TrueLife - Tom Scheiding PhD - Economics, Crises in Hawaii

Episode Date: May 18, 2023

One on One Video Call W/George https://tidycal.com/georgepmonty/60-minute-meetingSupport the show:https://www.paypal.me/Truelifepodcast?locale.x=en_US🚨🚨Curious about the future of psychedelics? Imagine if Alan Watts started a secret society with Ram Dass and Hunter S. Thompson… now open the door. Use Promocode TRUELIFE for Get 25% off monthly or 30% off the annual plan For the first yearhttps://www.district216.com/https://www.linkedin.com/in/tom-scheiding-67507329Tom Scheiding is an Associate Professor of Economics who has been teaching since 2005. In his classes, he immerses students into how the wealth and resources of a country are distributed and how economic equilibrium takes place.. Tom discusses how economics influences other fields of study and how the world looks through an ‘economic lens.’ He hopes that students can learn to appreciate how important economics is to understanding the world through discussion of stocks, bonds, and economic events. Check out Tom’s lecture style in his online videos: https://www.youtube.com/c/tscheidi. One on One Video call W/George https://tidycal.com/georgepmonty/60-minute-meetingSupport the show:https://www.paypal.me/Truelifepodcast?locale.x=en_USCheck out our YouTube:https://youtube.com/playlist?list=PLPzfOaFtA1hF8UhnuvOQnTgKcIYPI9Ni9&si=Jgg9ATGwzhzdmjkg

Darkness struck, a gut-punched theft, Sun ripped away, her health bereft. I roar at the void. This ain't just fate, a cosmic scam I spit my hate. The games rigged tight, shadows deal, blood on their hands, I'll never kneel. Yet in the rage, a crack ignites, occulted sparks cut through the nights. The scars my key, hermetic and stark. To see, to rise, I hunt in the dark, fumbling, fear, Fearist through ruins maze, lights my war cry, born from the blaze.

The poem is Angels with Rifles. The track, I Am Sorrow, I Am Lust by Codex Serafini. Check out the entire song at the end of the cast. Ladies and gentlemen, welcome back to the True Life podcast. I hope everybody's having a beautiful day. I hope that you got to wake up in the arms of the person you love. I hope the sun is shining, the birds are singing, the wind is at your best. Got a great show for you today.

A friend of mine, a colleague that I see, not that we work in the same fields, but we used to work adjacent to one another, but one and only Tom Sheeding. He is shiting. I'm sorry. See, that's how the first colleague's growing. I don't pronounce his name right.

Well, he's an associate professor of economics who has been teaching since 2005. He, in his classes, he immerses students into how the wealth and resources of a country are distributed and how economic equilibrium takes place. He discusses how economic influences other fields of study and how the world looks through an economic lens. Tom, I'm so excited. You're willing to spend some time with me in the audience today just to kind of shoot the breeze and figure out some questions, man. Thanks for being here. How are you?

I am doing well. I am doing well. The semester has ended. So, you know, the stress that that brings on is lifted. The summer is here. And yeah, it's a, it's a, and I'm getting ready to do this epic thing for anyone who's listening to ever has to do advanced placement exams and getting ready to go to Cincinnati, where all of the AP exams come in, and then they bring a bunch of us into grade a thousand, you know, copies of the exact same question. So I'm, I'm prepping myself for that. That sounds kind of interesting in a way. So is it,

is the question like a free flowing answer where people write? Oh, so you're going to get to hear some. So what they do is they, we all fly to Cincinnati and it's like a big like expo center. So it's a huge center. And then they bring it about, I don't know,

maybe a thousand economists or a thousand, you know, it's not only economists like myself who teach at the university, level, but then it would also be people who actually teach the advanced placement exam in the high school setting. They bring us in, they spend a day, and it's a free response to someone, you know, hand writes it out. And as a group, we come to an agreement about this is an acceptable answer. If you're missing this, it's this number of points off, you know, that kind of thing so that we grade consistently. And then, yeah, you know, and then your work, so it's a very rigorous process.

Then they like double check your work at random to make sure you're not being like, you know, and you become very focused on one question. So basically for a week, I'll be grading one question for a week. So it's a very, you know, we were talking before the started of cogs in the wheel, right or cog is in the watch yeah a very good um cog and it's also for me it's very different too because it's a um

as a professor my my day is rather unstructured um structured but unstructured this one is very structured so it's a very different process yeah in some way it sounds exciting in that

maybe you get to stumble upon the next great economic theory i mean it's got to kind of exciting to think about some fresh eyes seeing a problem that has never really been interpreted a certain way. Have you ever come across that? You come across that from time to time. It's it is rare. You know, a lot of times where I think the big discoveries tend to be made, right? There's this. So back in the late 1800s, there became the very, first economics textbook, right? So, you know, colleges and universities, at least in the United States, are starting to become a little, you know, much more frequent. They made it one of the

first textbooks for it. And the person that was writing, his last thing was Marshall, he, you know, was describing the things that someone would typically see when they take an economics class, downward sloping demand, upward sloping supply. And he made this comment then where he mentioned that there was an exception during the Irish potato famine. And that people, that even though the prices of potatoes went up, that the people, you know, have kind of some generalizations here, but the people of Ireland didn't know how to make things other than using potatoes. So they still had to keep buying potatoes even though the prices had gone up dramatically,

which is the opposite of the way we think of demand. And the person who wrote that about the Irish potato famine, His last name was Giffin, G-I-F-F-E-M. That comment right there gave rise to what economists would call the Giffin good. And then for 110 years, 120 years, scores after scores of economists were on the hunt for another Giffin good. And, you know, people's careers were consumed by looking for more of these goods. I say this as a story that, you know, when you're a graduate student or even a young economist and you're trying to find what's your big thing, right?

That people try to think of this like really big idea, really explosive topic. But what I have found is that the most impactful things are often the uncovering or the re-revealing of something that was uncovered before that. Not to promote my own work, but just to kind of give you some context. My work, my dissertation and whatnot was on scholarly journals, right? So economists, when they're writing,

you know, we publish research in a journal, very expensive academic journal, and that these journals are not personally subscribed to by me, but are typically subscribed to by libraries. The libraries pay for the journal. They subsidize the whole process. Me, I don't pay anything for the journal, right? I go to the library if I want to read it or something like that.

But for an economist, that's a very bad way of structuring things because I personally am benefiting from the journal, right? Because my career is helped and whatnot. So about 40 years ago, 50 years ago, the two, the two, economists came up with idea of why don't you not just make libraries pay for the journal entirely, but instead find a way to capture how much benefit I personally get from publishing, how much benefit the library gets from having the journal, and extract and price each person for the benefit they get. So the idea was that I as an author would pay a fee to publish my article, the library would pay a fee to receive the journal and benefit the readers.

And for some reason, that idea was introduced in the early 70s and then never talked about again. Until, I mean, yes, and then I talked about it in my dissertation, and I'm not like the very first person to have re-revealed it. But it's now gained so much more prominence in a digital age where, you know, you've got people starting their own journals and they're entirely online. You don't have to have a printing press anymore, right? Even things like this, like a podcast or any kind of media thing, right, where we could think of ways to have subscribers or patrons that help, you know, pay the bills, but we don't have to have, you know, 20 minutes of advertisements to support, right? So we're kind of seeing this deconstruction of all the media and subscription things and whatnot. And I say this because it's probably the case that

even the financial structure of a podcast or, you know, a blog or anything like that, there's probably an economic model out there that was talked about 40 years ago or 50 years ago. And that's the innovative stuff. The innovative stuff is someone in the basement of the library reading journals and saying, hey, that works, you know, for what we're trying to do here. That's what, I mean, in terms of like when I kind of like sit back and like, wow, that icons really is doing some good work. It's not typically, you know, I have found the giffin good. You know, it's typically something more of like, look at this conversation we were having 50 years ago or 75 years ago. And maybe we should talk about it more now or less.

Yeah, that reminds me. My grandfather used to always say, George, if you want a new idea, read a really old book. Exactly true. But that's exactly true. Yeah. That's exactly true. Yeah. I almost think that this whole idea that you're speaking about,

whether it's economy or artwork, it seems like it's something that permeates all of knowledge. Like we just go down this rabbit holder. We go down this idea of incentives. And you could argue incentives for who. But, you know, it does seem. that we go down this road and we kind of get off the beaten path.

