Unknown: 0:16

The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and their guests. They do not necessarily reflect a position of any associated employers or organizations.

Adam Rice: 0:33

Hello, everyone, and welcome to episode 12 of the applied MMT podcast. This is the second part of our two part interview with Warren Mosler, one of the founders of MMT. As usual, thank you for listening, and we hope you enjoy this episode.

Ryan Benincasa: 0:49

Hey, so one, one of the reasons I reached out Warren was, you know, because we try to bring, you know, we've tried to MMT and, you know, we're trying to expand the pool of people who might be interested in MMT. And, you know, obviously, you have a great history in financial markets. And so one thing that investors and analysts who are not particularly macro economics inclined, you know, reference as, as, you know, proof that a recession is right around the corner is the inverted yield curve. And so, you know, in that kind of vein, right, you know, we have financial markets, people and stuff, listening to this podcast, like, could you just kind of explain what that actually is, how useful it is, and maybe, maybe give some insights into the institutional structure of the rates market? Because it's not, it's not really I think I mentioned before, it's not really a market that familiar with I do all high yield in equities. So yeah.

Warren Mosler: 1:59

So you know, what it's saying is that market participants believe that rates are high enough, or somewhere near high enough, or will soon be high enough, where they will create a recession or some situation where the Fed will then be cutting rates and cutting rates aggressively. And, and so the reinvestment rates for, for forward time periods are lower and lower and lower. So if I have money, I want to invest now for three months, I can get maybe 5%, or something like that. If I say, Okay, well, I'm gonna have money coming in, in two years, what can I invest it at, you can only get maybe three and a half or something like that. And that's called the that's what's that's what's behind the yield curve, the reinvestment rates going forward for short term investments. And long REITs are nothing more than a series of short term rates. And so the two year note, the two year yield for two year investment would be where buyers and sellers come together, lenders and savers come together, and their indifference levels about what's a fair rate would be the, what they believe is going to be the average of, you know, three month rates over the next two years. Because if they thought three year rates were going to be a lot higher, they went by the two year note that 4% or whatever, say one and a half, five, six, or seven. And and so the actual yields of funds and other interest rate securities are indifference levels between buyers and sellers, between investors and savers. And so what the yield curve is, is is a forecast of where investors savers and lenders think, you know, we're kind of agree or settle on, where rates are going to be that those are the levels they trade, where they are willing to buy ourselves with, where they agree rates are going to be as time goes on. And inverted means to forward the rates. As you go further out to cripsy by a two year three or four year, you get lower and lower yield, because investors agree that the highest probabilities, that yields are going to be a lot lower. And so they're happy. The buyer and the investors are happy with those yields. The borrowers are happy with those yields. And, and so they're just it's a market consensus. It's just an expression of the market, and the market can be wrong. But historically, the market has been right, more than it's been wrong. And so the yield curve has been a good indicator. But that's all it is, is a market forecast. There's nothing more in there. There's in the leading indicators that are much the same thing. They're more forecasts than they are of actual things such as industrial production or consumer spending, that are leading indicators of what the economy is going to do. They're more things like the yield curve, which are just forecasts of what the markets going to do. So we're all loaded with forecasts right now. And if you look at the Feds forecast, they're forecasting a recession for the rest of the year, basically, they think the whole year is going to be flat. And the first quarter is now coming into two and a half percent. So for the whole year be flat, it's going to be down somewhere in the rest of the year. To average flat, and the two and a half, I'm giving you a seat Atlanta Fed GDP forecasts, notice how we're forecasting the past, we're trying to forecast the first quarter, which ended March 31, economists get paid to forecast the past, and Goldman Sachs forecasted at 2.2, I think or something, something to be proud on. Alright. So to look at the forecast, phase forecasts are the past, it means the future is going to have to be very negative. Which is hard to imagine starting with unemployment and a 50 year low and job growth data very high. And of course, they say nobody wants to work any more than again, three or 400,000 new hires every month, somebody please, please those guys who want to work maybe next month, nobody would want to work. And you look at the Atlanta Fed wage tracker, I think is 6% growth rate. And there's some indication that wage growth has been slowing wages. So this put this in all indicators, good demand. And, of course, when you get a lot of new hires, your overall wage growth is less because the new hires tend to come in at lower wages, it'd be different if they were didn't have any new hires, and then all you have is the increases, you have to get people already working in a tight labor market, you get a different number. So just the fact that there's so many new hires as strong economy, but it also was, works to keep wage growth, you know, sort of like where they like. So I don't know if I exactly answered your question about the yield curve. Well, fine tune, or maybe,

