Lever Time with David Sirota

On today’s Lever Time, David Sirota sits down with law professor and policy advocate Robert Hockett and former FDIC attorney Todd Phillips, to explain “The Great Bank Robbery of 2023” — a financial grift that very well could be impacting you. The three explore how this complicated bank swindle has become so prevalent, what federal regulators could do to stop it, and how consumers like you can protect yourself from the scam. 

The grift goes like this: When you deposit your money at a bank, they should pay you interest for your money. That’s because they make money off of it: Banks lend out your deposits for mortgages and small business loans, or deposit money with the Federal Reserve — all of which generate a much higher interest rate return for the banks. The difference is profit.

Until recently, banks would pass along increased interest on these efforts to its customers. But over the last two years, as the Federal Reserve has hiked interest rates to combat inflation, banks haven’t been sharing the wealth. 

Today, the gap between the profit banks generate by lending out those deposits and what they pay their customers is the largest it’s ever been: On average, banks are paying its depositors 0.4% interest, while reaping anywhere from 5 to 7 percent interest via lending. This has resulted in one of the largest upward wealth transfers in the modern economy, from customers to bank executives.

A transcript of this episode is available here.

BONUS: Monday's bonus episode of Lever Time Premium, exclusively for The Lever’s supporting subscribers, featured our interview with climate scientist Dr. Andrew Pershing about “attribution science” — a new technique that can pinpoint how manmade climate change influences extreme weather events.

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What is Lever Time with David Sirota?

From LeverNews.com — Lever Time is the flagship podcast from the investigative news outlet The Lever. Hosted by award-winning journalist, Oscar-nominated writer, and Bernie Sanders' 2020 speechwriter David Sirota, Lever Time features exclusive reporting from The Lever’s newsroom, high-profile guest interviews, and expert analysis from the sharpest minds in media and politics.

David Sirota: [00:00:00] Hey, everyone, and welcome to another episode of Lever Time with me, your host, David Sirota. On today's show, we're going to be talking about how millions of Americans, including almost everyone listening to this podcast right now, is being ripped off by the banks in what is one of the largest upward transfers of wealth in the entire economy, one you probably haven't heard of.

You know how you receive a small amount of interest on your savings account? Well, the banks are making much higher interest by lending out your money, resulting in billions of dollars of upward wealth transfer from you, a bank customer, to bank CEOs and their shareholders.

So today, I'll be speaking with two experts in financial regulation about what has become the Great Bank Robbery of 2023.

We discuss what [00:01:00] regulators could do to stop it. What other countries are doing to prevent it, and how you as a bank customer can protect yourself from it. For our paid subscribers, we're also always dropping exclusive bonus episodes into our Lever Premium podcast feed. This past Monday, we published our interview with climate scientist Dr. Andrew Pershing about Attribution science. It's a new technique that can pinpoint how man made climate change influences extreme weather events and how we can use that information to curb some of climate change's worst effects. And obviously, there have been a lot of them. Uh, snowballing, no pun intended, in the last few weeks.

If you want access to our premium content, head over to levernews. com and click the subscribe button in the top right to become a supporting subscriber. That gives you access to the Lever Premium podcast feed, exclusive live events, even more in depth reporting, and you'll be directly supporting the investigative journalism that we do [00:02:00] here at The Lever.

As always, I'm here today with Lever Times producer, producer Frank. What's up, Frank?

Frank Cappello: Not much, David. Doing all right. It's a pretty rainy day here in New York City, uh, which is a nice break from some of the summer heat. How's the weather in Denver been for you guys?

David Sirota: It's been above 100 degrees the last few days. It's been pretty bad. We had a lot of rain earlier this year. It's actually the first time in recent memory that nowhere in Colorado, is under a drought warning. So that's, I guess, kinda good. But some of the weather has been truly apocalyptic, like massive hailstorms and sudden thunderstorm, not just normal thunderstorms, like really crazy, scary thunderstorms and some flooding.

I think it's safe to say, or really, maybe it's unsafe to say that we are living, through the evidence that the climate crisis is here, it's real and it's now, uh, now, before we get to our interview today about the great bank robbery of 2023,

I want to talk about. a big story that we also just published at The [00:03:00] Lever, which is about another kind of scam that I think not a lot of folks have heard about. You've probably heard about the Writers and Actors Strike. You may not have heard about the magic of the Walt Disney Company, though it's not movie magic.

