EPISODE 418： SILICON VALLEY MELTDOWN - US BANKING SYSTEM DOWNGRADED TO NEGATIVE ON BANK RUN FEARS
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Summary
Mayor Glenn Jacobs of Knox County, Tennessee joins Jack and Jack to discuss the crisis in the banking system and what it means for the future of the economy and the stock market. Mayor Jacobs also discusses the role of the Federal Reserve and its role in the current financial crisis.
Transcript
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these investor service has downgraded the entire U.S. banking system to a negative outlook from
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stable, citing a rapidly deteriorating operating environment. It added that banks with unrealized
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losses are under particular pressure. Joining us now with the latest is Yahoo Finance's Julie
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Hyman. Hey, Julie. I mean, I guess on that last point,
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tell me something I don't know. We've all come to realize over the last few days,
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unrealized losses on certain bank balance sheets once they are forced to realize those losses
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become a problem. So just to talk about what exactly is happening here, Moody's coming out
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with this note late last night, but it was only just released publicly in the last hour or so.
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The headline on this note, Outlook Change to Negative on Rapidly Deteriorating Operating Environment.
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And the Moody's analysts behind this saying that they made this call on the U.S. banking system,
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that there are concerns here, even despite the actions that the federal government took over
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the weekend to try to shore up the banking system. Well, ladies and gentlemen, welcome aboard today's
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edition of Human Events Daily, powered by Turning Point USA. We're very excited to have a special guest
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on with us to go through all of the insanity that we're seeing from the U.S., the banking system,
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the stock market being hit. Moody's now degrading the entire U.S. banking system to negative,
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not just SVB, not just a couple institutions, the entire system citing, and I quote,
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rapidly deteriorating operating environment. And our guest tonight, very excited to have him on.
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And he's someone that I've followed for several years on economic issues and a lot longer than
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that on a slightly different issue set, shall we say. It's Mayor Glenn Jacobs from Knox County,
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Tennessee. Mayor Jacobs, thanks so much for being on with us today.
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Hey, thanks for having me on, Jack. I greatly appreciate it.
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Well, I really appreciate it. Now, when we're looking at something like this, for the folks at
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home sitting back, you've got money in your bank accounts. People are starting to wonder,
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should I go take the money out of my bank? Can you contextualize for us where things are from
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your perspective and how we got here? Well, unfortunately, if we look at the big picture,
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really the overall banking system and overall finance system is built on a fraud. It's built
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on fractional reserve banking. In 1971, you know, Richard Nixon took us off the gold standard,
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which just allowed all sorts of undisciplined actions coming out of the federal government from
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the federal reserve. And this is what happens. You know, all the booms and busts that we see
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throughout our economic history are the result of printing money and then inflation starts to take
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off and it's causing pain to the consumer. So then you start contracting the money supply, which causes
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a crash. And then you look at the investment going into parts of the economy where it shouldn't and
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what economists call malinvestment. So there's a lot of issues, unfortunately. And this is something
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that, you know, ultimately, I hope that we get through this intact. But nevertheless, it can cause
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a lot of pain for a lot of people. I don't think anyone is immune from what could potentially happen.
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No, I think you're exactly right. And that idea of malinvestment, it's this thought that,
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well, if we're just going to shore up a couple of banks, we're going to shore up a couple of
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institutions. But at the same time, what you're doing is you're throwing good money at bad
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investments. And you're not teaching. And this is something that I find it's such a breath of fresh
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air that you talk about, because I hear a lot of people on the right say, well, we got to protect
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the companies. We got to shore things up. But that's not actually a free market system, is it?