Ryan Benincasa: 7:22

yeah, maybe fine. But like, I've heard people try to make the argument that there's that they're like, you know, the yield curve, the inverted yield curve, mechanically slows down bank lending.

Warren Mosler: 7:36

How does it do that?

Ryan Benincasa: 7:38

I think the argument is that, you know, banks can emit the reinvestment rates for the future are insufficient to, you know, versus just saving? Well,

Warren Mosler: 7:54

if they were, then the rate would be there. Because that is the right word. Okay. You know, that's like saying the market is wrong, the markets, not wrong. The market is what it is. Right? Right. It's forecast might be wrong, but those are real levels, where real buyers and sellers are coming together and agreeing, and voluntarily happy with those two sides. And if somebody comes into the bank for a loan in the bank looks at its cost of funds, marks it up 3% and offers a loan. You know, the rates are what they are.

Ryan Benincasa: 8:32

Right, right. Yeah. Yeah, that, you know, the, I mean, it's so funny, like, but the rates are what they are, I was going to try to say before, like, all this obsession over the rates level for, you know, expansion, and I it's like, how I've never heard of an entrepreneur, saying, oh, rates are low, I should start a business. Right? It's like, Oh, I see a business opportunity. I need a loan, what's the rate? Yeah,

Warren Mosler: 9:01

and that's right. And I'll say, you know, this is my, these are my sales forecasts, I can get this price, which is enough to cover my expenses, and leave me with a 30% margin. Now part of his Expenses are the cost of capital. So the cost of capital is in there. And if if the cost of capital, if it doesn't work, the cost of capital is what it is. He says, Alright, this model works with a price 10%, higher, doesn't work with the price, I'm forecasting, can I get a price 10% Higher, and he'll do a market study or whatever to see if he can sell at that price. And if he can, and he tries to fund it. So what what determines whether he can get 10% Higher? Well, it's where, you know, the buyers have to have the money to spend has to be competing for consumer dollars that are out there looking to be spent, and those consumer dollars are fed pretty much directly but certainly indirectly by government deficit spending. As the deficit gets higher, the government's net spending is adding that many dollars to consumers checking accounts, who can then end their borrowing power who can then go out and buy you know, houses and cars and medical services and education, whatever they want. Right now. So with the sufficient deficit spending, there is a price that will allow for business expansion. Okay, so that's, that tells you whether the deficit spending is enough, you will get the economic growth. And right now, we look at economic growth, and it looks like the deficit spendings plenty to sustain two and a half percent real growth, to sustain lending, borrowing, whatever the interest rates are, it seems to be enough to be pushing us through that. So the data is telling us that, yes, the economy can afford these interest rates. Now part of it is as the Fed raises rates, instead of the rate becoming less affordable, it becomes more affordable. Because when they raise rates, what they're doing operationally is paying more interest out to all the Savers, and with the debt to GDP this high, they're pumping in more than enough money for the business models to be able to afford the rates. You know, so it's so they're creating your own ability to afford the rate center increase? And then so Right. Right.

Ryan Benincasa: 11:20

You know, it's so funny, like, people talk about, you know, low rates as being loose, I'm like, Well, okay, I, you know, I have to look at my firm, you know, our, the returns for our flagship fund, you know, probably generated seven or 8%, in excess of the risk free rate for the last 20 years, something like that. Well guess what the risk free rate at one and a quarter is, you know, versus the risk free rate at four? Well, our returns were therefore a lot, a lot less than we could take the same credit risk and made much higher returns than we did, because because the risk free rate was so low that how can that be characterized as, as loose? It doesn't make any sense?