It's tax loophole Magic. And we just published this story at The Lever, so go check it out at levernews. com. Here's the, the basics of it. Recently, Disney has removed dozens of original TV shows and movies from its streaming platforms. Disney Claims it needs to vaporize this content to cut costs on platforms that they insist aren't making money.

And by doing so, they're claiming about, get this, one and a half billion dollars in corporate losses. But experts say the company is overstating the value of that content, which could ultimately help the company pocket a massive tax break. Yes, a tax break for [00:04:00] incinerating a digital library.

As one business finance professor put it in our reporting, quote, If you take a show off because people are not watching it, you can't in good conscience then turn around and tell the IRS it's a billion dollar loss, or even a hundred million dollar loss, because you're taking it off because you're saying people aren't watching it. Here's the kicker. Beyond the potential tax write offs, removing content from streaming platforms is a way for Hollywood studio executives to avoid paying licensing costs as well as residual payments to striking writers and actors. So, it's a way for them to effectively financially punish, financially make it harder for actors and writers who are on strike, demanding fair treatment, demanding a share of the revenue generated from streaming content, the streaming content [00:05:00] that they create.

And just for some broader context about Disney's financials. Over the last five years, Disney has made nearly 40 billion in profit and paid its CEO, Bob Iger, almost 500 million, all while paying a single digit corporate income tax rate. Now, Producer Frank, I, I look at this as it's kind of a horribly perfect tactic for a company like Disney.

It can get itself a big tax write off, and it can squeeze the actors and writers that it doesn't like being on strike. It can make it harder for them to stay on strike by cutting off... Uh, the residuals that they are due. I mean, there's some evil genius here, right?

Frank Cappello: I don't know if it's as, punitive although what I have heard, I heard a WGA writer who is very well versed on this subject is,[00:06:00] back in the day, Uh, in the old Hollywood studio system, the, the studio heads, you know, they might have been like, uh, these tough business guys, but ultimately they were in the business of, like, making movies, making TV shows, and establishing relationships with the writers and directors and actors who make those things.

Um, but now that these studios are being run more like tech industries, you have accountants coming up being like, Hey, we found this way where we could, you know, like, have this huge tax write off. And in the old days, some executive might say, Well, we don't want to do that. We don't want to remove this entire movie because we'll hurt our relationship with that director.

Now we have people who are in charge who are like, Oh, we don't give a shit about our relationship with that director. Kill his thing, save the money. So it's, I don't know if it's punitive, but it definitely is more of like that cold, calculating, just pure business

David Sirota: I mean, I don't want to be like overly figurative or metaphorical about this, but when I first saw this story I thought about how, you know, we look back on history at the burning of the great library at alexandria or [00:07:00] the, you know, the burning of books, uh, during horrible moments in history. We look at that as kind of a bad thing.

Here we have a tax code that actually rewards Companies for, figuratively burning their digital libraries, right? Like, like that's the crazy part. I mean, you may not like the, the content that Hollywood studios and streamers are offering, but it is part of our cultural library to have a tax incentive for these companies to.

Eliminate them, delete them, remove them from ever being accessed. I mean, it is kind of a tax incentive for the assault on culture on, on basic pop culture.

Frank Cappello: That's a such a good point. I hadn't thought of it that way. This is basically like a legal form of digital arson.

David Sirota: yes, yes. I mean, you're like, the IRS is like, oh, you're burning your, your, your cloud library. Uh, here's a tax break. I mean, you, you get a tax [00:08:00] benefit for that. It is, it is just insane on top of. On top of everything else. I mean, it's, it's financially ludicrous. It is, uh, harmful to actors and writers, but it's also, you know, what does it do to the culture?

Uh, the sort of vaporizing our, our collective memory. I mean, I'm not saying, look, I'm not saying like all the stuff being taken off is like the highest form of art, but it is part of our culture. Okay, let's stop there because we should get to our main story, uh, which is what I've been calling the great bank robbery of 2023. This is reporting that we've been doing.

At the lever about what I have called one of the largest upward transfers of wealth in the entire economy. And there is a way for you to protect yourself from it. Although you are likely being fleeced by it right now, we're going to discuss all of that after the break.

