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Current time:0:00Total duration:10:09

Video transcript

let's talk a little bit about what I'll call the plot ski plan because it came from my friend Todd blood ski but I think it's a good plan but let's think about a little bit of its repercussions and see if it's more or less likely to actually work well first of all and you know I throw out in the last video of 50 banks maybe that's logistically difficult instead of having 50 banks with 14 billion of initial capital maybe you do five banks with one hundred forty billion dollars of initial capital but the point being is that you should have more than one bank it shouldn't be too big to fail and and you should try to instill some type of competition there but because they have pristine balance sheets all of these banks are going to be able to lever ten to one which we know isn't crazy Merrill Lynch and and Morgan Stanley and all the life been leveraging up 30 and 41 so 10 - what is normal for Bank and frankly they're probably going to be able to attract a lot more you know we said of you know foreign governments probably willing to lend to them the private sector is willing to lend to them a lot of these are commercial banks which means that they can take deposits a lot of people are going to be willing to essentially put their money with this bank because it has a clean balance sheet and it is essentially owned it'll be owned individually by the American people and will have this federal backstop above and beyond the the FDIC insurance limits and all of that although I do like the the one provision to increase the FDIC caps and maybe I'll do a the insurance caps on on deposits but I'll actually be able to attract a lot of deposits from everyday people they'll feel safer with these these banks so in terms of whether you'll be able to capitalize these banks and lever up ten to one I don't think there's an issue there then there's a question will it solve the fundamental problem of of keeping credit markets flowing to those people that needs to keep credit - well we already said that it'll have no trouble being able to have access to funds above and beyond how much the government capitalizes it with it'll be able to track deposits it'll be able to attract investment from from the private sector and from from international money especially with this five-year government backstop so it will be able to essentially put ten times as money back into the system so if you take seven hundred billion dollars collectively you'll be able to this will introduce seven to ten times as much so so seven trillion dollars of new loans seven trillion of new loans so there's seven trillion of I mean that's literally half of of the American GDP I mean you might argue that is too much that might that might provide too much credit and it might go from you know thawing to overheating credit markets so then you might say well if seven trillion is too much liquidity well why don't we just reduce this number a little bit why instead of saying 700 billion why don't you make it a hundred billion right because then 100 billion if you do ten banks with ten billion each so you introduce 100 let me just say 100 billion they all lever up because it's all new its new liabilities and new assets clean balance sheets it'll introduce one trillion dollars of new loans that it can go put to work for people building factories and doing real things and because they're incentive is not to bail out their friends it's not to help out the companies they used to work for the companies that are donating to them in some way or contributing to them or promising jobs in some way it won't go this trillion dollars is not going to go to buy assets at higher prices than they should you know I could go to buy assets at discount prices if the new managers of these banks do see a good return but most probably they'll invest it in areas of the economy where they do see a positive return on investment and it'll and and I what one person had 10 minutes a day wouldn't introducing all of this liquidity into the into the financial system whether it's 7 trillion or 1 trillion wouldn't that lead to hyperinflation and I'll probably do a whole series on inflation I I think there's a lot of misunderstanding around it in general if anyone makes a positive investment so if if I have a dollar and I make it an investment where it generates a dollar 20 of benefit that by definition that by definition is not inflationary because I had a dollar in the world I had a dollar in the world and I created a dollar 20 of wealth so actually the pie gets bigger a good way to think about inflation I'll do a lot about this because it is kind of it is a very abstract concept let's say that this is the pie of goods and services in the world or let's say just say in a country right goods and services goods and services in a year you could say it's our GDP or however you want to measure goods and services in a year in a year right that's the goods and services in a year and let's say I have another pool of the amount of money there isn't in a given year so money and the money supply is an interesting thing because it's not just dependent on the amount of physical coins or dollars it also is a function of how quickly those transact and how much leverage there is in the system so you can actually have a whole economy where everyone just has one dollar bill but every time someone needs