Warren Mosler: 12:06

Well, if you look more broadly, the, you know, when rates were low, we did not see increases in investment and increases in borrowing that the Fed had assumed were there. And they said, our models are broken. And same for the Bank of Japan, you know, 30 years, they didn't see any kind of monetary or credit, expansion of any consequences after 30 years of zero rates. And they said, Well, you know, we just need a little more time, right? That's the same thing. That's the same thing. Draghi said the same thing. Yellen said, you know, we just need more time with these low rates to kick in. And as the same thing, the MMT proponents are saying about the high rates, we just need more time for the recession. Exactly. Yeah. But so there is a strong dynamic effect of debt to GDP being high enough where the, you know, the increase in rates is causing whatever, larger increase in demand, right, and not not even an equal increase in demand a larger increase. Now, I can't tell you that for sure that would happen before it happened. I can just say, Look, this is going to increase deficit spending by a whopping amount. And let's see how much of that actually gets spent into the economy. Because a lot of the MMT proponents are saying none of it gets spent. Pension Fund earns more interest, it doesn't spend, you know, here's a competition, bondholders say you're an interest salesman. These people, they're foreigners, they don't spend is. Okay, so we can look at all the micro data, or that we can find. But let's look at the macro data. So this was a year ago. So I started looking at the macro data. And I see the economy is doing better, you know, we were almost flat, almost negative, where we had negative GDP, I know it was inventories, all that but still was negative. And

Ryan Benincasa: 13:52

we had had a big full tightening, we had a big fiscal

Warren Mosler: 13:55

collapse at post COVID. Like after anymore, the deficit went from 15% to five or something. But then it started going back up again, because of interest because of military spending, and Social Security and all these other index things. It started going back up again. So it's alright, let's see what happens and now starts to grow. And now for a while now, we've been about two and a half. Is that commensurate with a deficit of 7% of GDP? Is some of that getting spent? Is that where it's coming from? It's like, it's not a bad narrative, you know, what's what's, why not start with that narrative? Instead of starting with a net, where the narrative is like, Oh, the deficits really only 2%? Because other forms, whoever is interest, that doesn't count. And well, then how do you explain it two and a half percent? Well, private sector this or that resilience? I don't know. The I think the burden of proof was on somebody to say that there is not sufficient amount of this money getting spent to support growth, when there has been for the last year. If there isn't any economy collapses and we still have an 8% 7% deficit fine. Okay, the propensity is to consume out of that spending were were low enough or were not sufficient to drive growth. But just the data from the last year indicates it. The narrative seems to be intact. Back to That's enough of that interest expense is getting spent directly or indirectly, to support obscenely regressive of course, but support current levels of growth that we're seeing. Right,

Ryan Benincasa: 15:29

right. I mean, whether it be because banks generally lend against income, right? You're sort of alone that you're sort of like capitalizing the firm or or persons. But

Warren Mosler: 15:43

what are you seeing? What are you seeing for corporate earnings? They look pretty good to me. Oh, yeah.

Ryan Benincasa: 15:48

Yeah, no, I mean, and, and the other thing is,

Warren Mosler: 15:52

you know, what, to leave the levy profit equation from 1930. That's still valid shows corporate earnings and deficit spending go hand in hand, except when it's interest, well, looks like maybe that counts to, you know, kind of from the last year. Yeah,

Ryan Benincasa: 16:09

though, I think that's yeah, though. corporate earnings have been strong. And the other thing is like the, I mean, corporate default rates are still below, you know, long run averages. Yeah,