Back to lever time. If you're an adult person living in America, you need somewhere safe to put whatever money that you [00:09:00] have Unless you're stuffing cash under your mattress, which I would not recommend, most likely you're keeping your money in a bank.

And it's even more likely you're keeping it at one of the big, too big to fail banks, like Bank of America, Wells Fargo, Chase, or Citibank. In fact, the majority of all American deposits are now in a handful of these huge banks. And that's in part because these... Huge banks, they enjoy special government guarantees against collapse that other smaller banks do not get. When you deposit your money at one of these big banks, they are supposed to pay you interest for the privilege of getting your money to then invest it and profit off of it. They invest it in other things, like mortgages, as one example. This is what is called net debt. Interest income.

It's the profit [00:10:00] that banks make from charging higher interest rates to borrowers than they pay out to depositors and their other account holders. That's always been. bank's entire business model. Not necessarily super controversial.

But here's the new problem, which is controversial. The gap between what banks are paying American savers and what banks are paid when they take Depositor's money and put it at the Federal Reserve. That gap is now the largest gap in recorded history. Right now, the average savings account is paying you 0.

4% of annual interest. That's according to the Federal Deposit Insurance Corporation. But it turns out, when the banks deposit your money, at the Federal Reserve, or they loan it out in the form of a mortgage, they are raking in much higher interest than that, [00:11:00] usually in the neighborhood of 5 to 7 percent.

So in practice, your bank is likely paying you almost nothing on your savings deposits, but can then take your money and deposit it at the Federal Reserve where it will be paid roughly 5 percent. And thanks to lobbyists, You, an individual American, you are not allowed to just go deposit your money at the Fed and get those same interest rates.

Only the banks themselves are allowed to do that. You may be thinking, Well, look, Sirota, I only earn about 30, 40 bucks in interest every year on my savings account. That's not really very much. How big a deal could this be? Well, there's sort of the Superman III office space issue here. If you multiply...

Your account by the millions of customers of these banks, this amounts to billions and billions and billions of dollars that the banks [00:12:00] are making off of our money. All of our, the rest of us, the 99%, whatever you want to call it, . It is a system that is vacuuming up relatively small amounts of money over and over and over again from the working class, the middle class, uh, the non super rich class.

Straight to bank executives and their shareholders. In fact, in recent earnings calls, most of the largest banks are reporting huge profit increases and they are bragging that those increases are because of skyrocketing net. Interest income. The Wall Street Journal, not exactly some left wing publication, recently estimated that customers at the biggest banks had probably lost out on nearly 300 billion of interest payments that they could have gotten at more competitive rates In other words, the banks in these earnings calls are bragging that they are making boatloads [00:13:00] of money off simultaneously ripping off savers and ripping off depositors. This is one of the largest upward transfers of wealth of the modern era. And why I'm calling it upward. The Great Bank Robbery of 2023.

To help break down this issue, I spoke with law professor Robert Hockett and former FDIC attorney Todd Phillips. Robert and Todd explain how this is happening, what regulators could do right now to stop it, and how you as a consumer can protect yourself and your family from this scam.

Hey, Todd.

Todd Phillips: Hey, David.

David Sirota: Hey, Rob. How you doing?

Robert Hockett: Hey, David, great to see you again.

David Sirota: All right. Listen, we've been reporting on this larger dynamic in the banking industry. That I think is ripping off lots and lots of people who are listening and who may not know that they're being systematically ripped off.

So let's talk about just how a bank works when it comes to.

Taking deposits lending out money, [00:14:00] uh, and how a bank is supposed to basically make money off that. Just explain those basics,

Todd Phillips: Banking 101 is a bank, uh, takes in cash or deposits from customers. Uh, it turns around and then lends those dollars out to borrowers. So the way banks make money is on the spread between the amount, uh, that they pay to depositors and the amount that they receive in, uh, from borrowers. So. Banks want to pay you as little as they possibly can get away with on your deposits.

Uh, it is, I think, important for most people to shop around for the highest interest rates. I Think that one of the problems here is that people don't know that they can do that.

David Sirota: right? Okay. So let's talk about that bigger problem right now. Uh, the Federal Reserve is telling us that the gap In the United States, that the gap between what [00:15:00] the, uh, a bank is paying the average deposit in a savings account, and what it can get by parking depositors money effectively at the Federal Reserve, that gap is the largest in recorded history.

