The Munk Debates Podcast - Friday Focus: Banking Blowup – Iran & Saudi – Eminent Canadians

Episode Date: March 17, 2023

Friday Focus provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving the news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates.  The following is a sample of the Munk Debates’ weekly current affairs podcast, Friday Focus.   On this week’s edition of the Friday Focus podcast, Janice and Rudyard start the show with a discussion of crises rocking US regional banks as result of the bailout of Silicon Valley Bank. How is the rest of the world reacting to yet another “made in America” financial crisis? How does the bailout effect the so-called “moral hazard” in investing, and does this concept even exist anymore? Friday Focus wraps up with a twin discussion of how Iran and Saudi Arabia have restored diplomatic relations and the appointment of David Johnston to investigate election interference in Canada.   To access full-length editions of the Friday Focus podcast, consider becoming a donor to the Munk Debates for as little as $25 annually, or $.50 per episode. Canadian donors receive a charitable tax receipt. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

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your generous contribution. Hello, Monk members. Roger Griffiths here, your host and moderator. Welcome to this, the regular Friday Focus podcast. This is the program each and every week where we We check in with Janice Gross Stein, the founding director of the Monk School of Global Affairs, an internationally renowned scholar and author. We dig into the big issues and ideas, moving the news, and hopefully leave you with some new analysis and insights. Janice, great to be in conversation with you again. Where are we finding you today?

Well, you are finding me in bright, sunny, Toronto with a little bit of snow forecast. But you know what, Roger, I would rather be here than in Silicon. Valley this week. Well, I'm staring out over a pretty kind of battered and busted up Santa Bella Island off the coast of southwest Florida down here to view what happened after a remarkable hurricane slammed into the Fort Myers area last fall. I can report Janice that a kind of pandemic vibe, not a lot of people around, which to tell you the truth, I'm kind of liking. But let's go over to the West Coast Silicon Valley and what we saw this. We can try to add something new to this conversation because everyone has obviously been

glued to the ongoing turmoil in the American banking sector as a result of the failure, the collapse of this Silicon Valley Bank and the knock-on effects to other banks. And also now Credit Suisse in Switzerland, having to be bailed out by the Swiss National Bank. Janice, how does the rest of the world look at this? I have a thesis of you and what I want your gut check on. I think the rest of the world sees these kind of decades, seemingly every 10 years financial crises coming into the United States and is just sick of it and is increasingly dismissive about U.S. economic leadership. Forget political, diplomatic, military, all of that. This is a real blow in my view to U.S. global economic prestige,

and it's a boon for China. I could not agree with you more, Roger. Frankly, when the story first started, I couldn't believe it. It was, I couldn't believe it because of our listeners. know, well, frankly, this was just stupid mistakes in many cases, right? But you look at the United States from outside, what the United States has claimed with justification. It is a leader in the innovation economy. That is its biggest economic attraction to the world. It pioneers new technologies. It commercializes them. It develops them. And for this to happen in that sector, it seems to me this is just a gift to the Chinese government. The Chinese government began in 2009 saying that the United States was in terminal decline and this was going to be China's century. Why was that?

They drew that conclusion from the mayhem in the U.S. financial sector. The competition is now focused keenly on technology. So, oh my Lord, Rutgers, to have the Silicon Valley Bank set off yet another panic, the Chinese will take every advantage of this and say, you cannot trust the United States. You can't trust the U.S. financial system. And if this is what's funding their innovation economy, we're on a winning streak. Yeah, I think the other thing to realize I've been thinking about is the response of the U.S. Treasury Department, the Federal Reserve, the federal insurance scheme for banks, was it effectively to extend the government's bailout provisions from the systemic banks?

