Is It Time For Public Checking Accounts at the Fed?

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

So Tracy, there's still tons of dimensions potentially to explore.

Tracy Alloway (0:22)

So much.

Joe Weisenthal (0:23)

With regard to the Silicon Valley Bank collapse. But one of the sort of simple questions that a lot of people are asking is, from here on out, do we just assume that every deposit in a bank is insured, even if officially they only promise up to 250K?

Tracy Alloway (0:38)

Yeah, well, I mean, that was kind of the implicit takeaway from the weekend announcement. And I know we spoke with Dan Davies, and he made the point that historically, it is rare for depositors in modern financial times to lose a bunch of their money. Because normally, bondholders and equity holders lose all their money when a bank fails. And some of that gets taken away to pay the deposit holders, because deposits have seniority over bonds and equity.

But I still think this is a pretty big change.

Joe Weisenthal (1:14)

It feels very major. Or at a minimum, it feels like the implicit has been made explicit in a way that's before. Because yeah, maybe in the end, even without any intervention, SVB's depositors may have gotten whole. We don't know that. There was no fire sale or anything like that. They just announced everyone is getting their money back, Signature Bank, too.

And then that raises a second question.

Well, if depositors are really always implicitly or explicitly guaranteed by the government, what is the point of having private retail banking, for-profit retail banking? Why not just let everyone have a checking account at the Fed? And then you never have to worry about any of this stuff.

Tracy Alloway (1:52)

That's right. So we touched on this a little bit when we spoke to Lev Menend. But if you think about banks as providing an important public function, not only do they provide a safe place for people to actually put their money, but they also create money in the system. They lubricate the economy with credit.

But they also tend to fail sometimes, repeatedly, as we're saying. And they also tend to get bailed out, right? Because the argument that you see time and time again is, oh, you can't let this go because it would be bad for the financial system as a whole. You don't want to publish these particular people or this group of people because then what happens if the little guy is in trouble next time? What if it's a farmer's credit union?

Joe Weisenthal (2:40)

There's always a farmer at the end. It really says something about, I think, people's moral intuition still, that the thought experiment is replace Silicon Valley with Kansas Farmers Bank or something. But it's true, the point is true, that a lot of people, A, people can't be expected to do due diligence on a bank. That's not realistic. Most professionals can't do that.

But B, it's also true that there are a lot of, quote, innocent people who did not take some crazy risk, who think they have money, and then the idea that they're told they don't. I mean, the points are legit.

Tracy Alloway (3:15)

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

Joe Weisenthal (3:45)

Right, there's all kinds of questions. I think we should get to our guest because our guest, I really do believe, we have the perfect guest, someone who's been warning about a lot of these exact issues for a long time has anticipated a lot of these debates that people started having over the weekend and who also has ideas about rethinking the banking system and what it means when some of these implicit guarantees become explicit. We're gonna be speaking with Saule Omarova. She is a professor of law at Cornell.

She also had been President Biden's original nominee to head the Office of the Comptroller of the Currency.

Because of her perspective, she came under very sort of like vicious attacks, some by some more moderate Democrats, a lot of attacks by sort of like the community and regional bank lobby, and all the Republican centers. It was a pretty awful affair. There was a lot of red baiting, basically accusing our guest of being a communist, very publicly because of wanting to have different thoughts about how the banking system works. But I kind of feel like some vindication over the weekend and people are sort of like rethinking a lot of what she's written about. So Professor Omarova, thank you so much for coming on Odd Lots.