And all of a sudden we find ourselves in a cul-de-sac. And that's kind of almost where we are now. Like we've found ourselves in somewhat of an economic cul-de-sac because it's, you know, there's just the same old song and dance. But I think we're beginning to see these new little tributaries come off the mainstream. And you're getting to see this kind of peer-to-peer idea. Like as a podcaster, I'm able to go out and almost as an independent contractor, find my own sponsors or find lucrative ways to create value for people.

And maybe that shows itself in an exchange of goods or exchange of services like that. And it's almost free of constraints where it seems like a big portion of the economic model we're in has been thoroughly constrained. And that seems to be a problem. What do you think about that? Yeah. I mean, but it goes to the other way, though, too, right? Because what happens when a really good idea that's outside, you're just talking about media, a really good idea is done outside of the traditional media structure. What happens, right?

Oftentimes what happens is that the traditional media structure either, like, you know, creates an alternative that is better in some way more financed than whatever was produced, or they buy it out outright, right? So the one that came to my mind as you were just talking was, Think of crossword puzzles, right? So crossword puzzles, you know, are like, your grandpa does those, right? Or like nerds, you know, in coffee shops. But the idea is that, right?

So if I work, you know, for the Wall Street Journal or the New York Times, a really well-financed national newspaper, I'd be like, I'm giving all these column inches to crossword puzzles, and it's a dying business. And, you know, how are people going to do these online? why are we still doing this? And then, what was this? About two years ago, three years ago,

Wordle came out, right? Wordle was that thing where, I mean, I've never played it, but it's kind of like, you know, a crowd. It's a new version of a crossword puzzle. And a guy just developed it on his own. He had a website and he was developing it on his own. And then what happened? New York Times bought it.

So I mean, right? So rather than making their own, right, they're reviving their subscription business or their online presence and developed whirdle, which is something you only really do online. But I would imagine, right, the accountants realized we make a bigger profit margin on online subscriptions than we do paper anyway.

Let's buy wordle, pay over, pay more than asking, give them an offer they can't refuse. And there you go, right? I mean, you've, you know, so the other one I was thinking of when you were saying this was this whole idea of streaming, right? And I think of my childhood, which was, you know, began with, you know, over-the-air television, you know, and then cartoons only on Saturday morning to a point where, I don't know, maybe I was seven or eight or nine. and they finally got cable service to where we lived, right? And then that was a big deal. And then it evolved to what maybe 10, 15 years ago

where you started to do the satellite dish thing, right? To a structure that, I don't know, maybe five years ago or 10 years ago, was one where the cable companies had these packages, right? That were pretty immutable, right? That you've got whatever they got. So yes, there was ESPN, but there was also EWTN, you know, the Catholic Channel. You know, there was Disney and there was NBC, Fox, and all those. But at the same time, there was the home shopping channel that no one really watched,

but somehow always curiously in there, right? So everyone was, to put it better or worse, everyone was lining everyone's pockets, right? And it was a good setup, right? If you were a sports watching family but didn't have kids, you didn't like the Disney package that was included, but so what, right? If you were the opposite, you had kids, never watched sports, you had ESPN, but you paid it because you didn't have a choice. But then what happened, right? Or the past 10 years, especially over the last five years, it's all been disaggregated, right?

So now, right, you can be an entirely streaming household, right? And you don't need the cable package. you know, I say this because, again, you know, the others, right, the established cable companies then find that they have to do something else to keep the lights on, right? So they can, you know, what's the one, like for here, you know, for us in Hawaii, you can only get the surfing channel if you actually do your surfing. subscription through spectrum, right, the time warmer spectrum, the official cable channel, right? And if you don't have, you know, if you have telecom like me, you don't get that channel. That's not something you get because it's not part of, right? And so you can see that.

But at the same time, ESPN is going to make a streaming app that has all of their channels. So, right, so think about it. If I love sports and it's all I do, why would I still pay $70 a month for a whole cable package rather by the $20 app, right? $20 a month streaming app, right? Or just Netflix or those things, right? And I'd like to think that it changes and it changes for the better and the technology makes these things better.

But at the same time, we were talking about the complexity of the world. The complexity of the world is such that you know, I feel like the past will keep repeating just as you kind of your earlier comment. I feel like, you know, when you have a monopoly or when you have a very strong market presence, they'll usually do quite a bit to maintain that strong market presence. And we see that even today here in Hawaii with Hawaiian Airlines and Southwest Airlines, right? I mean, it's a complicated issue, right? But we can see that that's a, you know, it's something where Hawaiian now has to make these moves to remain the dominant player, but it's certainly under attack.

And then, you know, what else do you offer, right, to get that? So, yeah. So how do these, so this is interesting as a podcast. What usually happens? Do you usually do most of the talking or does the inter the other person do most of the talking when we do? It's my job to make sure that the other person is what I try to do. I want the people listening to this to get to see why I'm so fascinated in the person I'm talking to. And I think you're doing a great job of that right now.

I like the way you think. And I admire that. And I have genuine questions. And I care about what you have to say because I think it's not only important to my life, but I think it brings value to the other listeners there. So, I mean, it's as much of a conversation as it is an interview. So let me say what's on my mind today. Please.

You know, I'm coming off of the heels of, well, there's two things. And they're both related to when I, what keeps all of this running? Just the entire global economy, the United States economy, what is the most essential thing, right? So when we think of human life, right, the most essential thing to human life is oxygen and water, right? can live a long time without food, but without oxygen, we have a very, very, very, very short life without water. Not as short, but still pretty darn short, right? And when I think of an economy, like a breathing creature, the most essential feature is credit. Credit is the thing, right? I mean, I've never seen the play, but it's the thing that Hamilton, Alexander Hamilton, said about

why we needed to borrow money, why we needed to take all the colonies that had amassed their own debt to fight Great Britain, why the United States needed to take on their debts, right? And they went to the Dutch, they got a really big fat loan, and the most important thing was paying off that loan to establish credit. We fast forward to today, right, and we know that in January we hit this credit, this debt limit. And what that meant was, what was it, $31 trillion, something like that, a $31 trillion debt limit, which meant that the government couldn't borrow, couldn't issue debt for more than the $31 trillion. So all that it's been doing now are two things, either issuing new debt to essentially refinance old debt, right? So replacing one debt with a,

new one. But given that interest rates are getting higher, there's not a lot of refinancing of the debt, right? Or it's debt that has come to term, has matured, and they're just taking that in and just issuing new debt to kind of do a one-for-one replacement. And we're coming in the and then to pay the bills since January, they've been doing what are called these extraordinary measures, which are kind of accounting tricks, basically, right? Like if you were, if you were running a business, you wouldn't be allowed to do this, but imagine, right, is that you're taking payments from your employees for like health insurance premiums, you know, if you have a generous employer and you have a pension, right, and you make a contribution. Well, what the

government's been doing is taking that money out of its own employees, federal government employees' paychecks and not putting it in a pension savings account or, you know, pension asset, but rather using the money to pay bills and being like, we'll do you a solid later, right? When we got the money, we'll put it back in the account. It's not like that, I mean, it's not just the federal government that even in Hawaii as a state employee, the state did that with my pension contribution. They, you know, when we hit the depths of COVID, you know, my payment, you know, the payment

they were supposed to make on my behalf. wasn't going to the pension people, right? They were keeping it in and saying, we'll pay it out later. So it seems like great. So already you can say that here in May, right, May, what is it, 17th, 18th, 18th, right? We're in a dicey situation. If you were running a business and you're saying, I'm only, you know, paying the bills by taking my employee's contributions and paying things off, you'd be like,

dude, you should be in jail, right? I mean, it's pretty bad. So let's June 1st is the earliest predicted date when the government won't even have enough money to pay those bills. It's called the act's state. And so all these politicians are meeting right now

to come up with a deal so that they can issue new debt. Here's the problem. And this is the thing that is not being talked about a lot. If you watch TV or, and I'm not a very, I'm not like one of those political people where I get like super impassioned, they all let me down. So I don't get too enraptured with any particular politician because they all just, you know, make you mad.

But, you know, it's two camps, right? One is saying don't pass that deal. Like people need to, you know, we need to make these cuts or do these things. And they're only, only until they're forced against the wall will they make hard decisions, right? Or there's the other one that like, everything will be okay. the U.S. has never defaulted on debt and will reach an agreement before June 1st, this X day. Let's just say that that best case scenario is reached, right? That all this dire situation of the government not being able to borrow more.

