In The Comments: Can We Save Our Financial Future
I did a Stack on the destruction of the American Dream. The question now is, can it be resurrected?
The most important thing you can say is “I love you.” Second is “I’m sorry.” Third is “I forgive you.” And fourth is “but the data says…”
We’re back, with episode 2 of ‘In The Comments.’ As a refresher, here’s how I described what exactly these are back in Episode 1:
I’m going to start posting things taken directly from the comments sections of writers I follow and whose followers I engage with, quite frequently, in what are usually really fun discussions. This feels more like my history with radio/podcasting (not what you think - in college and for work, respectively) in that it’s usually top of mind, organic, and perhaps more lively. It’s less well-researched, but hopefully in some ways that helps, because it’s more a thought experiment than a formal hypothesis. I’d say it’s more likely to be wrong, but who knows, that will play out over time.
I’ll always title them with “In The Comments” and I’ll change the name of anyone else in the conversation so as to ensure their anonymity. The goal is just to illustrate some of the fun discussions being had around the type of topics I like to write about, but in the informal settings of a comments discussion as opposed to a formally prepared essay.
I hope you enjoy… and if you don’t, I hope you’ll stick around for the megaliths I still hope to publish as frequently as my children allow me a couple weeks of uninterrupted after-work writing time (so maybe never :)). Let’s get into it
************************************************************************************************************
This, like many comments discussions, is taken from the comments section of a ‘The Free Press’ article on the foundation of Bank Runs. Unlike past posts, there were numerous threads going during this discussion, but I’m going to try to consolidate the conversation down to those that actually contributed to the discussion of my core thesis, as trying to follow the multiple winding threads would be really difficult in this format. That said, I’ll leave some detours in here as I was called an idiot numerous times, and, well, you all deserve the option to agree with my favorite commenter who thinks I’m very, VERY, dumb.
Blaming the SVB bank run on psychology is the perfect analogy for the “anti-agency” view of humanity that is now pervasive across western cultures. It wasn’t the risk of the bets, it wasn’t all the bad credit lines given to insanely overfunded terribly run startups and it certainly wasn’t the especially risky bond structure of a bank that only invests in unprofitable companies - it was “psychologies” fault.
No, that premise is nonsense. in 2008 (though really WAY before that - that was just when the chicken came home to roost) we turned the entire banking industry into one giant moral hazard. All the upside goes to the banks, all the downside goes to debt on the tax payers. And SVB played the game and they played it especially aggressively. They financed SOOO many unprofitable startups it would blow your mind if you actually went through the details. But as long as money was free (it was actually better than free in real dollar terms) it didn’t matter because valuations kept going up (based on nothing but that capital was cost negative) so their amassed assets kept going up, so who cares that the entire thing was a house of cards built on something like a 3% real-asset (cash flow positive) asset base.
Until we unwind federal income taxes and dismantle the fed we’re just going to see more and more of this. It started small when the interest rate and debt swings were small - now the debt is HUGE so even tiny interest rate swings cause contagion after contagion. Your psychology doesn’t matter - the broken market matters.
Just wait till all the startups with no cash left empty their bank accounts (6-18 months) and an actual bank run happens - not on panic, but on bankruptcies. This is just the beginning, and it has nothing to do with psychology and everything to do with a HEINOUSLY broken system built entirely on the moral hazard of privatized gains and socialized losses
COMMENTOR A
You would have thought banks would have recognized bubbles, bad real estate deals, investing in building office space, gouging the general workers whenever they could as bad for business. They never invested on a community level, redlining, closing bank branches in small communities, doing everything they possibly could do to shortchange the daily person. They wanted to be with the sports figures, the moneyed old and new, the derivatives, wanting special favors from the government and bailed out every 10 years due to “market changes.”
They made their future and present problems and now I am being told don’t run on the bank because that will cause bigger banking problems. BULLSHIT. Personally I say to those who invested 250,000 or less you get your money. Apple, Microsoft, Zuckerberg, etc. welcome to the real world. This is where you get bloodied, learn from it. Let the banks and their CFP, CEO, and company see and feel prosecution and real pain. For once hold them accountable. Going to have a drink and it is only 11am.
I did a very long piece on this -
- but fundamentally I don't accept blaming the banks. Should we be disappointed in them/there leadership? Sure. But as I argue in my thesis, they are just responding to incentives. The government created the moral hazard, and banks are simply playing the game within the defined rules. if you tell them they get to privatize the gains and socialize the losses, they're going to gamble. They'd actually be irrational not too. It's simple game theory - if you every time you flip heads you keep the money and every time you flip tails someone else pays your debt, you're going to flip that freaking coin as many times as humanly possible.
