Transcript
This isn't your average business podcast, and he's not your average host. This is The James Altucher Show. So, Omid, I don't know if you know Cal Fusman. He was an editor at large at Esquire. He he interviewed everybody from Gorbachev to I always think of Gorbachev, but all everybody on down from Gorbachev. And Larry King and Cal had breakfast every morning for, like, 700 years. So he's he's the interviewer's interviewer and super smart guy. And Cal Omid has written books about crypto. He was really responsible for crypto at Citigroup, like, was one of the top guys for helping Citigroup figure out the crypto landscape. And Omid and I have worked together since 2002, Omid, or 2003. Yep. Sounds about right. And, pleasure to meet you, Cal. And it's great to be here. Thank you. I just thought I was gonna be a fly on the wall, but I'm so grateful to be able to participate. But I I'm gonna be listening for a while because I gotta get caught up on stuff. Yeah. And, Omen, I was thinking I would give, like, a brief explanation from the banking viewpoint of what has happened recently. Just like in layman's basic terms because I think the media is fanning a lot of different flames, and I just wanna put it in perspective. And then I I would love then to hear and maybe even challenge your perspective from a crypto viewpoint. Sounds perfect. Let's do it. And and, Cal, when when I describe the bank stuff, feel free if you have any questions. I'm just gonna go really 10,000 feet high at first, and then we'll see, you know, where it lands. But we all have been seeing the news. I just saw 2 headlines back to back this morning. Banking system could collapse within the next 24 hours, and the other headline was everything's fine. Don't worry. And so the truth is, a, nobody knows, and b, the answer is probably somewhere in the middle. But to understand why it's important to know what the basic basic business model is of a bank. People give money to a bank. When you put money in a savings account, you get, you know, the bank's obligation is to maybe pay you 1% interest per year. Then the way banks make money is they take all that money and they lend it out or they buy treasury bills that give them 3% a year. And they give you your 1%, they make 3%, and they their profit is the 2% in the middle. I'm oversimplifying, but that's it. So they're buying treasury bills all day long, all year long. The problem is the Treasury bills they bought last year are crap right now because the Federal Reserve has raised interest rates at the fastest rate in history. So if you are sitting on Treasury bills that have a 3% dividend or a 3% yield, why would I buy one of those when I could buy new Treasury bills that are yielding 5 or 6% because of rising interest rates? So in a sense, what's happened is when there's a run on the banks, meaning more than 5% of the banks' depositors want their money back, the bank has to start selling these treasury bills at a significant loss. Because again, remember, the treasury bills they bought last year are worth a lot less than they were were a year ago, because nobody wants to buy those treasury bills unless you give them a deal. So the banks are losing money on every treasury bill they've bought until the past month or so. Because all those treasury bills are losing money. That wouldn't be a problem normally because eventually, the treasury bills will pay all of their money over time with interest. Like the US government is a safe entity to lend to which is what a treasury bill is. It's a loan to the US government. So the in the long run, all these treasury bills are fine. But short term, they're all losing money. So when there's a run on the bank, again, more than a few percentage of depositors want their money back as equivalent to a run, the banks have to start losing money by selling treasury bills at a loss. And so that's, in a sense, what is happening. There is a lot of people depositors who want money back from let's say Signature Bank, which is one of the banks in trouble. Signature Bank doesn't have the cash on hand because they invest all their money in super safe treasury bills. So they have to start selling these treasury bills. They have to admit that they're losing money doing it, and then they actually run out of money and they go under. This is a little different than 2,008 because banks then were buying super risky things, not super safe treasury bills. They were buying credit default swaps on mortgage backed securities and whatever. But that's, in a sense, what's happening. It's all a lot of it is psychology. If there's no run on the banks, there's no problem. It's the run-in the banks combined with the Federal Reserve. They hiked interest rates so fast you couldn't adjust for the risk. Nobody could anticipate how fast they're gonna raise interest rates, and this is what's causing the problems with the banks. And if everybody believes that all the banks are bankrupt, there'll be a huge run and then the banks will be bankrupt. If everybody believes that it's safe, there won't be a run and then everything's safe. On paper, all the banks are probably bankrupt right now because of of the Federal Reserve situation. So that's the short term summary, overly simplified of what's happening. Like, Omen, would you add anything to that? Like, I've left out the crypto angle because there is an important crypto angle. The only thing I would add is that this particular problem impacts small regional banks a lot more than the big systemic so called too big to fail banks because those banks have very large and very diversified balance sheets. Plus a lot of their depositors tend to be more sticky in part because, you know, the second we designate a bank as too big to fail, you don't worry about Iran because in the case of Iran, everybody expects and has expected for since 2008 that the government would intervene and bail them out. So the problem here in the US has been that small and regional banks, which are perhaps not too big to fail but still had significant deposits over the FDIC insurance limit, are the ones that have experienced runs. But as we've learned before, once a crisis starts, who knows where it'll spread? So as of this weekend, what began as a regional banking crisis in the US has now taken out effectively one of the world's biggest banks, which is that as of this weekend, the Swiss government engineered a shotgun wedding where UBS bought Credit Suisse. Yeah. For for 3,000,000,000, which is similar to when like, in 2007 when JPMorgan or or early 2008 when JPMorgan bought out Bear Stearns for a dollar and, you know, there was arranged weddings back then as well. And that was considered the canary in the coal mine, which led to later Lehman Brothers. There's some history there too though where, like, when long term capital was blowing up in the nineties, all the banks got together to bail long term capital out, except for Lehman Brothers and Bear Stearns. The 2 only 2 banks that were not bailed out in 2008. So Wall Street had its revenge. And so the crypto angle here is is Wall Street and the government aiming at crypto friendly and VC friendly banks the way they aimed at Bear Stearns and Lehman Brothers. In a way, yes. And I think this is going to, in time, turn into a scandal, or at least it should because well, first, I wanna acknowledge all financial crises are always multivariate. There's never one specific cause. Right? Like, even in 2,008, yes, the housing bubble and the banks doing too much risky lending was one factor, but there were multiple factors. And this current bank run that we have, you laid it out well, James. Part of the problem is that banks bought a bunch of treasuries last year that are now trading down, but the multivariate part is also that all of these banks had an explosion in deposits during COVID because the Federal Reserve printed a lot of money, while simultaneously trying to suppress interest rates. So all of these small and regional banks saw their deposits swell, and what banks do is they invest deposits in things like treasuries, but then they were forced to buy treasuries. Not forced, but they chose to buy the only treasuries available were the ones that paid extremely low interest rates. And then when the Fed started raising interest rates, then the assets out of their balance sheet fell in value. So now the crypto part. Oh oh, no. Let me let me just quickly add to what you said. A a lot of banks are being accused now of not having appropriate risk management, but it's just I just don't believe that's true because you couldn't, you know, banks try to hedge their risk a little bit, but you couldn't have anticipated the speed with which the Fed would raise interest rates. So if you thought you hedged your t bills at 2% when interest rates were 3%, well, what happens now when they're 4%, Now your hedges are losing money and your treasury bills are losing money. So they the thing about hedging is you're taking on twice the risk for half the money, and it really is twice the risk. I think that's fair. Even I believe people have pointed out how even the Fed's own so called dot plot where they project their own future actions did not anticipate the extent to which they ended up raising rates in the past 12 months. Although, I wouldn't fully let bank risk managers off the hook either. At the end of the day, if you are going to be a private entity that is taking risks with people's deposits, you bear some responsibility for all potential