Is It Time For Public Checking Accounts at the Fed?

When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size. But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School. She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby. That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly "out there" view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.

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Episode Transcript

Speaker 1 (00:10):
Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, there's
still tons of dimensions potentially to explore so much with
regard to the Silicon Valley Bank collapsed. But one of
the sort of simple questions that a lot of people
are asking is, from here on out, do we just

(00:31):
assume that every deposit in the bank is ensured, even
if officially they only promise up to two hundred and
fifty k. Yeah. Well, I mean that was kind of
the implicit takeaway from the weekend announcement. And I know
we spoke with Dan Davies and he made the point
that historically it is rareferred depositors in modern financial times

(00:54):
to lose a bunch of their money because normally bondholders
and equity holders lose all their money when bank fails,
and some of that gets taken away to pay the
deposit holders because deposits have seniority over bonds and equity.
But I still think this is a pretty big change.
It feels very major, or at a minimum, it feels

(01:17):
like the implicit has been made explicit in a way
that's before because yeah. Maybe in the end, even without
any intervention SVB as depositors may have gotten whole. We
don't know that there was no fire sale or anything
like that. They just announced everyone is getting their money
back Signature bank too. And then that raises a second question, Well,

(01:38):
if depositors are really always implicitly or explicitly guaranteed by
the government, what is the point of having like private
retail banking for profit retail banking. Why not just let
everyone have a checking account at the FED and then
you never have to worry about any of this. That's right.
So we touched on this a little bit when we
spoke to love men end. But if you think about
banks as providing an public function, you know, not only

(02:02):
do they provide a safe place for people to actually
put their money, but they also create money, you know,
yea in the system. They lubricate the economy with credit.
But they also tend to fail, sometimes repeatedly, as we're saying,
and they also tend to get bailed out. Right, because
the argument that you see time and time again is oh,

(02:24):
you can't let this go because it would be bad
for the financial system as a whole. You don't want
to publish these particular people or this group of people,
because then you know what happens if the little guy
is in trouble next time. What if it's a farmer's credit.
There's always a farmer At the end. It really says
something about I think people's moral intuition still that like

(02:46):
the thought experiment is like replaced Silicon Valley with like
Kansas Farmers Bank or something. Right, But it's true. The
point is true that a lot of people, like a
people can't be expected to do due diligence, like on
a bank. It's not realistic. Most professionals can't do that.
But b it's also true that like there are a
lot of quote innocent people who did not take like

(03:08):
some crazy risk, who think they have money, and then
the idea that they're told they don't like. I mean,
the point is like the points are legit, well, we
should get into them. But I do think like overall,
there is this question of and I think we're going
to see even more of it. People are still digesting
what's happening. But there's this question of, Okay, if we're
going to keep supporting banks in quite dramatic ways, then

(03:31):
why let them be private? Entities, yeah, or why not
give them I guess like a closer relationship with the
government in one way or another, whether that's a regulatory
function or something else. Right, there's all kinds of questions.
I think we should get to our guests, because our guest,
I really do believe we have the perfect guest, someone

(03:51):
who's been warning about a lot of these exact issues
for a long time, has anticipated a lot of these
debates that people started having over the weekend, and who
also has ideas about rethinking the banking system and what
it means when some of these implicit guarantees become explicit.
We're gonna be speaking with Salle Amarova. She's a professor

(04:12):
of law at Cornell. She also had been President Biden's
original nominee to head the Office of the Comptroller of
the Currency. Because of her perspective, she came under very
sort of like vicious attacks, some by some moderate Democrats,
a lot of attacks by sort of like the community

(04:32):
and regional bank lobby and all the Republican senators. It
was a pretty awful affair. There was a lot of
red baiting, basically accusing our guest of being a communist,
very publicly because of wanting to have different thoughts about
how the banking system works. But I kind of feel
like some vindication over the weekend and people are sort
of like rethinking a lot of what she's written about.

