've seen in the current era happens at a community bank. Like, you know, there is some questions setting aside, and I want to get to your thoughts on like Fed accounts.

and all that. But setting aside that, a lot of people over the weekend, they're like, well, why shouldn't I just have all my money at Chase? Why shouldn't I just have all my money at City? Because, you know, we've been told they're too big to fail. We know they're going to get bailed out. Also, just structurally, they'll have a more diversified depositor base, most likely, so maybe less likely to run. Do you see a positive role in the economy for these community banks that opposed you so much? Well, I do. I do see a very important, potential role for community banks to play because community banks, just by definition, they are tied to their own communities, right? They are actually the epitome of that, you know, image of a

private bank being really aware of what the businesses and the households and individuals in any particular community really need in terms of financing, right? What kind of businesses they engage in how responsible they are in running their financial affairs, whether or not their ideas are deserving of funding. This is the image that basically underlies and informs our existing hybrid system of banking when we outsource the credit allocation and money creation to local banks. And of course, these huge institutions for $3 trillion in assets institutions like JP Morgan Chase, they cannot possibly be held to the same standard of being aware of what.

what's happening on the ground. So to the extent that community banks are that kind of a bank, we really should promote their existence and support their existence and facilitate the existence. But the problem is structural, because it is true that we've made along the way so many policy decisions that effectively reward banks that are large, diversified by virtue of conducting

businesses and providing financial services, that go farther and farther away from the traditional extension of long-term loans that they hold on their own banking books into, I don't know, investment advisory and investment banking and dealing and trading in various derivatives instruments and so and so forth. Because that is the other side of what we call diversification. That's how you diversify away from the traditional lending business. Of course, that diversification has its own risks, but it also, among other things, makes this big, diversified institutions effectively too big to fail, because now they have a hand and they play a critical role in so many pockets of the increasingly complex financial system.

So, of course, it's rational for wholesale depositors to take their deposits out of a smaller community bank or even mid-sized regional bank and put them into JPMorgan or Bank of America simply because you know that for better or worse, these institutions are not likely to fail. You don't want to think about the safety of your deposits on a going forward basis. You have too many other things to worry about in your actual business, right? So talk to us a little bit more about what can be done about the mismatch between, you know, money as a public good and this private risk-taking idea. And specifically, you mentioned the political economy earlier,

and we've been talking a little bit about your own experience with the point. politicians, but what can be done and what is realistic from a political perspective? Well, what is realistic from a political perspective is a very difficult thing to predict, right, because politics is fickle. And it's also very difficult to see which political lobbying groups, which political interests are currently pushing for what and, you know, how that balance of power is playing out in a moment when everybody is so nervous about potential further fallout from this particular situation. So leaving that aside, what can be done, right?

It's inherently extremely difficult to find the right balance between the public interest in having safe money produced by banks on the one hand and the banks own quite legitimate interest in being privately profitable, on the other hand. Historically, we've had this approach where we try to limit, for example, the activities and investments of what banks could do. So banks under the Glass-Steagall Act, even before that, under the National Banking Act, for example, were explicitly prohibited from engaging in a variety of activities outside the traditional lending.

But then, you know, long story short, gradually we've allowed these banks, even though they may be limited in what kind of risks they can undertake, to affiliate with securities firms whose business it is to take a lot of risks by trading and dealing in capital markets and derivatives markets and various other markets. Basically, their business is to assess and take on various risks that their clients want to take on or to buy or sell. So, for example, if we want to really sever the kind of private risk creation by virtue of certain types of incentives, certain types of activities that banks undertake and keep their deposit taking money creation function, then we would have to make these banks instead of kind of almost universal, diversified financial services providers, purely payments providers, providers of this particular public good public. utility, safe deposit, safe money. We have to limit the kinds of activities they can undertake. We have to limit the kinds of affiliations they can have so as to limit their incentives to create further risks and to abuse that specific public subsidy. And that, of course, immediately brings back the ghost of the Glass-Degel Act, right? And we know that Glass-Degel Act was repealed in 1999 precisely because it was supposedly stifling competition or stifling innovation and all of

these things. And we are now in an era where stifling innovation is a really, really bad label and everybody is afraid of being accused of stifling innovation. So personally, I just don't see how completely acknowledging, explicitly acknowledging that the government is going to stand behind all private deposit liabilities of all private banks, no matter what size and what asset side risk profile may be on the one hand, without actually, you know, basically poking at that beast of activity limitations and the ghost of Glass-Steagall, I just don't see how that will happen realistically. So we sort of teased at this, but one of the things you've written about is this idea of, okay, if we're going to separate just sort of core checking and deposits,