Let's say that everyone gets in a room, says it would be really bad if the government defaulted and we'll make a deal. even in that best case scenario. So the government right now is down to about $80 billion, sorry, yeah, about $80 billion to $85 billion that it has right now to spend, which is so low. Again, that's why we're coming up to this June 1st day. Let's say they come up with a deal. If they come up with a deal, what's the, I mean, I'll just ask you, George,

what's the first thing that you would do? then do as the government. If your bank accounts down to $80 billion and you know you've got a lot of bills coming up, what's the first thing you're going to do? If I'm the government? Yeah, you're the government. And you've just been told you've got a higher credit limit. And you're down to like $80 billion. And so you know, I'm going to run out of money by June 1st. I've got $80 billion left. And Congress has just raised my credit line. Oh, you're going to raise it up to the limit because the best predictor of future behavior is past

relevant behavior. You're just going to max it back out again. Exactly. Exactly. So they're going to max it out again. But think about it. It's now gotten so low. So here's the estimate. And I wrote this down before. So I haven't committed this memory. They will need $600 billion by the end of summer. So that's important because what does that mean? That's what, $520 billion that they're going to have to go out into the credit markets to borrow from? That means that's $520 billion less of car loans, home mortgages, business loans for expansion, new business loans, right? Public financing loans. All of the, there's $520 billion that's going to get massively sucked out in the summer, you know, just as they need it when, you know, the government's going to be given this higher credit line. They're going to sap out $520 billion right away.

That's in the best case scenario just laid out. Congress comes to a deal. They raised a credit line before June. first and then they extract almost $600 billion, you know, by the end of summer. So it sucks out all the credit, sucks out massive amounts of credit. That's the best case scenario. That's a credit market that's working and a massive amount sucked out. Let's talk about the worst case scenario.

Worst case scenario is that we do default. We did once default, and people don't talk about it a lot, but that actually, Back in the late 1970s, there was a problem not unlike this. So as you're talking about the past as prologue or the past has good lessons. In 1978, we had the exact same problem. And the U.S. government did the exact same thing we're talking about today, taking money from employees' checks and other things to pay, who's got to get paid. The computers were much smaller and worse and whatnot.

and they forgot to pay the interest payments on treasury bonds for two weeks. Right. In the scheme of things, there were two particular bonds. I think it's two or four bonds, and they forgot to pay the interest for two weeks. So technically, you're in default, where if you haven't made any payments at all for two weeks, it was a technical default. They discovered the problem after two weeks, and then they fixed it. but just that one little delayed payment,

they call it a technical default to make it seem like it's less bad than a real default, but that one little technical default raised interest rates pretty significantly in a long-term fashion. So think about what it would be like today then, if not just for two bonds we made this little mistake for two weeks. I mean, here we're just, we're really quite literal. a mistake away from a computer for getting to pay something, right, and forgetting to make an interest payment. If we hit that, I mean, the ramifications of that are, I can't, as a person who kind of studies these markets, it's hard for me to fathom what the consequences would be

of a actual default, even a technical default, because it would just be the sucking out of credit and not even having it offered. So it's different than the best case scenario where the credit was there except the government was just taking it all. Now there's no credit, right? Yeah, people will still buy U.S. government bonds, but they're going to need a lot more money to do it. And for everything else, credit cards, mortgages, everything else,

all that credit is gone. So we're absolutely in a recession then. I mean, it's probably worse than a recession, but it's going to be something very bad. It's why we distinguish the 2008-2009 recession as different than any other recession. It's why in common terms, like two people talking, we call the 2008-2009 recession a financial crisis

because it was exactly that. credit not being there like it used to be. And that's why even this kind of regional bank mess that we find ourselves in in March and April, why I wonder why people aren't talking about it more. And I think there's something very telling in people that talking about it more. Because it means that it's a lack of credit available even in local communities. You know, we can think about for us in Hawaii where we don't even have a national bank presence, the ramifications are probably a bit more severe than I haven't actually seen any meaningful articles

actually talking about how it's affected, certainly Bank of Hawaii and First Hawaiian. And what it means is that those two banks right there have less credit that they can lend out to right to the state um on the mainland it's a little different but it still means that you know most like you and i regular people most of our loans don't come from the big bank of americas or wells hargoes they come from regional banks or local banks and those banks aren't able to lend out as much as they used to um and so this is all a long way of saying is that you know If we were to actually go in default for the government, that would certainly destroy the credit. The credit's already being attacked with this, the availability of credit, it's already being attacked with this banking crisis, regional banking crisis.

It's already being attacked with the fact that even in the best case scenario, all this capital is going to be drawn out. It's why I'm generally pessimistic for the near-term future because everything relies so heavily on credit. and yet the mechanism, the watch that's keeping all of this running, the credit markets are under incredible stress right now. And this default or possible default, this debt limit crisis has put incredible strain on the credit markets, which are already in kind of in flux because the because the interest rate, you know, by the Federal Reserve, the federal funds rate has gone up so much. Already banks have been kind of having to shuffle how they do things because interest rates went up.

Some would say unexpectedly, a person like myself would say, I'm not sure why you didn't see it that way. And that would be more of a monitorist or Milton Friedman kind of interpretation. So, yeah, I never wanted to say I predicted something before it happened. I really am not saying that. But at least the theory that we teach would have predicted that we would see ourselves in the situation we're in today. What are, you know, to me as like the layman who I don't, I don't thoroughly understand how all the gears and the credit markets and everything works. but, you know, I'm 48, and so I've seen, you know, I remember echoes of the 80s, and I remember the dot-com bus, and I remember the 08 bus, and the 12 bus.

And it seems to me that what we're seeing here is a machine that broke a long time ago, and it's just been papered over and papered over. And isn't it interesting that these regional banks fail, and they're just bailed out? You know, when I listen with my primitive ears to the Fed speak, And I hear Jerome Powell standing up and protecting the zombie corporations. It seems to me with my limited knowledge that the people that are in government, they don't care one tiny fraction about the guy that gets up and goes to work. They care only about the shareholders of the regional banks that they own.

They will bail them out continuously forever and ever and ever and ever. And the people be damned. And I think that that is like, I think the best case scenario is that we do. do default. I hope we default. I think that it's the only way in which we can rid ourselves of the corrupt nature of some of these giant sort of like leeches or these giant parasites that have wrapped their tentacles around working people and are desperately trying to jam their blood funnel in anything that smells like money. Yeah, I mean, but it's interesting. So I'm 46. I'm not very, you know, different to age from you. And, you know, what, what I'm, what,

I would I find, you know, so my first notion, my first memory, even economic memory, I think I was like four or five years old. And there was a pretty severe recession in 1982. And I remember it because it was around Christmas time. You know, my parents didn't buy any presents or anything. And I remember the only memory I have is my father as a machinist, the union bought like a single gift for every child. I'm sorry. I remember, you know, I remembered that. I say that because what's interesting about the current moment is, you know, when we think about who does the Federal Reserve represent as a bank and where is their concern alive. So let's think about when the Federal Reserve was first created. It's created about 110. Huh? It was created about 110 years ago, huh? So 110 years ago, it was created.

And it was created at a time when it was a pretty bad economic recession in 1908. And it was so bad that the U.S. government had to go to the richest person in the U.S. at that time, J.P. Morgan, and ask him for money because they had no way to pay it. And we didn't have, we'd had, like, national banks in the past. We had, like, the first national bank, the second national bank. I think we had a third one, too. The second one, I think, was during Andrew Jackson. I think we had a third one maybe. But then after that, you know, states kind of kept to themselves, right?

And then we had the Civil War. And then there was kind of that big push for nationalization, right, instead of individual states. But the economy was every few years was fluctuating pretty regularly. And then, again, we had this 1908 recession, which was pretty significant. and the realization, at least by Theodore Roosevelt, was, dude, these rich people, they have their tentacles and everything. We need to have a bank. We need to create a financial structure that's modern, reflects the U.S. emerging as a modern country. We also need a central bank that will protect against these moneyed interests.

Now, when you're typically debating these national banks, the big debate is, Yes, there are all these benefits to centralization, but what about our regional and state concerns, right? Like, how do we get those represented? Right. It's why we have a Senate and a House of Representatives, right? In this case, we kind of, the Federal Reserve has districts. So we have 12 districts, right? We're part of the 12th district.

But who are those district banks owned by? They're owned by the businesses and the banks in that region, right? So Bank of Hawaii is a shareholder, and they're actually called shareholder, is a shareholder in the 12th district Federal Reserve Bank, right? So all of, you know, so it's not like the Federal Reserve Bank in our 12th district can be like for the people, right, because they're already designed in a way and structured in a way and are governed in a way that reflects those who have the money, right? have the established presence.

