Unknown: 0:16

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Adam Rice: 0:33

Hello, everyone, and welcome to episode four of the applied MMT podcast. In today's episode, Ryan and I discussed the effects of the rate hikes in terms of inflation and also bank lending. As usual, thank you for listening. And with that, we'll get started. Alright, so I think so one of the things we want to touch on today, there are two threads in particular, on Twitter that we thought were relevant to discuss. The first is it's actually just a tweet. It's not a thread written by Edward Harrison, who is a senior editor at Bloomberg Business does a lot of good work on economic commentary. Very familiar with MMT. I don't think he considers himself an MMT er, but Ryan, and I noticed this tweet was on February 10. His handle is at Edward and H on Twitter. But basically, it looks like he's coming around the idea that the interest rate hikes might be stimulating the economy. I know that he interviewed Warren Mosler back in 2019. And this was something they disagreed on. So it's interesting to see Harrison kind of changing his mind. I'm going to read the note right now. Basically, he says financial conditions are loose enough that we may have to consider whether the interest income channel of monetary policy transmission has become dominant. Then he writes and includes a paragraph that he wrote that morning, it says one last mostly unnoticed monetary policy transmission channel, the interest income channel is also adding stimulus to the economy. If one breaks the economy into three broad groups, the private sector, the public sector and the foreign sector, you can see the public sector as a net pair of interest income to both of foreign and private sectors. This means that credit growth and credit access impeding functions of rate hikes must override the additional net financial transfers to the private sector from higher rates for the overall policy to be restrictive. But since long term interest rates and credit spreads have on net declined while the mortgage market has stabilized, its possible interest income is now the dominant policy transmission channel, thus adding stimulus. So very interesting. It sounds like he is kind of leaning, you know, in the Mosler direction, saying that they're the rate hikes are stimulating the economy. Ryan, do you have any any thoughts on this?

Ryan Benincasa: 2:57

Well, Adam, my first thought is that we may be out of a job soon. Yeah, I guess everyone else is upon it.

Adam Rice: 3:09

It's coming around to this idea. Yeah,

Ryan Benincasa: 3:12

yeah, exactly. No, I mean, that I think one of the critical distinctions in today's economy versus in the past with with rate rate hike. programs implemented by the Fed is just that the the national debt to GDP level is so high compared to past periods. Right. I mean, when when Volker took rates up, you know, to to the mid teens, and in the 80s, I think the US debt to GDP was around 30%, or something like that. Now, it's, you know, like 120%. So, so it's four times. So it would be the equivalent of, of, you know, Volker or taking rates up to like, 60%. In. Right, because, you know, if you just take four times. Yes, exactly. So that is something that is genuinely Oh, and the other. The other thing is the interest paid on reserves. It is also a relatively new phenomenon. It's not something that we had in the 80s. It was enacted into law in 2008. After it like we've talked about in the past, after the you know, the Clinton administration paid down the national debt and all of a sudden there's this fear that the Fed wouldn't be able to implement its monetary policy it because there'd be no more treasuries. So we enacted into law, that the Fed could just set the rate to the peers on reserve balances, which again, are like deposits for banks held at the Fed. And so you have these, these genuinely novel conditions, high debt to GDP, and interest paid on you know, ample reserve reserves. And so the that is, to me what, you know people talk about okay, well, what's different this time? Why would you know in the past even if it's true that that in the past, you know raising rates tightening financial conditions? I'm not even convinced that that's true but but let's just assume for a moment that that it is I think it's fair to say that that with these new you know these conditions is high debt to GDP ratio and high reserve balances and interest being paid on reserves, that that that those presents those present novel conditions that makes the interest rate hikes much more stimulative much faster than in past periods. And I think that's really what what's missing from all the commentary and what potentially, you know, officials at the Fed investors, busy, you know, you know, business people, policymakers, what, what a lot of them are missing right now, is these novel conditions that that you have, frankly, we haven't really seen before.

Adam Rice: 6:33

Right, right. It's fine. I also saw a tweet from Mike Norman. I don't know if you saw this one. But he said, after a year that saw eight rate increases, which was rapid and aggressive as anything since the Volcker period, bank loans have increased by $1.1 trillion, by far the biggest increase in credit creation, recent memory. Yeah, I mean, it's

Ryan Benincasa: 6:57

cool. It's all

Adam Rice: 6:59

out there. It just it seems like, you know, not many people are noticing it. But maybe, you know, if Ed Harrison's noticing it, and there's other people on Twitter noticing it, I wonder, you know, I wonder if popular opinion will change soon.