(04:54):
So Professor Amarova, thank you so much for coming on
odd lots. Thank you so much for inviting me to day. Yeah. Absolutely,
you know we're going to get into all of your
thinking about how we can rethink the banking systement and
so forth. But just sort of like very simply to start,
as an almost regulator, what does the SVB disaster to

(05:15):
say to you about flaws within the existing regulatory structure
of banking. This is exactly the kind of questions that
I like to think about or cannot help myself thinking about.
So while of course there are many immediate reasons for
the failure of SVB in particular, there are also these

(05:36):
sort of more deeper structural issues here that are on display.
The first thing that we've learned is that the systemic
risk in the financial system is actually a very complex
and dynamic phenomenon. We are used to thinking about systemic
risk caused by banks because banks invested in particularly risky assets,

(05:57):
which they've done before. This is how we got the
tooth snate crisis. But in this situation, the assets themselves
didn't seem to be quite so risky until the monetary
policy tender changed. Right, So what it tells us is
that past policy choices actually shape future policy constraints in
this particular area. Another thing that sort of became really

(06:19):
obvious here is that there is a lot of political
economy involved in bank regulation and the banking sector in general. Right,
just like Joe what you said about how the rhetoric
changes depending on who's asking for a bailout in a
particular situation, right, And our perceptions change when people drug

(06:40):
out the farmers. Suddenly everybody feels sympathetic this time around
its venture capital industry, Silicon Valley. It's sort of difficult
to feel sympathetic right to these billionaires who usually are
known for being quite libertarian and kind of not liking
the government genuinely speaking. But most importantly, and I think
that's the point you've been driving at early, is that

(07:03):
this particular crisis really exposed the public nature of the
banking business, the deposit deposit taking the deposit money. Right,
And this is precisely what my scholarship has been about
for many many years. Banks are very special animals in
our free market economy because their products are twofold. On

(07:27):
the one hand, they create money that we treat as
equivalent to sovereign money, so we all basically use deposits
as if that was you know, the US dollars, but
of course their liabilities of private banks, private firms, And
the key about deposits at the bank is that they
absolutely must be safe, must be perceived as safe. We

(07:51):
need our money to be free of any doubt, so
that everybody knows that when tomorrow go my bank or
check my ownline back and bank account, the money that's
been there is going to have its power value no
matter what happens. And that is necessary because money is
a public good. It is really essential lubrican to all

(08:12):
economic transactions. So in effect, public goods like safety and security,
national defense, safety that we know that if there is
a fire and then the fire brigade will come, you
don't have to pay for it. Those kinds of things
we traditionally perceive as public goods, and they're provided publicly,
and that's fine. But safe money is a public good

(08:35):
exactly in the same way because it guarantees us the
right to participate in economic exchange without being worried about
the value of our money, the means of payment right.
And the funny thing about that particular public good provision
is that institutionally we have this system in which this

(08:55):
public good is provided by private profitmaking firms banks. We
regulate banks, which charter banks. We try to kind of
treat them as if they were franchises of the federal government,
purveyors of this public good. But nevertheless they are doing
it through private risk taking on their own balance sheet.

(09:18):
In other words, we've coupled this money creation with their
lending functions. So banks create money when they extend loans.
Right when they extend loans they open deposit accounts into
which they deposit is newly created purchasing power that didn't
exist before. And that is kind of ingenious because it

(09:41):
connected the deposit taking capacity, the money creation capacity, with
the sort of the judgment of supposedly kind of on
the ground, really attuned to the needs of the economy,
private banks that can judge which business, which house, which
individual deserves that that kind of valcation of credit, and

(10:04):
that creates the elastic currency. This is how we basically
have just enough money in the economy to satisfy all
the needs of the productive economy, right, and that also
creates that monetary policy transmission channel. So that's what connects
the Fed and Central Bank to the private banks that
extend money, allocate credit, and in the process of doing it,

(10:26):
actually expand or contract the amount of money that we
treat a sovereign money available in the economy. So it's
a very complex system. There's sort of a mismatch between
the public money good and the private risk taking. But
just to play Devil's advocate for one second, you know,
one of the arguments that you do see going around is, okay,

(10:49):
the ftic ensures up to two hundred and fifty thousand dollars,
because the vast majority of people in the US do
not have more than one hundred and fifty thousand dollars
in their bank accounts. But if you're a company with
a lot of cash, presumably you're more sophisticated, maybe you
have a treasury function whose job it is to actually

(11:12):
manage that cash. Is there an argument to be made
that as the pool of money gets bigger, people should
be more attuned to managing it. And making sure it's
not going into riskier banks. This is actually a very
astute question and kind of the question that is on

(11:34):
the minds of many people today, and there is an
argument for that, and the argument. One argument would be
theoretical argument in a way to say that, look, let's
just stop pretending that bank deposit money is not in
fact public money, because it is publicly back. So let's
just dispense with this fiction by removing that that cap