Warren Mosler: 16:20

today, they just came out with mortgage defaults are all time low. You're just flooding the economy with money. So what happened to the stock market in Argentina? You know, in nominal, I actually don't know, oh, pesos, just bring it up. It's just through the roof. Okay. Well, yeah, cuz because of the inflation. And so you could say, oh, in dollar terms, it has been doing some US fine. But that means, you know, our stock market, at least in dollar terms is gonna go up through the roof. Now, in the meantime, there's a big, you know, give and take, because as rates go up, okay, earnings are better. But valuations have to get through a higher discount rate, right? And which one's going to win? Well, if you look at Argentina, it's kind of a flattish for a while and then all of a sudden, the inflation thing wins, and it just shoots up. So valuation wins, it wins, it wins, that it doesn't. And then suddenly, the asset values, you know, shoot up. And so if you look at all these countries with high interest rates, and high inflation rates, the nominal stock market prices go up quite Turkey, you know, in lira, they've gone dramatically for years, because then you discount all by the inflation rate to put in dollar terms that doesn't look so good. But domestically in terms of the local currency, it just goes up. So becomes kind of an inflation hedge, right? All the assets of General Motors. If we started trading at pennies, instead of dollars, we'd be denominated, it'd be worth 100 times more, right? So maybe you have a higher discount rate for your present value of future earnings, but they're also growing at a higher rate because of the inflation. Awesome, right? Right. Right. Yeah. So it's not that you know, that clear cut at a discount rate is going to win in the evaluation game over the inflation rate. Again, and you'll see big pullbacks, when they announce, we're going to Feds going to really clamp down and we're going to jump like Volker did to 9% from six or whatever, which is what he did. And you get a big setback. But But then as the numbers come through, it all recovers. But nobody's gonna nobody's gonna believe that with the first announcement. So you don't want to you don't want you don't want to get caught along with the first announcement.

Ryan Benincasa: 18:39

Right. Right. So it's very, I can't

Warren Mosler: 18:42

trade it, you know, it's impossible for me to even imagining trade. Yeah. Because of that. What

Ryan Benincasa: 18:47

I find astonishing, is that the fiscal tightening that we experienced in 2022, you particularly in the first half of 22, yeah, that I mean, that how was that not the cause? Of the massive stock market sell off?

Warren Mosler: 19:07

I know, I know. I know. It's typical, postwar tightening.

Ryan Benincasa: 19:13

Right, right. We had a huge tax drain whatever. And, and, you know, I think April last year, had the highest tax receipts ever. And, you know, that document we got to we got the two quart straight quarters of GDP growth and the stock market rolled over and then the s&p was down slightly in the back half flesh, but like the Dow, right, with, with with, which is a little bit more economically sensitive was up in the back half of last year. And that included, you know, the, the, the fourth quarter, which was the first quarter of the 2023 budget, which had all this kind of indexed, you know, price increases like that a reference or and, you know, the the interest rate hikes had started to sort of flow through. Yes, yep. So, it's just it just astounds me. That that, that that that flows, go opponent is not talked about, literally at all. I mean,

Warren Mosler: 20:20

I don't I know, I know, especially all these deficit hawks out there, talking about how bad it is for all these years suddenly is really the highest peacetime proactive deficit we've ever had. Even talking about why they're not talking about it. Right,

Ryan Benincasa: 20:37

right. I mean, people will say, Oh, you know, all this speculative, you know, tech stuff and Bitcoin that was all a zero interest rate for now as an alum. The point repeatedly on this bag is he's like bitcoins up 80% this year. Yeah. Yeah.

Adam Rice: 20:55

I mean, the number of times that I've read, you know, I mean, everything has been attributed to this zero interest rate phenomenon. Yeah. Oh, Facebook over hired because of zero interest rates. Oh, Bitcoin went crazy because of zero interest rates. But there's no talk about fiscal and either side.

Warren Mosler: 21:11

Yeah, Russia invaded Ukraine because of zero interest rates. Because of this monetary policy, and it's MMT is fought. We did MMT. And look what it got us. The Democrats did MMT. Republicans, Cato started that for the election last year that, you know, the Democrats did MMT and liquidity Kada. Still?