Ryan Benincasa: 7:13

But Adam, I thought that this is but this is tightening. Tightening. This is this is why this is why again, you know, we started talking about this in the fall, this is why I was like everyone was so wrong on this, because anything any sort of objective look at at the data at credit growth, right, the the stated, The stated position of the Fed is that it is trying to tighten monetary conditions by raising interest rates, tightening monetary conditions, I don't know about you, but to me, that means that would imply credit growth, slowing, and or outright contracting. And all what we were seeing in the data beginning last fall, is credit growth expense expanding. So that to me, it's just not even, it's just not even close. And that's why, you know, I felt so strongly about this idea that, that, you know, the, the economy is doing a lot better, and was going to do a lot better than than most were thinking because everyone's thinking that, you know, the rate hikes are going to are going to slow credit growth, but the data was was clearly showing that was expanding credit growth. And if you think about it, it actually makes sense. The the higher interest paid to the private sector. Right, so the private sector has more income banks lend based on income. Right? When anyone who's taken out a loan, you get a you get a mortgage, you know, you get a your commercial loan, what have you, it's always the bank, underwrites it based on income, because income reflects the borrower, the borrower's capacity to repay that loan. So when you so when you have higher income being channeled to the private sector, that enables higher credit growth, higher bank loan creation, because there is because the borrowers have income that, you know, creates capacity for them to, to borrow and service their debts. So like, I'll have I'll have, I mean, a buddy of mine will send me all this, you know, this doom and gloom about oh, you know, consumer credit balances are at all time highs, it's like, well, first of all, as a percent of GDP, it's still pretty low. And, and, and second of all, if if consumer credit growth is growing, that that's going to reflect more spending and growth and income for for, you know, the production sector that that produces goods and services sector that that you know, to provide services. So, you know, higher consumer credit growth means it means that you're probably gonna have more consumer spending, which is, which is more income, which creates even more credit growth. So this is why, right, it's like this whole, that's that's how that's literally how the financial system works. That's how our economy works. So increasing income to the private sector, you know, the logical conclusion is that that's going to lead to increase credit growth.

Adam Rice: 10:50

Right. I mean, which makes total sense. And I think just looking at the, you know, the total outstanding consumer credit doesn't really tell you much. You know, the risk would obviously be if that debt is not being serviced, but I think by all indications it is, it's not like a 2008 type situation, is that right?

Ryan Benincasa: 11:09

Right. I mean, the, it? I mean, I think it was, I think it was Brian Moynihan, who, CEO of Bank of America, who recently said that, you know, average savings balances are multiples of what they were pre COVID. Right, for US consumers. Another thing, oh, I just remembered this. So I think I sent you Did you Did you happen to read that piece written by Matt Klein, who is the author of the economics newsletter, the overshoot? Now, I actually haven't read it yet. So he makes some, some really interesting points, because a lot of the narrative has been that, that consumers have been spending down their, their, you know, their COVID Savings balances, essentially, and, and that's why they're turning to, you know, consumer lenders, you know, to, you know, they've spent down their savings, now, they have stopped borrowing, and oh, my gosh, this is a way all over again, like, you know, consumers are being stretched way too thin. And, you know, we're gonna have this, this this depression or recession, because, you know, they're, they're borrowing too much, and they're not gonna be able to pay it back. Well, first of all, the, again, the, the most important, and, like I talked to, I talked to management teams at banks, and they all agree, the most important, and we do this to when we when we underwrite, you know, like, like a bond we're going to buy for our, for our fund, the most important input when, when considering, you know, lending someone money is their capacity to pay that debt back. And the most important driver is income. So in the US, you make income by generally by having a job. And so when you have, so when you have unemployment rates at 50, year lows, and you have, you know, robust job creation, I mean, we talked about last week, the the ninth nonfarm payroll, you know, blow out number. And that means that people have jobs, they have incomes, that meet those incomes, can then support any any debt that they're incurring. So that's, that's what so that's why, like the I mean, the MMT project is so important, it talks about things like job guarantees, or so forth. If you want to have maximum output, Max, you know, maximum efficiency, maximum, you know, capacity utilization within within an economy, it requires ensuring that people have jobs that they're making an income off of, so that they can, you know, so that that can spur further credit growth. I mean, that that's just how that's how it works. And so going back to my what I was saying about the about Matt clients piece, what he talked about No, and there's this narrative, right, people burning off their their x their clinical excess savings. It actually doesn't look like that's what's happening. A lot of the the excess savings that got paid off in 2022. was a function of taxes paid. Yep. Okay. So particularly, capital gains taxes and interest at lower than average interest and dividends received on financial assets. Okay, those were the those were the main contributors to this sort of burning off excess savings. Those savings are gentle really are generally associated with higher higher income earners, right, the lower income earners that depend that whose income comes predominantly from salaried employment was actually fairly stable. So the savings in 2022 from from in that cohort, lower income who relies predominantly on on, you know, salaried employment, that was stable in 2022. So it was just like, it was just people, you know, you had this one off in 2021, you had this all sorts of crazy capital markets activity, you know, the SPAC Bonanza, right? I mean, I mean, I mean, I mean, you know, yeah, exactly. No, but puppets particularly like, like the deal flow in 21. Yeah, it was nuts. I mean, I talked to people, you know, my buddy runs a equity capital markets desk at at Jeffrey's they had an absolute blowout year, that year. And it would they just knew that wasn't going to be repeated, I don't think. And then in 2022, do you activity just dried up? I mean, whether you're talking about the high yield market, or the IPO market, I mean, Spax. I mean, we're not seeing any longer in 2022. So, that is, so you had this all this capital markets activity 21, people had to pay a lot of taxes on gains from that in, in 2022. Right, we talked about this how, you know, there was a huge fiscal tightening in 2002. And in particular, in April, last year, you had the largest inflow of, of money to the Treasury, ever, and in a single month. So, again, one off record, fiscal tightening, that primarily impacted higher income earners. So, um, so this narrative that like that, you know, it people are spending beyond their means, and they're burning off all of their savings, and resorting to, you know, consumer credit, you know, they put all this money on their credit cards, etc. That's not really what that that's just inconsistent with what with what the data is saying. Yeah,