outcomes, however unlikely they might be. But but I would say, like, with Silicon Valley Bank, and this is an interesting point. This is the multivariate part. On the one hand, we could say it was targeted because Wall Street doesn't like venture capital and crypto. But the one place where Silicon Valley Bank didn't take appropriate risk management was they have a very unique set of depositors, like large venture capitalists who themselves, like, if a few of them withdraw money at the same time then Silicon Valley Bank's in trouble. They're not as diversified in their depositor base like a small regional bank might be, who has mom and pop banks at the small regional bank and, you know, big big venture capitalists that have been pulling their slowly pulling their money out of Silicon Valley Bank for the past few months. They knew all along there was problems and there was this sort of risk, and Silicon Valley Bank did not account for that risk as well as they could have. And this is one of the important lessons of history about the need to diversify a bank's client base. And it's a particularly American problem, James, because in America, for various reasons, we happen to have thousands of small banks, in contrast to Europe or even Canada where there tends to be fewer larger banks, which there are downsides to that, but one of the upsides is that the banks have more diversified deposit bases. So in the case of Silicon Valley Bank for tech in general, but also the crypto friendly banks, which was this for a bank like Silvergate. This was even more true. The risk of having a concentration of deposits from one industry is that the health and soundness of your bank is now tied to the health and soundness of a single industry. Yeah. So and and one one final question about just on the banking side. The problem with this model as opposed to 2,008 where the the the securities that the banks owned were actually very risky assets, like, you know, triple mortgage backed securities. But with Treasury bills, they're actually really in the long term is no risk. You're going to get all of your money back. 100% chance you're gonna get all of your money back with interest. Just not as high interest as the interest rates are, but if people just wait you're gonna get your money back. But the problem with the bank is if a depositor wants their money back you have to give their money back that second or day. So here's the question I have. If I were the Federal Reserve and there was a run-in a bank, I would simply loan the bank full value of the Treasury bills they own, and also I would get equity in the bank. Just like in 2009, they took they took some equity. You know, and the deal is I'm gonna sell off the equity when it's at at a profit and, you know, so I don't nationalize the banks. But that seems like a good backstop just against treasury bills. So this way, banks are encouraged to buy treasury bills, and they know they have a loan for the full because the loans are totally a 100% safe, they know they have a loan available to them if if there's a run of the banks. But there's a cost, there's a consequence, the Federal Reserve gets equity. The US government gets equity in the bank. So the first half of that equation is already true that last Sunday, the Federal Reserve did announce a new facility that does exactly that. It allows banks to go and borrow against their treasury and potentially agency securities at par as if they're were still trading at a 100¢ on the dollar. Perhaps not surprisingly, though, the Federal Reserve is not taking any equity or warrants to benefit from the upside of this or for taxpayers to benefit on the upside of this. And this leads to this whole other conversation as to what do we achieve when we just go from one bank bailout program to another, however justified they might be. Which is why I think there needs to be consequences, and the US veer into national nationalizing banks and and fascism where business and government are combined, which really is definition of fascism by the way as opposed to whatever everybody thinks about fascism. So I think that part of the equation is important, but you're right. They they are opening up the the lending window to lending at par, which by the way, prevents the run on all the banks like everyone is afraid of. Like, they're this is not as bad as 2,008. Like, this situation is already resolving itself, although, correctly, people are nervous. That's correct. And I never thought it was going to be as bad as 2,008 because in some ways, we've been on this road for decades where in the United States and, frankly, most of the developed world, we just don't let banks fail anymore, and we certainly don't let depositors lose money anymore. And, you know, correctly so because it's the government's fault the banks are so underwater on their treasury bills. Like, why is the Federal Reserve I mean, basically, every bank this second is technically bankrupt on paper if there was a run because of the the Federal Reserve raising rates so fast. So they got what they wanted. They we have a systemic potentially systemic crisis if people psychology turns that way. Yeah. I mean, the Fed certainly deserves a lot of blame, not just for raising interest rates as rapidly as they did, but for suppressing interest rates for the many years that they did, forcing banks, even the banks that wanted to be conservative a year or 2 ago. You know, like, there are few things more conservative as you pointed out earlier as US treasuries, but it just so happened that US treasuries paid almost no interest a few years ago even if you went out the yield curve to 10 30 year bonds. So this blatant suppression of what has been the normal financial situation for, frankly, most of history, which is that there's such a thing as an interest rate. And then short term interest rates might be 1 2%. Long term interest rate might have been 5 6%. The Fed and other central banks collapsed that, which put a lot of these banks in a precarious situation, particularly during COVID when their deposits swelled, and they had no choice but to park that money in low yielding bonds. Well, you know, it's interesting. When on the podcast, I had a, deputy fed of the Federal Reserve on the podcast. It's, Square cofounder Jim McKelvey is the deputy fed president, fed governor of, of St. Louis. He said the main thing they were worried about then was deflation. Everything was deflating, and so they were begging to have inflation, and now they got their wish, unfortunately. They did. And then when the inflation showed up, they thought they told us it was transitory. So they didn't act as early as they could have. I mean, there was a period not that long ago when we had GDP growing at a record pace because we were rebounding from the collapse of 2020. We had the stock market surging to all time for highs. We had unemployment extremely low. And at that very moment, we also had zero interest rates. Yeah. So maybe if the Fed had not injected as much liquidity as they did in the first place or started pulling it out a lot sooner, this whole process of renormalization of interest rates could have happened more slowly, which would have given these banks more time to adjust. But don't you think the Fed should like, the interest rates take about 12 to 18 months to really be felt in the economy. Everything else is anticipation. And we haven't had that we've had we're we're 12 months in now, a little bit more than that. But shouldn't they wait a little bit at some point to actually see the real effect as opposed to the psychological effect? I think they should be more humble and stop thinking that they know what they're doing because the history of modern central banking and these constant whipsaws just shows that they don't know what they're doing, and and that's not because of the quality of the people. Right? Like, they you could put the smartest people on the planet, in the central bank, but, ultimately, the economy is extremely complex, and the forces that impact growth and employment and inflation are also very complex. And this idea that we have these, you know, group of, like, a dozen or so people that get together and say, well, we're gonna do this. Right? QE, raise interest rates, cut interest, etcetera. And because of that, here's our 10 year forecast of what's gonna happen with growth and inflation, which, by the way, we've never been right once on any of this, but we're just gonna keep doing it. And with every passing crisis, we're going to do it with more money than we've ever done before. Yeah. Which by the way, over the weekend, I think, Balaji Srinivasan, a Silicon Valley guy, made a $2,000,000 bet that within 90 days, the whole system collapses and Bitcoin will be $1,000,000. Yeah. I I that that I disagree. Yeah. I do too because I think and this is a very Silicon Valley perspective. A, crypto is not ready, and we could talk about that. But, b, it's just not gonna happen because, you know, there's not gonna be a massive run on the banks like there potentially was in 2008. No. Because what we now know is that there is no level of government intervention that they won't do to preserve the banking system. So Yeah. They'll do it that downside right. So the downside is not a potential complete collapse of the banking system. Certainly, if that didn't happen in 2,008, it's not gonna happen today when the big banks, like the JPMorgan's of the world, are actually fine. You know? They're very well capitalized, and