Moral Hazard in the Tech Industry: The Case of Silicon Valley Bank

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[0:00:39] SJ: Hello, and welcome to episode 16 of Stocks Neat. I’m Steve Johnson, Chief Investment Officer at Forager Funds. This is Forager’s podcast, where we talk the world of finance and stocks, and sometimes drink a good whiskey. I’m joined by my co-host, Gareth Brown, who is in London. It’s 6 am in Sydney. Sounds like a Bloomberg TV intro at 6 am in Sydney, 7 pm in London. Welcome G. You’re back on the road, traveling around, meeting with companies, and going to conferences.

[0:01:08] GB: Hi, mate. Yes, that’s exactly what I’m doing. I’m in London for nearly two weeks. I’ve got two different conferences to go to that are three days each, which allow me to meet a lot of companies in a short space of time, and then a couple of days where I’m visiting companies directly, and catching up. So it’s good to be back.

[0:01:26] SJ: We will chat about a little bit of that as we go through the podcast. I won’t be drinking whiskey at 6am in the morning, but I do have a good one to recommend for people that was given to me as a gift. I’m on the coffee’s as we sit here at the moment. We’re going to talk about the Silicon Valley Bank bankruptcy. You’re always one with some strong thoughts on moral hazard, so talk about the implications of them bailing that out. And yes, some thoughts that I have on the world of moral hazard out there and also a world of monetary manipulation. That’s the topic for today’s podcast. Gareth, have you got anything to drink there? You’re in the evening.

[0:02:05] GB: Yes, I’m drinking something from the Sainsbury’s discount bin. It’s a Jacob’s Creek Double Barrel, something Shiraz. I think it was 10 quid right in the center of London so it’s not a very good one, but it will do the trick.

[0:02:18] SJ: Good to see the Australians still selling their wines in Tesco over there. Good to see.

[0:02:22] GB: Yes. I saw the Spanish one, but they didn’t have a screw cap, and I wasn’t sure if I had a bottle opener in the room. 

[0:02:29] SJ: It was a very, very generous gift from a friend of a friend, but I was given a bottle of this Ledaig 18-year. We have a video here, so you can see that on the screen, Gareth. Which you and I both really enjoyed that Oben whiskey last year, and this is in a similar vein of a little bit peaty, but not a really strong peaty taste. I really enjoyed that whiskey. If anyone’s looking for a nice gift for someone who wants to put in a request for their own birthday present, then yes, a good option.

[0:02:57] GB: Do you know where that is geographically?

[0:02:59] SJ: It says Tobermory on the bottle. You can probably Google that while we’re talking. I think on the edge of the mainland somewhere.

[0:03:09] GB: Yes, okay. It’s on an island.

[0:03:10] SJ: Let’s get into the topic of today’s podcast, Silicon Valley Bank bankruptcy, which I’m sure everyone has seen in the headlines of the paper. It’s been a little bit of schadenfreude, I have to admit to this week, just watching all of the Silicon Valley elite scream, absolutely screaming. I mean, in capital letters on Twitter at the government for bailouts. You and I have talked a lot about the sense of entitlement in that sector over the past couple of years as the bubble has imploded. It’s been another fascinating episode to watch of these people that thought they could live without the government, all of a sudden wanting the government to help them.

[0:03:48] GB: Exactly. Something as simple as spreading my deposits around in different bank accounts. I mean, they could have got ChatGPT to tell them what to do.

[0:03:57] SJ: Yes, you would have thought the algorithms, I noticed one person this week was talking about how difficult it had been for them to move their business bank accounts and that some of the large banks have not even wanted to bank with them, and said the biggest thing he’s going to miss is the personal relationship with the banker at SVB, that he could just ring up and talk to about anything you want to talk about. It’s just so funny coming out of the tech sector in particular. And you’re dead, right? I think if anyone can analyze or build something that should have been able to analyze bank balance sheets, it was supposed to have been the tech sector, and they think they are extremely intelligent, so to be caught in this situation has been quite entertaining. But I mean, what is your thought here? Should the government be stepping in and bailing out depositors of a bank or not?