Ryan Benincasa: 21:41

Right. Right. Right, despite the fact that it was under the Trump administration that that passed, most of like, I think, you know, 3 trillion out of the 5 trillion total in in, you know, fiscal spending in response to COVID was done under the Trump administration, but it was the smaller tranche that was passed by Biden, that's what caused the inflation,

Warren Mosler: 22:06

the straw that broke the camel's back. And, yeah, so anyway,

Ryan Benincasa: 22:14

you know, what's also funny is, you know, the how misunderstood the oil market is, and I mean, I can't tell you how many times I've heard, oh, no one understands the oil market. No one understands and can predict anything. No one. And, you know, when, when the Saudis a few weeks ago, announced their production cut, and, you know, immediately the lightbulb went off, it's like, oh, that means demand is down and the price initially, because everyone that gets speculators sort of pile in, and now, back down, you're on or you're the date? Yeah.

Warren Mosler: 22:52

Well, you know, at the margin, they're setting price because there's a point of logic, they have to whenever you have relatively fixed short term demand, somebody on the supply side has to set price or the price either goes to zero or infinity. That's just markets one on one. And, and they're the only ones with excess capacity. So obviously, they're the only ones selling price and letting quantity adjust kind of like a gas station, you post your price. And then people come in for gas, you fill it right. And you set your price, and you let the quantity adjust. And so if you do that, it's your characters, situations characterized by excess capacity, if you're just going to lower price until it's your stuff sells, and you're not going to have any excess capacity. And that's everybody else in the oil market. The Saudis are sitting there with excess capacity. So it's stands out like a sore thumb near the swing, producer selling price. Alright, so how do they determine what they want to do? That's the other interesting thing. It's only two guys see Oil Minister Nick King, right. And they were both brought up in their own private a 380s. Right. And, and, you know, if you've known anybody that's come from privilege and thought they were a little bit off, you know, multiply that 100 to get what's going on in these in the heads of these guys. Right. You know, and, and, you know, they have a bad night, and I wonder they're gonna raise oil prices or lower oil for who knows what they're going to do. They decide they want to, you know, they're mad at Biden, or they want immunity from killing journalists. And all they have to do is lower the oil price, or at least do that for why they play the long game, right? That rich, short term oriented, and you just don't know when they're not going to say, and you got Biden and Trump and all these, the rest of the world giving them the skies in the fact that they're setting price by telling them they should pump more pump less, saying that somehow, you know, change in quantity will change the demand is not just pricing and no argue that they've got the oil market imbalance and supply and demand imbalance and I don't know, you know, they'll do everything except not reveal that it's just a simple price setting. You know, and it's through the ISPs. They do it through spreads against benchmark But underneath it all it's still simple price, but it has to be has point a logic there's no other possible way. The price can be set, there can be a price to price can be determined. Okay, so What's their strategy? Now? Is it to keep prices low to get rid of excess production? Because they know we're going electric cars long term? Or? You know, I don't know, is it to keep prices low, where they are now, so rushed to keep precious income down for the war? I don't know. Now Russia hasn't figured out that they can ask any price they want for their oil and get it. Okay, they're exporting million barrels a day. If they say aren't we want $100? How much less? Are they going to sell? Is world demand going to drop by the amount that they don't sell? Made? Maybe. But so maybe they only sell 5 million barrels at 100 instead of 7 million at 60. Or 120. isn't gonna go? You know, they've got it. We need a data. They do not. And Putin Russia has never understood that, that they can set any price they want and sell most of it. They just don't get it. And so now would that mean oil is expanded around the world and production and eventually, price would go back down? Probably but for the next six months to a year one? Right there. terawatt large lags before you can replace 7 million barrels a day. Is demand gonna fly? I doubt it not because of price. That doesn't move the price of gasoline enough. 50 cents a gallon. So I can change anything. So So yeah, so I'm just saying that they don't understand that either.