they have diverse balance sheets, and they've been experiencing deposit inflows as people leave these regional banks. So I think the real downside risk here is persistent inflation that the Fed can no longer fight because doing so means breaking the banking system. Let me ask you this. I mean, Milton Friedman's statement, Nobel Prize winning economist, you know, from, like, 19 from the Reagan era in 19 seventies. Milton Friedman stated that inflation is always and only a monetary supply issue. So when the amount of money in the economy goes up, there's inflation. When it goes down, there's deflation. But we have seen because of the economy shutdown that there is such a thing as transitory inflation. Like, when you stop cutting lumber for 2 years, the cost of building a house goes up because there's no lumber around. So that's an example of transitory inflation when no there's no supply chains working from China because China shut down, price of pharmaceuticals and other things we get and computers go up because that's what we get from China. So and when there's a war in Ukraine, the price of wheat goes up. So these are all transitory issues. Yeah. Sure. But at the same time, during COVID, the Federal Reserve expanded its pound balance sheet by something like $4,000,000,000,000 as did every other central bank in the world, and they started shrinking it in the past year. But guess what? Just by taking back a fraction of the amount of money that they injected into the system, the banking system started to break. So literally as of last week, the Federal Reserve's balance sheet has started expanding again because these new bank facilities, including the one that you outlined about lending against par, so far, I think the numbers are something like $200,000,000,000, in, additional monetary expansion from the Fed. Right. And so this is where it's scary. This is the scary thing that has to be underlined is that now it's all psychology after that. Because every dollar that's printed theoretically changes to the value of the dollar bill crumpled up in your pocket, and it's a story then. You have to either ask yourself, is the US economy thriving and innovative enough to grow faster than the devaluation of my dollar or is it weakening in some way? And whatever story you tell yourself is and if enough people tell themselves that story, that's what's gonna decide psychologically the the will the banks collapse or not? Yes. But not I again, like, I don't think that psychologically it's not that will the banks collapse. I think just psychologically, are we just gonna have persistent inflation? Because if this idea starts to set in that, 1, the economy cannot function effectively without easy money, which I think is true now, and 2, that with every passing crisis, the government will go more and more out of its way to prevent a reset, which even something like saving these regional banks by letting them go and borrow against their underwater securities at par or what some of the banks are asking for, which is they just want the government to guarantee all deposits for a couple years. Right? Individually, we can say, well, those are good programs because we don't want a collapse of our banking system today, and that's fair. But if you project forward long term, just like in 2,008 or 2,001 or 1998, there should have been a natural shrinking of the money supply because people and banks blow up, but the government is preventing it from happening. And I think at a certain point, psychologically, the message that that sends to everybody is like, hey. This Milton Friedman esque money supply thing, it's only ever gonna go in one direction. Yeah. But, again, as you pointed out earlier, it's not the depositor's fault. They don't know how to manage the risk that, oh, Signature Bank is not as safe as Wells Fargo Bank. Maybe it is, maybe it isn't. And, I mean, big banks could blow up as well. It's really the bank's management who's at fault, and they and they they do have real consequences. Like, they will get fired if they if there's if they have to go to the Fed. Management is taken out is first thing. So so I feel like they do have enough consequences there. Some of them I mean, sure. Like, the the management of the banks that have failed, which so far we should remember is really just 3. It's Silvergate Bank, Silicon Valley Bank, and Signature Bank. Yes. Their that management public also. I mean, they got taken over, but essentially failed. They're still they're still operating, and the government has not, taken receivership of them, so I don't put them in that category. But even them, sure, their stock has fallen. Yes. Their management has paid a price, and I say this because other people are out saying, look. These bailouts are not like the 2,008 bailouts because we didn't save the shareholders of these companies, which is true. All of their equity was wiped out. A management is often a major shareholder. That's true enough, but when you introduce the programs that have been introduced in the last week, you are indirectly saving the management of every other bank because all of their stocks if the government did nothing and we did have a systemic run on all the small and regional banks, all of their shareholders would be wiped out. So by introducing these programs, we're sort of saving them, and we're sort of saving their management. And, again, like, I have nothing against these people. You know? I'm not someone who thinks that businesses should fail and we should have banking crisis, but we should zoom out and be mindful of the overall trend, which is that in the developed world, we no longer let banks fail to the extent that their depositors feel the pain. So the question I ask you, James, and I ask everybody else is, if the government is always going to underwrite the downside of banking, isn't it a little bit of a farce to then say we have a private banking system where shareholders and management could benefit from the upside of banking? The answer is nobody knows. Right? It seems scary either way. If you don't do what the Fed's doing, then a lot of poor innocent people are gonna lose their life savings and that's horrific. And by a lot, I mean tens of 1,000,000. And if you do do this, you have the consequences you're saying, which is that at some point the easy money gets a little too easy, and then the story becomes true that the dollar becomes weaker and weaker and weaker and inflation goes turns into hyperinflation. So that that's the bet Balaji Srinivasan made over this weekend is that he thinks that time is now. By the way, on my podcast in 2020, John McAfee said the same thing and committed suicide a month later. So look what happens. So so that's you know, I wanna get to the crypto part, but I think that, Cal, was that an okay summary from the banking side? Like, do you feel like it was, you know, layman enough to understand? Yeah. Can I throw in a few questions just before you get to to the crypto? And these are, like, very basic questions. Perfect. Not even about banking. My first one is just about speed. We're at a place now, it seems to me, where when we you know, you think a bank runs, you think back to it's a wonderful life and Jimmy Stewart and all the people lined up outside of his little office, and and they he knows. We gotta get to 5 o'clock. If we can stay in business till 5 o'clock. So every conversation he has with somebody, every hug he gives somebody, every argument he gets in somebody, the clock is ticking. Now it seems with the speed, you just pick up your phone, and I don't know how it's done. But, basically, everybody can just try and move their money out of the bank in in an hour. How Yeah. How could a bank possibly survive that? And especially if just say there was nothing wrong, but somebody put out a rumor over the Internet. Everybody got scared and just went to their phone and took their money out. Great question, which is what the Federal Reserve is fighting exactly that psychology, the the rumor slash 10 seconds later, there's a run. Because that kind of is what happened with Silicon Valley Bank. Yeah. It's a great point in that, the speed of bank runs are now, unprecedented, and it unless we have artificial constraints, it they're only gonna get faster and faster because systems get better. Right? Like, the the Federal Reserve is finally going live with a pseudo real time payment system called FedNow, which, it's gonna have all sorts of restrictions in place in the beginning, but, eventually, the idea is that 247, even nights and weekends, you can move up to a certain amount out of any bank and into any other bank. So us crypto people are actually fine with this because everything in the crypto world, in the crypto financial system, is instant 247 anyway. So in crypto, there is this general understanding that you need to build systems that are resilient to the speed of the Internet, and it looks like the traditional banking system is now learning the same lesson in the hard way. I mean and and just to add to that, decentralized finance as opposed to centralized banks. So so a bank is one company. The bank's management decides where all the money goes, and the bank's depositors don't see where that money goes. And on a daily basis, they have no understanding of what's inside the bank. With a decentralized crypto based exchange like Uniswap, not Coinbase, which is centralized, but Uniswap is an example of a decentralized crypto exchange, The depositors, I e people