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No, absolutely not. If we look at 2008, and what happened, and of course, and again, don't get me
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wrong, this is a serious situation. 2008 was a serious situation. There's a lot of pain. We all
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need to understand that. But it's almost like people think that, say, when the card manufacturers
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were bailed out, well, if we don't do this, they're all going to go away. No, they're not. What's going to
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happen is those assets are actually going to be able to be acquired much more inexpensively by
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better operators. And in a market, losses are as important as profits, because what losses reveal
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are mistakes that are being made, have been made, and also incompetence in management. And what needs
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to happen, of course, is you don't keep on repeating those mistakes. And that's where we're going right
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down that road again. Oh, we need to do this. And this will be the last time. And, you know, then
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everything's fine after that. Well, this has been a cycle that we've seen time and time and time
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again. And I see people now talking about, don't worry about moral hazard, and don't worry about
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learning lessons. The reason we're in this situation is because we haven't learned any lessons.
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And at some point, you can't just keep on papering things over, which is what's been happening for a
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long time, especially since 2008. It's just been ramp up the printing press, you know, try to throw out
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as much phony money as we can to paper over the economy and everything will be fine. There is a
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consequence to that. No, that's exactly right. And we're coming up on a break here. But when we come
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back, I do want to get into some of these issues, because we've actually been talking about recently
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here on the program, we had another guest on Raheem Kassam, who was talking about how a lot of the
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government decisions that we've seen since specifically 2008 have been because there's been a lot of this,
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you know, call it, you know, papering over, call it printing presses, we've been calling it funny
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money, that the funny money has just been floating around in the system. And it's causing decisions to be
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made, whether it be foreign policy, whether it be domestic economic policy, whether it's on trade, that
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it's actually causing the wrong signals to go throughout our entire system. And that, of course, because
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and we all know that there are people, there are politicians that are getting donations, we know there's on
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both sides of the aisle that are benefiting from this. So they're perpetuating this longer and longer. And at some
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point, right, at some point, we are going to have to pay the piper. And when the Fed hikes those interest rates,
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like we just saw over the past year, whatever is in a position of vulnerability is gonna go boom. And that's
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exactly what we're seeing right now with Silicon Valley. Stay tuned, we'll be right back. Mayor Jacobs
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And we're back. Human Events Daily with Mayor Glenn Jacobs out of Knox County, Tennessee. Mayor Jacobs,
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when we last left, we were talking about this idea of bad signals, false signals being sent throughout
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the entire system. And you talked about price signals and the importance of price signals. Can
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you break that down for the audience and explain what's going on there? Well, sure. A great example
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of how important price signals are is the Soviet Union. They didn't have any. And their economy is
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incredibly ineffective, incredibly burdened by just every possible inefficiency, political decisions
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being made. So on one hand, you'd see in warehouses, you'd see plenty of whatever good, but then it
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wouldn't go out to the market for whatever reason. Okay. And you just had all these inefficiencies and
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ultimately that helped crash their entire country. And that's what entrepreneurs in market look at is
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that's how you make decisions. Okay. I can make money here. I'm going to lose money here. So I'm
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going to put more money into this. Right. And then when that starts going up and more people will get
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into it, then this over here will start dropping down and there's opportunities over here. And that's
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really how resources are allocated in a market. And that's what a free market economy is. It's
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allocating resources and it uses price signals to determine that. The problem is when the money is not
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sound, those price signals just go all over the place. And then that's when you start seeing
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entrepreneurs who are generally really good at forecasting the market and predicting what's going
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to happen. But what you've done is you've taken away their barometer for figuring out, okay, this is a
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good investment. This is not a good investment. And kind of what happens is it looks like everything
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is a good investment because there's just all this money flowing in. And then as you said, what happens
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is it's revealed that no, this is as a terrible investment. And once that starts to contract,
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all of that is essentially destroyed through the market. So yeah, prices are people price
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are the bedrock of a market economy. A hundred percent. And so some people then start realizing
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this. So we saw like, for example, at the end of last week, it was Peter Thiel of not the regulators,
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right? Not the government, not, uh, you know, not the California state, you know, Gavin Newsom or any of
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this, no, it was Peter Thiel, a Silicon Valley investor himself, one of the most heterodox
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thinkers in Silicon Valley, by the way, he came in and said, we got to get out of this thing because
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this thing is crashing. And then suddenly everybody saw what was going on because I think you had a
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little bit of a little bit of follow the leader going on there, but it's, it just blows my mind
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that you have all these systems in place that are supposed to be tracking all of this on a regular
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basis. But I think a lot of people, they point to things point to things. I'm seeing this on the
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right too, where people are saying, you know what, it seems like a lot of these banks and specifically
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this bank signature bank that was out there, they're focused on going woke. They're focused
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on pronouns. They're focused on ESG ratings. And this whole idea of an ESG rating for your investment,
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which is it's, I guess it's interesting if those are your issues, but that kind of takes you away
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from what you just pointed out, these price signals, doesn't it? Yeah. And then also you look
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at Silicon Valley bank and from everything that I can gather, you know, it's, there was not great
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management. They did not hedge their interest rate risk. It's interesting because Jerome Powell,
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who is chairman of the federal reserve recently said that higher interest rates will not have an
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impact on bank risk. Well, see how that turned out for you in this case. Yeah, not so much.