from other banking functions. You know, why not have let people have a check-a account at the Fed? If that's all it takes, there's no risk there. And you've written about that and you've advocated that. And it feels like a lot of people are talking about that these days. And people are talking about CBDCs and the difficulty in dispersing unemployment insurance and PPP money during the crisis also revealed some issues the government has in getting money to households. But I think the difference between your work and a lot of,

of the popular conversation. The popular conversation, it feels kind of like technical, like, almost like inspired by crypto, digital currency, et cetera. And your work, in your case, feels more explicitly political about changing the balance of power and changing the sort of conduct of banking, not just a, not just a technocratic central bank fix. Can you talk about the sort of like impulse that you have and sort of like your vision for what the Fed would offer? Yes, of course. Well, I believe that. that all finance is inherently political. Because we're talking about this public-private partnership, right?

There is that division of labor between the government that basically has to ensure the safety of all money, as we are learning now in the private institutions that get to allocate credit. And as we talked early, it's extremely difficult to maintain that balance, so it really is a win-win situation. We have that fiction that we can basically manipulate technocratically, by, I don't know, capital regulation and various other tools,

technocratically somehow always fine-tuned that balance so that the private banks can be profitable, but also in the process of being profitable, they could generate this public good for us. My idea for the Fed accounts is really kind of to imagine the world in which we bite the bullet and say, look, instead of constantly trying to keep up with the fast-changing environment where private banks constantly keep pushing on that line, right, in favor of their private profit-making capacity,

why don't we just say, look, everybody can't open an account, deposit account at the Federal Reserve. Of course, the Federal Reserve then would have to re-establish some form of partnership with private institutions. Let's call them community banks, right? smaller private institutions that are more likely to adhere to this kind of a public utility model and have them administer the opening and the management of those accounts on behalf of the Fed for all of us so that, for example, for me, not much will change. I would still go to my Tompkins Trust, which is a community bank where I bank, right, and open my deposit account there, my checking account there.

But my checking account would actually have in it the liability not of Tompkins Trust, but the liability director of the Federal Reserve. Now, if I want to have also a savings account or maybe some kind of a money market account or maybe open a CD for some extra money, that will not be provided by the Fed, then Tompkins Trust will already have me at the branch, right, or on the phone, and it would have a great opportunity to tell me, well,

by the way, if you want to have a CD or some savings account, here it is. We can offer you that particular function. for a fee, basically the way they do it now. So it will be a great situation for community banks. They would be effectively the agents of the central bank for a fee that the central bank will pay them, manage these kinds of deposit accounts, but also have other services that they can provide to everybody like this.

And their business model would have been under the situation much more stable than it is now when they're basically at the mercy of depositors thinking, well, you know, I'd rather move my money to JPMorgan Chase because that is definitely too big to fail institution. So that would have been for us how we would basically deal with it. And yet there would be no need for federal deposit insurance anymore because the transactional accounts of checking accounts in which we hold our deposit money that we use for payments every day would be explicitly, directly the federal government's liability. And the federal government's liability. And the federal government doesn't have an incentive to provide that public good, save money,

as some kind of a private profit-making opportunity. So that would be the win-win. And we would separate the public money creation from the rest of the private financial and lending activities on the other side, and we'll not have to deal with all this complicated technical matters of making that regulatory system increasingly complex. and increasingly unstable because we keep tinkering on the edges. Tinkering on the edges is a really good way of putting it.

I have a very basic question, and I fully admit I haven't read that much about the whole Fed checking account idea, but how do deposit rates work in that scenario and how much differentiation would there be between individual banks under that sort of framework? So this is where there is, of course, a range of design choices. And in the paper that I wrote, the people's ledger, my main point was kind of structural. To just imagine when this type of a decision is made, what kind of structural implications it will have. And that it's not as scary as people think because they have this sort of image of, oh, big, bad government is just going to control all of my money and that's bad.

of course that would be a bad thing, but we don't have to design the system that way. So that was the point of the paper. But to your question, one of the beauties or potential opportunities that creating this type of a Fed account system offers, particularly in the age of CBDC possibilities, in other words, that those Fed accounts will actually be digital money, tokenized money perhaps or account-based money, whatever it is, is that then the rates on various deposits can be established in a much more tailored,

much more sort of finely managed way, right, depending on a variety of public policy needs by the Fed. So there could be, for instance, interest paid on all of these Fed accounts, right? And the ability to pay interest could actually be a very much a direct tool of money. policy for the Fed, then one might ask a question, should the rates differ for individuals and for companies? Well, they can if that makes sense. For example, if a particular occurrence or particular dynamic in the economy may necessitate, for instance, to channel more liquidity into a particular sector of the economy by maybe increasing the rate on the deposits that's being paid to a particular type of institutional, institutional depositors, that can be done.