(11:57):
so that everybody, wholesale depositors as well as retail depositors
don't really ever have to question and worry. And it
would definitely eliminate the incentive to run on a bank
by these big money holders who are now able to
orchestrate these runs faster than they used to do it before.
So it would be a systemic structural fix to this

(12:19):
problem of bank runs. The problem that I have with
this argument is that, well, in that case, if we
completely eliminate the fiction of some kind of private risk
management by the banks themselves on the assets and the
liability side of its balance sheet by saying work, all
of the important liabilities of banks are in fact the

(12:42):
federal government's liabilities, then we need to do one of
the two things. One thing would be either we need
to make sure that these banks really start acting truly
as public utilities on the assets side, on the investment
side of the balance sheets as well. In other words,
we need to make sure that they are not able

(13:03):
to abuse this kind of public subsidy, public backing, explicit
backing of its life of their liabilities to make investments
that would generate higher private profits for them but potentially
increase the liability for the FDIC that is now direct.
Or we need to basically say, well, you know what,

(13:24):
we don't really need private banks to intermediate this kind
of money creation, since all the money is public. Let's
just provide those accounts publicly and deposit accounts publicly, so
that this particular public with just the means of payment,
means of exchange will be provided publicly. Everything else, lending,
investment services, everything else that does require risk assessment on

(13:46):
the ground that is best provided by private firms should
be provided by proctors. But we would separate those two functions.

(14:10):
Let me ask you a question, I mean your nomination
to head the Office of the Controller of the Currency.
The community banks, the regional banks really were vociferous in
lobbying against you. And of course, so now the first
crisis that we've seen in the current era happens at
a community bank. Like you know, there is some questions

(14:31):
setting aside, and I want to get to your thoughts
on like FED accounts and all that, but setting aside that,
a lot of people over the weekend they're like, well,
why shouldn't I just have all my money at Chase?
Why shouldn't I just have all my money at City?
Because you know, we've been told they're too big to fail.
We know they're going to get failed out. Also, just
structurally they have they'll have a more diversified depositor base
most likely, so maybe less likely to run. Like, do

(14:54):
you see a positive role in the economy for these
community banks that opposed you so much? Well, I do
see a very important potential role for community banks to
play because community banks just by definition, they are tied
to their own communities, right, they are actually the epitome

(15:15):
of that image of a private bank being really aware
of what businesses and the households and individuals in any
particular community really need in terms of financing, right, what
kind of businesses they engage in, how responsible they are
in running their financial affairs, whether or not their ideas

(15:37):
are deserving of funding. This is the image that basically
underlies and informs our existing hybrid system of banking. When
we outsource the credit allocation and money creation to local banks,
and of course there's huge institutions for three trillion dollars
in assets, institutions like JP Morgan Chase, they cannot possibly

(15:58):
be held to the same standard of being aware of
what's happening on the ground. So to the extended community,
banks are that kind of a bank, we really should
promote their existence and support their existence and facilitating existence.
But the problem is structural because it is true that
we've made along the way so many policy decisions that

(16:21):
effectively reward banks that are large diversified by virtue of
conducting businesses and providing financial services that go farther and
farther away from the traditional extension of long term loans
that they hold on their own banking books into I
don't know, investment advisory and investment banking and dealing and

(16:44):
trading in various derivatives, instruments and so and so forth.
Because that is the other side of what we call diversification.
That's how you diversify away from the traditional lending business.
Of course, that diversification has its own risks, but it also,
among other things, makes these big diversified institutions effectively too
big to fail, because now they have a hand and

(17:06):
they play a critical role in so many pockets of
the increasingly complex financial system. So of course it's rational
for wholesale depositors to take their deposits out of a
smaller community bank or even itsized regional bank and put
them into JPMorgan or Bank of America, simply because you
know that, for better for worse, these institutions are not

(17:29):
likely to fail, and you don't want to think about
the safety of your deposits on a going forward basis.
You have too many other things to worry about in
your actual business, right, So talk to us a little
bit more about what can be done about the mismatch
between you know, money as a public good and this
private risk taking idea. And specifically, you mentioned the political

(17:55):
economy earlier, and we've been talking a little bit about
your own experience with politicians. But what can be done
and what is realistic from a political perspective? Well, what
is realistic from a political perspective is a very difficult

