Slate Money — The Fallout Edition (July 9, 2016)

Episode Overview

This episode of Slate Money, hosted by Felix Salmon with regulars Jordan Weissman and Cathy O’Neill, is the "Brexit Fallout" edition. The hosts revisit the financial and economic repercussions of the UK's Brexit vote, examining both immediate chaos and longer-term consequences in global finance. Specific attention is paid to the frozen UK property funds, the world of negative interest rates, and the precarious state of Italy’s banks, all positioned within the shifting backdrop of European and international financial policy.

Key Discussion Points and Insights

1. Brexit’s Impact on UK Property Funds

• Commercial Real Estate Illiquidity:
  • Several UK commercial property mutual funds, holding around $25 billion in assets, have "closed their gates," suspending redemptions due to massive uncertainty and an absence of buyers post-Brexit ([03:01]–[05:56]):
    • “They’re not letting anyone take out their money.” — Kathy O’Neill [03:15]
    • “The fact is, no one knows what's happened to the value of this commercial property because no deals have got done in the UK since the Brexit vote. Literally zero.” — Felix Salmon [03:48]
• Frozen Markets as Panic Barometers:
  • Discussion over whether these funds now function as ‘fear indexes.’ Felix argues the banking sector and the pound are more indicative, with property fund freezes highlighting just how abnormal the period is ([05:56]–[06:53]).
    • “The last time we all remember funds closing was Soc Gen and Bear Stearns at the end of 2007, the beginning of the credit crisis. And that was a harbinger, as we know, of much, much worse things.” — Felix Salmon [06:33]
• On Suspending Redeemability:
  • Consensus that suspending redemptions, while potentially ‘postponing bad news,’ is rational because forced fire sales would be even more destructive ([07:46]–[09:47]):
    • “If a property fund has a lot of redemptions, the only way it can meet those redemptions is by selling property. Yes, you can't sell property. No one benefits if you sell property in a fire sale.” — Felix Salmon [07:46]
    • “Many of them had 20% cash on hand...but when 40% of people wanted their money back… they’re like, screw this, we can’t actually do this.” — Kathy O’Neill [09:22]

2. Uncertainty and “Confidence Fairies”

• Economic Paralyzation Due to Uncertainty:
  • The episode echoes the psychological cloud blanketing British business, with actors ‘waiting to see’ and economic activity grinding to a halt ([10:34]–[11:30]).
    • “What we’re seeing right now with these property funds and across Britain is a response to… uncertainty. We really do not know what's going to happen.” — Jordan Weissman [10:34]
• Paul Krugman & “Confidence Fairies”:
  • Contrasts the post-2008 US “confidence fairies” debate with post-Brexit Britain, arguing that—this time—lack of confidence itself is a destructive economic force ([11:30]–[12:51]).
    • “In the UK, you're absolutely right, they do exist. They are real. We're seeing them in the way that people are trying to get out of their exposure to commercial property and not being able to.” — Felix Salmon [12:10]
    • “It's not just a question of confidence, although confidence is certainly making things worse.” — Felix Salmon [13:10]
• Not Just About Confidence:
  • Kathy O’Neill’s skepticism of magical thinking: “It's not normal. It's going to be different.” [13:08]

3. Global Flight to Safety and Negative Interest Rates

• Bond Market as Fear Index:
  • With Brexit, there’s a ‘flight to quality’—investors pile into safe government bonds, even at negative yields ([13:10]–[15:05]).
    • “When people are afraid, you get this thing called flight to quality… you wind up buying bonds in euros, dollars, Japanese yen, and Swiss francs and you pay whatever it takes.” — Felix Salmon [13:10]
    • “If you invested in government bonds at the beginning of the year, right now you're sitting on a 25% annualized.” — Felix Salmon [14:22]
• Explaining Bonds in Uncertain Times:
  • Bonds serve as both a counterweight to falling stocks and as a guarantee of capital, even if yields are negative, thanks to associated currency moves and deflation expectations ([15:05]–[16:45]).
    • “Bonds have a guaranteed return of capital…even with negative yield… it's inherently a much safer place to put your money.” — Felix Salmon [15:40]
    • “If you think there's deflation coming… you can actually also make money off of a negative yield… in real terms you're making money.” — Jordan Weissman [16:09]
• Negative Yield Mania:
  • Dramatic stats: $13 trillion in negative-yielding bonds; 659 global rate cuts since Lehman Brothers; Switzerland and Germany issuing 10-year bonds at negative rates, with Japan following ([17:07]–[19:53]).
    • “We live in a world of zero interest rates... the entire world is becoming Japan.” — Felix Salmon [19:53]
• Central Banks in a Trap:
  • The global move to zero/negative rates constrains central banks—raising rates in one major economy causes damaging currency appreciation ([20:24]–[20:43]).
    • “When bonds everywhere around the world go to zero, it in turn becomes incredibly hard for a central bank to raise rates.” — Jordan Weissman [20:24]