[0:04:38] GB: Well, is it worth quickly outlining what happened here in case people aren’t sort of right over the situation? I think that’s probably a fair use of time. A bank typically has a big pool of liabilities, so deposits from customers typically, and money they’ve sourced through wholesale markets and whatever. Then on the other side of the balance sheet, they have a big pool of assets. That can include things like home loans, trading securities, cash, and other assets. Then typically, a small amount of equity that buffers those. Banks in Australia for example are probably 10 to 15 times geared from my recollection. I haven’t looked at a bank balance sheet in Australia for a long time. But it’s typically a dollar of equity, $11 or $15 worth of assets, and then $14 or whatever it is worth of liabilities. That’s how the bank balance sheet looks.  

[0:05:37] SJ: The problem here if you think about that liability side. So for the bank, the deposit is a liability. Typically, a smaller percentage of their balance sheet than you might see. I know with Lloyds, which we’ve owned in the UK, they’re close to 100% of the loans that are out are backed by deposits on their balance sheet. Whereas here in Australia, it’s important still deposits, but there is a lot more wholesale funding on the liability side of the balance sheet. This Silicon Valley Bank was was mostly deposits as well.

[0:06:05] GB: Yes. Those deposits had grown very dramatically over the last five years to the point where they couldn’t push it into sensible loans. A lot of it was held in other kinds of assets there. Mortgage-backed securities, I think that was the main piece, and government securities. To look at the solvency of the thing, it didn’t look too bad. But actually, when you sit here and say, “If I lose a chunk of my deposits quickly, this is a business that will be very hard to liquidate those assets in any sort of reasonable timeframe.”

[0:06:42] SJ: Actually, the assets are very, very easy to liquidate. They’re invested in high-grade assets that can be liquidated. It’s the price, that’s the problem.

[0:06:50] GB: Again, two kinds of problems for a bank. The most important or the most dangerous one is a solvency problem, where you’ve made loans, and you have other assets that get marked down in value dramatically, and you wipe out your equity, you are bankrupt. The other kind of problem there is when you need liquidity to fulfill the obligations that you have to your depositors, and then that’s a liquidity problem. Bad liquidity problems are in effect solvency problems as well.

[0:07:22] SJ: I think it’s worth touching on this really quickly.

[0:07:26] GB: Accounting standards. 

[0:07:26] SJ: In the lingo, this is a duration mismatch. So they didn’t go and buy mortgage securities that are two or three years in duration. They took deposits, which are at call, and where the interest rate changes month to month, day to day. They invested that in these mortgage-backed securities that have a duration, so not due to get your money back for more than 10 years. Two interesting things have happened here, A, the deposits have gone out and they’ve needed to sell those assets that are 10 years in duration. In the interim period, interest rates have gone up 4% or 5%. 

In the bond world, taught at university, interest rates and prices move in the opposite direction to each other. So interest rates go up, the price of the bond goes down. That’s really obvious, right? Like five years ago, if you bought a bond, a really highly-rated bond, and it was paying you a percent a year in interest, you would say, “Well, okay. That’s a reasonable yield, and I will pay $100 for that $100 bond.” You put the interest rate up to 5%, and you say, “Well, I don’t want that 1% yield here when I can get 5% somewhere else.” So you have to pay less, and the price of the bond goes down as interest rates go up. 

Here, they’ve taken that short-term deposit money, and they’ve invested in these 10-year securities because it gave them the extra yield. The average yield on those 10-year securities is 1.6%. They were paying zero on the deposit, and they’re going, “Voila, look at this beautiful profit that we can make here by taking these deposits and investing 1.6.” The depositors, and it’s become a proper bank run. In a modern bank run where people are sitting on the bus, someone else’s taking their money out of Silicon Valley Bank on their mobile phone, and the person next to them says, “I should do the same thing.” Interesting, I think how that happened in a digital age. But as they wanted their deposits back, they’re trying to sell these 10-year assets, taking massive haircuts, and the equity was wiped out. There was a nice chart that showed, if you actually valued those securities at market value, there was no tangible equity at all left in Silicon Valley Bank.