Adam Rice: 17:57

yeah. Well, I think yeah, I mean, with with all this stuff, I think it's always important to go beyond the headline numbers and look at kind of the distribution of, you know, like the distribution of the debt or the distribution of the assets or the savings. And that's something that is often ignored. By, you know, like headline commentary.

Ryan Benincasa: 18:19

And I think that's a great point. Yeah.

Adam Rice: 18:22

And I think I think that brings us so there was a second thread that you and I were talking about, written by Joey Politano, handles at Joseph Politano. On Twitter. He writes a news and economics newsletter called a preset toss.io. I think I think I'm pronouncing that correctly. But basically, it's great, by the way. Yeah, he's very good. But basically, he wrote a thread starts off he says, Every few months, someone asks, What if raising rates? What if What if raising interest rates actually increases inflation, just to get promptly dunked on by econ? Twitter? And he actually has a screenshot of Stephanie Kelton responding to Jason Furman where she says, Have you considered the possibility that raising interest rates might move inflation higher? And Furman just tersely responds, he just says, No, that's, that's. So there's a lot of interesting stuff.

Ryan Benincasa: 19:21

Just for the audience, who's Jason Furman.

Adam Rice: 19:24

Jason Furman is a Harvard economics professor, who I think is also isn't he on the the CEA, the Council of Economic Advisers for the White House. That sounds right. And he was a big, I believe he was a big austerity advocate. He was on Obama, CA. That's right. That's right. Yeah, he's a he's a professor at Harvard. So I think he informed a lot of Obama era economic policy. He's also a guy who, you know, in 2018, was saying things like the Trump tax cuts are going to limit the government's ability to respond to future crises. For some reason, he still gets a lot of airtime and he's very popular on Twitter. So anyway, in this in this Politano thread, he kind of you know, he talks about what or how raising rates might contribute to growth or might contribute to inflation? One of the things let's see here. So one of the things that he says is that, you know, one of the theories, and this is what what Ryan and I always talk about, he says, raising rates increases the income of the private sector by increasing interest payments on government debt. Ryan, do you want to just briefly touch on what we were talking about? Before we started recording when you said that there's, you know, there's probably a lag between the rate hikes and the interest payments, and then the effects of those payments on the economy?

Ryan Benincasa: 20:51

Yeah, sure. Well, it's just, I mean, it's very simple, you know, the Fed raises the interest rate, it takes time for that interest to then accrue and be paid to any bondholders, right. So so so for people who own the securities, a, you know, you kind of have this, this effect of okay, you know, if the, you know, the debt, the existing stock of debt rolls off as that matures, you know, the, and they issue and the Treasury issues, new debt, the interest that is owed on on the total stock of Outstanding, outstanding debt gets incrementally more, but then it takes time for the interest to accrue and eventually be paid to holders of that debt. So there's essentially like a time lag between the stated rate hikes and the actual impact on interest income, and eventually spending in the economy. So while while Joey, says that, you know, it doesn't look like it's had that much of an impact on the budget deficit? My argument would be that that's a very backwards looking. Conclusion. And it's, it's obviously correct. I mean, the interest paid on government debt was very low for a very long time, it's going to take time for the you know, for you know, that those bonds to and bills and, and notes to to mature and get replaced with higher yielding paper that then take time to actually accrue the interest, that thing gets paid. So while while he is correct, that it hasn't had that much of an impact on the budget deficit to date, my argument would be that the impact currently, and going forward, is going to it is going to move the needle meaningfully in terms of the budget deficit,

Adam Rice: 23:11

right. I mean, I think so. I was looking at the numbers the other day. And these are gross numbers. But the annualized rate of federal government interest expenditures in q4 was 853 billion. And that's going to go higher as the Fed raises rates. So.

Ryan Benincasa: 23:33

So that's the current run rate. That's the

Adam Rice: 23:35

current run rate with the q4 run rate is 853. billion. Wow. Which is, you know, substantially higher than then defense spending.

Ryan Benincasa: 23:45

So what's, okay got?

Adam Rice: 23:48

Defense spending is let me see.

Ryan Benincasa: 23:52

So yeah, so that's 3% of GDP. Ish. A 50. Yeah, yeah. Three 3% of GDP. Huge. And what was it? And what was it a year ago?