And so you're never going to see, I mean, there's some sense where we can't be too surprised by what we get because that's the structure we created. So we can't be surprised when the Federal Reserve doesn't create digital dollars because all the interests are already in keeping physical dollars, right? We're not going to see them go to a gold standard, right? It's always going to be a fiat currency because that's the way that keeps everything going the way that it is. The thing, though, the thing that becomes different, though, I guess I was really shocked by it this latest time. Was I couldn't, maybe I shouldn't be too surprised.

So when the 2008-2009 crisis happened, There was massive fiscal stimulus, but there was also massive monetary policy stimulus. Lots of cash was provided and lots of cash was created. But the realization was that in 2011 or 2012, we kind of had a mild recession or the economy was pretty weak. And that was only like, what, three years, four years after the 2008-2009 crisis. And it led many economists to think, including Jerome Powell, that we hadn't done an that we should have done more stimulus in 2008-2009 to not get in such a precarious situation

in 2011 and 2012. And that's exactly what created the pandemic response. So as a comparison, fiscal stimulus for the 2008-2009 crisis was at, what, $750 billion dollar fiscal stimulus. I think it was about $750 billion. That was the TARP thing, right, that Congress first voted, did not do. Then the market's really crashed. And I were like, okay, we'll write your check for $750 billion.

Think of the pandemic. That was like $5 trillion in just fiscal stimulus alone. So like we went from not providing enough money to providing way too much, right? And it was the same with monetary policy that you can, anyone that listens to this podcast, go to the data. If you go to fred. org,

what you can do is you can track the money supply, right? And so the one to do, let me write this out here. Yeah. Is that the M2 money supply or which? Yeah. So if you do this, So if you go to, let's see here, yeah, it works here.

So if you go to that website and then you search for just M1, that's our basic definition of the money supply for account. So much currency exists. You can see how the money supply grew dramatically in 2020. How do we trust those results? Why would those results be true? There's so much fraud. Like, why would they publicize that? So for data, that's actually, it's interesting that you say that, but the data, the data is actually pretty trustworthy.

So the data, I mean, because even during the Bush, or sorry, during the Trump administration, there were attempts to, like, change how certain data was collected. And a lot of people on both, you know, on whatever, wherever you were in the political spectrum, really resisted that. So the numbers that we get are actually pretty reliable. Compared to what, though? Reliable compared to what? Well, the distrust, actually most of the distrust among statistical people. I listened to a paper about two weeks ago or three weeks ago that was talking about the numbers from coming out of China. And there, the problems are much more difficult because

the central government in China has stopped releasing a lot of data. So there's no way to know certain things. I say that because the big debate right now is, and this is just before we started this podcast. I was talking about China. And they had plans about 15 years ago or 20 years ago, or 20 years ago to build this massive road that was going to connect. Yeah, the built and road initiative?

Yeah, exactly. So it was going to go from China, go in through Africa to get all, capture a lot of resources, go all the way to Europe, where the consumers were, right? And it was supposed to be something that, you know, was going to keep, they were going to grow the economy. But it needed massive financing to extract resources. from sub-Saharan African countries and then transport those goods to Europe. And so China made massive loans to countries like Pakistan, Kenya, Zambia, Laos, Mongolia.

Countries that I've just listed are not at the top of your list when you think of modern prosperous countries, right? They were countries in need of capital. they were countries not much loved by the United States or cared for by the U.S. So China offered them a bunch of money to build an infrastructure that they wanted. So Zambia, for instance, which had lots of electrical problems, all of a sudden got, I think it was like, I want to say, what was the figure I saw? Something like $10 billion or $15 billion to build a hydroelectric dam.

Right, great, right? That's a probably be something that would help the account. I mean, unfortunately, Zambia defaulted on its debt, I think last year or maybe just earlier this year. And the problem with all of that is that right now we don't know how much Zambia borrowed from China because China doesn't tell the rest of us how much was borrowed. Why is that a problem? I don't understand. Why is that the first problem?

Yeah, and the other problem is that typically when the World Bank makes that kind of loan, and they default. We usually, so like Jamaica borrowed a lot of money, I think in the early 2000s from the World Bank, couldn't pay it back. And then the World Bank says, you know, we'll do you a solid,

just pay us 10 cents on the dollar, right, or something like that, right? And give us all this land. Yeah, or something like that. That's the same thing China does, though, man.

The only way they do that is they say, like, you have to pay certain creditors first and they usually put themselves at the top of, of us. Sure. The problem right now is that either the debt amount, the borrowed amount is not being reduced or the problem is that they're putting themselves in front of the line. But here's the thing I will defend China on. China behaving like that, right? We could think like in the United States, like bad China, like that's not the way you should do it. You shouldn't be asking to get paid back

first. But as we've been talking about through this podcast, history repeats itself. It's no different than what the World Bank does. So it's not like the World Bank is in any like, you know, is any holier than thou position because they do the exact same thing. I get the sense when we, when, you know, when you read kind of a popular press article about China, it's like, why is China behaving like that when in fact, oftentimes the United States just behaved like that with others, right? Or we can complain, China gave all these big loans to sub-Saharan African countries and treated them really badly. Well, is that any different than when Portugal and Germany and Britain had colonies in Africa? Is that really any different? I mean, history repeats itself.

That's the best way to say, or even the modern day part of it. Yeah. Which would be France. France has, you know, when we want to think of how does France maintain control of colonies today? Well, it uses the euro or it actually has a special French franc that it only issues to other colonies, controlling the credit markets, which means they control the economy, right? And there's no better way to control the people than to control the economy. Yeah, I think you could, you know, there's a couple of books that come to mind. One is the creature from Jekyll Island that talks about the formation of the Federal Reserve.

And another really good one is a book by John Perkins called Confessions of Economic Hitman. We talks about in that book, right? And I bring these up because we're talking about different models. And when we say things like whether you're the World Bank or the IMF or the Chinese version of that, you're going into other countries, you're offering them predatory loans that you know they're never going to pay back. so that you can grab all their resources. And if we know that's true, and we also know that our technology mirrors each other,

then isn't it probably a pretty safe bet to know that when China fails to release accurate information about the economy, that the United States is also doing that? Like, if you want to know what happens in your country, look what happens in other countries. If we sit here and we say all these things, oh, China's economic model of this, ours is 10 times worse.

We're based on complete lies. You know, how is it that the rates can go up? And, you know, it should be, if rates go up, shouldn't the price of housing come down? Aren't those, shouldn't those move in opposite ways? But he would just see them move right up this way. Even in Hawaii, you can see money being moved offshore into these accounts. It just get pushed away.

You know, it's over. Like, I don't thoroughly understand how we can continue to move forward when we're using words like trillion. of dollars. I don't have a visual for a trillion dollars or a billion dollars. And nobody does. And the people that are in charge, at least who think they're in charge, they know this. They can just paper everything over until they can't. But when they can't, that's when you start seeing gallows start coming up. That's when you see strong men start coming. I mean, I think we're pretty close. I mean, I know lots of people that would get behind somebody who has horrible ideas,

long as they were to bring about, you know, order. And I think that what we're getting close to is people don't really understand the difference between justice and revenge. And especially the people in power should be very, very scared right now because there's, there is no justice, but there well may be revenge. And I think that that's coming for the capital markets. I'm a little nervous there. No, I mean, I think that that's true.

I mean, you know, when we think even of like the COVID, responses, right? A lot of them were couched in this way of still maintaining control, right? And keeping the way things are in order. And so the only way you could do that was just by like buying people off, right? So remember we all got $600, right? For anyone that was unemployed, they got like an extra $600, right? It was, you know, do you qualify for Medicaid? You don't need to tell us if you still qualify for it. You get to keep it right until a certain point or food stamps, right? It was this way of keeping everyone kind of in line and to stop questioning and to just stay in your house. Here's some free line. Yeah, exactly. Just like keep it going. Yeah.

And so right now even though too, right, I mean, even in Hawaii, we're looking at, right, rail, right, which right is emerging, right? And then it was like, well, let's start the stadium, right? But how can you, you know, when we even just talk about it, like the logistics of it, I mean, the logistics of it are just even the fact that we don't even have enough cement or asphalt to fix the roads, let alone build a stadium. And I say that because right now, all of the islands available asphalt and cement is all going to the airport to like, I think it's like to expand or rebuild a runway. And so all of the available resources going there. So why are we talking about a stadium? Like we don't have any cement to build one, you know?