[0:09:20] GB: Then you’ve got a solvency issue and a liquidity issue all in one. I think that’s maybe part of the interesting – I don’t know whether it’s worth getting into here, but the way that the American banks in particular are allowed to hold to maturity account, something like. You sit here and say, “I’ve got customer deposits on my assets side. I’ve got a mortgage-backed security. That is insured by Fannie Mae or one of the other government agencies. I am guaranteed to get those cash flows over the next 20 years. I can pretend that the market price hasn’t moved when I’m calculating my solvency.” But then, when you actually have to go and liquidate it to satisfy your depositors is taking their money out. All of a sudden, you’re bankrupt.

[0:10:03] SJ: We might get into the regulatory failure here later and talk a little bit about that and how it’s happened. Yes, it’s honestly mind-boggling, but we might come to that just a little bit later in the podcast. Let’s just deal with this issue first. There’s 200 billion or so of deposits here, and Silicon Valley Bank had an unusual amount of small business, tech companies, and deposits that were over, up to 250 grand is guaranteed by Federal Deposit Insurance Corp, a government-run agency in the US. If you’re over 250 grand, you weren’t insured. The vast majority of deposits in this bank were actually not insured. Businesses were sitting there saying, “We’re not going to be able to make payroll next week because all of our money is sitting in Silicon Valley Bank and it’s bankrupt.” There was this huge debate over the weekend, should they be bailed out or shouldn’t they? What’s your view?

[0:10:54] GB: It’s a tough one. I think we need to encourage systems where you put your money in a bank at core, it is risk-free. I think we might need some steps to get there, though. I think you’re going to argue that you should be able to make a deposit and it’s money good. I’m broadly in line with that opinion. Maybe outline your opinion first, then I’ll add a couple of addendums.

[0:11:18] SJ: Yes, I think it is completely and utterly absurd to expect small business owners, even individuals that have got more than 250 grand to be running around doing credit analysis on a bank. The moral hazard argument here is, if you didn’t have this backdrop, people would be far more careful about where they put their deposits. And that competition for deposits would force the banks to be more conservative with their balance sheet. Because if you don’t have the conservative balance sheet, you’re not going to get any deposits. I think it’s completely and utterly absurd to expect the average person on the street to be analyzing a bank’s balance sheet.

Even people saying, “Well, these are business owners, but plenty of business owners that are working with $5 million of turnover are not in a position to be analyzing a bank’s balance sheet. I think even people that are, it’s become so complicated that it’s difficult. I think it’s mad, and it’s going to cause all sorts of distortions in the system if you expect people to be doing that analysis on a bank. If you’re in a modern developed economy, you’re banking with a regulated bank that has gone and got a license from the regulator, you should assume that that money you’ve put in the bank, you can get it back whenever you feel like it. The whole functioning of the economy, I think, is quite dependent on that flow of cash and the ability to manage it.

I mean, you can’t even run a business without a bank account these days. It’s not like 200 years ago, where if you wanted to, you could run it with cash. The whole world is digital and online, and you can’t live without it. I think it’s absolutely right to try and come up with a system where those deposits are protected.

[0:12:50] GB: My pragmatic answer first is, as soon as the government steps in and says, so basically, these bank runs are caused by a duration mismatch. As soon as you know you’re backed by the government, there’s no such thing as a bank run anymore. It solves that problem. It really does pragmatically solve it. A bank won’t be destroyed for a liquidity problem. Right?

[0:13:15] SJ: No. But I think in this situation, okay, the equity has been wiped out. Your argument is, that has been caused by people worrying about their deposits and wanting to take them out.

[0:13:24] GB: No, no, no, that’s not my argument, but that would be an argument. Yes. Correct.