something from someone else they exchange that one dollar bill so that one dollar bill gets used you know fifteen trillion times a year so you'd actually have fifteen trillion dollars of money because the velocity would be so high but anyway let's just say that this is the pool of money if this pool the pool of money grows faster than the actual goods and services and the actual productive capacity of that country then you have inflation so if this circle is grows faster than this one you have inflation if this circle grows faster than this circle you have deflation you have the same or you have some amount of money representing more goods and services so goods and services actually become cheaper and the the problem that we're talking about right now this credit crisis this is a problem of deleveraging where the government injects a dollar into the this current broken banking system and instead of that dollar you know you you let nor the normal system is you lend a dollar to a bank so you lend one dollar to a bank and then let's say this is the Fed right this is how they inject liquidity they lend a dollar to a bank let me draw a bank here then that Bank has to keep it can only lever ten to one so it essentially it has to keep in reserve ten cents of that dollar but then it lends 90 cents to somebody else to another Bank right then that other Bank has to keep 10% of that so it lends 81 cents to someone else and then that someone else can lend whatever 81 times 0.9 is so I know seventy something cents to someone else but you get the idea that in normal functioning the normal functioning banking system $1 injection of the system has this multiplier effect so it actually creates a lot of money and that's what if people are implicitly talking about when they talk about the printing press but what's going on right now is the Fed lends $1 to Bank a but Bank a is so scared it's so scared that it doesn't lend out to anyone else it just keeps that dollar because right now their main priority isn't to try to get a little bit of incremental interest on whatever money they have their main priority is survival so that dollar just goes into a black hole and so that's what the feds frustration is it keeps lending money into the system but that money keeps disappearing and actually as the economy slows the velocity of money is going to slow down as well so the main problem when you have a credit crisis and when you have a recession is actually the money supply shrinks the amount of goods and services probably shrinks as well but the money supply shrinks even more so your main problem is deflation and that's why you know that was the main problem in in the Great Depression and that was the main problem in the Japanese crisis and you know you Ben Bernanke he's written papers about this and he's like well you can always you can always cure deflation by printing money and dropping money from a helicopter well to some degree that's what they've already been trying to do they've already been the feds been willing to take you know really take pretty large credit risks on bank and lending money into the system but the problem is is if this multiplier effect is disappearing at a faster rate than you are dropping money from a helicopter you still have deflation right before when you not only levered a lot people lever ten to one you let them lever 30 to one and 40 to one every dollar you put into the system became $40 that it was given to someone else and then they could lever up so you had this huge explosion of money and frankly the only reason why we didn't have inflation I mean in the last 5-10 years we had this huge explosion of money and the only reason why didn't it didn't at least in measurable inflation show up is that week on the other side of the equation you had all of this new productive capacity come online in China and India and so manufactured goods got a lot cheaper but in things that were not manufactured goods like commodities like homes you had this huge asset inflation or even college tuition or healthcare things that are dependent on on American labor it became hugely expensive in this because you had this huge huge infusion of you know that there's there's different ways to measure money but the broadest indicator which is called m3 and I know I'm kind of going out of the domain but I'll make a bunch of videos on this the broadest indicator m3 which the government stopped officially reporting exploded because there's so much leverage in the system now things are the exact opposite is happening the leverage is disappearing from the system there's no lending to each other everyone is going from 31 to 30 levels to one to ten leverage so money is actually disappearing the system the velocity is slowing this is shrinking but this is shrinking more no matter what the Fed is doing and frankly this new $700 $700 bailout I personally think this is the helicopter that Ben Bernanke always talked about using and whenever you're going to drop money from a helicopter the question is where do you drop it and they think they should drop it into an already broken banking system the point of this video in the last is maybe you should just drop it into a new banking system or maybe you just drop it into everyone's pockets and and and see what happens and you let new banks form where they can anyway that's all for this video I know it's a little bit rambling but hopefully you'll learn a little bit see in the next video