So. Bob, explain to us in practice what that means is actually going on,

Robert Hockett: Let me first say really quickly, just to preempt some of the objections you might hear. From folks who say that banks don't have to get deposits in order to make loans. The key point here, I think, is that even though banks are able to lend out deposits in theory, they nevertheless do take lots of deposits.

And then just as Todd said, right, they make money by lending out those deposits or by using them. To invest in the financial markets, which is, of course, increasingly the case, and, of course, they make high returns with those sort of speculative gambles that they do now back to the main question that you asked essentially what's going on here is, you know, for quite some time now, the Fed has been paying back significant rates.

On the money that the [00:16:00] banks themselves keep with the Fed, right, one way to think about the Fed is as a kind of bank for the banks, right? So the banks themselves maintain accounts with the Fed called reserve accounts in the same way that you or I would keep accounts with the private sector banks themselves.

And the Fed pays so called IOR or interest on reserves to those banks for holding that money on the one hand. And then those banks in theory, right? You would have thought might have been able to pass some of that on to us as depositors, but they don't. And there are, I guess, two reasons, right? One is they don't have to.

There's no legal requirement that they do so. And second, there's essentially an oligopoly situation that we have in the banking markets so that there's really not an actual competition underway between private sector banks for depositors that they sort of run in the form of competitive interest rate offerings.

David Sirota: This then raises the question. Okay, so the banks can, I can, let's say I put 1, 000 into a savings account, the big bank can then take my 1, [00:17:00] 000 and literally go deposit it at the Fed. The bank that I've deposited the money in can give me a 0. 4% interest rate or less. The bank can take my 1, 000 and go park it at the Fed and get paid 5% interest on it.

So, of course, then the question becomes, well, why can't I just... Cut out the middleman and go to the Fed and just deposit my thousand dollars at the Fed. Why can't I do that?

Todd Phillips: so the way that Congress set up the Federal Reserve back in 1913 is it is supposed to be the bank for the banks. As Bob said, you know, banks have these reserve accounts with the Fed where they park their own cash. Uh, but Congress made the cognizant decision back then, uh, that they were not going to have the Federal Reserve basically act as a competitor to the commercial banks.

Uh, I think we've all seen just how problematic that is,

David Sirota: I, can I stop you there and just ask you what, what, what, what was the [00:18:00] theory of that? Like what, what was the rationale for not letting us all bank at the Fed?

Todd Phillips: Back then, Congress was really concerned about it looking like the government was taking over the banking system. Um, This is certainly, uh, an issue for another podcast, but the, the Federal Reserve is really an amalgamation of part government, part private sector, uh, the, the banks that are members of the Fed are part owners of the Fed, um, there were, you know, Congress did a lot of things to try to make the Fed not a government institution.

And one of the ways they did this was by saying that the Fed is not going to be a commercial bank to people like you and me. As I was saying, you know, we have seen the consequences of that, where the Fed wants to engage in monetary policy by paying high interest on reserves. Um, but they do not allow you and me and Bob to have bank accounts where [00:19:00] we can get that interest.

Uh, we rely on... The commercial banks that we bank with to, you know, take the interest rates, the Fed is paying them, scrape off a little and pass on the rest to us. But as Bob was saying, you know, there is really insufficient competition in banking services that shopping around, um, is, is near impossible.

You can shop around and you're not going to get anything close to what the Fed is paying. That, that being said, I do want to say, um, Um, the Fed has created, uh, something called the money market fund, , reserve facility. And, uh, it says that money market funds can effectively. Uh, in so many words, bank with the Fed and get those same kind of interest rates.

And so if you take your money out of a bank and put it in a money market fund, you will get higher returns [00:20:00] because there is more competition for money market funds than there is for banking. There are, you know, significant problems with that. Money market funds are, don't have deposit insurance like the banks do.

Um, but there is more competition, ergo you're going to get higher rates.

David Sirota: And, and just to make clear how much the big banks control the deposit market, uh, there's a stat that says just 15 banks now control more than three quarters of all deposits in America. I mean, really think about that. That's, that's an incredible stat, right? An 18 trillion dollar deposit market.