Ryan Benincasa: 26:49

Got? Yeah. And I guess that's kind of a little bit of a tail risk for the economy. Is it? Oh, yeah.

Warren Mosler: 26:54

Huge shoulders, because, you know, our actual recessions have been, the last few have been led by oil prices going up? A lot. Which, yeah, 2850. So it doesn't mean you can't have recession without it. But it does mean if they do it, you get slammed?

Ryan Benincasa: 27:09

I mean, that is just so shockingly underreported. Yeah,

Warren Mosler: 27:14

yeah. Yeah, exactly. Exactly.

Ryan Benincasa: 27:21

So one, little bit, I know, a lot has already been said about the whole SVB thing. And I want to two things, I was hoping to once stress test this idea with you, but a lot of the criticisms I've heard about the so called held to maturity, accounting, and the I guess, the institutional structure around that. And, you know, these, these banks should have to run those losses as expenses through the income account and take a charge against their capital and, and raise capital and blah, blah, blah. And one of my push backs against that has been well, okay, so my wife and I, we, we bought a house and in 2021, we got very, very favorable rate on our mortgage. So theoretically, that mortgage loan would trade at like 70 cents on the dollar. I don't book that, you know, that's, you know, it's a liability on my balance sheet that went from 100 to 70. Output that 30 as income. So why should the bank have to book that as an expense as a loss?

Warren Mosler: 28:41

You know, you don't have to answer to the FDIC or anything. That way the bank does, your deposits. So they're their government regulated, insured deposits. But what what it is, is like, on the other side, let's say, they have compensating balances for their checking accounts that don't earn interest, let's say, and you can't move those. So I've got an account, and I have to keep 250,000, in my checking account or a business account, you know, and I can't, I can't move it, I've signed on for five years or something,

Ryan Benincasa: 29:13

right? With

Warren Mosler: 29:14

a bank. And so they consider that cost of that money. And the duration is five years, and they make you a mortgage with a five year fixed rate at 3%. And they're giving me zero. You know, for five years, whatever I'm locked in. So now they know they've got a match. So now that the regulator's come in and say, hey, you've got a 3% mortgage, if rates go up, you got to pay 6% for money, you're gonna lose, they go, oh, wait a minute. Over here, I've got this deposits on my business accounts that are locked up for five years at 0% as a company's cost of being able to do business with me, I'm allocating nose against this loan book. It's a pair off, you know, so I'll put this in ultimate surety. And I'm just going to accrue that 3% over five years. Aha. Okay, so what's wrong with that? So when you see if that's the whole picture, nothing's wrong with that. And there's no financial risk associated with that. There's no reason to like, mark that to market unless you're going to mark them. Like you said, give them a profit on the five years. They got locked into zero or something. But then you just, it's just a waste of accounting time, you can just say, was blocked into three ones locked in at zero. So let him accrue 3% a year for five years. And then we reset everything. So when I had a bank, when I had a bank, that's the way it went, we have to like show this to the regulators. Otherwise, they'd write us up and fire the management. Uh huh. And they were not nice people. They were like IRS agents. Yeah.

Ryan Benincasa: 30:42

Uh huh. Right. And but the other thing is like, it doesn't give any credit for the for the amortization. Right. It's not like I can pay back that loan. It's 70 cents on the dollar.

Warren Mosler: 30:53

Yeah, right. Right. Right, right. Yep. Okay, so that's the negative convexity involved on the launch, you can pay it back if rates go down. But if rates go up, you don't have to. Right now, right? That's why right. Okay. So that is why I am a strong supporter always have been of the Fed, or one of its agents, Fannie Mae or something like that. Having mortgages, you know, buying all these mortgages on your books and having them or funding, providing match funding for the banking system to make mortgages, because that way the government needs to convexity. And that's a loss or a risk. It's trivial for government. And it doesn't, you know, as opposed to letting the banking system or the lenders and pension funds be subject to all this negative convexity and have to have these wild dynamic hedges on all the time, that that seriously, volatility. So by the buying all these mortgage banks, the Fed was taking an enormous amount of vial out of the markets, I thought that was a constructive thing, you know, for serve public purpose, given the rest of the institutional structure. Now in a permanent zero rate policy, you don't have to have any of it to begin with. But given what we have, I thought that was like, nice to do that. Get rid of this unnecessary volatility from all these foliage is out there that have to be there, you know, right. Right. But now they're like South, they never even considered it for that reason. And they're not even considering that when they're letting a runoff. So but it was, why was there a volcano down? You know, and that was a good thing.