Adam Rice: 24:06

So the run rate, the run rate in q4 of 21, was 600 billion. And QR or of 19 was 569 billion. So it's, I mean, it's substantial. It's substantial growth. I mean, even compared to compared to 10 years ago, roughly. So q4 2010, it was only 400 billion. Right? Okay. So it's a ton of interest income that's coming to the economy, and it's gonna be in q1 of 23. When those numbers come out, it's gonna be even larger, because the, because rates are still going up.

Ryan Benincasa: 24:39

Right. Right. So and it's also important to note like the, it's not just it, I mean, it's accelerating, that that is something that I also don't think is quite appreciated. Like, this is like this interest compounds. So as it adds money to the private sector, right. And then the money that it adds to the private sector, itself accrues more money, right? This is not something this is not something that we really had for the last decade. plus, yeah, right. That's why it just gets. So that's why I just get so shocked to people talking about, you know, higher rates as being tightening. I'm like, I'm like, the money gets paid from the government to the private sector and it barely accrues any interest, right? That is that is tight. That is tight money. It's where it's just like, it just, it just stays there. It doesn't really accrue much. Now, any money that gets added to the private sector, accrues like like, you know, four to 5% more money per annum. That is like that, to characterize that as tightening. It's just, it's just wrong. It's just insane in my mind. And yeah, so what so we're saying, you know, to the 250. billion more in terms of run rate, you know, versus a year ago, that's a, you know, 30 to 40% increase on that on that line. Right. So going from six months. I mean, that, Adam, that's huge.

Adam Rice: 26:28

Yeah, massive, massive.

Ryan Benincasa: 26:32

And that's why Yeah, no, go ahead. No, I'm just saying that that's why I just think that people are so offsides with this, like, how can you we're seeing that we're taking this very, very large line item on the government's, you know, you know, I mean, I don't want to call it an income statement or p&l because it's a mischaracterization. But you get you get the point on their on their budget, and you're increasing it by 30 to 40%. Right. What do you mean, what do

Adam Rice: 27:08

you think would happen if social security payments went up by 30 or 40%? A year?

Ryan Benincasa: 27:13

Exactly.

Adam Rice: 27:15

Which is the same, but this this kind of goes back to the distributional question where it's like, Who is that money being paid to? And in this case, it's being it's being paid to people who already have money, but that money is still going to be spent or invested? It's just it's it's all a distributional question.

Ryan Benincasa: 27:34

Right. It's a distributional question. And, you know, to the extent that it gets spent, I think that is a fair. That is a to me that that is the most fair criticism of our argument, which is that yeah, sure. It's it's money, but it's going to people who don't spend it. So that doesn't generate economic activity doesn't cause inflation. It just kind of accrues in people's savings accounts and, and just sits there. I happen to think that they're, you know, at this in the past, you know, again, going back to like Volker 80s, when the debt wasn't very high as a percent of GDP as it is today. That was probably more true. But that today, you know, you have, because of the because of how much this is as a percent of total GDP, it's going to move in, it's going to have an impact on on spending, I think spending an economic activity. That's, that's, you know, it offsets that, that sort of regressive structure of of what interest rates are. So I think that's a fair argument. But I think, you know, just the sheer, just the sheer size will offset it.

Adam Rice: 29:06

Yeah, I mean, it'd be kind of shocking if it didn't, you know? Yeah. So the next thing I wanted to touch on was also the idea. You know, what we were speaking about with, with banks with a willingness to lend, given the higher interest rates.

Ryan Benincasa: 29:28

So that was another point in Joey's thread.

Adam Rice: 29:31

Yeah, I think he said, trying to find the specific tweet. Actually, I don't know if that was in his thread that you and I were talking about it, though, just about how banks will be more likely to make loans given the high Yeah,

Ryan Benincasa: 29:48

I think he said he talked about bank margins.

Adam Rice: 29:54

Oh, yeah, he did. He did. Yeah. So so the second point here, he says, he says the second point that people you know, like to make around higher rates contributing to inflation. He says that raising rates supposedly increases bank margins, which increases banks willingness to lend thereby boosting inflation.