15 banks control more than three quarters of all deposits in the United States. I, I take your point, Todd, I mean, one takeaway that everyone should hear here is that shopping deposit rates on your savings is an important thing to do. And frankly, I think a lot of people have gotten used to not shopping their deposit rates because for so long we were in a kind of zero interest rate environment.

[00:21:00] In the last year, year and a half, two years, that's, that's changed and there are better rates to find. But Bob, I want to ask you this question. There seems to be a collective action problem here. Uh, at the consumer level. We can talk about the policy level in a second, but at the consumer level with millions and millions of Americans having less than what is it?

Two, three, four thousand dollars in savings.

Robert Hockett: Silence.

David Sirota: The pain in the ass of changing banks, right? The paperwork, the shopping, the, you know, learning an online portal, all of that adds up to a big obstacle to simply changing. It's not impossible. It's just a pain in the ass. And the pain in the ass cost of time is.

Not necessarily worth it if you have a balance below five, four, 3, 000, because it's maybe you're going to make a 10, bucks more per year. So the collective action problem is, is that. Is that the threshold is high to move for the individual. They're not going to make that much more, but, but then I go back to the, you know, the idea that we wrote [00:22:00] about in our story, this like Superman three office space scheme where it may not be a big deal to one depositor, but multiply that over millions and millions of transactions, and that's billions.

Of dollars, the Wall Street Journal estimated that Americans have lost out since 2019 at the big banks. They've lost out on almost 300 billion of interest that they could have gotten at more competitive interest rates. So my question to you, which I'm not sure is an answerable question is. How do we get past the collective action problem at the consumer level?

Robert Hockett: There's a pretty easy way around it, David, so I think, first of all, you're quite right that it actually is a collective action problem in Not to incur that sort of pain in the ass, because it's a fairly small game that they stand to enjoy by doing that. But then, of course, that individually rational act on the part of each depositor aggregates when everybody does it into a collectively irrational outcome in the sense that in aggregate, there's a massive deadweight loss, essentially a massive deadweight loss in the form [00:23:00] of a gift to the banking sector.

Here's the easy way around it that I'm just really stunned still that no, that people don't know about this more broadly. So as you know, the IOR, right, essentially what the Fed pays in the way of interest on deposits to the banks always moves in very tight connection with or tight tandem with Treasury rates, right?

In other words, the return on U. S. Treasury securities. And any American Can open an account with the treasury department. They can't do it with the fed just as Todd said, but anybody can open an account with the treasury department through the so called treasury direct system. And if all of your viewers and listeners would actually just Google the name, treasury direct, all one word, but with a capital D, they'll find how easy it is actually to put their money into treasury direct accounts.

In which case they're investing directly in us treasuries and enjoying the rate of return that those treasuries pay. Which, again, is pretty much the same rate at all times that the Fed pays to the banks. Now, that's going to freak out the private sector banks if lots of people do [00:24:00] this. But, you know, so much the better.

That's, that would be good because that would be a form of competition suddenly, in effect, a public option, right? And they would then have to start offering higher interest rates, I suspect, in order to prevent a mass exodus over to Treasury Direct. And as you and I talked about before, David, back in the middle of the pandemic, I contacted both Treasury Direct.

And U. S. Digital Service, which is a White House office and ask them how difficult would it be and how long would it take to convert the Treasury Direct system into a system of essentially peer to peer digital wallets so that we could all not only invest in the Treasury through Phones, but so that we could also make payments to one another across phones and therefore in that sense, have a kind of public banking system as well, a public payment system and saving system on our phones and usds, which specializes in these kinds of upgrades, said that they could do that upgrade within a few months.

So in theory, if the biden administration instructed Janet Yellen to digitize the treasury direct system today, by august or september, we could [00:25:00] all in effect have a public payments platform and a public savings platform accessible as well. On our phones. I call it the digital greenbacks plan in honor of the first version of the U.

S. dollar, which was issued by the Treasury Department for the first 50 years in the 50 years before the Fed was established in 1913.

David Sirota: Now, I'm sure, I'm sure the banks hate that idea. Uh, I mean, they have hated every idea to do public banking. I mean, there's been ideas around there, around Congress about doing postal banking and the like. Um, but this gets, this is a good segue. Into public policy solutions. Okay, you've mentioned Janet Yellen could put in place a system to essentially expand the existing treasury direct system, Todd.