trading on Uniswap, they see everything that's happening. It's full transparency combined with privacy, so you kind of know what's happening and and you're not very worried because of that. That that's the goal of crypto. Right. And not just the depositors. Everyone. Like, you and I right now could pull up one of thousands of websites and look at not just decentralized exchanges like Uniswap, but also decentralized banks like Aave or MakerDAO. And, remarkably, we will know more about their balance sheet to the second than Jerome Powell knows about the balance sheet of JPMorgan. Or, hell, even Jamie Dimon knows about the balance sheet of JPMorgan. Anyone who's worked in big banks knows that there is so much opacity throughout the entire system, even for the people who work there, which in a crisis, opacity is the most dangerous thing because the depositors who are fleeing will assume the worst. Don't forget, Satoshi Nakamoto, the supposed creator of Bitcoin, made Bitcoin in 2009 as a reaction to the banking crisis. The I the original idea of concept of Bitcoin was to was to not have a crisis like the 2008 banking crisis. Now there are many there are thousands of more use cases of crypto than Satoshi's original outline, but that was the reason Bitcoin was created. It was totally a response to a situation like this. Just like the original intention of the Internet was to send email, and now you could do many other things, like there's the web and there's websites and all these other things. But, you know, the crypto has evolved also, but but this was the original purpose, was to avoid a situation like this. Yes. How does somebody who has a limited education in banking know what is a good bank to bank in? Because, you know, I can tell you, when you walked into a First Republic Bank in in Beverly Hills, you were treated with a level of courtesy and, like, I'd almost use the word elegance. There was no there's no lines. You went to an individual who was sitting down at a nice desk, and you were basically treated to figure out your situation. You knew the people at your bank. That would have been the last bank that I would have thought was going to have trouble because of the level of detail that they put into just interacting with the customer. But here I'm finding out that I had no idea what's going on behind the scenes. To your point, this is why I think it's not the depositor's fault, is that depositors are not shouldn't be required to be banking experts to know where the risks are and where they are they aren't. Furthermore, even the bank experts, to Owen's point, don't know where the risks are and where they aren't. And it's almost arbitrary because at the current moment, every single bank is essentially bankrupt if there was a run-in the banks because of the sharp increase in interest rates. So there's no way to know. But, Omid, if you wanna add to that. No. I I would just add that we, as a society, Cal, made a decision at some point a long time ago that depositors should not have to shop around, based on the safety of a bank. And and this is ultimately a political decision and a social decision. Right? It's not really a financial decision. But when we started introducing things like FDIC insurance, strict regulations, and then started bailing out depositors as we did during the savings and loan crisis and then again in 2,008, the consensus among society was that don't worry about it. Like, you pick your banks based on the services they offer, the fees that they charge, convenience or costs, but not safety. And there are obvious downsides to this, the simplest one being the the moral hazard, argument that, well, if depositors don't care how safe their banks are, you're gonna end up net net with more dangerous banks because it's not something they're competing on. The political answer has been, yeah, depositors will not worry about it because regulators are gonna worry about it. The regulators will pass rules that make sure that banks behave responsibly. But what we see with every passing crisis is that regulators are always caught flat footed, and they're always fighting the last war. So our banking system today is extremely resilient against the problems that took down everything in 2,008, but turns out it was not resilient against the simple issue of interest rates going up and duration mismatch. So now I'm sure we get new rules and regulations that say, well, we're gonna prevent that from being a cause of a crisis the next time around, but that likely just means that we're gonna be completely blindsided when the next crisis comes. Every time interest rates rise quickly, banks fail. I mean, even the great depression, 1933, like, all the banks failed. There was a bank holiday. President Roosevelt, when he became president, had to shut down all the banks. And there was rumors that he was shutting down all the banks, which made the run more intense, which meant they had to shut down the banks even faster. So, like, we've seen the story play out and it turned into the Great Depression. And each time, I feel we learn a little bit more, but, Omid, to your earlier point, because we learn a little bit more and we learn the easy money solves the problem, we just keep on printing easier money. And here's where I think crypto is actually very useful as a alternative that we can consider. Because, Cal, let me ask you. Why did you have an account at First Republic? What were you doing there, if you don't mind sharing with us? Actually, because I moved to California, and I start to have breakfast with Larry King every day. And he used First Republic Bank, and I saw look. When Larry walked in, he got very special treatment. And so I was next to him. So I don't know if I got more special treatment than anybody else, but I do know that anybody who walked in that bank got to see a personal banker and get individual service. They knew each other by name, and I I really didn't see that anywhere else. I've used Signature Bank for 15 years for the same reason. It's just the personal service that you got was better than what you would get at one of the big banks. But what I meant was, if you don't mind telling us, like, what were you doing there? Were you did you have a savings account, a checking account? Were you using a credit card? What services were you getting from that bank? Yeah. I think it was, it was a basic checking account that has been because I now live on the other side of the country and there are no First Republic Banks near me, it it sort of has become meaningless in that I don't know the banker to go to. So it was just a part of the timing of my life that led me there, and it was actually, it made banking a beautiful experience, which is why when I am seeing this, I'm feeling horrified because if any place seemed to be doing it right, it was First Republic Bank. And and I'm just wondering how they could be in this mess. So let's talk about the architecture of banking then because you mentioned having a checking account. Right? Like, all and and your checking account didn't pay any interest anyway, I assume. Right? For the yeah. Right. So you just needed a place to park money because you had to pay your bills. Correct. And one of the current design decisions of our banking system is that people like you are effectively forced to subsidize people who need mortgages or want a credit card, by which I mean, you just need transaction servicing. You need the you know, in the old days, you'd use cash, but cash is going away. So now you gotta pay rent and you use bill pay and whatnot. So you park your money in a bank, but then the bank turns around and takes a portion of that money, or it's fractional reserve banking, and they give someone a mortgage or a credit card or a construction loan or, ultimately, you know, they fund the US government too by buying treasuries. And that's one design of a banking system, but it's a very fragile design of a banking system because it lends itself to the exact situation that we're in now where you have a lot of, asset liability mismatch on part of the banks. A different design of the banking system is imagine where there was a bank that allowed you to open an you just wanted a checking account. They would give you a checking account, and all they ever did with your money is buy 30 day US treasuries. Right? Bonds that just are extremely short term. They're they're basically cash in the financial system. And a lot of the problems that have happened in the last year where interest rates went up, so bond values went down, that's for, like, 10 year bonds. So it doesn't apply to 30 year bonds. Right? That kind of a bank, which in traditional economic parlance people call a full reserve bank or a narrow bank, it's also possible that it would ins it wouldn't even buy treasuries. It would just park the money at the Fed. All American banks keep some of their money at the Fed. There's a design where you say no. This bank exists for no other reason than to take Cal's money and park it at the Fed. And then if Cal needs to pay James, then who cares? It's just a debit and credit on its systems. Ironically, in our current system, the government has not allowed that kind of narrow or full reserve banking to exist because they say, well, if you open a bank like that, it's so much safer than a First Republic. Me, James, and Cal put most of our money there. And now the banks that are doing mortgage lending and construction lending, they have to pay higher interest, and they're gonna have