If we want actual change - stop blaming the banks, or the Zucks of the world, and let's get serious of changing the rules of the game. If the fed stays, interest rates can never go below REAL inflation (there HAS to be a carrying cost of capital, or again, there is no risk), and we need to DRASTICALLY reduce federal tax income so it is infinitely harder for them to borrow against OUR assets. We reduce the debt/spend cycle and maintain interest rates above the real cost of capital and banks will respond to a whole new set of incentives. In the short term the middle class will suffer. In the long term, the billionaire class will be de-structured, and we'll return class mobility to the U.S. But it's going to be an awkward and painful march to get there. That, or we keep becoming a worse version of Russia, but with better weather and more natural resources.
COMMENTOR B
"If we want actual change - stop blaming the banks, or the Zucks of the world, and let's get serious of changing the rules of the game."
Change the rules of the "game"? There are already rules --and laws--which make conspiracies to commit banking fraud a crime, rules which require accurate reporting of financial conditions, rules which prohibit withholding, hiding or altering financial records to create a false impression of financial soundness.
When the financial authorities get to the bottom of this case's history--if they do an honest and thorough job and meet _their_ legal responsibilities,--they're going to find that this rotten mess was very clearly understood by the bank's principals to be and to have been going on.
The suggestion that this sort of debacle could happen while dotting all the regulatory "i"s and crossing all the "t"s is scandalously outrageous. It makes chumps of all of us, not just customers of SVB.
You should read the article that breaks this down in detail -
- or just read the section
But here's the key part:
"Our tax dollars literally go to paying regulatory agencies to lie on behalf of their real clients (the companies they supposedly regulate) and we pay the price. Don’t EVER blame the company because of corrupt political systems. That’s like blaming NBA players for “traveling.” If the refs don’t call it traveling it isn’t traveling. The rules of the game are irrelevant – rules that aren’t enforced aren’t actual rules – the players simply play within the ACTUAL rules of the games. The rules are broken, not the players."
Because here's the truth - they absolutely would have passed a stress test, right up until the bank run started and they couldn't any longer. every single time the FED drops interest rates below inflation, banks are literally stealing from the American people. Period. it isn't just allowed, they're being TOLD to do it. Then the fed started jacking rates, and now the rules have changed mid-game, but the regulators can't do anything about it, because it's their game in the first place. SVB had a ton of assets that were insanely overpriced due to free money - but they didn't set the asset value of those cash-negative businesses - and they didn't determine that the lending rates were 0++ and they didn't set that the threshold for fractional reserve banking is based on "book" value, not marked to market values (that is, if the last time I priced a building I own was 3 years ago, I'm still using that book value as the value of the building even if, were I to reprice it tomorrow it was worth half. We CAN force banks to mark to market, but the regulators don't do that today - so this is on them).
Blame bottom up never works. It isn't traveling if it doesn't get called. You want traveling called, change the rules ,and most important, change the referees. Or keep screaming that the gather step isn't being called and let me know how oblivion is...
*************************************************************************************************************
Quick detour for me being called an idiot, then we’ll get back into it…
COMMENTOR B
The bank had to have fraudulently misrepresented its lawful reserve obligations--and committed a host of other violations of banking regulations or it could not have come to that sorry pass in the first place.
Read your blog? I've read your nonsense reasoning here. Why would I follow that up by wasting more of my time reading it where you first spout it? I have a _lot_ on my reading list and your stuff--outside of this blog, and, now, maybe _inside_ this blog, does not meet my minimum quality standards. You see, _I_ have standards, too, and I _apply_ them to my choices of how I spend my time.
Hopefully this makes you laugh like it made me laugh. Most discourse on Substack is really really positive, engaging and thoughtful. But sometimes a person deserves to be called an idiot, and perhaps this was my time. Just to be clear though, SVB did not fraudently represent anything - they played exactly by the rules of the game and were simply over-leveraged due to non-marked-to-market assets that were being held at a massive short term loss and because of gambles on venture debt that should not be legal but are.
In case you have friends who also want the chance to call me an idiot :)
*************************************************************************************************************
Back to the discussion
COMMENTOR C
I think you've nailed a part of our problem, Data - but the 'dismantle the Fed' solution you propose will create the very bank run you rightly fear (only national), along with a rampaging stampede to the exits on equity markets that will annihilate and turn to desert sand every single adult American's 401K. Pennies on the dollar? It would be worse than that.