Those were the big banks like J.P. Morgan Bank of America, huge deposits, so way larger than Silicon Valley Bank. to effectively every bank. And it's a it's a playbook that we keep seeing repeated in Europe in the United States, which is the privatization of profits and the socialization of risk. And I just, I just think there are costs to this, that model. There are costs politically. There's anger that you can see. It's got a bit of a partisan divide in the United States over this bailout between Democrats and Republicans. But it all, also just goes to, you know, how dynamic, how vibrant, how real is American capitalism when it seems to serially bump into itself in the night and cause some kind of grievous injury.

And then when that happens, what's the response? Well, the response isn't to ask these depositors, many of them, you know, multi, multi, multi, $100 million venture capital funds to even take a 5%? loss in their deposit, even a 10% loss to show some moral hazard, some responsibility for the risks that they were taking. They were getting interest on their deposits, Janice, of almost 6%. And I think anyone knows who looked at their bank accounts and investing money over the last couple of years. If you were getting 6%, that reward came with a risk. And yet here it is, Janice. Everyone's made whole. There's no price discovery. Yes, the shareholders of the bank were wiped

out the bondholders. But this strikes me, Janice, it's just a string that we just keep playing out and out and out. And I worry about the long-term consequences for our economies, for this thing called capitalism, which is supposed to be one of our big competitive advantages vis-a-vis China and the rest of the world. Let me backtrack just a little bit here. I just to highlight the difference between 2007 and what we're seeing now. So, the frankly as you rightly just said every depositor now is fully insured for all the sense of purposes if they're in anything but a mom and pop a local bank 22 trillion worth of assets now effectively guaranteed by the full faith and credit of the u.s.

that's right that's where we are now what's funding that um i'm not going to use the word bailout because it's not U.S. government money and it's not taxpayer money. Let's just look at this. So where's the risk now that banks are taxed? And there's a fund which has effectively covered these depositors. But in what world is this fund going to be big enough in the future to deal with the systemic risk of making literally every depositor whole no matter where you decide to put your money. And think about the moral hazard for a minute. You can see that I was not happy with what happened.

You put your money in any bank you want, and if you can get 7, 8, 9% risk, go ahead and get it because if it goes busts, in effect, it's going to be covered by a so-called fund that financial companies are going to pay into, which have no capacity really to matter. I just, there's terrible, to me, terrible moral hazard here, frankly. I don't understand the decision.

I agree with you. There had to be some risk that the depositors were running when they were getting that kind of interest. And let's just add one other piece to this. Silicon Valley Bank had the highest level by an enormous stretch of uninsured deposit. Well, you know that when you put your money in the bank. And here's the Enron shower curtain. The Enron shower curtain was a famous shower curtain that cost $14,000 that an executive at Enron bought for a bathroom.

And that's what killed Enron in the end because average people just couldn't relate to this. The Silicon Valley Bank was giving mortgages at low rates for these investors. to buy multi-million dollar homes in Silicon Valley. Now, if this doesn't infuriate Middle America, nothing will, frankly. So globally, a disaster, locally in terms of U.S. domestic politics, just red meat for people who can't understand how a system is structured this way.

And I can't either. Yeah, I, Janice, in this segment, we're going to violently agree with each other. I, you know, the cynical side of me thinks the reason this bailout happens so quickly and all the depositors made whole is, you know, this bank and its clients represented some of the largest donors to the Democratic Party, to the presidential campaign of Joe Biden's, Kamala Harris, to key senators. I'm sure there was a flurry of calls out from Silicon Valley into Washington saying, you know, in a sense, you're going to kill the entire tech infrastructure. in the United States, you're going to set us back a decade. Look, I don't know enough to know whether those arguments are true enough, but I think those arguments could have been weaponized and exaggerated

to intimidate and pressure Washington politicians and bureaucrats who probably don't really know what they don't really know about the tech infrastructure and Silicon Valley banks, roll in it, et cetera, et cetera. The end result, though, is what you summarize. It is the abrogation of moral hazard. It's the guaranteeing now of all bank deposits in the United States. And just to me, it's like I know in Canada there's a $100,000 limit of insurance per account. And if I guess I really wanted to be kind of squirly and, you know, a can of beans run to the hills kind of guy,

I would spread my money out each bank with $100,000 if I was lucky enough to fill up the big five and have all my money insured. But I don't do that. None of us does. But with the same time, I don't know. I don't assume that all my money is insured at my bank. I assume that in a worst case scenario, some collapse of the full faith and credit of the Canadian government.