You have to. There's a revolt if you don't have those jobs, right? Like people would have a revolt. Right. We don't have a sports team to use it. Right. I mean, so right, I mean, I'm at U.H. Minoa. We've got, you know, we've, we feel the, you know, we built something that was good enough to keep us in division one for NCAA.

and you just have to have, I think, a stadium that has like 15,000 people. And we built something that's either just almost that amount or close enough, I guess, for them not to get bothered by it. It's actually turned out to be fine. It's on campus. It's big enough. You know, we just, so why all this push? Why to build a stadium, right?

Why is there all that push? It's because, right, they want to build an entertainment district that has restaurants and hotels And right? And why are they all going to say, we'll build it for you even? Just, you know, like, obviously it's a, you know, it's a, again, it's this thing of, you know, trying to do something where you're using public resources even just to kind of augment your private wealth, right? Yes. We certainly start during the pandemic.

Yes. We socialize the losses. Privatize all the profits. Yeah, exactly. The gains are privatized. but the losses are socialized. That's so well-same. And, you know, we certainly saw this in March with the banking crisis, right?

Silicon Valley Bank, right? The largest bank failure, or second-largest, largest-largest bank failure. Used to be Washington Mutual, which is a great book. It was a really good book that I read that was only about, let me look at what it was called just a book reviewer, or a book suggestion. The Lost Bank by Kirsten Grind.

The Lost Bank was a book that looked at Washington Mutual, a bank that was the largest bank failure when it failed in 2008 or 2009. But it kind of talked about how did that bank get to that point? Because it was a storage bank that it existed for, you know, decades was a powerhouse bank, a powerhouse, largely regional bank, but it was a meaningful bank, and it became the largest bank failure. But it was caused by a series of missteps over a pretty long period of time. Silicon Valley Bank was a very different story. And when that bank failed,

the problem with that one was that, you know, we're talking about like insiders, you know, trying to get best advantages. Silicon Valley Bank, a bank that I had never heard of before. I'm doubting you had ever heard of it before. Never heard of them. No. So it was a bank that was started in the 80s, I think, and the whole idea was I start a bank that if I know you're very rich, I'm going to like, and you, you know, if I know that

you're very rich, I will come to your house to collect your check deposits, you know, and because you're so rich, I'll offer you a mortgage that's really, really cheap. And, hey, you've got an idea, George, to start this business. I will take a risk with you and give you the financing for it. All that I ask that you do is that you take your private wealth and deposit it at my bank. So here's what happened. Leading up to March, the bank had offered loans that are unheard of. So get this.

So Silicon Valley Bank has on its hat on its books, loans, mortgages that required 10 years of just interest-only payments. Not actually paying any of the principal interest-only payments for 10 years. So now, you know, the bank got bought out essentially. And now, right, the biggest bank in the United States. States, JP Morgan, was allowed to get a little bit bigger because it bought Silicon Valley Bank. And it's now got these really shitty assets of interest-only mortgages, right, that, you know, it can't even start to collect on until year 10 of the mortgage. And the biggest thing about Silicon Valley Bank is that it did get bailed out.

It got bailed out because on Friday, on a Friday, it was revealed that this bank was about to fail, and it was going to be bad. And then what we saw on Friday and Saturday, like during that weekend, it was that companies that you and I have probably heard of like Robox, right, which Roblox, which is the company that like sells games to kids. Right. But something like, I forget how much it was exactly, it was something like, it was something like, it was. many, many, many millions of dollars of uninsured deposits and that other big tech companies had lots of uninsured deposits. And you would think, why would a company as mature as Robux, which is, you know, a pretty big company?

Giant corporation. Why would they hold so many millions of uninsured deposits at a single bank? Any kind of risk assessment would have said, spread it out. but it was because Silicon Valley Bank required them to keep the deposits at the bank to keep their financing, right? And so the bank then almost in some sense couldn't be allowed to fail because it had all of these uninsured deposits. And if you were just to wipe out everything completely, then those companies would suffer, right? And the whole narrative that weekend was the economy is going to collapse because all this credit's going to be gone. Well, maybe the problem was that we let a bank control it in that kind of way.

But it did start Silicon Valley Bank, among others, started that series of debates. Because right now, for Bank of Hawaii, if we look at the share price, the share price for Bank of Hawaii, ticker symbol B-O-H is down like something. Let's see here. Why should I theorize what it is down? Yeah, right there. How much it's down. So ticker symbol B-O-H Bank of Hawaii, second largest bank here in Hawaii is year to date it is down 50% in share price.

This month alone, it's down 20% and we're only a little over halfway. From about April 20-something to today, it's down 20% in share price. So why is that? because Bank of Hawaii has the exact same problem, although in different ways, meaningful ways. So it's not the exact same situation. But Bank of Hawaii also has a lot of uninsured deposits sitting on its balance sheet, and it's made a lot of loans, right?

Not the lucrative loans like Silicon Valley may bank made to others. But here's what happened this week. So this is, again, May 18th. For any of your listeners that are kind of like wondering like why does this all matter, the president of the Silicon Valley Bank was asked to testify to Congress about why did your bank fail? Wasn't he also, I'm sorry to interrupt you real fast. Wasn't he also a member of the Federal Reserve in the state of California as well? Wasn't he on the board? No, he's our district.

District 12. He is in our district. Exactly. Okay. Okay. Carry on. So he was asked, why did your bank fail? And his response was, essentially, it wasn't our fault.

It was people spreading rumors on social media. Now, you know, I don't use social media that much. I mean, I'm barely even on Facebook, and that's like what an ancient social media at this point. I mean, the whole fact of the matter is that I'm not sure if you can really blame social media, right? because if any of your listeners are hearing this and for the first time realizing, wow, that's how Banco does business? Like, I'm totally taking my money out. Who is the culprit here?

Is it me for revealing the way that they do business? Or is it Banco for doing business that way? I'm not really, you know, if we're pointing fingers, I don't think a lot of blame could be placed on me for saying, like, oh, you know, if I had, I don't have a million dollars, But if I had a million dollars and it was at the bank and you just told me that that's the way they do business, I probably would take my money out. And that's not because I'm spreading fear, but rather it's me spreading information and reacting to that information.

I'm not sure you should be blaming people for reacting rationally to information or blaming the people that shared the information. And so I worry about that for Silicon Valley Bank because now what if the Federal Reserve, takes what that guy is saying and says, yeah. Now our playbook for the next banking crisis is contain the information. Don't let others talk about it. Don't give them enough information to talk about it. We saw some semblance of that actually in the March thing, right? Because there was this bank, First Republic Bank, right?

which kind of had this long, drawn-out failure. People weren't saying what was going on, right? And you only get, what is it, monthly? I think monthly you can get data about how deposits have changed. But that's like a lifetime. So then what finally happened is that it was revealed that the bank had lost like a billion dollars, I think, in deposits in very short time.

and then that was kind of like, you know, kind of the boulder going down the hill kind of thing. And I say that because, you know, the banking system itself relies on trust. It's a fractional reserve banking system. You know, it all is on trust. I don't know why, I mean, it's not against the law to share information about how a bank is performing, but I don't think we should demonize those people who, like, you know, say, wow, your bank is really not running things. properly, you should be doing something different, and I don't trust my money sitting there. I mean, you can't, the Silicon Valley Bank president giving the testimony really did bother me

because it's, you can't, you can't, you shouldn't, I should say, you shouldn't demonize people who share why others should not trust the bank that they do bank with, that they bank with. You know, just as I, if someone's learning here for the first time that Banko has all those uninsured deposits, again, I don't think I'm the bad person, right? I think it's more of the others. And if a bank, you know, when we're talking about some of the smaller banks, if some of those banks should fail because someone spreads that kind of information, I don't think that's wrong. And I say that because it was just earlier this week that someone from, I think it was Goldman Sachs, which is obviously one of large investment banks in the United States, said essentially what I'm saying to you, which was, you know, Congress needs to investigate those who talk badly about a bank's financial position.

Like, really like, you know. Sounds like panic, right? Doesn't that sound like panic to you? Like, hey, you've got to get these are the guys are the problem. Like, they're already pointing the finger at people. And if we look back to the Silicon Valley Bank debacle, I'm pretty sure it's public records. You can go back and see that that guy was paying out huge bonuses a month before this thing happened. He took a giant bonus.

Like, what, I mean, that kind of points to malfeasance, at least in my book, at least, hey, let's just pay everybody out right now. Like, that's kind of odd. Why'd you do that? Why didn't they ask him that during the Congress? So it's two things, actually. not only did he defend continuing to get his salary, but it was that executives of the bank were selling their shares while doing it. And before we even say, well, you know, all those businessmen are greedy, it also can be said, though, that the same government officials with that information that wasn't open to the rest of us are also making the exact same stock trades. that was certainly evident during the pandemic where the secretary for health and human services,

right, who had all that information for how bad COVID was going to be, was all of a sudden dumping his entire stock portfolio at the end of February before the March crash, right? Yes. You know, is that coincidental? I don't think so. You know, of course it wasn't. So, you know, this goes back to even your earlier comment of like, everyone's in bed with each other, you know, and I'm not, you know, everyone's enriching themselves in their particular ways.