There are other things that could be done as well. I mean, the Roosevelt Institution has put forward a plan to allow people to have fed accounts. We see now in Britain regulators there are talking about ways to get Their central bank, AKA their version of the Fed. [00:26:00] They have the same problem, by the way, they want to get their version of the Fed to essentially mandate that interest rate hikes are passed, to depositors in the form of better deposit rates.

There's also a question of, uh, uh, consolidation. Janet Yellen has floated the idea of banks consolidating even more, which. exacerbate the situation. So talk to us about the different things. If you're in Congress right now and you've never heard of this. Uh, and by the way, the only person I could find who's even talking about this in Congress is Senator Jack Reed on the banking committee from Rhode Island.

But let's say you're in Congress and you're listening to this and you're like, I want to do something like. What can be done.

Todd Phillips: Yeah, there are a number of things. So the thing you mentioned is Fed accounts, uh, very easily Congress could pass a law directing the Fed to allow everyday Americans to open bank accounts with the Federal Reserve or with the regional banks, um, and, and allow you and me and the listeners to deposit your cash there [00:27:00] and get the same.

Interest on reserves that that the Fed pays to banks, uh, you could require that, uh, the Fed's interest rate increases get passed along to depositors. Um, I think that. That might be a little bit, uh, tricky and we can go into why, um, one other thing that we haven't talked about is in the Dodd Frank Act in 2010, Congress required the CFPB to write a rule for open banking.

And this rule, uh, if it's finalized would make it easier for folks with bank accounts to take your data and take your information and basically just take it over to a different bank. It's supposed to make it. It's easy for people to switch bank accounts. That being said, it has been 12, almost 13 years at this point, and the CFPB has still not written that rule.

One thing I would love to see members of Congress do is, is write in to the CFPB. [00:28:00] Ask them, where is this rule? What are you doing to make it easier for people to change banks? Um, that is, is one thing that is already on the books. We are already supposed to have it. Uh, and it's crazy that it's 13 years later and, and we still don't.

David Sirota: That is really fascinating and that is something I want to do more reporting on because it's fascinating that that is on, on the books. Okay, so Bob, I want to, I want you to play, uh, I want to play devil's advocate and I want to hear your response.

question is... Okay, the banks don't want that because the banks are making such big money off of this gap The banks obviously hate everything that you and Todd have mentioned Uh, a public option for banking and the like, or at least having the CFPB make it easier to switch bank.

They don't, they don't want that. Things are great for them right now. But they can't just come out and say, we don't want this because we just like, uh, sitting on top of a giant pile of cash. Right? They have to come up with some public minded argument about why this would be bad. [00:29:00] So, What are they saying?

What? What are the arguments against doing what you're saying?

Robert Hockett: Yeah, so it's the usual style of sort of bull byproduct argument, right? They're going to, they're basically going to traffic in the usual cliches. They're going to say the banks are essential because they essentially transfer money from say, And so they in effect capitalize industry and production and so forth with all of our savings that we sort of virtually virtually save up.

So this is the classic capital accumulation and investment argument. Now, the thing is, that might have actually had a certain degree of plausibility in the 19th century when banks actually were financing industry and the like. But since the 1970s, especially, and it really even before that, but in the 70s is when it really accelerated.

The banks have been much more into making their money by gambling on price movements in secondary and tertiary markets. In other words, stock prices, bond prices, and so forth are constantly fluctuating on the secondary markets and derivatives prices are constantly fluctuating on the tertiary. Markets and [00:30:00] what they essentially do is they place bets on those price movements.

Now there's a, of course, a pejorative term for this. We call it speculation or gambling, but even if we stick to the sort of technical terms, it's not that difficult to see that those are effectively zero sum style operations. They don't add to the productive capacity of the country. They don't grow the nation's material wealth.

Therefore, and they certainly don't grow wealth in any way that has been widely distributed over the population as a whole. And so partly for this reason, I think this is another reason, in effect, to kind of socialize that particular banking function. And the great thing is that even if the banks object to it, there's nothing they can do to prevent all of us from doing a mass exodus right now to Treasury Direct.