Of course after all of that, when companies can't make payroll or pay their bills because there is nothing to guarantee their deposits (since the Fed is gone..) and their liquidity has disappeared there go all the jobs, and then mortgages won't get paid and well..
Time to bring out the muskets..
COMMENTOR D
As my daddy taught me, "[name] if you cannot pay for it you don't need it."" Best.Advice.Ever. Mama said be prepared to make a car payment and trade every year. I am really glad I listened to daddy. And while I accept what you say as true the longer we kick reality down the road the harder the course correction will be. And looming over this banking dust-up is $32,000,000,000,000. We have had 120 years of the Federal Reserve. All it has created is a house of cards. It is time for the grown-ups in the nation to say enough, dismantle the house and start to build a firm foundation. Americans are tough and hard people. We can, and should, do it. It should be done from the local and state level.
COMMENTOR C
A house of cards is what we have. I agree with you. I'm afraid, though, that the time for a course correction of the stature you mention is past us. We're already too deep. It was very revealing that the Fed, Treasury and all the usual suspects over the weekend made all depositors whole for not only Silicon Valley Bank but for Signature Bank as well. That tells me that these two events are but the canary in a very deeply connected coal mine involving debt and too much leverage, and that there is a lot more at stake than two seized banks. They realize that many banks are holding assets declining in value and will not withstand a run on deposits. They need more liquidity, ie more regulation - maybe revisit Dodd-Frank and vote in more legislation. But it's clear authorities are worried. This is a deeper issue than people realize.
Your house of cards scenario..
COMMENTOR D
[Commentor C], I am a hard person, not a cold person, but a hard person. So I say this knowing that. It needs to fail. I fear that is the only course correction for the nation at this point. We should have let it fail in 2008. Yes it will be hard, some, including myself, might perish. But out of the ashes a better America might (I believe WILL) rise. We can face it now or we can face it later but it is only going to get worse. The only alternative I see is to 1) recognize that the Federal Reserve system has failed and is not viable; 2) have a planned dismantling thereof which does not mean no federal currency or national banks but rather both backed by something of value and governed by stakeholders who will sink or swim based on merit of policies not federal government guaranteed safe spaces; 3) time-out for the over-reaching federal government accomplished by a return to the notion of governance close to the governed at the local and state government. Will it be messy. Of course it will. But as you point out, and I agree, the "Schmoosing and Vibes Bank" failure is just the tip of the iceberg. That $32,000,000,000,000 is a ticking time bomb as is the planned use of the votes of those we-don't-even-know-how-many-millions-of-illegals to entrench the ruling class' power and those people do not care about you or me or our welfare. I am a proponent of America and her people. We have cancer and it needs to be removed before it metastasizes further.
COMMENTOR C
Radical, but in a way it sounds exciting..
Certainly not for the faint of heart.
I differ from you in the sense that the banks are certainly scary beasts because many of them are unstable, and we have a trillion too many dollars floating around out there - but it is the equity markets that worry me most. They've been massively overvalued for years due to speculation and I feel in my bones a meltdown is coming, regardless of Fed monetary policies etc..
And no one will save anyone in a massive market crash. Investment banks along with every small investor and pension fund will be swept down the toilet. The losses will be in the trillions and the government will not have the means to clean up the mess.
The course correction you seek might be the result of a calamity like that.
I believe there's a way to do this, but it certainly isn't for the faint of heart, and it won't be simple at all.
I outlined some of it in this article -
Fundamentally, it boils down to fixing two things:
1. If we keep the FED, we can NEVER have a fed funds rate below REAL inflation. There HAS to be a cost of capital or the moral hazard never goes away (privatized gains, socialized losses). If we eliminate the FED great, but it's the funds rate that goes away, not the insurance agency. Insurance should be jacked up to ~10M, and then walked backwards every 2 years until we return to a reasonable level in the 1M range. The federal government only has 3 jobs - secure the currency, secure the border, negotiate international trade agreements. Federal deposit insurance is a KEY part of the first process, a fed funds rate is not, at all. Let banks individually analyze risks (they'll always make better decisions than the fed deciding for everyone what's right) and determine loans based on those risks. you know, crazy idea of a free market.