Ryan Benincasa: 30:11

What are your thoughts? And so this is something that's that I mean, is commonly accepted as truth, this idea that bank margins go higher, when interest rates are higher, and I took a look, I mean, you can you can like go on the Feds website and look and look up name or net net interest margin and look at the aggregate number for commercial banks, United States, there's just this, there's just no, there's no correlation at all with this with this idea that higher rates leads to higher net interest margins for banks, it's just, it's something that's like an axiom, that's just not true. Like so many other things. There's no evidence that supports the assertion that higher rates increases. Bank names, because, and the reason that is, is because banks, like what they're, you know, they generate higher rates on their, their assets, right, their loan and securities portfolios, but they also have to pay out interest on their liabilities. So deposits and other funding sources funding source, their mean, is an accounting term, it's not an actual source of funds. But that's why it doesn't, it doesn't actually work to increase margins, what increases bank margins is lower credit losses. I mean, I was, I literally, I was looking at a couple of different banks that we have made investments in, and, you know, looking at these us, you know, Wall Street sells, I was looking at, like the Goldman guys model for this one particular bank, and all of the torque all of the leverage in in, in the, in the banks in the earnings. Is is, is, is in the credit losses, you know, the assumptions for credit losses, right, if, you know, they're they're taken high charges, you know, for future expected credit losses today, right, based on what their economists are modeling and stuff. And so that, I mean, it's a non cash charge that, you know, depending on how it actually shakes out, moves the needle substantially in terms of what their actual earnings end up being, right, that's where the torque is, is credit losses, and so the way, right, right, it's like, it's, you know, the other the other variables like interest on securities and interest on loans and interest paid on liabilities, those are all variable, right? The the torque is in the credit loss. So, if you want to have lower credit losses, the way to minimize credit losses is I think we were already talking about this is to have people to have income to pay back their debt. So that's, that's how you, that's how you minimize credit losses is to you know, have people employed, so that they can have so that they can generate income, so that they can pay back their, their credit card or their, their auto loan or their student loan or their mortgage. Right, that is how you you achieve that end is by ensuring that people have jobs, that they're being productive and getting paid for it. And therefore, using that income to pay back their debt any any, you know, analyst or loan officer who's any good at what they do is going to is going to be focused on on income, you know, for the borrower, for the potential borrower, and their, you know, their capacity to repay. Now, capacity repay could also mean that they have other other sources of credit, right. But ultimately, all of that any sort of loan is that gets that gets made, is made with an assumption that there is going to be income to to support it to pay it back. Right. Even even like a, you know, a company with an asset, asset backed loan, you know, for their for the inventories that they like, like, the idea is that they can sell their inventories, generate income and pay back that loan, right. So it's all based on income. So, again, you know, if if If the government is paying more is spending more into the economy, that spending is going to generate income for the private sector, and with the private sector has more income, it's going to be able to service its debt. So that's, that's why that's the other reason why I think, you know, rate hikes are potentially inflationary, especially, especially in today's world, because it's providing income that then that then leads to more credit creation. And, and more credit creation means more spending. You know, we've already talked about this, but But yeah, so that's the that's, that's, that's how that works. The other thing I would say about, you know, banks, business models and stuff, if you can, so if you have, if a bank is generating interest on its reserve balances, which is something that they didn't used to make, okay, it was reserves were treated like cash. So they didn't accrue any interest until 2008. So they're during interest on reserve balances, and also on their securities portfolio. That interest, right, and that's in their securities portfolio, they are basically risk free, like Treasury securities and agency MBs. And that sort of thing, that interest, it, you know, increases the return on bank equity capital, okay, so those, so the banks do generate higher income higher from those sources. So that earnings, that higher earnings, accrues and helps build up the capital, that the bank's equity capital surplus. And so that creates more of a cushion for potential credit losses. So to the extent that it you know, it does influence bank lending activity, my argument would be that, you're, you're essentially building up additional surplus, so that, you know, that like that return, that retained earnings balance is going to grow, you know, in the shareholder equity portion of the bank's balance sheet. So that creates an additional capital surplus that can absorb potential credit losses. So if you have, the bank has more, has a bigger buffer, they may be comfortable going out and making potentially riskier loans and generate a higher yield on those loans. Because they have space to absorb potential credit losses. So that's something that I think, and now it is true that that the higher the higher rate paid on on debt is going to cause the bank securities portfolio, there are assets to take a mark to market loss, that's going to that's going to lower the bank's equity capital, right, you have to you have to mark those securities to market and so that, that, you know that that is going to you know, create a lower capital surplus, but going forward, right, you have lower book equity for a bank, any higher and you're generating higher income, that means that your return on equity is going to be higher, and that is going to help build the capital surplus. So again, this is sort of like thinking about forward looking not just backward look, it's like, okay, what, what is the earnings profile of these companies, you know, going forward. And so my contention is, especially if you don't have as rapid of rate hikes in 23, as we saw in 22, you've already sort of the banks have already taken the charge to their, to their book equity, in terms of like the mark to market losses on their securities portfolio, they've already taken that charge. So now it's just like, okay, they're going to earn higher and higher interest on their securities and on their reserve balances that accrues to the to the return to the retained earnings balance. And that helps build up that capital surplus that then, you know, enables them to go out and and make and make more loans. So that's to me, that is how this this really worked. And there was a lot of thought that, that, like the QE programs, post financial crisis would accomplish exactly what we what I just described. So okay, you know, the Fed is going to, is going to pin rates low across the curve. And so banks are going to I, like I read this, this one thesis that like, essentially, okay, that's going to, you know, the banks are going to realize, a one time sort of gain on their securities portfolio. And, and, and that's going to accrue to the, to the capital surplus, and, and they're going to be able to, you know, build their balance sheets back up where they can, where they're in a position to make more loans. The problem with that is that incremental income, on their securities on their on the asset side of their balance sheet is much lower, right, you book what it's like a you book a one time sort of gain, because the Fed lowered rates, so that means higher prices for, for Treasury securities, so and so you sell that, you know, back to, or you sell that to the Fed, right, because they were in the market buying bonds, so, you get the sort of one time capital gain, but then your, your incremental returns are lower, because Because rates are low. In this case, it's the, it's the opposite, you took a took a mark to market charge and 2022. And now your incremental returns are gonna be higher. And so it's to me, it's possible, if not likely, that that's going to spur more credit growth. Because, you know, the other thing is, you know, we've really, you know, the basil regulations and stuff have had an impact on the, you know, the ratio of, you know, assets to, to, you know, bank equity, you know, essentially, the banks have to have to hold up, they had to have higher equity balances than they than they used to, I mean, the the effective leverage ratios for some banks, you know, before the financial crisis was like, 40, or 50. To one, right, so, so that just doesn't leave a lot of room, right? Like, you can quickly become insolvent. If you get a you know, a big, I mean, that's basically what happened, the financial crisis was, you know, you got this sort of, you know, these these banks took this hit to their, to their loan books, and all of a sudden they're insolvent, there's just one big margin call, essentially, on the system that required Congress to create money to cure the the margin call essentially, the the insolvency. That's basically what happened. You know, so now the banks have a much higher, you know, equity balances as a as a percent of their total assets. There's a lot more cushion there. So there, there's, uh, you know, it's amazing, I'm pretty sure I read this the other day, like, I don't think Bank of America lost money, you know, in during the financial crisis. isn't really isn't that amazing? Yeah, I read that. And then I, I sent it to my coworker, and he was like, I don't know if that's right. That that might have been JP Morgan. But, but it isn't that like concrete, like, incredible to think about. You don't even like you have this, like global financial crisis, and you don't even lose money. I mean, it's a it shows kind of like the, the how the sort of the, the institutional structure behind banks is pretty strong in the United States, that how much we support them. But, ya know, it's just, it's just an amazing thing to consider, you know, for, for companies that are supposedly, you know, cyclical, and, and, you know, at the whims of, you know, business cycles and stuff like tonight and lose money during that period. is amazing.