Because, again, No new law has to be passed. That's there. Anybody who wants to look into this again, all they have to do is Google treasury direct or Google the phrase, uh, digital greenbacks and my name. And they'll find all kinds of white papers that I put out on how to do this. And of course, what I've talked about [00:31:00] before is what we can optimize that and make it even better.

But the key point for the moment in connection with your question, I think is that even if we did nothing to improve it or optimize it, we could still all move into treasury direct today if we wished,

David Sirota: So Todd, I want to, I want to ask you about the too big to fail effect here because I feel like part of this is, is exacerbated. by the too big to fail situation in this way. I mentioned that stat that the big 15 banks control, what is it, three quarters of deposits in America. And at a time when people have seen headline after headline about regional banks being in trouble, uh, Silicon Valley bank collapsing, first Republic getting, uh, subsumed and almost, well, I guess collapsing and getting, getting consumed by JP Morgan.

People are nervous. About well one, there's a general stickiness of the devil. I know i'm not going to move my money At least I know my bank is fine. I don't i'm just I i'm too scared to do anything But there's also if i'm gonna move my money There's an impulse to say i'm just gonna move it into one of those giant guys [00:32:00] Who I know has the implicit backing of the government beyond the fd Fdic guarantee like the fdic guarantee I think is an ironclad guarantee Up to 250, 000.

There's, there's never been a breach of that in the sense of the FDIC not backing that. So, but, but if I'm going to move into a bank, I'm just going to move into one of the big ones that the government bailed out in 2008 and is going to bail out again. And I feel like, tell me if I'm wrong here, but I feel like part of the problem is, is that those too big to fail banks.

Then they know, listen, we're going to get a lot of money from people just running to security. So we don't have to compete for your, the customer's money by offering better interest rates. Cause you're coming to us because we got the government behind us.

So I guess the question is how much does the government's too big to fail guarantees distort the situation and actually make it worse for the average depositor.

Todd Phillips: Yeah, I think that's absolutely right. J. P. Morgan, after buying, uh, First Republic's assets, now I think has [00:33:00] 13% of, uh, deposits in this country, which is just an incredible, staggering number. And you're absolutely right. The government is not going to let J. P. Morgan fail. Uh, if you want to make sure that your money is absolutely safe, uh, I think we can all safely say, J.

P. Morgan is absolutely safe. Same with Bank of America. Same with some of these other, uh, behemoths that being said, they know that and are not going to pay you a competitive interest rate because they know that, they have deposits coming to them. They don't need to do anything. I'll also say one of the things, you know, Bob mentioned how they are.

The large banks are all just speculating on price changes. Um, I will say that it is some of these The largest institutions are the ones, the big Wall Street players are the ones who are doing this kind of speculation and are not necessarily, uh, turning around and taking your deposits and using them in a productive manner.

I [00:34:00] will say, you know, it is the smaller institutions such as the community banks and credit unions who are doing that, who are taking your deposits and are lending them to the corner store or someone down the street so they can, Uh, you know, build up a shop or something like that. Um, if you want to have your money used productively, go with a community bank.

But, as we've said, the downside is that a community bank doesn't have that same too big to fail guarantee. Um, I think folks are really between a rock and a hard place. And, uh, what the government, in my mind, needs to do... Is needs to make it so that there is no too big to fail guarantee I'm, not saying that we should just let jp morgan the 13 percent of deposits bank fail.

I do think that we need to undertake an active strategy Of making the institution smaller so that if it does end up failing, um, it won't have the same kind of systemic ripple effects [00:35:00] that caused it to have that too big to fail subsidy in the first place. Um, there are definitely things that the government can and should be doing to bring more competition to this market and to make it an even competitive playing field.

Um, they just haven't. done those things yet. And you and me and Bob and all the listeners, all the depositors are, are paying the cost.

David Sirota: Right. And again, I think a lot of listeners, they're thinking, I got, you know, I got a thousand bucks. I got 2000 bucks in savings, right? That the average American, I forget what the number is, certainly less than 10, 000 bucks in savings, right? It may only mean 50, 100, 200, 250 bucks over the course of a year.

I should mention that's over the course of one year. I mean, over the course of 5, 10 years, it can add up to some, to some real money. But again, this collective action problem where it's just such a pain in the ass to move.

And look, I, I should mention, a trillion dollars in deposits have moved out of the traditional banking system in the last year, year and a half. At least some [00:36:00] people or businesses are looking for better rates and, and frankly, I think that's good.