to charge the borrowers more. Wow. Okay. Now I'm see, this is why but I'm seeing my I'm walking into a bank, and for me, the experience was personal. And and not only that, but when you know who you're dealing with, you you don't have to pull out your driver's license and, you know, go through this rigmarole of being checked. They know who you are. So I wasn't looking behind the curtain, see what The Wizard of Oz was doing there, and I wasn't thinking of it that way. I was thinking, okay. What how does this benefit Cal right now? And it made me comfortable, and it did what it was supposed to do. Yeah. And and it's not like the Wizard of Oz here is doing something bad. The banks are the source of everyone in the country buying homes because that most people get mortgages. The banks are the source of loans for many small businesses who who need to survive and grow and flourish, and and that's why the US economy is is so innovative compared to almost every other economy in the world. Like, as a culture or a society, we made this decision 100 of years ago for a reason. This is this is the best, most effective way to grow an economy, it turns out. Well, a a debt fueled economy, James. I'm gonna disagree with you a little bit in that what we're doing in this situation is we're forcing cow the cows of the world who just wanna park their money and make payments to subsidize people who wanna buy a house or take out a small business loan, and that is ultimately a political decision. The benefit of it during the good times is we get cheaper financing across the board, so you do get more homeownership and more investment. The downside of it is that it is a more fragile banking system by design. It's going to be prone to more crises like the one we're experiencing today. Yeah. I agree. It is a give and take. You're you're paying for that innovation. Okay. I can I just I'm gonna I have a third question, and then I'll let you move it along to the crypto? And I hesitate to ask this question because it's a terrible, terrible, terrible scenario. But I'm reminded of a time where I was on, I can Internet conversation like this, and a world renowned expert was talking about politics. And it was before it was in the run up to the Trump Biden election. And I wanted to ask the question. Like, what if Donald Trump doesn't want to leave office or his supporters want to stop the rightful president from assuming the office. And the way the guest was talking was, like, well, that that can never happen. It's impossible. And then I'm watching on January 6th, and everything that I was thinking in my head was being sort of played out. And so my question now is, what is it? The end of or sometime June or July, the government runs out of money, and congress needs to do something to basically say, okay. You can borrow more and keep the thing rolling, which seems like we've been doing for a long time. What if that happened, like, on the same day that banks were getting run at. And you've got a congress now that's pretty well split, and there are people who don't want to bail out anything and just say they don't go along with it. What happens then? I mean, that's a good question because it's never happened. I mean, every year, this happens where there's a budget crisis. We hit the debt ceiling, and congress has to vote to increase it, and the newspapers always say, oh, no. 100 of thousands of government employees are not gonna get their paycheck. It's all over. Every year, this happens. And the same thing happens, which is that they raise the debt ceiling, and there's never really an issue. So I would presume that congress wouldn't be so split as to not come to some agreement and raise the debt ceiling again because that's just what always happened. But, yeah, it's possible that that could fail. That that that that's also built into the system that we're gonna basically come close to failure every year, but we're gonna compromise and agree to move forward. But what if we don't? That's a good question. It could theoretically happen. By the way, your your friend about the the, presidential elections is completely wrong. If he just looked at history, 18/24, the presidential election of John Quincy Adams versus, Andrew Jackson, there was also some third parties. Andrew Jackson won by a huge amount, the popular vote and the electoral college. John Quincy Adams lost both, but neither side got 50%, so it went into the house. And John Quincy Adams pulled aside the speaker of the house, Henry Clay, and said, listen, I'll make you secretary of state if you make me president. Deal done. And so John Quincy Adams became president despite losing the clearly losing, it wasn't close, the electoral college and the popular vote. So there was a rigged election, more than once. 18/76 was another example. Alright. I gotta do some homework here, but it it sounds it sounds like everybody that I talk to in finance, they always say, don't worry. At the last minute, it's always gonna be resolved. And it it just seems to me that you've got some people sitting there now that don't want this resolved, that that are saying no. We are not borrowing any more money. I don't know if that's happened in history. Maybe you can enlighten me there. It has I it it always happens that people posture in order to get what they want out of the compromise, but you're right, though. The real answer is we just don't know what would happen in that case. Alright. I'll let you I'll let you move it on. I'll I'll add one thing that we were talking about inflation earlier, and James was quoting what Milton Friedman said that it's always a monetary phenomenon. But I I think, it it's really a trust phenomenon. Like, inflation in a current currency is highly tied to not just how much people trust that currency or that the supply of that currency will not be hyperinflated, but what is the political and legal system underlying that currency? Right? Like, one of the reasons the dollar has been the global reserve currency for decades now is that people trust our political and legal system far more than they would a Venezuelan one or even a Chinese one. But everything that's happening today from the dysfunction in Washington to, the actions that the Federal Reserve is taking to me is starting to undermine that trust, and the net result of that trust is going to be more inflation than we would like. Look at a very stark example. China just brokered relations between Iran and Saudi Arabia. You know, Xi, the head of China, is in Russia now for a 3 day visit. The the world is is is shaping up without us a little bit for the first time in a 100 years. And that is a potentially scary thing for the dollar because so as as Omid just mentioned, so much of the world uses the dollar as its currency. But if Iran, Saudi Arabia, Russia, and China decide that, hey, we're gonna start trading oil in yuan because the US hasn't been good to us lately, you know, that's that's an issue for our dollar. And and quite deservedly, like, you know, we're we're all about justice and liberty for all, but who have around the world have we really given justice and liberty to in the past 20, 30, 40 years? And I think these could be real issues that combined with the domestic issues could have a problem. And I'm not being a doomsayer. I'm not being a conspiratorial. These are just things that are happening that that people have to think about. And, James, that is such a good point because I fear that the headlines about the, Iran and Saudi Arabia warming of relations or China and Russia getting closer have sort of been lost in the current banking crisis. But Yeah. I've been monitoring it very closely because, full disclosure, as a crypto person, I feel like, you know, one reason why I'm generally bullish crypto is that it's ever more useful in a multipolar world where the dollar is losing its status. One of the anchors of the dollar's status as a reserve currency has been the petrodollar system. Right? Just to oversimplify for your audience, this idea that, you know, the US brokered these deals decades ago where the world's biggest oil producers, like Saudi Arabia, price their oil in dollars, and they get paid in dollars, and that forces the world's biggest buyers of oil, like China, to always have to need to buy dollars because that's how they pay Saudi Arabia. And this arrangement has really benefited America and thus Americans. It's kept our inflation low, and it's kept demand for US treasuries high. So literally, like, more Americans were able to afford houses because of this arrangement. And there are all these shifting dynamics globally that you know, it starts with, like, the US sort of pulling back militarily. Then there's the fact that we have weaponized our sanctions regime to the point where, you know, given what we did to Russia and before that Afghanistan, if you're the government of any country that relies heavily on dollars, you might be thinking about diversifying. And then lastly, the fact that previous enemies like Iran and Saudi Arabia are starting to talk. I don't wanna get too far ahead. There are still many significant differences between them. But there is a world in which, Iran, Saudi Arabia, Russia, China, India, the UAE get together and decide that, you know what? We're overly dependent on dollars. Right? Like, Saudi Arabia is selling a lot of oil to China. Why is the US getting to have power over this with the currency that they use? So if these countries start to move away from the