Adam Rice: 44:45

That is amazing. That's, that's kind of crazy. I'm so, you know, what just came to mind is, you know, last week when we were talking to Douglas, just about how, you know, we were saying that now, it's just it's kind of like an empty petri dish, like we're about to, you know, we've seen a lot of things that are confirming MMT. And will I think we'll continue to see things that are confirming that MMT is right. What I'm thinking about now is how kind of you know, after the oh eight crisis when the government you know, they did some stimulus, then they basically pursued austerity. They did quantitative easing, they lowered interest rates to try to spur growth. And credit growth was very slow. And now we're seeing them raising interest rates to contain growth, but we're seeing rapid credit, as well. Like it's totally backwards. And so, you know, I think really like it all comes down to what you're saying, which is, after 2008. The reason banks weren't lending, I mean, interest rates were basically zero the reason they weren't lending wasn't because it had nothing to do with interest rates. It's because there weren't credit worthy borrowers out there. And that's exactly. There are credit worthy borrowers out there. And even though rates are increasing rapidly, loans are still expanding, because it doesn't matter what the interest rate is, it matters if there's credit worthy borrowers.

Ryan Benincasa: 46:08

Exactly, exactly. And you'll hear me hear this thing like, like, oh, the supply of credit, it's like, Dude, there's no limit to the supply of credit. There's only a limit to credit worthy borrowers.

Adam Rice: 46:20

Exactly. That's, that's what it all comes down to. Yeah, very interesting. It really isn't MMT petri dish, like the last the last 15 years? Yeah.

Ryan Benincasa: 46:31

Well, I mean, that's what's been so amazing to me is like, when I started looking into MMT, and, you know, they made they said that, oh, you know, QE is not going to do anything. And you know, there's gonna be a recession. But this is back in the 90s, there's gonna be a recession because of the government paying down its debt. And, you know, QE is not going to do anything for growth. And no, the Bank of Japan cannot run out of yen. And anyone trying to short the end thinking that it can is going to lose a lot of money. And it's like, these people literally gotten every one of these calls, right, and everyone else has been wrong. I'm like, why is it more attention being paid here? These macro calls and get told all the time? Oh, no one knows. No one understands. It's like, these people have literally gotten every call. Right. Oh, you know, the only risk, the only risk to government increasing spending is inflation. I mean, what has dominated the headlines over the last, you know, 12 months? It's been it's been inflation after you know, I mean, it's just, it's just, it's just remarkable how prescient and how, right, the, like the leaders of MMT people of the MMT movement have been, and how, I guess, people empower, I guess, I guess, the the Jason fermions of the world, just kind of like gaslight, the public about the about about how things actually work and say, Oh, no, no, pay attention to that. Like, like, Who are you going to believe right, me or your lying eyes like those people have let they, you know, there's some cranks. I get told, like, oh, you know, MMT is some? You know, some it's like academics up in an ivory tower. I'm like, what I mean, it was literally founded by a hedge fund guy. What are you talking about? You know, and it's built on the legacies of people like Hyman Minsky, Hyman Minsky was a banker.