[0:13:30] SJ: Yes. I think irrespective of which way this went from here. To compete for deposits now, you need to be offering people 3.5% and 4%. We’ve seen that elsewhere in the system. If you’re not offering competitive deposits, and people are going to take their money and go. Irrespective of what happened here, this bank was going to be sitting here with an asset that was earning 1.6%, that they had locked in for the next 10 years, and their cost of funding was going to go up there. It was going to be an absolute mess from a profitability perspective. Equity has been wiped out, the senior unsecured lenders to the banks are going to be taking a big haircut. In my view, there’s plenty of pain here for people that are shareholders of banks to be putting pressure on the management team to do a much better job of running a bank conservatively. It’s not like nobody’s losing any money here.

[0:14:17] GB: I think the other argument I’d like to bring up is if you recognize that duration mismatch, in particular, is just a feature of banking, right? You have people that want at call deposits, and then they want 30-year loans. It’s sort of hard to solve that problem systemically. The only person that can underwrite the whole thing is the government. I guess the argument there is why have the middleman in the first place. I’ve seen proposals for government bank accounts or central bank accounts where you have your at-call money, it’s safe, you don’t earn a great interest on it because it’s entirely risk-free. Then banks are sort of doing longer loans and funding that with longer money where they can find it and the government may play a role there. But sort of, why have the middleman in the first place, I guess if you’re going to take a lot of the moral hazard?

[0:15:08] SJ: Yes. I think that is fair and a potential solution, even some sort of intermediary there, right? Where the entity that takes the deposits is guaranteed, they are doing a much more sophisticated job of working out who they lend it to than the average depositor. Maybe you mitigate some of that risk, some of those ways. Yes, there’s some fairly simple solutions. I think jumping to the failure here of the regulators, you just touched on something really important, right? When you think about the Australian banking market, where we had over the past few years, and this is not a great feature at the moment. But we have not typically had a lot of fixed, long-term, fixed-rate mortgages in Australia. To your point, there’s plenty of demand for it. There are people that would like to lock in the cost of that funding of their mortgage over a longer period of time. The banks don’t offer it. You sit there and you say, “Well, why doesn’t that happen, right? There’s demand for it, the banks don’t offer it? The answer is because we have a whole heap of regulation in this country that stops them taking on this dramatic liquidity mismatch.

[0:16:50] GB: Well, let’s see interest rates are slightly different here. The mortgage still matching the interest rates is nice from the bank’s risk point of view. But it’s still a duration mismatch here, that I have 100,000 with them, and I borrow 100,000 from them. But I can go and take my 100,000 overnight. They can’t demand my 100,000 back overnight.

[0:17:10] SJ: But the value of the two things are moving in tandem, right?

[0:17:14] GB: It saves you from the solvency problem.

[0:17:17] SJ: Yeah. But if I want to sell that loan to someone else, right? Let’s say I do need to do that. I’ve got an asset and my liability that I have the same interest rate attached to them. Therefore, their value should move similarly. Here in Australia, if you have a mismatch there, the regulations say, “We’re going to hold a lot more capital. There’s liquidity ratios here that are fully recognizing this fact that you don’t want to get those two things wrong. That’s why the banks don’t offer longer-term fixed products because they’re sitting there, the whole regulatory systems says if you do that, it’s going to be really expensive for you, and you’re going to have to hold a lot of capital against it, which is the right way to go about it. It’s just mind-boggling to me that in the US, that has not been a feature.

Maybe Gareth, you can just explain a little bit about where Silicon Valley fits into that. Because if you’re a shareholder in JP Morgan and read the annual report, you’ll think they’re the most heavily regulated financial institution in the world, how is this happening at a Silicon Valley Bank?

[0:18:17] GB: Your insights might be better than mine here. I’m not sure where you want to take it. My understanding is this is a business that’s raked in a huge amount of deposits in the last five years. Its liability side has gone up four or five times. They needed to find places to invest that, right?

[0:18:33] SJ: I was more just talking on the regulatory front. They have different tiers of regulation in the US, where if you have a certain amount of assets, there’s actually an under 10-billion bank/credit union size, where you get all of these advantages. When they brought in all of the regulation post the financial crisis called the Dodd-Frank Act. They wanted to keep the small banks in business, and there are hundreds and hundreds of banks in the US. If they had regulated them all the same way, the view was all the small banks would have gone out of business. So they carved out less than 10 billion in deposits. Then more recently, under the Trump administration, they actually carved out under 250 billion of deposits as well, as a separate category of banks that are going to be free-er from all of this regulation that’s applied to the supposedly too big to fail large banks.