petrodollar system, it's going to have significant implications on inflation, US power, and ultimately crypto. And now, Omid, let me ask you. Did they target Silicon Valley Bank and Signature because of crypto? So they targeted Silvergate and Signature because of crypto. And if if you don't mind, I just wanna spend a couple of minutes talking about this because I think this is important for the audience to know, and this should be a scandal. Yeah. So we all know that crypto is very volatile. We talked earlier that it's bad for, any bank to have concentrated deposits. Unfortunately, the crypto industry in some ways had the most concentrated deposits. They were literally at 2 mostly at 2 banks, Silvergate and Signature, but not necessarily by choice because US regulators US bank regulators have always frowned upon crypto in a way that the big banks just refuse to bank crypto companies. They're coming around a little bit now that it's going more mainstream, but every crypto company could tell you that for years, if you went to a Bank of America, JPMorgan, and said, hey. I'm a Coinbase. I wanna bank through you guys. They would say, no. It's too risky. Our regulators have not given us clarity. We don't wanna deal with it. That created an opening for smaller regional banks, and, importantly, Silvergate and Signature both had real time 247 payment systems among their clients. A lot of people might be surprised that if you have an account at most banks and you wanna pay somebody else who has an account at the same bank, they often can't process that payment at real time. But QuickBooks If you do it at, like, 6 PM, it shows up the next morning at 9 AM. It's not Right. It's not instant. It's not instant. Just mostly because the infrastructure is old in banking. But because the crypto markets are 247 and Bitcoin, for example, trades 247, if you're an exchange, a lender, a hedge fund, a wallet provider, you want your banking to also be 247. So Silvergate and Signature attracted significant deposits because, a, they were willing to take crypto companies as clients, and, b, they had 247 payments among them. So they were very important infrastructure for the industry. But given the the bear market of last year, the collapse, the delevering, the fraud of FTX being exposed, they first of all, they experienced significant declines in their deposits because their customers were blowing up, and we talked earlier that that's not good for a bank. But the other thing is they came under significant political scrutiny, and there has been an amazing series of events just in the last 3 months that within the crypto industry we call operation choke point 2.0. This is a reference to something the justice department did, I believe under the Obama administration where they try to hamper legal industries like online poker by preventing them from getting access to the banking system. And the TLDR of what happened is that first, all of the federal banking regulators put out a joint memo in January that effectively said they think crypto is dangerous for banks. There was this one remarkable memo in it that said, we're not here to tell banks what industries they can or cannot serve, but we don't think there's any safe way to serve crypto. Ask anybody who's worked in banking. That kind of statement from your regulator is almost as good as them telling you not to serve a particular industry. And I think this is a remarkable document, this public memo that people can Google and read, because if there's one rule every bank regulator should follow, it's first do no harm. Right? Like, there's a reason why president Biden and every you know, Janet Yellen and Jerome Paul have repeatedly said in the last week that they believe our banking system is safe, because the second anyone in power says any banking system or banking activity is unsafe, you have sown the seeds of doubt, and you might trigger a run. So I think it's remarkable that although crypto is a very small industry, you had all the federal bank regulators say, hey. We think crypto banking is dangerous because think about the message that's sent to the depositors of Silvergate Bank or Signature Bank and potentially even SVB, even though it did not have a significant crypto clientele. So Silvergate ended up shutting down a couple weeks ago. There was a few other questionable things there, like the fact that it was under constant attack from Elizabeth Warren in the senate for potentially being involved in the fraud that FTX committed. But, again, think about this. We have a sitting senator questioning the viability of a bank. What message was she sending to the depositors of that bank? Not a good one. And then then the last piece is that it had gotten emergency funding from a arm of the US government called the Federal Home Loan Bank System, which there are questions as to why they chose to repay that loan in a way that would lead to their demise. Were they forced to? Did they decide to? We don't know the answers. But what ended up happening is that because of choke point 2.0 and the multivariate situation with the Treasury market, shrinking deposits, etcetera, Silvergate Bank shuts its doors. Within a couple of days, the run on Silicon Valley Bank begins, And I believe the fact that one tech friendly bank in California failed surely registered in the decision making of the customers of another tech friendly bank, which is Silicon Valley Bank. Maybe they all would have failed eventually anyway because of this dynamic with the bond market, but certainly the fact that the US government drove one bank to the brink did not help the cause. And then a few days after Silicon Valley Bank fails, at the same time that the Federal Reserve last Sunday announced a special bailout, the one that you described where I said they did it, but they didn't do the part where they got shareholders. The government announced that, but simultaneously, they announced that Signature Bank in New York was shut down. It was shut down by the New York State Banking Regulator. And there are a lot of open questions about why that happened because people who work there, including Barney Frank of the Dodd Frank, legislature fame, who happened to be on the board of it, has come out and said that signature was shut down even though it wasn't insolvent because it was a crypto bank. And there's been other red flags that have come out since, but when you zoom out, there's clear evidence that the US government went out of its way to drive crypto out of the US banking system, but one of the unintended consequences of those actions was a generalized bank run that's now ended up consuming banks like First Republic that had nothing to do with crypto. Yeah. And so where can you bank crypto? It's extremely difficult in the US today. There are some other, small and regional banks that were starting to lean in. However, who knows what decisions they've made just in the past week given the overall environment. What about Coinbase? Is that you know, that's almost equivalent to banking. Is it SafeAir, which is the the biggest, crypto exchange? It's more a question of, like, where is Coinbase banking? And, from my contacts throughout the industry, I know that everybody's been scrambling to open up as many bank accounts as they can. The crypto industry also learned an important lesson in recent months that they don't wanna be cons they don't wanna have all their money in just 1 or 2 banks. Unfortunately, until unless something changes in the US as far as federal policy is concerned, everybody is looking offshore now. That people are looking for banking relationships outside the US where they don't necessarily have these problems. But then the question, you know, asks itself, Omid, you know, in order for crypto to in order for Bitcoin, say, to hypothetically, to get to a $1,000,000, a lot of people have to buy it. It can't just be, like, billionaires buying it. A lot a lot of people have to say, oh, I need some Bitcoin to protect myself against the diversify against the collapse of the dollar. And grandma and grandpa at Indiana are not gonna say, oh, well, I need to spread my money out to 16 banks, and I'm gonna use a MetaMask wallet here and a treasure hard store nano storage here, and remember my 24 key password in, like, 3 different places and hiding spots in my house, and they're just not gonna do it. No. And so this is gonna dampen a sharp increase in crypto as much as it deserves to be much higher because of ultimately the story it tells and and the solutions it has. But just how do people buy it and store it? It's it's hard. It is hard. The liquidity thing is actually interesting because in the short term, you can argue it both ways. Like, there is less liquidity in the crypto markets now because the US based entities have less access to banking. But, to me, that just means more volatility, and it could mean more volatility to the upside because if suddenly the price of Bitcoin starts spiking, some of the traders and hedge funds and market makers who will be there to short it aren't there anymore because they don't have a bank account. But in the long run, it's important to remember crypto is a global phenomenon, James. And at the same time that the US has gone out of its way to debank crypto, the rest of the world, from a regulatory perspective, is becoming more and more friendly towards crypto literally by the day. And in the and in the US, it's actually not just a debanking thing. It's also like the SEC has gone out of its