And the rest of us are just out there, like, you know, hustling and hassling, just trying to make a go of it. And yet then we're, again, demonized or ridiculed or something when we try to become more informed about things and try to, like, fight for why we believe a certain way and yet are than ridiculed or criticized for doing that. And, you know, it's not a new phenomenon, but it's certainly, it's painful to always be reminded, I guess, of it, that, you know, what banking crisis always emerge. And yes, there's always telltale signs that it was going to happen before it happened. one, we tend to ignore it or it is ignored or it's plastered over, as you're saying,

you know, by others that everything is okay. Don't worry about it. With this latest one, everyone keeps saying, well, you know what, it was a March crisis. There's just a few bad apples. Everything's okay. Here's the counter. The counter is there's an awful lot of smoke and it's really, really hot. it probably is not a false alarm fire, right?

I mean, the only way you keep it from getting even bigger is if you try to, you know, shut the door, shut the windows and try to clamp it down. And I feel like that's what they're trying to do more of is they're trying to just like contain information, keep it down, make it against the law to talk badly about something, whatever you've got to do, rather than actually fix the fundamental problem. right which could be any range of things right it could be you fix the accounting standards right so this problem that we got into was that banks i mean do you want me to talk about about how how did silicon valley bank get in this problem of course yes please so banks are not allowed to buy like you know when they take in deposits the question is what did they put their deposits into They don't have many choices. In fact, they're pretty limited to U.S. government treasuries and U.S. government agencies' bonds,

so like Fannie Mae, Freddie Mac, and whatnot. And so when the pandemic started in 2020, remember, like, things were just like flush. Everyone had tons of money, right? And people were making massive deposits. And so people put their money into Silicon Valley, bank and they deposited it. And so their deposits were huge.

And so what the bankers did, any large bank, they usually have, like, Banco has an entire floor devoted to buying U.S. treasuries, right? Buying and selling U.S. treasuries, U.S. government debt. So they bought a lot of U.S. government treasuries. Now, U.S. government treasuries are typically long-dated, meaning five years, 10 years, I think they do 20, but they definitely do up to 30 years, right? So they're buying these very long-dated bonds. Now, back in 2020, the prevailing interest rate was basically like near zero or very, very low,

which meant that treasury bills were also had a very low interest rate, right? Now, what can we say about this past year, right? is that the interest rate now is something on the order of north of 5%, which means that treasuries are trading much higher, have a much higher interest rate than they did in 2020. Now, what is the value of a bond that was issued in 2020, let's say that has an interest rate of 1% versus a bond that I could buy today that pays, let's say, 4%.

The bond that was issued in 2020 has less value, because it offers a lower interest rate. So if I were to try to convince you as an investor to buy my 2020 bond versus my 2020 bond, I'd have to give you a pretty good discount on my 2020 bond to buy it because it pays such a low interest rate, right, versus my 2023 one. But now think about it, that 2020 bond, if I actually priced it at its market value,

it's now significantly less than it used to be. because the interest rates had gone up so dramatically, which now means that a bank that had a really good capital structure now has a much less capital structure. That happened, it's happening right now to Banko. It happened to Silicon Valley Bank. But the accounting, how could we fix this situation if we really wanted to fix it?

Is we could change the accounting rules so that they had to take the money. the market value of the bonds that they're holding. The accounting rules right now just say you don't have to do that. You can just say you have $100 million in bonds. You can just keep it at $100 million. You don't have to tell us what the market price is. Until they sell it, right?

Like it's off there. Once. Yeah. Yeah. Exactly. So if you actually sell it, then you have to actually reflect the actual value of it. But if you don't, it can sit on your books and it doesn't have to reflect the market value. So some really smart people in late February, early March said, you know, fuck, like this is really bad, right?

And they started to look at the list of like where the banks where the most exposure is. And it was Silicon Valley Bank. Bank of Hawaii, right? I mean, Zion's Bank is another bank. I shouldn't just be picking on Banco. Zion's Bank is a pretty large bank. Citizens Bank What's the other one?

The bank based of Buffalo, New York, merchants, I think it's like Merchants Bank or something like that. Regional banks, they don't have like the protection where we say that they're too big to fail. Right.

That we give to the national banks. And they had a shaky asset structure. What stops people from a What stops people from lots of money to shorting those banks? Like if we know that they're right there, why does number just get together and short them all? And is that kind of what people are worried about by letting people talk about it? Like you could see hedge funds. It's just short all these guys.

Let's just punish them. Why? Because we'll make tons of money. Well, no. I think it'd actually be the opposite. So my theory is that it's exactly the opposite. Okay. Here's the question, I guess.

What do you think the chances are that we would allow, Let's just take an example other than Bank of Hawaii. What would be the chances that we would allow Zion's bank to fall? So Zion's bank, let's see. Who is we? Who do you define we as? We as a society. Okay.

So we as a society were like so reluctant to get involved in Silicon Valley. And then so, so reluctant to get involved in First Republic Bank. I don't think we had a choice. You know what I mean? Here's the issue, right? So why short it then? We don't have a choice and they're going to do everything they can to struggle to resist the bank from failing. Why would you short it then?

Why wouldn't you just let the value get really low and then just buy it, right? That the share price will go up, right? So that's, you know, in full disclosure. So let me talk about in full disclosure, right? So I've been pooh-pawing this idea of the regional banks. So last week, I did buy shares of Bank Hawaii. I bought it at $32 a share. And the reason why was that notion of like, yeah, if I think everyone is corrupt,

and I think that the whole system is corrupt and that nothing is fundamentally going to get changed, why don't I just take advantage of the fact that the share price is so beaten down that I buy it? I bought it a week ago, just one week ago. about a $32 a share. And I'm not saying this is a way to make bad. Financial advice here. We're just two guys. Yeah, I make bad bets too.

But it's $39 a share this week. Now, what evidence do we take from that? The only evidence I can take from that is, one, all those gains could disappear just as rapidly still. Sure. But I think the other side of it is that if I had to make, if you just said to me my objective is to make money on it, you could try to put. profit on it falling further. But I tend to believe,

I tend to believe it's not going to, no one's going to, no one is going to allow the bank to fail. So they will come up with some sort of solution most of the time. That preserves things. And so that seems to have been the better. So if we look at the regional banks that are surviving today, so the one I just had said about Zion's bank.

So Zion bank, ticker symbol Z-I-O-N, past five days, has been up 20% in share price. Now, year-to-date, it's down 45%. But there's this realization, at least over the past week or so, that maybe the worst of it's over. I don't know if I believe that, but, and I don't think I'm going to be a long-term older of being in line. And again, I'm not your stockbrover. You don't come talk to me about it. But I mean, at least the writing on the wall as I see it suggests that.

Banking as an industry seems to be just as bad as it was in the 1980s as we were talking about with the savings and loan crisis. Seems to be just as bad as it was in the 1930s with the banking crisis. which was the topic, by the way, of Franklin Roosevelt's very first fireside chat was exactly on the banking crisis. That was his very first fireside chat, partly as a realization of how important banking is, but also as a realization that what was done even in 1933 was kind of like a patchwork fix. I mean, he did two things. He created the Federal Deposit Insurance Corporation, which is what you and I rely on when a bank fails to be able to get some of our money out. And so apparently the solution to today's problem is that we want to increase the FDIC limit from $250,000 to maybe a higher amount or maybe make it unlimited.

that's pretty dangerous. I mean, right? Because then that would mean that it's dangerous because it's just a, you're trying to say that, okay, we really, we have to trust. Just going back to my whole trust thing. Yeah. We have to trust banks to some extent because there can be sometimes a gap between what we're insured up to versus what we have in the bank, right?

You can imagine an old person having more than $2.50k in the bank. they have to trust it. If you remove that trust, what it means then is that, let's say I have $30 million. I put it all in that same thing. I don't take any appropriate risk minimization or, you know, risk education into what's going on because I know I'm insured up to the max. And so what does that mean? It means that maybe we stop some of the current problems we're having, but then we have a really, really big problem, you know, in the future when everything, when a bigger bank fails, we were lucky Silicon Valley Bank was the 12th largest bank. So it wasn't the biggest bank.