Adam Rice: 48:38

Yep. Yep. Yeah, it is. It is crazy. It is crazy. All right. So I think last point we want to touch on today in honor of recording on Super Bowl Sunday, not really MMT related more kind of just politically, or political philosophy

Ryan Benincasa: 48:56

of JSON. It's a JSON, it's

Adam Rice: 48:58

a JSON. Ryan, do you want to? Do you want to go into this into your thoughts on NFL versus the other leagues? Yeah,

Ryan Benincasa: 49:05

well, I just, it's just something that I've thought about for a long time. And, you know, especially, you know, in today's world, political, the political kind of debates have become much more heated. And a lot of times I see this sort of, like any, any sort of public policy that gets proposed will be shut down by people say like, oh, that's socialist. And it's like, first of all, I mean, there are people who generally say, like, oh, that's socialist, like, generally, in my experience, don't even came in tell you what socialism even is or what capitalism. Capitalism even is. But in general, I just think this sort of tribal tension between so called socialist and so called capitalist is, is stupid and unproductive. Especially in terms of how it frames public policy. And, you know, this is sort of, to me exemplified and looking at the NFL versus the other major sports leagues in in the US, including major league baseball, the NBA, the NHL, I mean, the NFL dominates So I don't have the specific numbers off top my head, but in terms of ratings in terms of revenues in terms of how many, you know, the value of the actual franchises themselves, like the NFL teams, I mean, it's just, it's just far and it just commercially isn't, isn't a league of its own, pardon the pun. And so, in my opinion, a lot of that is due to the sort of institutional what we do, and I always have joke about the institutional structure, right. And it's true, the NFL, first of all, so So let's back up for a second. I was a football nerd as a kid. So I have all this like kind of useless knowledge. But but the history of the NFL, but basically 1958, the Baltimore Colts beat the New York Giants in overtime. In in the NFL championship game, it was a first NFL game that was broadcasted nationally. And it said, like, like, the ratings were astronomical. And so you know, the powers that be kind of realized, like, wow, we might we kind of might have something here in terms of commercial opportunity with expanding this the sport in this league. So a few years later, you had actually a new league pop up the American Football League. So it's sort of like today, like, I don't know if you remember the XFL it would be like the NFL competing with the with the, you had these two leagues NFL, and at the time AFL, the first Super Bowl was the winner of the NFL versus the it was nice six, seven, the winner of the NFL Green Bay Packers versus the winner of the AFL, which was the chiefs. And the Chiefs obviously are are playing again tonight. The one of the most famous liberals ever was a few years later, Super Bowl three John Nemeth, famously guaranteed victory over the Colts and they want the Jets one. A couple of years after that there was a merger between the NFL and AFL they now call him the NSC, the AFC during this whole time, like Pete Roselle, in the 60s was a commissioner in the NFL, he was very savvy with negotiating contracts with or, you know, these sort of licensing contracts with, with the, you know, the national broadcast, right, like NBC, CBS. And so you buy by sort of combining by by rather than by using all the teams, as you're sort of negotiating leverage, rather than the way that it's done the other leagues, they were able to get better terms with with like, with these national broadcasters and stuff, this is in direct contrast to how things work and the other leagues, which is dominated by these, these regional sports networks, right. So they're called rsmeans. You know, they essentially, like a regional sports network operator will essentially, you know, share advertising revenues with the actual team so so like the Madison Square Garden, enterprise, the Dolan family, they are actually their own regional sports network operator. And so you have all these rsmeans kind of exists around the country, contracts are negotiated one off, a huge portfolio of them is actually owned by Diamond Sports Group, which runs like the valley sports what's called Valley Sports Network. And, I mean, we literally we were pitched these bonds, these these D sport bonds, diamond sports, they're literally about to file for bankruptcy. Like it's in the regional sports networks, our model is in complete shambles. Part of that is because of the change from like cable and distribution to streaming. Right? You know, and who owns it, you know, they haven't been able to figure out, you know, who which, who's gonna own the right the streaming rights, you know, the direct to consumer streaming, streaming rights, etc. So it's a complete mess and meanwhile, the NFL just dominates the, with the RSN model. Right? You You know, everything's done with that local or regional. A team and networks and so, you have, you know, the the team and the network will split up or, you know, whatever amount of advertising revenue they can generate within that network. So this has the impact and at the same time, like, like MLB teams, for example, do not have salary caps the way that the NFL does. The NFL, by contrast, actually splits evenly. The, the revenues generated from from nationally from from National Broadcasting. So, so, you know, you could be, you know, I mean, the Dallas Cowboys, I'm assuming are, I assume are the most popular team in the NFL, they make just as much money from the National from national broadcast, as you know, who was as the Browns do? The Browns were okay this year. So but, but but the point is, like, I mean, Dallas versus Cleveland. I mean, Dallas is a major, major metropolitan area that has GDP, that's I'm assuming much higher than Cleveland, right? No offense to Cleveland shirts of great place. But but the point is, is that is that the revenues are split evenly, at the same time, they have these teams will have salary caps. And so when you have to work within a salary cap, it's really hard to accumulate a super team. Right? You can't just you can't just pay people to, you know, just because you have a, you have a deeper wallet, you can buy the best players, et cetera, you can't do that. And so this has the effect, in my opinion, of creating a lot more parity in the NFL. And so, I mean, a couple years ago, the Bengals were like a joke. Now. They're, I mean, they're a real contender. You know, and so essentially, these teams, because they they split the revenues, because there are salary caps. They're able to and and because you get the first pick in the draft, if you're the worst team, right? That's, that's different actually from, say the NBA, which does not only the NBA and NHL also do the RSN model. But in the NBA, you you get it's a lottery system. Right? What is it like the bottom 10 teams, then then, essentially, it's like a lottery ticket to get the first pick or something? It's, it doesn't. In the in the NFL, it's worse if you get ranked. And if it's,