(18:15):
thing to predict right, because politics is fickle, and it's
also very difficult to see which political lobbying groups, which
political interests are currently pushing forward, and you know how
that balance of power is playing out in a moment
when everybody is so nervous about potential further fallout from

(18:38):
this particular situation. So living that aside, what can be
done right, it's inherently extremely difficult to find the right
balance between the public interest in having saved money produced
by banks on the one hand, and the banks own
quite legitimate interest in being privately profitable on the other hand. Historically,

(19:03):
we've had this approach where we try to limit, for example,
the activities and investments of what banks could do. So
banks under the Glassdigal Active, and even before that, under
the National Banking Act, for example, were explicitly prohibited from
engaging an variety of activities outside the traditional landing. But then,

(19:29):
in a long story short, gradually we've allowed these banks,
even though they may be limited in what kind of
risks they can undertake, to affiliate with securities firms whose
business it is to take a lot of risks by
trading and dealing in capital markets and derivatives markets, and
there's other markets. Basically, their business is to assess and

(19:50):
take on various risks that their clients want to take
on or to buy or sell. So, for example, if
we want to really sever the kind of private risk
creation by virtue of certain types of incentives, certain types
of activities that banks undertake and keep their deposit taking
money creation function, then we would have to make these

(20:12):
banks instead of kind of almost universal diversified financial services
providers purely payments providers, providers of this particular public good,
public utility, safe deposit, safe money. We have to limit
the kinds of activities they can undertake, We have to

(20:33):
limit the kinds of affiliations they can have, so as
to limit their incentives to create further risks and to
abuse that specific public subsidy. And that of course immediately
brings back the ghost of the Glass Degalact. Right, And
we know that Glass Degalact was repealed in nineteen ninety

(20:54):
nine precisely because it was supposedly stifling competitional, stifling innovation
and all of these things. And we are now in
an era where stifling innovation is a really, really bad
label and everybody is afraid of being being accused of
stifling innovation. So personally, I just don't see how completely

(21:18):
acknowledging explicitly acknowledging that the government is going to stand
behind all private deposit liabilities of all private banks, no
matter what size and what assets side risk profile may be,
on the one hand, without actually, you know, basically poking
at that beast of activity limitations and the ghost of

(21:39):
glass Tigel, I just don't see how that will happen realistically.
So we sort of teased at this. But one of
the things you've written about is this idea of, Okay,
if we're going to separate just sort of core checking
and deposits from other banking functions, you know, why not
have let people have a checking account it the FED.
If that's all it takes. There's no risk there. And

(22:00):
you've written about that, and you've advocated that, and it
feels like a lot of people are talking about that
these days, and people are talking about CBDCs and the
difficulty in disbursing unemployment insurance and PPP money during the
crisis also revealed some issues the government has in getting
money to households. But I think the difference between your

(22:21):
work and a lot of the popular conversation. The popular
conversation it feels like kind of like technical, like almost
like inspired by crypto, digital currency, etc. And your work
and your case feels more explicitly political about changing the
balance of power and changing this sort of conduct of banking,
not not just a technocratic central bank fix. Can you

(22:44):
talk about the sort of like impulse that you have
as sort of like your vision for what the FED
would offer, Yes, of course, Well, I believe that all
finance is inherently political because we're talking about this public
private partnership, right there is that vision of labor between
the government that basically has to ensure the safety of

(23:06):
all money as we are learning now, and the private
institutions that get to allocate credit. And as we talked earlier,
it's extremely difficult to maintain that balance. So it really
is a win win situation. We have that fiction that
we can basically manipulate technocratically by I don't know, capital
regulation and various other tools. Technocratically somehow always fine tune

(23:29):
that balance so that the private banks can be profitable,
but also in the process of being profitable, they could
generate this public good for us. My idea for the
FED accounts is really kind of to imagine the world
in which we bite the bullet and say look, instead

(23:51):
of constantly trying to keep up with the fast changing environment,
where private banks constantly keep pushing on that line right
in favor of their private profit making capacity, why don't
we just say, look, everybody can open an account deposit
account at the Federal Reserve. Of course, the Federal Reserve

(24:11):
then would have to re establish some form of partnership
with private institutions, let's call them community banks, right, smaller
private institutions that are more likely to adhere to this
kind of a public utility model, and have them administer
the opening and the management of those accounts on behalf
of the FED for all of us, So that, for example,