And so it wasn't because it was relatively smaller, we could handle its failure. That might not necessarily be the case the next time around. We could imagine a really, really big bank failing and not having the assets to cover it. But the second thing that President Roosevelt did at the time was on June 5th of 1930. So in March of 1933 was when he created the Federal Deposit Insurance Corporation, insuring the deposits, but on June 5th of 1933 was when he took the United States off the gold standard. Which really, right, so not only then we were readjusting what it might. means to trust the banking system, but we were also adjusting what it means to trust the currency,

right? Which is a whole other debate that we're having right now, right? Do you trust the US dollar? Do you trust, you know, something that you and I have talked about before? Do you trust these cryptocurrencies? Do you trust the Swiss franc? Like, what currency do you trust? I mean, I don't know. I, you know, my students have asked me this, you know, here at UH. And my response typically has been, I don't know, I don't really trust any of them. All I know is I'm trying to survive. Right. And the bank wants to get paid back in dollars.

My kids need their tuition dollar paid in dollars. The grocery store wants dollars. So, I don't know, dude, pay you in dollars. I'm not going to, they've got enough things to worry about. I don't need to be, you know, buying other currencies and switcheroos. You know, on the other hand, you know, it's typically something failing that we always expect to work one way is when the problems emerge. So, you know, if the dollar were to ever not be the thing that's used, as I tell my students, yes, not only would I be affected greatly, but it probably means we're pretty darn close to the end of this economy if we stop doing that. So it probably doesn't matter.

It takes me back to like that fake missile scare. Like the story I remember. Yeah, I mean, the story I tell me since, you know, I was in bed. My son, my oldest son was in the middle. My wife who was pregnant at the time was on the other side of the bed. You know, get up to the phone going off. So there's all this bad stuff's happening. I'm like, well, you know, and I could hear, and I lived in faculty housing here at UH.

And I could hear my neighbors like peeling out. the driveway like like and like and I'm thinking about it and I'm like doesn't matter I mean what are you going to do yeah what are you going to do it anyway so I just went back to that now again you could say reckless and didn't care on the other hand I doubt that even the person peeling out the driveway if it had been something real probably would have probably would not have been okay either so where they're going to go the extra effort to be not okay yeah yeah Yeah, it's interesting. Like hypothetically, like let's say that there is some sort of like I always wonder like back in 08, I had bought in my first house like in 07 right at the height of the market.

And I got like a, you know, a like an 8% interest rate. And, you know, housing in Hawaii was way through the roof. I had bought this place then in Launani Valley that was I bought it for 310. And it was probably worth about like 210, maybe. But I bought it right at the height right there. And then when the market, when the bottom dropped out of the market, I realized that I couldn't afford it, you know, and I try to put tenants in there.

I was having such a tough time. And it was my first house. And so I was just so distraught over the idea of having my credit ruined and losing it. And, you know, I'd worked so hard and yada, yada, yada. And I started trying to go down. the road of getting a modification. And I had a countrywide loan, which was sold to Bank of America. There's no Bank of America in Hawaii. So as I was trying to go through the modification process, it was, I finally got a hold of someone. They're like, oh, you don't need any help. And I'm

like, what are you talking about? Like, I can't afford this. And they're like, well, you haven't missed any payments. And I'm like, oh, I get it. You need me to miss payments. And then you'll help me. And they're like, no, no, no, that's not what I'm saying. And I'm like, that's exactly what you're saying. You said I haven't missed any payments. yet. Okay, so I just miss payments and I'll call you back, right? And they're like, no, no, don't do that. But look, no shame in my game. Okay, I don't miss payments then. And I'll be darned in two months. I had people breathing down my neck. Hey, man, you need some help. Need some help. Need some help. And I was like, I was so mesmerized and how fast the help came. And I didn't, I didn't understand it until I got my

modification and then I started seeing on the news like hey Hawaii doesn't participate in the non-judicial foreclosures which means bank of Hawaii couldn't come and take my house like they couldn't do it and I started seeing people online and in hearing stories about like going to court and showing the judge like hey these people don't hold my loan and I would be happy to give them my payment I would be happy to give them the house if they can just show me the loan and people couldn't do it yeah that hit me And even to this day in Hawaii, there's people who just, yeah, you know, okay, I'll give you the house back and I'll pay all penalties. Just show me that you hold the loan. And if you can't do it, that house is mine.

And like that was the first time in my life, I went, oh my gosh, look at this. Like this is a real possibility that could happen if there was some sort of economic default. And I think that that is what scares the pants off of some of the banking institutions, the state, the government is like, how would you collect, you know, a million people's mortgage payment? if the institution that held their note failed. And I think that what do you think about that? Is that like a possibility that could happen if it was a default? Well, it's a long way of a roundabout way of answering it. Think about what the pandemic did.

So the pandemic then said, you've got a mortgage payment. You can delay it. Remember that whole thing? Yes. I got my mortgage. I got my mortgage in October of 2020. So it was after that whole thing. And wouldn't you know it?

my mortgage, which was from Central Pacific, even had a clause that said, you cannot get any, you cannot use any COVID modifications or delays in your payment. Right. So there was that whole thing, right, as a kind of a new borrower, right? But certainly for you as an existing borrower, you got to make use of that. But the banks probably weren't too happy about that situation either, right? But even, too, we look at it, you know, the biggest loan, though, isn't the one that you and I are actually talking about right now. The one, the biggest loan out there is all the uncertainty about the student loan crisis, right?

That's the one where, you know, I don't, I'm helping someone right now, a fellow professor like myself who, didn't go to, he didn't go to a fancy school. He went to a state school. He went to University of Oklahoma in the late 90s. And, you know, it didn't add up to that much. I think the loan was, I say not that much, but, you know, at the time, I think it was, you know, he got all the way to a PhD, I think it was about $100,000. So he didn't pay anything out of pocket, but it was a hundred thousand dollars. And so in the early 2000s, he, called them up and said, you know, I'm just starting out. I'm an academic. I've got all these, you know, I've got this big student loan of $100,000. You know, what can you do for me?

And so it's kind of much like the story you're telling. They said, well, you know, you can get a forbearance. What that means is that you can take six months or, you know, or whatever and just not make any payments because, you know, you're just kind of getting your stuff sorted out and you can just not make any payments. And so he and I weren't friends yet. We wouldn't become friends for another five or six years. But for five or six years, he would call every six months. And they'd be like, yep, we understand. We'll do a forbearance. Every six months, he would call and get the same thing. So what are we at today? 2023. The balance on that $100,000 loan taken out in the late 90s after forbearance, which means in forbearance, you've got the

principal amount, and then the interest is being capitalized, meaning the interest is being added on to the original borrowed amount. If he were to pay it off right now, like, let's just say someone rich died and he had all the money to pay it off right now, he would need close to $500,000. Wow. And if he were to take the 20-year repayment plan that's offered to him, you know, for any student loan. The total amount he would pay off after 20 years is $1 million. Wow. So who failed who here, right? You know, as I've talked to him and he and I kind of share a similar sentiment, it's not that, you know, it's not that you, for instance, want to try to get a house for free. Right. It's not that he doesn't want to pay anything on the amount that he borrowed to go to

school. He's more than willing to make an honest and fair repayment, right? In your case, right, it's, dude, the situation changed and it's changed so much that I can't possibly keep to this obligation I have. So it's either going to be cut and run or stay with it. But if I stay with it, let's negotiate and come up with something that is painful to both of us, right? Not just painful to one. Shared sacrifice. Exactly. And it's the same thing that he's got going on right now as well, is that, you know, as I've told him, he's, what, 65, something like that? You know, I told him, dude, stretch it out and we don't have debtor's prison and you'll be dead before you have to pay it all back, you know? and it's a shitty thing to say to someone,

but at the same time, like when they're unwilling to acknowledge the fact that they gave bad advice for 10 years and kept telling him to stretch things out and stretch things out, you should have to be held somewhat accountable for having given such bad advice for soul. Or in your case, it would be, yeah,

market conditions have really truly changed. And by the way, it's not costing us that much, to as an institution, let's say Bank of America. Right. To borrow the money or have the money to be able to lend it to you. So you know what? Price of business has changed. Used to be 8%, but you know what?

Interest rates are now near zero. So why don't we just give it to you for three? I mean, they're not going to say that, right? Unless there's a real fear that you're not going to do anything at all. Right. So, yeah, it's like a gun to your head, right? Like, when do we start getting rational here? And that was it.