Silicon Valley slotted right into that. Yes, it had grown very quickly, but it still hadn’t hit the upper limit of that where you’re going to get heavily regulated here. We’re able to do this. Whereas, this issue to your point exists in all banks, but it is much more heavily monitored. The capital requirements are much more significant in the big banks in the US.

[0:19:45] GB: I kind of get that, but on the other hand, do you really want a bunch of smaller entities running around doing crazy stuff, unregulated or less regulated, let’s say?

[0:19:55] SJ: I think a natural consequence of this is going to be irrespective of the government underwriting the deposits here. You’re going to see deposits go to the too big to fail banks, in my opinion. You’re mad not to. Maybe we’ll move to that. There’s some really important issues, I think for people to think about regarding counterparty risk that we know from psychology that really low probability events, your human brain immediately assumes that it’s a zero. I think losing your deposits in a bank is not something that most people are going to think is likely, and therefore, don’t give a lot of thought too.

But I do think this issue around counterparty risk, and it’s a wider issue, is an important one for all investors to think about. Where is your money? Who actually owns the assets? Is there a small probability here of something happening with dramatic consequences that I can take away at almost no cost? You can have your deposits spread around, for example, all being under the guaranteed amount. Some people would say you’re wasting your time, and that’s stupid, but there’s no cost to it, and you get a benefit that could, in a very small number of situations, be quite significant. 

[0:20:56] GB: I’m actually not even up to date on the rules there. I remember pre-GFC, I think it was a million dollars per customer, right? Per bank?

[0:21:04] SJ: Here in Australia.

[0:21:05] GB: Yes, in Australia. I’m talking about here. Which was explicitly guaranteed, and then – if you had $5 million, you would have been wise to deposit it with five different banks, because you had an explicit guarantee. Then during the financial crisis, they came in and quickly stepped in and guaranteed sort of everything. Everyone was in the same boat. I presume that still holds, but I haven’t actually thought about that for years. Do you have any insight into that?

[0:21:32] SJ: I haven’t looked it up myself, but not something I need to worry about at the moment.

[0:21:37] GB: It’s something that the Americans definitely need to worry about and maybe Australians do too. But historically, in Australia, and definitely to this point now in America, you can get that explicit guarantee by – in America’s case, I think 250,000 a deposit, is that right? So if you have a million bucks in cash, why wouldn’t you have it spread over four different bank accounts with different institutions? You are explicitly guaranteed by the government then, and you don’t have to rely on someone coming in and making the decision. What we’re seeing in effect is they often come in and bail you out. But you never know when they decide to shoot down the moral hazard issue like they did with Lehmann.

[0:22:17] SJ: Yes. I just think more widely in the investments space, just be really careful, take the time to go through a PDS, for example, get on ASICS website, check that the person has the license that they say they have, that Melissa Caddick, the fraud here in Sydney. I listened to that podcast, which is excellent. But she ran a Ponzi scheme, basically. She had an AFSL license number on her website and all of her information, that was someone else’s AFSL that she had stolen. You see AFSL number, blah, blah, very, very few people would go and look that up. I do think it is worth doing those little things. Who is the custodian of the product here, jump on ASICS website, and just do a really quick search, and just check all of those little things that when someone is committing a fraud, that is how they get away with doing those sorts of things. 

Often, it’s not that difficult to chase them up and make sure that your money is held by a reputable custodian, and that those checks and balances are in place. It’s quite easy when you think about, we run a managed fund and someone says, “How do I invest?” and you say, “Well, here’s the bank account.” You’re going to put the money in the bank account. It’s easy to see how people can get away with committing those sorts of fraud. I think as a client, you want to be really vigilant about it. Then you want to take some of those risk protection things that feel like  they’re probably will be a waste of time. It’s a small waste of time to protect you from a very, very significant consequence of something potentially going wrong.