2. We have to DRAMATICALLY reduce the size of the federal government, starting with its revenue structure, and we have to impose a zero dollar hard debt limit (also as a constitutional amendment). We reduce tax revenue by 5% a year, and federal spending by 10% a year, until we're down 50% from current levels (more than 50% of government spending is outright waste, so the math works). We transition to a flat sales tax, we distribute, tax free, all government held liabilities (medicare/medicade) back to the recipients and we be very clear that these safety nets will exist at 100% for those over 70, at 80% for those between 65-70, at 70% for those 60-65, 50% for those 50-60, 25% from 40-50 and zero percent under 40. you will be paying WAY less taxes, and its your job to save for retirement/medical . We HAVE to return agency to this process... people HAVE to be responsible for their decisions, but that's only possible if we remove the WILDLY irresponsible federal government from the process.
We do those two things, we CAN peacefully unwind this absolute disaster we call a "system."
COMMENTOR C
Lots of things there I like. But one thing I didn't see, but perhaps I missed it, but in your example of declining tax revenues, how does the country clear off the books it's $32 trillion in debt? Do we walk away from it and go rogue? And if we honour it at the coupon rate - how? Where does the money come from? The sales tax? Serious question..
Yeah, it's a great question, and one that we have to think long and hard about. In my above hypothetical, we're decreasing spending by 10% and decreasing revenue by 5% per year. That delta is principal pay down. Realistically that doesn't get us anywhere near paying off the entirety of the debt, but we'll never pay off the entirety of the debt, nor are we intended too. We borrowed from ourselves against ourselves for the majority of this debt and those unfunded liabilities (specifically pensions, medicare/medicaid, etc.) are going to have to die slow and (hopefully) moderately painful deaths as we reduce any future liabilities by expiring the programs.
This requirement to bifurcate tax revenue from spending is the key. By reducing spending more than we reduce tax revenue we both address the debt burden, but more importantly are forced to think very critically about where we reduce "spend." (remember that a lot of our spending isn't actually spending, it's just taking on more future debt). For instance, if you remove future medicaid contributions (no one under 40 is ever seeing a whiff of this benefit) that reduces the federal budget each year substantially. So the goal is to reduce both actual spending (Ukraine doesn't get another cent, neither does the WHO, NATO, etc.) and "spending" in the form of program retirements.
Eliminating the IRS (we're only collecting taxes through sales tax, and we start with a relatively high flat rate that assumes a 2% decrease in GDP that keeps tax revenues at 95% of prior year) saves us a ton of money. Eliminating the department of Ed is another huge cost savings that goes back into tax payers pockets to allow them to fund school choice directly through their states, etc.
The math doesn't work perfect, and I'm sure by the time it does it'll have been basterdized something spectacular, but the framework does work, and if we can minimize accounting "adjustments" we can, without much short term pain (and HUGE long-term gains in market efficiencies and personal responsibility for life outcomes) re-balance our marketplace.
COMMENTOR C
I like your detail.
When one looks at VAT (value added sales tax) rates in Canada and Europe, depending on the jurisdiction, they range from 15% to over 20%. High. Items like food etc.. are either exempt or lower - but the fact remains that the US, in order to get anywhere near a balanced budget, especially in order to pay for the basics like social security, medicare, military (we'll still need one), infrastructure (don't expect the states to fund the electrical grid, high speed internet and interstates..) and paying the interest on the aforementioned debt - will need a sales tax at least as high but I think probably higher. I know you want to reduce spending, but the items I listed I think constitute over sixty per cent of our present Federal budget (please correct me if I'm wrong, that's off the top of my head..). That's one hell of a lot of money without income tax. And then there's state sales taxes - of which the vast majority of states have. What about them? If state taxes average around 5% and then added to a proposed federal rate - we could be looking at a 25% surcharge on everything somebody, poor or rich, would buy. Not an easy sell..
My fundamental argument was the long term phase out of things like social security & medicare. Social programs aren't something we can afford. Hard stop. While they may have been a "good idea" at the time, ANYTHING that takes money from people and gives it to bureaucracy is terribel in practice. It always leads to more regulation, more terrible ideas, and ultimately endless government funded corruption. It's this idea that we "need" these things that are exactly why we're in this place in the first place. Medicare has lead to the US having the highest per capita medical costs in the world by more than a factor of 2 and DECLINING LIFE EXPECTANCY! When you screw with the free market, your outcomes always get worse. We pretend it's for "equity," it isn't, it's to launder money and deliver worse service at a higher price thanks to regulations that put the cost on the government, the risk on the patient, and the profit in the insurance industry.