And that was exactly during COVID, you know, like when people, when I, when we bought our house, you know, in Manoa, yeah, we were for, you know, we've lived here since 2015. You know, you would look at houses and be like, there's no way I could ever afford that. And there was just a brief moment in time in 2020 when we, when we entered the market where. Sellers couldn't sell because there was like statewide restrictions on like having open houses and whatnot. And then you had borrowers who were like, oh, man, I needed to sell that house because I have a second mortgage. I have a business loan. I needed to sell this house. You're not letting me sell the house.

And so then when my wife and I went to like buy a house, it was exactly that situation of like a desperate seller saying, you know, the house was worth this. But, you know, I guess I have to take this because this is what you're, you know, willing to offer me. But, and that's what we saw at the end of 2020. And then throughout all of 2021 was all people like saying, I can actually finally afford a house. Right. And you all kind of like got into the market. And that was the stories we hear of like, you know, open house, 20 offers on the first day. Yeah.

You know, and now what are we at today, right? Now there's not as many offers. But I'm actually quite surprised. given what the mortgage rates are today, which are back to six or seven percent, I'm actually pretty surprised at how much people are still borrowing, even at six to seven percent. But what's also surprising, right, is how many people are unwilling to now move, because almost everyone refinanced their mortgage in 2020, in early 2021, when interest rates were so low is that no one now wants to leave their house

because they don't want to leave that really good mortgage rate that they had and take on a 6 or 7% mortgage. So the current housing problems that we're seeing today is due to lack of supply because no one's willing to offer their house up for sale, right, and lose that mortgage. Is that why we can see housing? I know Hawaii is kind of a different animal, but it seems even across the nation, like you're seeing rates rise in tandem with housing prices.

Like, how can that be? Yeah, I mean, well, part of it is, right, at least on the mainland, it becomes down to an issue of, you know, being able to build more, right? Or being able to, you know, kind of create a, you know, there's enough other houses out there that people are able to move to it and commute farther distances and whatnot. The prices themselves, since we don't have a lot of new inventory, if we talk specifically for Hawaii, we don't have a lot of new inventory out here. And so really then what it comes down to is that if you're the seller,

you're not, you're looking at what could the new buyer, how much could they, afford, right? How much could they get approved for a mortgage? So when we look in 2020, when, you know, even when my or if I bought the house, our income hasn't changed that much between 2020 and today or what it was in 2015, even in 2020. But what changed is that as the interest rate changed, the amount of house we could buy changed, right? So you can still have the same $100,000 income or $200,000 income. But if the interest rate is lower, then you can afford more house. Because what the bank only cares about is your monthly ability to support the mortgage payment, right?

And so what do we know? In the beginning of a mortgage, what, 50 to 60 percent of the payment is all interest and the remainder is the principal, right? And as the loan gets older, more of it goes towards principle, less towards the interest, right? But if the interest rates are higher, right? So right now, interest rates are almost triple what I paid and what I'm paying now, right, or what I would have paid in 2020, which would have meant that if my household can only support, let's say, a $5,000 a month mortgage payment, now that means I can't buy as much house because, right, most of that's not going to be that interest payment.

And it all goes back to the price, because then the price is, going to be if I'm trying to sell my house, I have to think how many people will want my house if I price it at, let's say, half a million, right, or if I'm on the mainland for 200,000, how many people will I get? And if the response to the real estate agent is not very much, or no one, right? I mean, there's a house that's being sold up on, at the top of the top of top list, which is like, what, $8 million? I'm like, dude, you were going to be sitting on in a house forever. Because like no one out there.

So what do you do? Right? You keep, in those kind of cases, right, you keep lowering the price until you get to someone that you can get. So it is, I mean, the only thing you can say right now in terms of housing prices, why are prices high right now versus interest rates being high? is that the higher interest rates are making it so that people are unwilling to sell their house, which means a few houses that are there for sale,

they know that there's not much inventory out there. You know, you and I can go on sites like Zillow and Reelder.com and see, there's not a lot of inventory out there. Yeah, if you want that $8 million house, but if I was looking for, you know, for something in Manoa, which, right, which is large, largely built up and there's not a lot of new inventory or even existing inventory. You know, if there's only a few houses for sale, someone that wants to live in that community is going to have to pay the price. The only thing where you see things a little different is on the leeward side, like in Eva, where they've got space to spread out.

But also the curious thing about Eva is just as you see in Ward Entertainment District, right? So in Ward Entertainment District, that's that's all managed by Howard Hughes, right? Right. Howard Hughes, you know, the corporation has structured those condos and they've built a whole living, working, whatever, community, right? Just like in Eva, you know, Eva by Gentry, right? The gentry, the company is building up all those townhouse, you know, communities, you know.

And that's where it gets a little different, right? because then the prices are kind of dictated by, you know, those companies that are just trying to, you know, get those units sold and, you know, get those units occupied. On the main lines, it's a little different though, too, because you don't get that, at least for most of America, you don't get that corporatization. The big thing in real estate right now is commercial real estate. So in commercial real estate, me and my wife just signed a lease renewal agreement, and they were offering critical. easy generous terms just to keep a place occupied, you know, like if you want to get commercial real estate right now, you know, what's the example I can give you? The example is five-year lease, you get almost the equivalent of like half a year of free rent, right? Like spread out over the five-year contract. That's quite significant, I think, in those kinds of terms. And so you've got, I mean, that's a big thing. And, By the way, I just continuing on my thing. What's on the balance sheet of a lot of regional banks?

Commercial banks, commercial loans. Yeah. So that would be your Zions, your Bank of Hawaii, all commercial loans. That's a good point. But think about that. What's going to happen to the value of that? So if that building goes under, right? Now the loan that I held as a bank, that assets worth a lot less.

Yeah. Which means the regional bank crisis now just gets even bigger. and bigger and bigger. And we're back to all the moving parts. Exactly. There's no simple answer, man. Exactly. Exactly.

Yeah. Tom, this has been an incredible conversation, my friend. I know we kind of put together last minute, but I got to tell you it's exceeded everything that I thought. I really enjoy talking to you. And we should do it once a month. I was just going to say, let's do it again. Yeah, of course.

Of course. And I think that we can, I really enjoy it. If anyone listening to this, if they want to put in my call. comments or whatever or share with you, we can pick up a theme. You know, right now we're just kind of like talking on the top of our heads. But if anyone wants to pick up a theme, I'm either willing to talk about it or I'll do some research too and I've got to come up with something.

Yeah, let's do it. Let's come up with something and we'll hit it up once a month or we'll figure out a time frame and we'll make it a thing. So but for now, Tom, before I let you go, where can people find you? You got anything coming up? I do. You know, in terms of like academic articles, I actually came out with this for anyone that's kind of interesting, that kind of stuff. I just published a research article, and it's not too technical, but I just published a research article in the journal feminist economics.

Nice. And actually this interesting issue of how did outsiders in the economics discipline, how did they struggle to become economists when the job market to become an economist like an academic discipline? Endic job economist was controlled by kind of like an old boy's network kind of thing. Like how do outsiders get to become economists? And so I did some archival historical research on the way that outsiders tried to be kind of recognized or legitimized in the economics profession. So that's coming out here in the next month or so in the journal Feminist Economics. It's probably the easiest way to reach me to O2 is I work at UH.

So even if you just do a kind of a Google search with University of Hawaii and my name right there, you can kind of see kind of some of the work that I'm kind of working on. A lot of my research is also now in the country of Mongolia as well, and kind of that economy kind of doing this long, decades-long transition. from being kind of a Soviet satellite country to being a market economy. But it's also a country that, as a recurring theme here, borrowed a lot of money from China for the belt road.

That's something I'm going to be working on here shortly, though, as well. Yeah, that's awesome. I heard there's probably untold fortunes waiting for the person who finds Genghis Khan's tomb, which is rumored to be in Mongolia. So take that with a great sand. Yeah. On the next podcast, I mean, I used to go to Mongolia almost every year. Oh, nice. Quite a few years up until I had kids.

So I can regale the next podcast with some tales from my trips to Mongolia. That might be a title. Trips to Mongolia, man. That sounds pretty awesome to me, man. Yeah, sounds good. So let's do this again. any listeners, you guys can make some comments and we can talk about those in the next podcast. Yeah, and so I will put the show notes.

I will put Tom's link in link in the show notes. And thank you for everybody for listening. Tom, hang on one second. I'm going to hang up with the audience, but I want to talk to you for my ladies and gentlemen, thank you so much for hanging out with us today. I hope you enjoyed the conversation as much as we did. And we will talk to you again soon. That's all we got for today.

Aloha.