(24:33):
for me, not much will change. I would still go
to my Tompkins Trust, which is a community bank where
I bank right, and open my deposit account there, my
checking account there. But my checking account would actually have
in it the liability not of Tompkins Trust, but the
liability director of the Federal Reserve. Now, if I want
to have also savings account, or maybe some kind of

(24:55):
a money market account, or maybe open a CD for
some extra money that will not be provided by the Fed.
Then Tomkins Trust will already have me at the branch
right or on the phone, and it would have a
great opportunity to tell me, well, by the way, if
you want to have an SD or some saving account,
here it is we can offer you that particular functionality

(25:18):
for a fee, basically the way they do it now.
So it will be a great situation for community banks.
They would be effectively the agents of the central Bank
for a fee that the Central Bank will pay them
manage these kinds of deposit accounts, but also have other
services that can deprop that they can provide to everybody
like this, and their business model would have been under

(25:42):
this situation much more stable than it is now when
they're basically at the mercy of depositors thinking, well, you know,
I'd rather move my money to JP Morgan Chase because
that is definitely too big to fail institution. So that
would have been for us how we would basically deal
with it, And yet there would be no need for
federal deposit insurance anymore, because the transactional accounts was checking

(26:05):
accounts in which we hold our deposit money that we
use for payments every day would be explicitly directly the
federal government's liability, and the federal government doesn't have an
incentive to provide that public good, safe money as some
kind of a private, private profit making opportunity. So that

(26:27):
would be the wind win, and we would separate the
public money creation from the rest of the private financial
and lending activities on the other side, and will not
have to deal with all these complicated technical matters of
making that regulatory system increasingly complex and increasingly unstable because

(26:47):
we keep tinkering on the edges. Tinkering on the edges
is a really good way of putting it. I have
a very basic question, and I fully admit I haven't
read that much about the whole FED checking account idea,
but how do you deposit rates work in that scenario?
And how much differentiation would there be between individual banks

(27:12):
under that sort of framework. So this is where there is,
of course a range of design choices. And in the
paper that I wrote the People's Ledger, my main point
was kind of structural, to just imagine when this type
of a decision is made, what kind of structural implications
it will have, and that it's not as scary as

(27:35):
people think because they have this sort of image of all,
big bad government is just going to control all of
my money and that's bad. And of course that would
be a bad thing, but we don't have to design
the system that way. So that was the point of
the paper. But to your question, one of the beauties
or potential opportunities that creating this type of a FED

(27:56):
account system offers, particularly in the age of CBDC possibilities
in other words, that those FED accounts will actually be
digital money to okenized money perhaps or account based money,
whatever it is, is that then the rates on various
deposits can be established in a much more tailored, much

(28:18):
more sort of finely managed way, right, depending on a
variety of public policy needs by the FED. So there
could be, for instance, interest paid on all of these
FED accounts, right, and the ability to pay interest could
actually be a very much adirect tool of monetary policy

(28:40):
for the FED. Then one might ask a question, should
the rates differ for individuals and for companies? Well, they
can if that makes sense. For example, if a particular
occurrence or particular dynamic and the economy may necessitate, for instance,
to channel molly equidity into a particular sector of the

(29:02):
economy by maybe increasing the rate on the deposits that's
being paid to a particular type of institutional institutional deposits.
That can be done vice versa. If the need is
too for example, in the pandemic, to send more money
to certain low income families, right, that can be done
much faster and much more easily. And that's one of

(29:24):
those flexibility tools that this type of a system would offer. Yeah,
it definitely seems like there's potential for an improvement in
the transmission of monetary policy, and to the extent that
the average deposit holder doesn't even get any extra incentive
in many cases. We just did in an episode about
low deposit betas with Joe Botte at Parkleys, and you

(29:47):
could imagine a much more sensitive as soon as the
Fed hikes rates, you start getting more in your savings account.
But that would that would clearly hurt nymbs of private
banks across the category. So you could see why even
though under your proposal as you envisioned, still a role
for big banks, still a role for the community banks
as branches, I mean, clearly, it would change their sort

(30:10):
of like funding structure and parts of their profitability. Oh,
that's absolutely right, And that is one of the one
of the arguments against considering something like FED accounts because
people say, well, where where are the banks going to
get their funding, because right now they get their funding
from chief deposits. Right, Well, we can actually engineer a