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But, but you're exactly right. And often it's, it's the individual entrepreneurs that people have
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money on the line that can say, wait a second, there's something wrong here. What's going on?
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And then also you look at SVG. I saw a statistic today. There's about 130,000 tech startups in this
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country. 65,000 of them had loans with SVG. So it was Silicon Valley, not only Silicon Valley bank,
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it was Silicon Valley's bank, but it appears that it was pretty, um, non-diversified as far as the
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investments and the loans that they were making. Well, and, and someone, and I've seen, and on
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Twitter, there've even been people coming out and saying that in fact, they tried to tailor their
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services so that they could be a one-stop shop for all of Silicon Valley, all of what they call
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founders. Um, and so that they were doing, they were doing housing loans for, if you were the CEO
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of a tech company, they were doing personal loans. It wasn't just business stuff that they were mixing
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all of these different products together and that they would go above and beyond even offering lower
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than market rates on a lot of these loans. But here was the flip side on the backend was that you had
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to make sure that your company's money had to be deposited with SVB, which to me, that doesn't
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sound like banking. That sounds like another type of a, that sounds like a scam. Yeah, absolutely. Um,
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I think as we go forward, obviously I'm not a regulator. Um, but I think more and more stories
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will come out about how they were really doing business and, um, uh, you know, how that has impacted
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this failure. Uh, and, you know, we still have contagion out there as far as with derivatives
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and the banking system. So interconnected. So no doubt, this is a very, uh, important time,
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which should cause all of us a lot of trepidation. Now, what about the role of regional banks in
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general? So this idea that, so this, they're trying to say that, okay, it wasn't just the Silicon
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Valley bank, but it's actually a regional bank. So what role do regional banks play in this system?
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I, for example, down, down Knox County in Tennessee, are you, are you experiencing any
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of this pressure? We have not. Um, you know, when you look at the banking system, of course,
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you have the commercial, the money center banks, which literally do business with the federal
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reserve, and then they're kind of the core and then it kind of goes out from there. Um, and also
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when I say that, you know, fraction reserve banking, uh, and the issues that causes, we can't
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blame the blank, blame the blank, excuse me, blame the banks for that. Uh, the reason is they're all
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trying to compete and this is the system that's been set up. And if they don't engage in those
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practices, they're not going to be able to be competitive. Um, so it's really the system that
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we need to be looking at and not just pointing to, oh, this is an issue at this bank and this bank.
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Yeah. I think in the case of SBB, there were some serious issues, uh, but I don't think that any
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organization is immune just because of the way the system works. No, I think it's exactly right.
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Mayor Glenn Jacobs, we're going to come back with you here in our very next segment, our last segment,
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because I want to talk about the bailout. I want to talk about what message this sends to people
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that are out there. Stay tuned. Human events daily coming up next.