Adam Rice: 57:52

I think in the NHL, it's if you're, if you're in the last, you still only have about a 25% chance of getting the number one pick.

Ryan Benincasa: 58:00

That yeah, that sounds right. And so but the NFL is, is explicit, like Nope, that we're gonna, you know, if you're the worst team, you get the first pick. So all this is to say like, and again, we're just having fun here. But like, if somebody were to rank what, what, what is generally referred to as, like, quote unquote, socialist versus clinical capitalist, the NFL is on that spectrum is far and away more quote unquote, socialist than the other leagues, right. I mean, I mean, think about, think about the idea of like, a salary cap, or, you know, splitting incomes completely evenly amongst the 32 teams, or, you know, punishing excellence by by telling the Super Bowl winner that they get the last pick of it, right, like all these all these tropes, that that that that we hear. Like the NFL, the NFL clearly leans more so called left and yet, it's far and away. The, the most successful of like the numbers are just are just off the charts compared to the other leagues, in terms of, you know, advertising revenues, and total enterprise values of the actual franchises and stuff. So like the by by making those sacrifices by Dallas, agreeing, you know, to, to allow Cleveland to have an equal share in the advertising pie. What that does is it creates parity. So the so teams, so the competition's a lot more even player or excuse me, fans are more engaged, because every year theoretically your like your like your team has a shot. You know, that results in higher ticket sales and merchandise sales. And then salary caps kind of have a similar impact. So my point what would what, you know, kind of using this analogy, it's just like, we shouldn't be thinking of things in terms of oh, this is socialist, or oh, this is capitalist. I just think that that's a dumb it's a dumb way. Have of, you know, addressing problems, right? If we should actually look at what are the what are the real world sort of impacts that are going to happen from this type of policy? And leave it at that. I also just think in general that that a lot of what a lot of what people complain about in terms of, like, you know, they'll say, like, Oh, look at what happened to Venezuela. A lot, what people complain about is really a problem of concentrated power structures, rather than specifically socialism versus capitalism. Right. Like, like the, the, the original libertarian movement in like, the early 20th century was actually like, it was like an antitrust movement, right, it was anti corporate power. But now like, like modern day libertarian movement is very much anti government pro corporate power, right, it's just sort of these arbitrary line second, that that have had been drawn up. You know, the, I mean, we had to deal with the, the baby formula shortage, you know, our daughter was just a few months old, and all of a sudden, like, we're, you know, this this national crisis of shortage of baby formula, because, because that market has consolidated so much. And, you know, one of the major suppliers failed, like a, I think it was like, it was just like a what do you call it, there was like bacteria or something found in their factories, they had to shut down the factories, and they couldn't supply. So all of a sudden, you have a very, you have concentrated power into into a few hands. And that resulted in I mean, we had to take take state action, right, our military actually had to go and source supply of baby formula, I think, from from Europe, and bring it over. So essentially, that I mean, you could think of that as like a, like a public bailout of these, you know, supposedly private corporations, right? So, in my view, like having, like, that is no different from like, like, like having just a, like, one or two, you know, suppliers for a critical good, even if it even if it's, you know, structured as like a, you know, a corporation and it's supposedly capitalist like that concentrated power presents huge social problems, and is essentially no different from, from the I mean, from nationalizing something, right, yeah. I mean, it's effectively nationalized at that point. Right. So, so that's where, again, I have I have, like, I mean, look, sometimes using labels is useful. And, you know, sometimes it's just not and I just, I think, like, I think we could all do a lot better in terms of thinking of things. Not so in this tribal sense of Oh, socialist versus capitalist and more so just in terms of, of Americans and what you know, what's best for the country? Yeah, for sure.

Adam Rice: 1:03:37

That was a great point. All right, I think I think we can cut it there. I like that, that ending and hopefully everyone enjoys the Super Bowl tonight. I don't think we'll be published by you know, this will be published after the game is over. But thank you everyone for listening and we will see you next time.