Vice versa, if the need is to, for example, in the pandemic to send more money to certain low-income families, right, that can be done much faster and much more easily. And that's one of those flexibility tools that this type of system would offer. Yeah, it definitely seems like there's potential for an improvement in the transmission of monetary policy and to the extent that, you know, the average deposit holder doesn't even like get any extra incentive in many cases. We just did it in an episode about low deposit betas with Joe Abate at Barclays. And you could imagine a much more sensitive as soon as the Fed hikes rates, you start getting more in your savings account.

But that would, that would clearly hurt NIMS of private banks across the category. So you could see why even though under your proposal, as you envision, still a role for big banks, still a role for the community banks, as branches. I mean, clearly it would change their sort of like funding structure and parts of their profitability. Oh, that's absolutely right. And that is one of the arguments against considering something like Fed accounts, because people say, well, where are the banks going to get their funding? Because right now they get their funding from cheap deposits. Well, we can actually engineer a similar way for private lending institutions, banks. We call them banks now, right, to get publicly subsidized funding for their loans. Pretty much the way they're getting it even today, right? The discount window type of an arrangement where they could actually extend their loans to credit-worthy individuals and businesses. then turn to the Fed and basically discount those loans to the Fed at the preferable rate, at the

preferred rate, very good rate of interest. This is basically what the Fed has been doing for many decades and what the Fed does every time it sets up this type of liquidity facility that we're seeing set up over the weekend, right, when the banks just basically bring their assets and discount those assets, push those assets to the Fed. And so that can be redesigned. as a more permanent solution to the funding needs for those lending institutions that really are interested in lending to the real economy. And it would give the Fed the capacity to really find you in the credit policy. In other words, the Fed wouldn't have to accept at that new discount window, for example, loans to, I don't know, short sellers and speculators out there in

capital markets, not to say that banks cannot then lend. to those speculators. It's just when they lend to those speculators for speculative purposes, they would have to fund those loans in capital markets and leave it to the market discipline to figure out whether or not those loans are prudent. But if they want to extend loans to productive enterprise to small businesses, medium-sized business or large businesses in any community, then they would definitely have access to preferential funding through that kind of a redesign discount window. In other words, you subsidize. on the asset side rather than on the liability side.

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On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown. town, San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. You know, you mentioned the Fed facility just then, which allows banks to, you know, tap Fed financing on their bonds at par, rather than the market value, because

the whole problem here. Part of the problem is unrealized losses on things like treasuries and agency mortgage back securities and things like that. What's the overall impact of that kind of facility on the banking system? How do you see that playing out? Well, this is, this facility, of course, is a familiar structure, right? The Fed has done it in the 2008 crisis in 2020, pandemic situation. So, to the extent, that this is at least the third time we're seeing this type of an approach, it is now, in my view, firmly ensconced in everybody's understanding as basically more or less a permanent type of a solution, right? And the question here is that is it the right thing to do, is that the right

policy choice and opinions differ? I do think that in the current situation as a kind of market-wide signal to support all the banks who are being heard by the Fed's own monetary policy, it's the right thing to do. But at the same time, sort of what does it tell us about this whole conventional image, right, of where the public subsidy ends and the private responsibility for the private risk-taking begins. So we are in a situation where now, you know, people are asking question, well, how come banks get this type of a liquidity facility? But for example, municipalities, right, or various other more publicly oriented institutions, finance institutions, they don't get something permanent of this kind. And this is where we get into this more complex and deeper

issues of structural change, right? If the Fed really is the only balance sheet in this economy that is already standing to absorb all the risks on various assets, but it makes certain choices whose risks on what assets is willing to absorb, then this question of what that choice entails and who should be making that choice becomes a political question. You know, it really feels to me, just sort of big picture, it really feels to me like the events of SVB have opened the sort of Overton window a lot. I mean, we're having this conversation. You and many other academics and the CBDC conversation has been going on for a while, but suddenly it feels more mainstream because this tension that you've been talking about for years,