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We're back here. Final segment, human events daily. Now, mayor, I wanted to ask you about the role
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that we're seeing of, and they're not calling it bailouts, by the way, you can't call it a bailout
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anymore. Now, now it's a backstop. It's a, it's just a, just a liquidity increase. I mean,
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they're just coming up with every name under the sun, but I got to tell you from the perspective of
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the regular guy out there, the regular family, it seems like it has this appearance and this,
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this, um, that this per this perception that here's an elite bank. It's Silicon Valley.
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This is a bank that obviously a lot of political donations go through here.
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They're getting bailed out. Meanwhile, prices, and we just saw the CPI index this morning are going up
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across the board, especially for guess what? Oh, housing and essential essentials, right? It's down
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in a couple areas, but housing and essentials are up. So, you know, the things that people actually need
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every day and it just feels like it's another squeeze on the little guy. Like the little guy
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is just getting squeezed out completely. You might even might even say choke slammed. You might,
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you might use that as a phrase. I don't know if you know anything about that, but, but, but what is,
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what is really going on there from, from the perspective of the little guy and, and these bailouts?
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Yeah. I don't think it's fair, uh, for the average person out there. I mean, we're talking about $250,000
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and everybody knew that going in. I feel bad for the depositors. You know, obviously when you put your
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money in the bank, you think that it's going to stay there forever and be safe. Uh, but we should
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all be aware that with your FDIC insurance is $250,000 limit. And that is what it is. And now we're
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retroactively saying, Oh, we're just going to cover everything. And I've seen things of, uh, up to
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$10 million for FDIC coverage. Well, here's something to keep in mind. The FDIC doesn't
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really have much money. Okay. I think in total, it has access to about $225 billion. The problem is
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the banking system is $22 trillion. So right now the FDIC, hopefully this would never, ever happen,
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but the FDIC can only cover about 1.26% of bank accounts across the country. Well, look, it's
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never going to work if you're talking about increasing that, that, uh, deposit limit by 40
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times. Um, and I don't think most people can wrap their head around a $10 million limit. So obviously
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these are people, uh, that were people of means. And it's, I think very difficult for the average
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person out there, who, as you said, who is struggling in many cases to pay their bills
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because inflation is crushing everyone, turn around and say, Oh yeah, we're, we're going to,
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yeah, maybe it's not a bailout and that you're not bailing out the bank, but nevertheless, uh,
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with the depositors, uh, we're going to make them whole. And, uh, that that's going to cost a lot of
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money. And the average person just doesn't have the political ability to say, well, what about us?
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You know, and, uh, what are you going to do about all the issues that we're suffering with?
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Well, Kevin O'Leary from, from shark tank, he was on CNN last night and he just came out and said,
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look, it, it feels like Biden is, is nationalizing the entire banking industry. Because if you're
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telling people at that, to your point that your deposit is backed up to an unlimited level,
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that it doesn't matter how much you've got in the bank, that FDIC is going to cover all of that.
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Well, guess what? There's only a few ways the government's ever going to be able to do that.
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There's only, and the federal pretty much only has one trick at this point to, to be able to get that
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money going. So when you talked about, you talked about price signals, you talked about the markets,
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you talked about, you know, it's, it's almost like we're the flip side of the Soviet union in terms of
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this, because they didn't have money running around. We've got nothing but money running around
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chasing all these different goods, but we're not using the, the language of price essentials. It's it's,
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we've got, we've got unlimited supply, but the demand is, is, isn't being met.
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Well, that's exactly right. And that's what Milton Friedman would say is the definition of price
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increases. Inflation generally is when you have more money than available goods. And, you know,
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obviously with inflation, economists, economic advisors, those people love it because they're able
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to control the economy. I believe that's actually kind of a form of alchemy, right? That you put
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money into the economy, you print a bunch of money, the economy booms, then inflation starts to get
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uncomfortably high. You pull down the money, the economy retracts, you know, and that's how things
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go. The problem is along the way, as we mentioned earlier, you have all these malinvestments throughout
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the economy, which burdens it within efficiencies. So yeah, the, the issue ultimately is we've printed
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way, way, way, way too much money. And that's coming home to, to roost now. And then of course,
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you look at interest rates and what's happened there. And the fact that, um, you know, the Fed
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thought that they could raise interest rates to help mitigate inflation without considering some of
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the things that that could cause in this case, uh, putting interest rate risk on banks and
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potentially, uh, hopefully this doesn't happen, but causing a cascade of bank failures.