(30:33):
similar similar way for private lending institution banks we call
them banks now right to get subsidized, publicly subsidized funding
for their loans pretty much the way they're getting it
even today, right the discount window type of an arrangement
where they could actually extend their loans to credit worthy

(30:57):
individuals and businesses and turn to the FED and basically
discount those loans to the FED at a preferable rate,
at the preferred rate, very good rate of interest. This
is basically what the FED has been doing for many decades,
and what the FED does every time it sets up
this type of liquidity facility that we're seeing set up

(31:19):
over the weekend, right when the banks just basically bring
their assets and discount those assets, plash those assets to
the FED. And so that can be redesigned as a
more permanent solution to the funding needs for those lending
institutions that really are interested in lending to the real economy,
and it would give the FED capacity to really find

(31:42):
you in the credit policy. In other words, the FED
wouldn't have to accept at that new discount window, for example,
loans to I don't know, short sellers and speculators out
there in capital markets. Not to say that banks cannot
then lend to those speculatoris it's just when they lead
to those speculators for speculative purposes, they would have to

(32:05):
fund those loans in capital markets and leave it to
the market discipline to figure out whether one of those
loans are prudent. But if they want to extend loans
to a productive enterprise, to small businesses, medium sized business
or all large businesses in any community, then they would
definitely have access to preferential funding through that kind of

(32:26):
a redesigned discount window. In other words, you subsidize on
the asset side rather than on the liability side. You know,

(32:52):
you mentioned the FED facility just then, which allows banks
to tap FED financing on their bonds at par rather
than the market value. Because the whole problem here, or
part of the problem, is unrealized losses on things like
treasuries and agency mortgage backed securities and things like that.
What's the overall impact of that kind of facility on

(33:17):
the banking system? How do you see that playing out? Well,
this is this facility, of course, is a familiar structure, right.
The FED has done it in the two thousand and
eight crisis, in twenty twenty pandemic situations, so to the
extent that this is at least the third time we're
seeing this type of approach, It is now, in my view,

(33:42):
firmly ensconced in everybody's understanding as basically more or less
a permanent type of a solution. Right. And the question
here is that is it the right thing to do?
Is the the right policy choice? And opinions differ. I
do think that in the current situation, as a kind
of market wide signal to support all the banks who

(34:05):
are being heard by the fed's own monetary policy, it's
the right thing to do. But at the same time,
it's sort of what does it tell us about this
whole conventional image, right of where the public subsidy ends
and the private responsibility for the private risk taking begins.
So we are in a situation where now you know,

(34:29):
people are asking questions, well, how come banks get this
type of liquidity facility. But for example, municipalities, right, or
various other more publicly oriented institutions, finance institutions, they don't
get something permanent of this kind. And this is where
we get into this more complex and deeper issues of

(34:52):
structural change. Right, if the FED really is the only
balance sheet in this economy that is already standing to
absorb all the risks on various assets, but it makes
certain choices, whose risks on what assets is willing to absorb,
then this question of what the choice entails and who

(35:14):
should be making that choice becomes a political question. You know,
it really feels to me just sort of big picture.
It really feels to me like the events of SVB
have opened the sort of Overton window a lot. I mean,
we're having this conversation you and many other academics, and
the CBDC conversation has been going on for a while,

(35:34):
but suddenly it feels more mainstream because this tension that
you've been talking about for years private profit in banking
with this sort of like utility function that everyone expects,
and you did see all these vcs. They're like, well,
if we didn't come on, no one really thinks we're
lending money to banks and we have a deposit and
I think they kind of have a point. Nobody thinks that,
and so why do we still pretend that that part

(35:56):
of the structure. But it definitely feels like this blew
the conversation wide out into the open. So what do
you think like happens now? I mean, like it's hard
to predict the future and obviously politics, etc. But like
what would you look for and sort of the I
don't know coming months in terms of like where this
conversation goes, where you expect to see regulatory changes and

(36:18):
sort of like how you're what you're watching to see
how it unfolds. I am hopeful that this conversation about finally,
you know, cutting that chord right between private deposit taking
and the public responsibility for what happens in the crisis
actually becomes more of an acceptable measure. But I'm not

(36:40):
sure it will simply because you know, rationality of doing
something is not the only factor that makes it more
likely to happen. There are a lot of vested interests,
economic and political interests that will be fighting tooth and
nail against it. The banking industry, for one, right, So