Ryan Benincasa: 32:28

Are they kind of doing a similar thing with this bank term funding program? Right, there's sort of they're they're, they're saying, like, you know, we'll we'll extend we'll extend credit against certain collateral so that you don't want

Warren Mosler: 32:46

the collateral is right, yeah. What's the latest collateral? I didn't even look? Is it the one?

Ryan Benincasa: 32:52

I'm not? I'm not sure.

Warren Mosler: 32:54

Yeah, the problem was, they would only accept government collateral, discount rate and at a penalty rates, so that drove funds, right? So they didn't want that. So this is like, an alternative to the discount window. And I, I didn't even look up the collateral, but they should just, you know, take all the banks collateral at a haircut equal to the capital ratio, say 90% or 10%, at most, or if no discount, because the FDIC is already insuring any deposit going in there. So the FDIC has already examined, the bank determined that the assets are of sufficient quality for them to allow insured deposits up to the full amount, right. All right. You know, there's a limited size but not limited quantity. So they got 100 billion diabetic, you could, the FDIC is fine with$100,000,250,000 insured deposits, your assets are good for that. But if the Fed makes a deposit, it's not insured by FDIC, okay. And the quality is not good enough. So it needs government collateral, okay. It's the exact same deposit. policy or you know, it requires collateral if I'm a depositor, the FDIC will cover me, but they won't cover the Fed if they're a device, like why not? Right, because why? Because they exceed the 250,000 limit. How about the Fed does it and individual deposits of 250,000 each broker? Commission, yeah, let someone make it had the Fed use a broker CD market to find never be another liquidity crisis, right. It's my proposal to make the point. But, you know, I saw the same thing, right. And so and so it's just a way of mine in institutional structure that they don't just guarantee liquidity.

Ryan Benincasa: 34:50

Yes, one. One other thing about the institutional structure and this just came out in the So Western alliance bank, I think reported the other day, and their CEO made some comments about options market activity, particularly in the pre market stuff. And I guess one of the problems that happened, is that like, options in history regional banks were historically very, very limited, not like a lot of not a lot of activity, I guess, you know, the retail day traders trading on the Robin Hood accounts weren't that interested in trading regional bank stocks, but all of a sudden this SVB thing happens. And I guess, you know, capital markets participants get nervous, they start buying put options on you know, the bank stocks in their portfolio, well guess what, the when the dealer sells that put option, they have to short the stock to keep their their book hedged

Warren Mosler: 35:50

that ratio ratio, so dynamic Esha, right,

Ryan Benincasa: 35:54

so that, that creates this sort of dynamic of like, it can, by virtue of I guess, they call it like a gamma squeeze

Warren Mosler: 36:04

to the dealer shortfall and option holders, long vol. Right.

Ryan Benincasa: 36:09

So and then, but that can if, you know, the, if people pile into these, these put options, all of a sudden that can that can actually cause the the, you know, the stock price to decline. And then, you know, it

Warren Mosler: 36:24

turns put on banquets buying puts and selling the stock without any wreckage.

Ryan Benincasa: 36:29

Right. Right. So you can sort of an A, because the stocks got killed, all of a sudden someone's like, oh, my gosh, like, you know, Western alliance, or pack west or first republic, their stocks are down at 90%. Like, I may have to pull my money out of that. Right. And it's sort of this, this? Yeah. Out of the bank. Right. It's like the self fulfilling prophecy.