private profit in banking with this sort of like utility function that everyone expects. And you did see all these VCs. They're like, we didn't come on. No one really thinks we're lending money to banks and we have a deposit. And I think they kind of have a point. Nobody thinks that. And so why do we still pretend that that's part of the structure? But it definitely feel like this blew the conversation wide out into the open. So what do you think like happens now? I mean like it's hard to predict the future and obviously politics, et cetera. But like what would you look for in sort of the, I don't know, coming months in terms of like where this conversation goes, where you expect to see regulatory changes and sort of like what you're watching to see

how it unfolds? I am hopeful that this conversation about finally cutting that cord between private deposit taking and the public responsibility for what happens in the crisis actually becomes more of an acceptable measure, but I'm not sure it will. Simply because rationality of doing something is not the only factor that makes it more likely to happen. There are a lot of vested interests, economic and political interests, that will be fighting tooth and against it, the banking industry for one, right? So my worry is that, yes? I'm just as an attack on, you know, very minor. I would love to have you back on another time to talk about that whole experience of the failed nomination. But, you know, just the political,

the vehemence of the opposition to you. Curious, like, you saw firsthand how powerful that community bank lobby is. That's absolutely right. They're very powerful. And unfortunately, they're too easily manipulated by the Wall Street big bank lobby in my view. Because the real fear from my views, you know, separate the public from private, the real fear was really coming from the big banks because they are the ones who run a lot of risk and take on a lot of risk and generate a lot of risk for all of us on the asset side of their balance sheets. And they knew that people who like me advocate for sort of, you know, the return to more kind of public utility type banking or to more public role in banking sector in general would not really hear their

point of view really well. But the community banks are extremely powerful and they play their role, unfortunately, in that process. Salé Omerova, so much thanks for coming on. I feel like it's the perfect guest for real to move this conversation forward, someone who's been thinking about these for a lot longer than a week and a half, like many other people have. Great to get your perspective. Thank you so much. Yeah, thank you so much, Sally. That was really interesting. From a, from discount window to Overton window, has anyone made that joke yet? Oh, that's a good one. It does feel Tracy, like this sort of like glaring contradiction of like, look, we all just want a checking account. We just want to have a place to put our money and not have to think

about it. And then the fact that everyone is in a while our checking account holders blow up and they out the profits or whatever. Like, it does feel like it's getting harder and harder to accept that that can't be resolved. Right. If it all comes back to the Fed eventually, then why not just go straight there? But I also thought Sally's point about tinkering at the edges of bank regulation was really accurate because it does feel, like, it's not just that. It's also that the very nature of regulation tends to be quite backward looking. And so we're always fighting the last crisis. And so the result of 2008 was, well, we have a lot of new capital and liquidity rules that mandate banks hold big buffers of bonds. And now that was fine during a period of relatively low

inflation. But fast forward to today, there's lots of inflation. And now those bonds are somewhat problematic. And now we're having to scramble to think of new things. When to her point, you could just kind of maybe try to strike at the heart of it. But that said, that said, I do think political constraints are real. And I cannot even begin to imagine what this process. I mean, you're talking about serious structural reform of banking would actually look like. No, that's true. You know, it's funny you said, like, how much, like, regulators always, like, fight the last war.

And it is so wild that, like, A, the real, like, sort of, like, panic was really on the depositor. which is not something we thought about in 2008 when it was really about the assets. And then the assets that they did have, I mean, it was like treasuries and MBS, which they did take a big rate hit on. But it's like going back to like 2008, it's like, oh, cool. You know, we never, I don't think people conceived of that as like where the location of like a big blowup would have it happened because it wasn't like they were like making really egregious loans to start up or like, you know, really exotic non-government back. The irony is they took money from risky startups and put it into really safe things. It really inverts everything, right? Like, I was trying to think about, like, has there ever been another financial crisis or

sorry, banking, bank that failed because they took money from risky entities and lent it to safe ones? Like, it really does invert our conception of how these crises happen. Absolutely. But maybe, you know, as we were discussing, maybe that's the peg that's needed to really start to think about some of these underlying issues. Because if even that is a problem, then it seems like we need to start looking for an alternative solution. Yeah, absolutely. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Alld Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwork. Follow our guest, Saleh Amarova. She's at ST Amarova. Follow our producers, Carmen Rodriguez, at Carmen. Armin and Dash Bennett at Dashbot and check out all of Bloomberg's podcasts under the handle at podcasts. And for more Odd Lots content, go to Bloomberg.com slash odd lots where we post transcripts. Tracy and I have a blog and we have a newsletter that comes out every Friday.

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