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Well, I think that's exactly what Moody's is probably looking at right now, because they're
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saying they know that at some point the Fed is going to have to try to fight inflation.
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But of course the Fed is now caught between a rock and a hard place, because if you actually
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want to fight this and, and, you know, I like, I like your phrase that it's like alchemy of them
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trying to control the economy. It reminds me of, uh, you know, Mickey Mouse and Fantasia when he's got
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the brooms, you know, dancing around that eventually that's all going to fall apart. So either
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you, they're not going to stop printing money, but they might stop giving it to some of their
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buddies or you're, you go and hike interest rates again to try to fight inflation. And then guess
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what happens, right? Then you're going to get more failures because we saw this in the eighties. We saw
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this in, at the end of the nineties, we saw this in 2020 and you're going to see it again here if we
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hike interest rates again. But it, it, it, it shocks me that these people thought that they could just
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continue going on business as usual, even though we know that Powell was talking about hiking rates
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for at least a year at this point, he's been putting it out there.
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Yeah, absolutely. Uh, ultimately, you know, we have a situation here again, because of prices and
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because of all the things that our economy, uh, with all the money that's been printed, um, in order
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to remain competitive, in some cases you have to do this and you have to take risks. And then, you know,
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the old saying of everybody looks good until the water goes out and you realize who's naked.
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And, uh, unfortunately with our system, it doesn't reward caution and it doesn't reward, uh, actually
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being a good steward of investment and of people's money. It rewards risk. And then you realize if you're
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big enough and you have enough political pull, you can get the politicians to socialize that risk
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while you've privatized the profits. That is not a free market. That is crony capitalism at its
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worst. Look, I think it's great that, that we're hearing people and even elected officials,
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such as yourself, start talking about this. I mean, I remember, and we were playing,
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we played on the show yesterday that that old George W. Bush clip, which was by the way,
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completely scrubbed from the internet. You can barely even find this clip out there anymore,
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where it's George W. Bush, December, 2008 on CNN, sort of one of his like exit interview from the
00:22:27.420
presidency saying, well, you know, we had to, we had to abandon the free market principles in order
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to save the free market system. And I, I think that that signaled that there, that there was something
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very wrong with his brand of economic policy. And that even from someone who's, you know, you know,
00:22:49.120
on a free market side that this, this ain't the guy. Yeah, no, in a free market, you have to have
00:22:55.260
losses and you have to allow that to take place. You have to allow the liquidation of bad investments
00:23:02.780
to take place. If you don't, you cause inefficiencies in the economy. And then you also
00:23:08.660
cause huge moral hazard, which is what's going to happen now. As you mentioned earlier, if we just
00:23:13.140
say, okay, bank accounts are, there's no limit to how much they're protected. Well, what's the
00:23:19.860
incentive for anyone to actually look out for their money or take care of their money? There is none.
00:23:23.660
If you know, the feds are going to step in and fix the whole thing for you or try to fix it.
00:23:28.120
Exactly. Right. And it's going to be risk after risk after risk. And at the end of the day,
00:23:31.760
it's going to be the American people that are left holding it back. Mayor Glenn Jacobs,
00:23:35.380
thank you so much for joining us today. Where can people go to follow you, get your coordinates?
00:23:39.400
Well, thanks so much, Jack. I appreciate it on Twitter. It is at Glenn Jacobs TN. So that's G L E N N
00:23:46.360
J A C O B S T N. And then I'm also on Facebook, uh, as well as Instagram. And it's, that's the same
00:23:53.100
user name, the same handle, uh, G L E N N J C O B S T N.
00:24:00.040
Appreciate it. Thank you so much, Mayor Jacobs. Ladies and gentlemen, as always,