If a person believes society needs social safety nets, then donate to charity. Work with a church. Start a foundation. There's a million ways for a society to care for one another inside a free market - the only reason it "requires" government is because the government wants your money.
We do need a military - that's less than 10% of our current budget, and "military" spending includes soooooooooo many things that have nothing to do with national defense it's outlandish, that could easily be 5% of our current budget and our military would improve.
As for infrastructure, I absolutely expect the local government first, then the county government second, then the state government third to take care of these things. And they will, or they won't have a fall back because they won't have a federal government to bail them out, literally every single year, when they have budget shortfalls. Local governments will be run like businesses, you either deliver a superior product at a competitive price, or people move to somewhere that will. CA and IL would be gone by now and we'd all be MUCH better for it - most importantly, the citizens of those states.
We HAVE to stop thinking of government as a solution. Government was designed to be the very last option. It's the thing you do when you have literally no other option. In every single other situation every possible free market, consumer driven solution should be tried before we bring in government. Government can only be regressive (it takes, wastes, then "redistributes"), no matter how much it tries to convince us otherwise...
*************************************************************************************************************
Another quick detour to be called an idiot again, but someone I appreciate has at least been hearing out a rather long conversation they had nothing to do with:
COMMENTOR B
.."If a person believes society needs social safety nets, then donate to charity. Work with a church. Start a foundation. There's a million ways for a society to care for one another inside a free market - the only reason it 'requires' government is because the government wants your money." ...
That is a vilely insulting (expletive deleted) load of crap.
Churches? Private foundations and other charities" shall handle the work of a national health-care system's needs for a country of 325+m? Yours is so utterly absurd a notion that it shall never see a world beyond your fevered imagination--and never should. It does not even deserve as much courtesy as is in this response.
Not even the Biden administration is that ridiculous. And that is to say a _lot_.
Re:
"We do need a military - that's less than 10% of our current budget, and "military" spending includes soooooooooo many things that have nothing to do with national defense it's outlandish, that could easily be 5% of our current budget and our military would improve."
"We do need a military"?
Really? Why?
If you want a privately-run world, better go the whole enchilada. Have a private military, too, just like any disgusting, self-loathing banana dictatorship run by a mafia-like junta.
I certainly appreciate his passion. I do want to address one point though - the single biggest political issue we have in this country, and I’ve discussed this before, is how much we care about other people’s business, rather than focusing on the things we can actually control. The amount of time I, who knows better, spends laughing about AOC is embarrassing. She’s a congresswoman who doesn’t represent me, but does represent her constituency (no matter how batshit crazy I might think they are - they elected her and that’s their right), and I know that’s how the system works and I should support that. You see the same issue above: “A church” addressing “325+M people.” Society is built on our church caring for US. A church doesn’t care for anything. But if each community church (and a “church” can be whatever you want it to be) cared for its community, then yes, of course a church could care for its people. Ask church attendees, and everyone can tell you stories of raising money for medical issues of members, or driving members to appointments, or cooking for the ill, or helping with homework and school access. The list goes on and on. The church CAN solve these problems, if we stop thinking about them in macro terms and start by just solving the problem right next door.
*****************************************************************************************************
We’ve reached the end. And I’m actually happy this debate didn’t change minds. By the end, we still diverged (as you’ll see). But we did share ideas, sharpen pencils, and open the dialogue. And that stuff matters a LOT to me, if not to anyone else
COMMENTOR C
Perhaps here is where we diverge. If one expects Oklahoma to make a deal with Vermont for transmission lines coming from Quebec forget it. Will Texas like to talk about a pipeline of natural gas going to NY? Who stewards that? Abortion across state lines? Guns? Will there be borders?
No state will cooperate with the other on a Pan American basis. Selfishness will prevail. The last time states willingly cooperated with others to make the pie larger than they were separately was in the latter stages of the eighteenth century. And that took the better part of twenty years to get right. Will we be an assortment of jurisdictions with fifty different regulations, laws, standards, requirements?
We saw that during Covid especially in the first year and that was a bloody mess.
And if Medicare is removed, who takes care of seniors? Would they be forced to choose between ten health insurance companies who could form a cabal and govern rates?
No pension system at all? No pay in with benefits later?
Americans by the tens of millions want them both and support their existence.
What about environmental standards? Any country wide regulations? There are only hundreds of thousands of them..
As the article said..
'Are you sure'..?
Thanks a ton for joining along, and if you have anything to add to the conversation, especially if it involves calling me an idiot :), well, that’s what these comments are for as well!