Competition is a good thing. Let's say that average deposit rate moves up, right? It's not 4%, let's say it's 1%. One and a half percent. I think actually in Britain, it's actually interesting. They're freaking out because the central bank, interest rate is 5%. And the average on demand savings account there, they're getting like 2%.

Like they're, they're in a much better situation as far as I can tell than we are here. And right there and their regulators are talking about actually doing something. It's like a real issue in the public's consciousness over here. The central bank is offering 5% to the banks and the average saver is getting 0.

4% like, and, and it's still kind of off the radar. I mean, that's a whole separate question about the difference between American politics and British politics. But I guess the question is, is let's, let's say we wave a wand. Things are better. Depositors are getting a better rate. Banks don't get so much money.

For free. Is there some kind of unintended consequence that ends up being bad for [00:37:00] another sector of the economy beyond just, you know, the banks don't get to rip in as much profits as they're making? Like, it's bad for small business some way, or it's going to raise borrowing costs some other way.

I'm just trying to think through all the all the possible ramifications here. If Depositors start getting treated more fairly.

Robert Hockett: Yeah, no, I think I think it's a great way to approach the problem and I don't I don't actually see, uh, any. Undesirable unintended consequence. I mean, the only people who would stand to lose something by this are the big Wall Street institutions, the speculators and the like. And those are people who we don't necessarily on a not out of, you know, some kind of spite.

Do we want to see them suffer? But they're the folk who we figure can probably afford to lose a little bit in return for the gains of some others. I think Todd's point, for example, was colossally important, right? The idea that the regional banks, the smaller banks actually do do more productive investment, unless it's a purely speculative stuff.

And that's one reason that you and I back in March, David talked about universal deposit insurance, right? So that we could eliminate that [00:38:00] Hobson's choice so that people could keep their money with those. Middle sized banks that actually do the investing if basically there were a bit of an exodus in response to something like that from the large Wall Street banks to now entirely safe, but not because of bailouts, but rather because of universal deposit insurance.

If more people were to move their money into those back into those banks, you'd see a bit of a productive renaissance. It's something that would be nice. Since we're talking about building back better, and we would see, of course, an exodus of somebody out of the speculative institutions. And so they would lose something.

But again, that's good, because those firms are actually destructive to the American economy. And then, if, in addition to that, we did the, um, uh, the treasury direct digitization thing, you'd have a public option that lots of people would avail themselves of. And again, That's good. Some of the banks would suffer in response, but again, they're the precisely the ones who ought to suffer a bit in the sense that, you know, they ought to, uh, there ought to be some losses that they incur on behalf of the rest of us.

And there are 22 draft bills on [00:39:00] both of these things, right? You'll remember we talked about my federal deposit insurance completion act of March, which quite a few Dems and Republicans in Congress have been talking about Joining forces on. And then the thing that would do the treasury direct upgrade is called the treasury dollar act.

And those are both on the web. Anybody can look at them. It'd be so easy to do, but we don't even have to wait because as we talked about before, people could begin to move some of their funds already into treasury direct. Um, and then if we can, you know, get that deposit insurance taken care of, a lot of people I think would feel safer to go ahead and put a lot of their money back into those regional banks that Todd, I think quite rightly pointed out, do do productive investment in that more traditional way.

Thank you.

David Sirota: Bob Hockett is a lawyer, law professor, and policy advocate. He's a professor of law at Cornell Law School. He's also a former official at the Fed, and Todd Phillips is a fellow at the Roosevelt Institute and a former attorney for the Federal Deposit Insurance Corporation that guarantees your money below 250, 000.

Todd and Bob, thank you so much [00:40:00] for taking time today.

Robert Hockett: Great to be with you, Todd. Great to be with you, David.

Todd Phillips: Thanks for having me.

David Sirota: That's it for today's show. As a reminder, our paid subscribers who get Lever Time Premium, you get access to our weekly bonus episodes, like our interview from this past Monday with climate scientist Dr. Andrew Pershing about attribution science and how it can help curb some of the worst effects of climate change.

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The Lever Time Podcast is a production of the Lever and the Lever Podcast Network. It's hosted by me, David Sirota. Our producer is Frank Capello with help from the Lever's lead producer, Jared Jackang Mair.