(37:01):
my worry is that yes, yeah, I just as a
tag on you know, very minor. I would love to
have you back on another time to talk about that
whole experience of the failed nomination. But you know, just
the political the vehemence of the opposition to you curious
like you saw firsthand how powerful that community bank lobby is.
That's absolutely right. They're very powerful, and unfortunately they're too

(37:25):
easily manipulated by the Wall Street big bank lobby in
my view, because the real fear, from my views, you know,
separate the public from private. The real fear was really
coming from the big banks because they are the ones
who run a lot of risk and take on a
lot of risks and generate a lot of risk for
all of us on the asset side of their balance sheets.

(37:46):
And they knew that people who like me advocate for
sort of you know, the return to more kind of
public utility type banking or two more public role in
banking sector in general, would not really hear the point
of view really well. But the community banks are extremely
powerful and they played the role unfortunately in that process.

(38:09):
Sally Omarova so much, thanks for coming on. I feel
like it is the perfect guest for real to like
move this conversation forward someone who's been thinking about these
for a lot longer than a week and a half,
like many other people have. Great to get your perspective.
Thank you so much. Yeah, thank you so much, Sally.
That was really interesting. From discount window to overton window.

(38:31):
Has anyone made that joke yet? Oh? That's a that's
a good one. It does feel tracy like this sort
of like glaring contradiction of like, look, we all just

(38:53):
want a checking account, We just want to have a
place to put our money and not have to think
about it. And then the fact that once in a
while our checking account holders blow up and they got
the profits or whatever, like, it does feel like it's
getting harder and harder to accept that that can't be resolved.
Right if it all comes back to the FED eventually,
then why not just go straight there? But I also

(39:14):
thought Sally's point about tinkering at the edges of bank
regulation was really accurate, because it does feel like it's
not just that, it's also that the very nature of
regulation tends to be quite backward looking, and so we're
always fighting the last crisis, and so the result of

(39:34):
two thousand and eight was well, we have a lot
of new capital and liquidity rules that mandate banks hold
big buffers of bonds, and now that you know, that
was fine during a period of relatively low inflation, but
fast forward to today, there's lots of inflation, and now
those bonds are somewhat problematic, and now we're having to

(39:55):
scramble to think of new things. When to her point,
you could just kind of maybe try to strike at
the heart of it. But that said that said, I
do think political constraints are real, and I cannot even
begin to imagine what this process, I mean, you're talking
about serious structural reform banking would actually look like No,

(40:17):
that's true. You know, it's funny you said, like how
much like regulator it's always like fight the last War,
And it is so wild that like a the real
like sort of like panic was really on the depositor side,
which is not something we thought about in two thousand
and eight, when it was really about the assets. And
then the assets that they did have, I mean it
was like treasuries and MBIs, which they did take a

(40:38):
big rate hit on. But it's like going back to
like two thousand and eight, it's like, oh cool that,
you know, we never I don't think people conceived of
that is like where the location of like a big
blow up would have happened, because it wasn't like they
were like making really agregious loans to or like you know,
really exotic, non good I mean the irony is they

(40:59):
took money for risky startups and put it into really
safe No, it's it really inverts everything, right, Like I
was trying to think about, like it has there ever
been another financial crisis or sort of banking bank that
failed because they took money from risky entities and lent
it to safe ones, Like it really does invert our
conception of how these crises happen. Absolutely, But maybe you know,

(41:21):
as we were discussing, maybe that's the peg that's needed
to really start to think about some of these underlying issues.
Because if even that is a problem, then then it
seems like we need to start looking for an alternative solution. Yeah. Absolutely,
all right, shall we leave it there? Let's leave it there.
This has been another episode of the Odd Thoughts podcast.
I'm Tracy Alloway. You can follow me on Twitter at

(41:43):
Tracy Alloway, and I'm Joe Wi isn't all. You can
follow me on Twitter at the Stalwart, follow our guest
sal Amarova, She's at st Amarova. Follow our producers Carmen
Rodriguez at Kerman Arman and Dash Bennett at Dashbot. And
check out all of Bloomberg's podcasts under the handle at podcasts.
And for more odd Lots content, go to bloomberg dot

(42:06):
com slash odd Lots, where we post transcripts. Tracy and
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for listening,