way to hold back crypto companies. Other state and federal regulators have been coming down hard. At the same time, the UK and the EU are increasingly pro crypto, the Middle East, Singapore. Hong Kong just made this radical shift from being starkly anti crypto in the same way that China was to just literally normalizing it. So at the end of the day, you know, like, people say this about the Internet. Right? If for some reason the US government had decided to crack down on the Internet 25 years ago, that doesn't mean that there wouldn't have been a Google or a YouTube or a Facebook. It just means that those would have been non American companies. And, unfortunately, crypto is now headed in that direction. Well, I mean, the US was initially worried in the mid nineties about, hey. Are all the phone companies gonna go out of business? You know, because because everybody's gonna make phone calls over this new thing called the web. And people would tell me with confidence, oh, the government will never let the Internet expand because there's crime on the Internet, and the phone companies will go out of business. So the US will protect those. But, you know, ultimately That's funny. I didn't know that because people have been saying that to me about crypto for years that, like, the US government will not let the banks get disintermediate. They're gonna, like, kill Bitcoin when it gets that big and so on. I mean, the banks are probably more powerful than the phone companies, but maybe not. I mean, AT and T and Verizon were, you know, pretty big, and all the phone companies were pretty big companies and the cable companies and so on. And people were, like, high level executives then were telling me this will never happen, and there was just nothing they could do about it. And so I think crypto is sort of where the Internet was. Like, a few years ago, crypto was where the Internet was in 1995. Now it's where the Internet was in 1998 or 1999, meaning everyone knows what it is, but it's very hard to use, and there aren't enough users yet. So the promise is there, the potential is there, but it wasn't till 2005 that people said, oh, yeah. I'll put my credit card in the Internet. It wasn't until 2,005 there was a 1000000000 users. It wasn't until 2,005 websites were easy to build with companies like WordPress and Squarespace. You didn't have to know how to be a programmer to make a website. So we're we're kinda following the same evolution, hopefully, faster. Yeah. And, actually, I have a question for you, James, because one of the interesting things with new technologies is I think they changed the power dynamics among industries. So to give you a specific example, to me, crypto really threatens the big too big to fail banks. You know? At the end of the day, like, my opinion of JPMorgan today is that JPMorgan is the poor man's Ethereum, that in time, Ethereum will do what JPMorgan does in terms of allowing people to send money and other assets around the world, you know, faster, cheaper, and safer. Interestingly enough, though, crypto elevates the importance of the asset management industry because, 1, we have a new asset class that that doesn't happen often, and 2, all of those tokenized forms of money or securities or whatever that are now writing Ethereum, they're gonna need servicing. They're gonna need custodians. They're gonna need issuers. And one thing that's really been interesting to me is that as much as the big banks have been pooh pooh ing crypto whenever they can, if you look at the asset management industry, like BlackRock, Franklin Templeton, you know, Fidelity just turned on the ability for millions of its retail customers to be able to buy and hold Bitcoin through them, and this might be how the political issue gets resolved. That for every banker that says, hey. This is bad for me. You have a asset manager who says, well, too bad. It's good for me. What was the Internet version of this? Like, AT and T, Verizon, yeah, they saw a decentralized network for communication as bad, but what industries showed up at that moment to tell the government that it would be good for them? The communications industry. So the the the irony is if you can't beat them, join them. So the cable companies built, you know, high speed fiber optics to Europe and turned on the Internet and and bought Internet companies and ISPs and, you know, provided Internet through the cable lines. And these communication companies are a 100% Internet companies now. So to your like, to our earlier point, crypto is hard. Like, it's hard to buy. It's hard to store. It's hard to understand. It's hard to transfer. So banks are good at all these things, and to Cal's point, it's courteous. The banking industry is courteous. You cannot get customer service at any crypto company. Who's gonna call a company called SushiSwap and find customer service there? Like, you can't. So ultimately question. It's not even a company, and there's no phone number to call. Right. There is no customer service. So, ultimately, crypto needs a front end, a financial front end before there's gonna be wide before there's gonna be a 1000000000 users. There has to be a 1000000000 users just like for the Internet, and the banks are the only ones well positioned to provide that front end. Nobody else is gonna do it. And, so I think ultimately, you see this in Jamie Dimon's statements. At first, he was only saying crypto's a fraud. Then he was like, okay. Crypto's a fraud. We're gonna build a crypto department. And and then he was saying, oh, no. Crypto I never said crypto is a fraud. Now he's saying, maybe it's a fraud. I don't really know yet. No. No. He's he's still he's he's still saying it's a fraud even though JPMorgan now literally offers Bitcoin products to its customers. So you have a lot more reach than I do. I would love, like, the next time he's on CNBC or somewhere, someone asked him, like, so just to be clear, your private bank is now selling a fraud to its customers. Right. Well, I should I should have asked that to different bank people I've had on, but I do think it it we're gonna go down the trend. If we truly are where the Internet was in, like, 1998, 99, eventually, it's gonna be if we can't beat them, join them, and that's what's going to happen. Because, look, London, which has a super crypto friendly prime minister now and the UAE, there those two areas, UAE and and and London, are competing to be the crypto banking centers of the world, and people like Jamie Dimon are not gonna let that happen. Actually, to your point, I I do agree that banks are still going to be important. It's just a question of which banks. And to your point, European and Asian banks have been much more forward on crypto adoption than American banks. Yeah. Now the SEC chairman, he's, like, going crazy or something about crypto. Like, he doesn't even make sense in what he's doing. And even s s I see other SEC commissioners are writing, you know, statements against what he's what he's doing. So there's gonna be, you know let's say, you know, there's the boomers, there's the gen xers, and then there's what followed. Okay. The gen xers are debating the fraud, not fraud issue. The boomers are all about gold, and the Gen y and and and Gen z people are don't even know what gold is. So at some point, people are gonna get old, they're gonna retire, and it's already getting there. The Elizabeth Warrens of the world are are gonna be leave office, and a crypto friend people who only know crypto and the Internet are gonna take over, and that's gonna happen fairly soon. From, your mouth to, I don't know, Joe Biden's ears. Oh, she's ears. Right. Yeah. Well, is there gonna be a baggy collapse, Orbit? No. But, actually, the reason I came on, if you remember, was because of the prediction I made the last time on your, podcast that that we were talking about FTX, and I predicted that soon enough some crisis or scandal would come out of the traditional system that would make everybody forget about FTX. So not not that I want there to be crisis, but, I do wanna take a victory lap here. However, I don't think we've seen it yet. I think the banking crisis is the canary in the coal mine. I think the real crisis and scandal that'll come out sometime this year probably is buried somewhere deep in the bond market. Because we just had one of the most historic bull markets ever and anything in the bond market, and it ended in spectacular fashion with the Fed hikes. And you, James, as a and Cal too, probably, as a student of human nature and markets could appreciate the fact that anytime there is a very, very long lasting bull market in anything, First, there's a crisis, and then there's a scandal. And by scandal, I mean, like, FTX or Bernie Madoff or WorldCom. So I still believe that both of these things will come out of the bond market. They will be aided by the fact that compared to banking, the bond market is even more opaque. And when that does happen, it will really highlight the full transparency of crypto and decentralized finance. Yeah. And and I have one point and one question, which is, first off, how do you buy a bond? I can't just go on an exchange and buy a bond. Like, I to this day, actually, I've even been a hedge fund manager as you know. I mean, we work together on a hedge fund. I don't even know how to buy a bond right now. You have to call a broker at a bond brokerage or something. It's not easy to buy bonds. No. The market is significantly more fragmented than the equity