I’ve got a very, very strong view that deposits should be protected in a first world economy. But that does not mean moral hazard is not an issue in the modern economy. This is another bailout, and every single time something goes wrong, we see government step in and try and protect it. 

[0:24:05] GB: I would just say that those banks should be told where a big pool of those deposits need to be invested to take care of liquidity solvency issues, or they should be disintermediated, and it should be directly between the citizen and the government. There are a couple of ways around it.

[0:24:24] SJ: I guess, elsewhere. What are some examples of bailouts where – do you have anything that you think they should have let go or where the moral hazard is one that people do need to be taught a lesson at some point in time?

[0:24:38] GB: I think when people are buying riskier assets for higher returns, they should recognize that they’re doing that. People should not be bailed out on equity investments. I don’t think generally on property investments, that sort of thing. I think the bank account is like you said, it’s this rock that we need for society to function. I think other, more equity-like investments should always be at risk.

[0:25:06] SJ: Yes. I even think that businesses, and it’s a very difficult thing to have conversations about because it sounds like you don’t have a moral compass at all. But it’s a really important part of our economic success that businesses actually go out of business, that the capital, and the labor, and the inputs there, if it’s not economic, they get taken to a part of the economy into a business that is economic, and where the returns and all of those things are better. That is how we get richer and more productive as a society. The only thing that really matters in the long term is that you produce more food, and shelter, and stuff. That is how society and people get richer. 

I think this whole culture of, well, those people are going to lose jobs, or that business needs to be protected, or we’re going to step in and look after them, is really creating more of a zombie economy. You can see it in the productivity statistics over the past 20 years that it’s just getting worse, and worse, and worse. I really feel like that lack of creative destruction is part of the problem.

GB: 100%. I mean, there’s a saying in biology, that it doesn’t work by teaching, but it works by killing. It’s an essential part of that survival of the fittest, right? You need a lot of death in order for the fittest to shine. Capitalism is a very good analogy to biology like that. Anything that stops the flow of assets from weak hands into strong hands is sort of ruining the whole point of the system.

[0:26:29] SJ: I think labor is a really important input as well. We saw this week Meta, owner of Facebook, has come out with now its third round of cost cuts. They did it in – when was that? December last year, the share price first reacted. We’re now up to round number three, and talking about – I think another – what was the number this week 10,000 staff, I think. I said in the office yesterday, I feel like what’s happened here is they’ve gone – we need to for economic reasons, get rid of 10% of our workforce and they’ve done it. It hasn’t really made any difference to the operations of the business. They’ve gone, “Well, we can do this again.” It hasn’t made any difference.

[0:27:06] GB: They’re all about it at Twitter. 

[0:27:08] SJ: We talked about Twitter a lot, right? It is still – the website is still working just fine. People are trying to make up things, I think about it not working, but it is just working fine and it’s a pretty simple product. But that’s one aspect of it. But those people then go, they’re smart people, they’re well educated, they go and do something else. That something else is incremental to what we are doing in the economy. Facebook is still what it is, and it’s still doing everything that it was doing. Those people go off and they were being very unproductive in that organization that they were in, and they become more productive elsewhere. That helps the whole economy.

I just think it’s a really important, painful process, but a really important part of society getting more productive over time. That every time something goes wrong, every time a business gets into trouble, the answer is, we’ve got to help fix it and look after these people’s jobs. Rather than recognizing that those people might be much more productive doing something else.

[0:28:00] GB: I think the more vibrant and more healthy the economy is, the fewer sacred jobs there are within it. You don’t need sacred jobs when you have an economy that creates opportunity.

[0:28:12] SJ: I think that’s one thing about the American economy, us having invested there for 13 years. They generally move on from things really quickly. I think you’re seeing it in the housing market over there at the moment. House prices are down, all the home builders can’t sell the houses for the prices they were. We need to work out a way to sell them for less. It’s not – we’re not going to sell any houses. it’s we’re going to sell them for less, and we’re going to work out how to do that and we’re going to cut out a whole heap of jobs. And already, I think you’re seeing signs of new home purchases there picking up at much lower prices. Whereas here, we might be 10 years, I think of lack of construction, because nobody wants to accept the fact that prices need to come down for people to be able to afford it.