Warren Mosler: 36:53

Right triggers a liquidity crisis. Yeah. Yeah.

Ryan Benincasa: 36:56

So I just want I mean, in general, I think the the, the options market has gotten out of control. But as it specifically relates to, you know, you know, banking stocks like that, like they should just, they should just get those shouldn't really trade and on the options market, I think because of this, you can't get like you can't have the options market causing ruck runs on the bank, something that's I don't think it's really serves the public, right. But

Warren Mosler: 37:25

if you if you have the lending facility open or, you know, allow the Fed to buy broker CDs to through to any bank, who needs it insured deposits, which we already have, then it doesn't doesn't matter if there's a run or not. Right, most of those deposits will find your way back in through the Fed, and are just open the discount window, unlimited with no penalty rate, you know, and that will do the same thing. So there's a lot of ways to skin the cat if you don't want banks to be at risk of liquidity crisis. So why would you want them to be at risk? Well, the only theory for that is a you have no choice. So under a fixed exchange rate policy, you don't because the government just doesn't have the resources. But But under phony exchange rate, you know, why would you want to use market the liability side like that? And the answer is from market discipline, you believe that you get information from the depositors as to whether the bank is a good bank or a bad bank, based on whether they put their money in it or not. Which is patently ridiculous. The only possible, but the only possible reason for having a system like this is an absurdity. That, Oh, should I put my checking account on my chair and kind of Bank of America, CitiBank, let's see which one's got the better financials. You know, the top analysts in the world can figure it out, you can have the average, you think by having the average person required to do that, to keep his money safe, you're gonna like, gain some insight into finances of Citibank and Bank of America. Why are you doing this? So you've got the FDIC coming in and actually examining their book regulating them to determine whether they're sovereign. I mean, how does having people decide, in addition to that, you know, make add to that process? How does that give you help you in your regulation? It does, like, it can't possibly help it's just hasn't been thought through. It's an anachronism from fixed exchange rates where you didn't have the choice. And it's there and it's a landmine and it's, it's like, you know, just another absurdity in our modern world. Hey, guys,

Ryan Benincasa: 39:43

oh, do you have to hop

Adam Rice: 39:44

I do have to jump off. Warren, thank you so much for coming on. If you have time to to continue with Ryan or not, but I just wanted to thank you before I jumped off, and I really appreciate it. Okay,

Warren Mosler: 39:58

well, thanks for having me here. Good talk to you. You too.

Ryan Benincasa: 40:03

Dave Ward one last thing for you. If you don't mind. This is very quick. I was talking with Adam about this. I tweet. So we have today. We call We refer to the national, we constantly use the term national debt. What do you think about making a making it a practice to call it the national credit?

Warren Mosler: 40:28

Fine. I mean, I'm certainly not against it.

Ryan Benincasa: 40:31

I think that could actually help. You know, I mean, something that MMT has been very good at is is reframing stuff. And I'm kind of like, well, if I manage a portfolio of, of, you know, corporate bonds, I call them credits. I'll call them debts. Yeah. Right. So, let's just get kind of a similar thing. Let's just call it the national credit. And I think, you know, maybe that won't sound as scary.

Warren Mosler: 40:56

Yeah, no, it's fine. When I originally called it back in the 90s, the interest rate maintenance account because it was you know, before interest on reserves, that's how we supported interest rates at the target. So I thought, you know, Irma, nice name. I like that. Yes, interest rate maintenance account. But yeah, so I Oh, and that's fine. You know, anything that anything tell?

Ryan Benincasa: 41:22

Yeah. Well, Lord knows we we could use

Warren Mosler: 41:24

it. Yeah. Good. No good idea.

Ryan Benincasa: 41:28

Well, anyway, so thank you so much. This has been incredibly fun. And, and, yeah, and we'll hope to have you back on sometime soon.

Warren Mosler: 41:42

Real good. Okay. Good talking to you.

Ryan Benincasa: 41:43

Right. All right. Thanks for