market. A lot of people buy bonds through things like ETFs just because it makes sense. Fund you can buy bonds. That's it. I know how to buy bonds through the stock market, but not like, oh, I wanna buy this loan that everybody made to for David Bowie's music. I can't buy, one of the Bowie bonds. But, the other thing is, though, but what what form do you see this crisis happening in the bond market? I don't know. I'm actually not smart enough about the bond market to know exactly. I just know that for our lifetimes, interest rates have not gone up until a year ago. Like, there's been this trend that really began with, when, Paul Volcker in the late seventies, early eighties decided to rein in interest state, inflation by jacking interest rates to the moon. And we've had this long term global decline in interest rates, which anybody remembers their high school econ cla*s. When interest rates go down, bond values go up. And every time it looked like rates might go up for any reason, the government has intervened. Right? So not only is this like a 40 year bull market, but it's a 40 year bull market that was effectively subsidized by 1,000,000,000,000 of dollars and euros and yen in printing. So there's a generation of people who've never been taught a hard lesson in the bond market. And study human nature, you know that that sort of thing ends with scandal. I wonder if we could see it happen in the, insurance industry. If there's large disasters where 1,000,000,000,000 of dollars worth of people need to be paid off somehow, and then we see really the exposure of the insurance companies to the bond market, and they just can't pay. You know, like, we like, almost happened with AIG in 2008, and these insurance companies just can't pay what they owe. Possibly. Or or the leveraged loan market, you know, leveraged buyouts, private equity. I mean, one of the things about the bond market is because it's generally perceived to be safer than things like equities, you tend to have a lot more leverage from by everyone. We saw some hints of this, by the way, like when in the UK, pensions had to start dumping, their UK bonds because of, issues having to do with interest rates were too low for too long, and they bought these instruments that juiced their yield, but it meant that when you had spiking rates like the Bank of England was orchestrating, they would have to start dumping, UK bonds. So, again, I am not smart enough about most things, including the bond market, to tell you exactly where the bodies are buried, but it's a multi $100,000,000,000,000 asset class that's only gone in one direction for a very long time. That sort of thing never ends without a scandal and a crisis. And we'll see. Maybe the Fed, though, knowing this is on the horizon, maybe they'll somehow figure out how to reverse and save face at the same time. Oh, I'm I'm sure it's going to warrant not just the Fed, but other central banks to intervene, but then that means they're giving up the fight on inflation. And it means we're going to have just persistently high inflation indefinitely, which this is not investment advice, but that's the kind of thing that makes certain kinds of people wanna own crypto. But, you know, I will say this also, and I'm, of course, a big believer in crypto, but owning anything that is priced in dollars is good. Like, not just crypto. Now cryptos made for this on the banking sense, but owning stocks that are priced in dollars, they'll go up too if the dollar weakens. Or owning, real estate, potentially, I mean, they're more affected by interest rates, but owning real estate in the long run will go up if it's priced in dollars. You know, collectibles will go up if they're priced in dollars. So, you know, stocks anything priced in dollars that aren't dollars will go up, but it's just that crypto for for for a store of value, crypto was made for this. I agree, but the thing to remember is that things like stocks are more complex, like companies If inflation forces companies to make less money and it impacts earnings, that's not great for stocks. And some you would know better than me, but some amount of the stock market gains of recent decades has been because of debt fueled share buybacks. Almost all of it, actually. Okay. Well, there's that. And then real estate is the most levered industry, so persistently high in interest rates, if we get them, are going to be a problem. Plus, the one good thing about crypto is it collapsed already in the past year. You know, one of the nice things about crypto, once you get to the other side, is that we don't have bailouts, and we let things blow up. And we have mass delevering events like we already did last year that lead to prices coming from significant lows in a way that real estate hasn't fallen that much. Stocks haven't fallen that much. Even collectibles haven't fallen that much. Yeah. So, Cal, any any last any last minute thoughts, questions, concerns, fears, hopes, happiness? Well, I I'm hopeful that we get to a place where and I start with myself. I gotta get more educated about this. I'm I'm listening to all this, and I'm just realizing that this stuff is behind a wall that I've never peeked into. And it really is time for me to understand what's happening when I go into a bank and I start an account there. And so one of the beauties of this conversation for me, even though you probably didn't intend it, this way you're trying to show people what's going on and where things are going, is I completely understand that I gotta go back to basics here and understand how this was put together so I can fully appreciate more of these conversations. Well, that might be true, but I also wouldn't educate too much on it because for every point that both Omen and I were making, there was a point in history before that that led to the point we were making. So you can go back to like, take student loan debt. Student loan debt is a huge problem in the US, but it can be traced back to, you know, the Johnson's great society program where, you know, formations of companies like Sallie Mae to back student loans, but that could be paced back to, you know, to the traced back to the the veterans bill in 1946, which paid for veterans student loan debt. And, you know, it could go on and on. The the over marketing of colleges in the seventies, you know, everything we're saying like like for instance, the banking crisis of 2008 could be traced back to subprime loans being created in the late nineties, could be traced back to also the great society program and welfare programs and housing projects and so on, which could be traced back to and on and on forever. So the problem with with learning about all this stuff is that there's no end to the things. It's fascinating and it's interesting and it could give us all educated guesses, but the true answer really for all of these things is we don't really know. We're just trying to make as well educated guesses as as possible. And but our our point is that just like we don't know, Jerome Powell doesn't know either. And like that. The one thing I do know is Cal should read my book. What's the Alright. Both of you got you got it, Desiree. I'll start. Email me email me your address, the new one, because, actually, James, I will take this moment to plug it. So much of, my new book, rearchitecting trust, is not about crypto. Right? It's about, like, why is the banking system the way it is? Why did why was central banking invented in the first place? Why does inflation happen? And then from there, it goes into how might crypto be an upgrade. So, Cal, please, please send me your address. I will it would be my pleasure to send you a copy, and then maybe we can all come back in some months and discuss what we've learned. And Cal could give me feedback other than what James has already told me, which is that the title sucks. But that said that said, say the full title again because it's on Amazon. You could buy it. It's an excellent book. I think it's the replacement to was it Peter Bernstein's book on risk? Like, I think it's better than that in terms of understanding the financial system. So what what what's the title? Thank you, James. It's rearchitecting trust, the curse of history, and the crypto cure for money, markets, and platforms. That is a lot of words, brother. And Cal, what's what's your what's your latest book? What's your book of interviews? We did, Meaning of Life, for, the composite of, the interviews I did for Esquire. There are 3 of them. And another one's called what I've learned, and those are basically all interview based. The the wisdom that people who've lived incredible lives, they've been icons of the last 75 years, the wisdom that they've taken from all their experiences. So I, I I think it's time that we all pay attention to the dollars. And not only that, but all the things you've been talking out beyond that because, you know, I I've interviewed a lot of people about fears and trust and what they believed were the most important things to them. But at least for me in my life, I am seeing that I better start following the decimal points. So we'll look at today as a start of something great. Alright. Well, both of you, thank you so much for for coming on the podcast. And, Omid, thanks for the the crypto perspective. Once again, you're always the a good crypto expert to to follow and to ask questions to, and, may the odds always be with you. Thank you, James. Thank you, James.
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