It's quite possible. Just like what happened in Cyprus in 2011, there would be some exceptional tax levied on, you know, bank accounts over X amount or whatever. These things happen. At the end of the day, you know, When stuff goes wrong, bills have to be paid. And again, I just go back to this thing of privatizing profit and socializing risk.

And this is just to be such a quintessential example because these were some of the richest, most powerful, most pampered people in the entire U.S. economy who were part of this bank, who were its clients, who were its depositors. And if these people in this instance can't even have a scintilla of some price for their actions and the consequences of being involved in this. And instead, it all has to be socialized because it's going to be all the small bank accounts, so if it's small Americans that are going to have to pay into this fund, which, as you say, at $25 billion, is nowhere near the implied risk of $22 trillion worth of deposits. I'll give you the last word on this.

I don't understand the financial model going forward because once you've done this, you've got a raise the tax on banks to be able to say no U.S. government money went into this. That's number one. And therefore, banks themselves become less profitable in a very competitive market. Nobody's talking about that part of it. Secondly, briefly, as you know, some of the key regulation was unrolled, was rolled back by the Trump administration. I can assure you that regulators are sharpening their parents. pencils and what's going to be regulated going forward are not, what is a systemic bank?

Every bank is a systemic bank if you look at this model. And thirdly, if you actually look, and I don't want to minimize it, but nevertheless, if you look at what depositors did, they got their money on Monday or Tuesday, although the bank is saying, well, payments are slow. And where do they go to Jamie Diamond and other of the biggest banks, they were able to move those deposits to meet payroll. Well, the innovation economy wouldn't have died, frankly, if there were some surcharge. And some of the big banks, there's another interesting story.

I know what he's talking about over the weekend when they were desperately looking for a buyer for the Silicon Valley Bank. The big banks didn't touch it because they're collecting depositors. Right. It's totally in their interest. Of course it is. And not only are they collecting depositors, they are scooping up employees at the Silicon Valley Bank,

many of them really well connected into the Valley and into these companies know everybody. Everybody wins here, except the deposit holders who are paying the tax across the system to sustain this kind of your responsibility. Which are not the deposit holders of the Silicon Valley Bank of California. Janice, great insights. My final takeaway is, you know, this all kind of feels like platocracy.

You know, big word means rule the rich. You just wonder if this is the moment in Joe Biden's America with Democrats in control the White House and the regulatory framework to respond to this banking crisis, why wasn't this the moment to kind of assert the public interest, assert the moral hazard, start talking about pushing back against, unacceptable risk-taking, unacceptable profiteering by some of the most wealthy and powerful corporations and individuals in America. Didn't happen.

It surprises me. That worries me about the future trajectory of American democracy. Well, look, when we come back from the break for monk donors, we're going to have a fun one-two punch. We're going to talk about this surprising tie-up, Saudi Arabia and Iran. What's going on here? Why are they seemingly reopening, re-engagement? diplomatically? What's China's role in all this? And then we'll talk about this special rapporteur.

It's a new term, a new position created by Prime Minister Justin Trudeau to investigate Chinese election interference. This person has been named. Janice and I may have different views on their suitability for the job. We'll have all that for you right after this break. Thanks for listening to this excerpt of the Friday Focus podcast to get full-length editions of each and every episode of this program. Simply go to our website, www.com. Click on the Friday Focus tab in our navigation on the top right of the site. Make a donation as little as $25 a year or 50 cents an episode and we'll send you not only the full-length editions of each and every Friday Focus podcast, but all kinds of special

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