[0:28:47] GB: Yes. This is probably getting too deep into macro, but that’s why I think shallow recessions every five to seven years is a much better thing for the economy than 30 years without one, and then an absolute humdinger. I think it gives the opportunity for the best to shine for costs to come to the fore, the waste to come out of the system. I would never pray for a recession, but I think it’s very normal to have them in that five to seven-year cycle if central banks and governments kind of let it happen. They seem to have gotten into the trap of trying to avoid a recession for the sake of it, and we were long overdue one now. It’s probably going to be nasty.

[0:29:27] SJ: Now, we’ve seen in the past few days, this Silicon Valley Bank issue, other regional banks in the US, now talk of Credit Suisse being absolutely fine and creditworthy, which is the last thing you want to hear about a financial institution. I mean, that problem has been dragging on for a long period of time. Do you see more widespread issues here?

[0:29:49] GB: Well, it’s hard not to in banking world. When you have that duration mismatch. It is possible for just about any bank to be subject to a bank run, and they will need government support to get out of it or some sort of intervention. When confidence takes a knock, everyone is thinking about it, because everyone’s looking at each other, wondering when they’re going to start taking money out of the next bank, right? There’s always the potential for contagion in that sector, like in no other. We’ve seen that Lloyds over here is down 10% over the weekend. It should be unaffected by it. But if people start changing their behavior as a result, you never know.

[0:30:31] SJ: If anything, you think as the largest bank, it should be a beneficiary of more deposits. But I do think one really important point out of this is that it is a direct, direct consequence of interest rates being zero for an extended period of time, and people doing stupid things as a consequence of that. It would not have happened if interest rates had not been at zero, and people were able to invest money at sensible rates of return. I do think this whole – and we’re seeing here at the moment, on the other side of things as well, that monetary policy is the main tool that is being used to curb inflation. It was also the main tool that was trying to be used to rescue the economy in COVID. 

It’s a very, very blunt tool. It’s not that effective. It creates really significant distortions that we’re only just seeing now. For me, I think Silicon Valley is not going to be the last of the problems caused by that environment that we had through 2020 and 2021. Here in Australia, we’ve got a lot of people that have taken out more money than they can afford to pay for at current interest rates. Because we provided them with an artificially low-interest rate that allowed people to borrow more money than they can afford to pay off now.

[0:31:41] GB: And that forced prices up in the process, right?

[0:31:45] SJ: Yes and there’s no talk in terms of curbing the inflation problems. The fiscal side of it is, we had all of this loose monetary policy for 10 years, it didn’t make that much difference to inflation. Then we had a crazy fiscal stimulus and inflation went nuts. Now, we’re trying to use monetary policy to fix the other side of it. It seems to me like government spending should be a part of the answer here.

[0:32:05] GB: Yes, couldn’t put it better. It’s very well said. I’ve never seen a central banker apologizing for causing an asset price bubble. But I’d like to one day. This use of asset prices as a way to juice the economy,  is just not the right way, I don’t think.

[0:32:19] SJ: Yes, and I just don’t even think it is that effective in terms of real economic activity, right? Anyway, on that rant wrap up, and let you get out and get some fine London food for dinner. What’s on the agenda?

[0:32:31] GB: I’m not sure, I might go to the pub.

[0:32:34] SJ: Well, it’s a very English experience. Some wonderful pub food over there. Probably the best aspect of visiting London in particular, but the wider UK. All right, guys. Well, thanks for your time, thanks for joining us late in the evening. As always, please get in touch if you’ve got any questions or comments about the podcast, or any topics you’d like us to cover in future. Our listenership is slowly ticking up, which is really good to see. I did threaten for us to end the podcast if we didn’t start seeing some growth in our user numbers. It is important for us that there’s a purpose to the podcast, but we’ve been ticking up over recent episodes. Please recommend it if you’re liking it on your podcast platform so that it gets spread a bit more-wider and share the news around. Thank you for tuning in again, and we’ll be back in a month’s time.