4. Italy’s Shaky Banks: The Next Domino?

• High Levels of Bad Loans:
  • Italian banks have roughly 17% non-performing loans—massively larger than seen in the US during the financial crisis ([22:23]–[23:09]).
    • “About 17% of the loans on their books have gone bad, are sour. Italy's banks are not in a good place financially.” — Jordan Weissman [22:23]
    • “It's like 10 times what's normal in the US now.” — Jordan Weissman [23:09]
• EU Bailout Rules & Political Toxicity:
  • EU’s 2014 banking rules prevent Italy from giving a blanket bailout without imposing losses on equity and bond holders. But many holders of Italian bank bonds are retail investors—making “bail-in” politically toxic ([24:49]–[26:47]).
    • “A lot of the bondholders of these banks’ debts are retail investors, which is really unusual…so this is politically toxic there.” — Jordan Weissman [25:25]
    • “If you have a bank CD, which is a big thing in Italy, then you’re a bail-inable bondholder rather than a depositor who’s protected.” — Felix Salmon [25:42]
• Structural Flaws in EU Banking Union:
  • The EU’s drive for banking union clashes with the vastly different structures of national banking systems:
    • “That’s really hard when you have national banking systems that don’t mesh, that don’t fundamentally work the same ways.” — Jordan Weissman [27:02]
• No Good Solutions—Kick the Can Down the Road:
  • Italian banks are forced to ‘wait out the credit cycle,’ but with unemployment still high and little sign of recovery, there’s no guarantee relief will come ([28:00]–[29:15]).
    • “Is this like sort of the first of many? Is this like Portugal and Spain?” — Kathy O’Neill [29:29]
    • “Southern European banks…have been in crisis for five years now and we’ve had a system of rolling bailouts.” — Felix Salmon [29:35]
• Bailouts Are Inevitable, Despite the Rules:
  • “Ultimately, when a country's banks get into trouble, that country does need to bail out the banks. We discovered that in the US in 2008…in Greece in 2012. We've discovered that in so many countries when push comes to shove, these banks are going to have to get bailed out. It's just part of how a modern economy works.” — Felix Salmon [30:02]
• Zero Interest Rates & Political Will:
  • The irony: governments can borrow at or below zero to bail out banks, but lack the political will or legal framework to act decisively ([32:14]–[33:00]).
    • “The cost to the government of borrowing the money to bail out the banks is zero.” — Felix Salmon [32:15]
    • “Anything that might get the economy going at this point, they [Germany, Switzerland] are being paid…are being paid to borrow and try to save the world.” — Jordan Weissman [32:48]
• EU at a Crossroads:
  • Resistance to change and inflexible rules threaten the EU’s stability:
    • “If these rules really get in the way of everything, this is gonna be terrible.” — Kathy O’Neill [31:55]

Notable Quotes & Memorable Moments

• On the Illusion of Liquidity in Property Funds:
  “It makes sense if you are offering exposure to a fundamentally illiquid asset class that at times like this, you basically suspend the fiction that the investment is liquid.”
  — Felix Salmon [09:47]

• On the Difference Between Bond Yields and Borrowing Costs:
  “Almost none [of the negative-yielding bonds] were issued at negative yields…When Jordan is saying you’re paying to lend money to Switzerland, that’s not true. What you’re paying for is an asset, a bond, which is owned by someone else.”
  — Felix Salmon [17:29]

• On Southern European Bank Bailouts:
  “We've had a system of rolling bailouts. One of the reasons for these 2014 rules is precisely that the European Union got sick of all of these government bailouts and said stop bailing out your banks…but ultimately, when a country's banks get into trouble, that country does need to bail out the banks.”
  — Felix Salmon [29:35 & 30:02]

• On Data Randomness and Jobs Reports:
  “What we are finally seeing is the kind of natural randomness in data series that you should…expect in all natural data series and we shouldn’t get alarmed by.”
  — Felix Salmon [35:50]

Timeline of Important Segments

| Timestamp | Segment | |:-------------:|--------------------------------------------------------------------| | 00:08 | Introduction; Brexit focus and “We need to return to Brexit.” | | 03:01 | UK property funds freeze; deep dive into commercial property risk | | 05:56 | Are funds now “fear indexes”? Panic in financial markets | | 10:34 | Uncertainty & behavioral economics: confidence, paralysis, risk | | 13:10 | Bond markets, negative yields, flight to quality | | 17:07 | Negative yield bonds and central banking conundrums | | 22:17 | The Italian banking crisis explained; the problem of bad loans | | 24:49 | The fraught politics of bailouts and EU banking union | | 29:29 | Comparison to Southern Europe, cyclical crisis and bailouts | | 32:14 | Zero borrowing costs vs. political will—EU at a crossroads | | 34:23 | Numbers round (Theranos, Jobs Data randomness, Moving averages) |

Tone and Approach

The tone is sharp, irreverent, and laced with skepticism:

• “Fuck that. Like this is not normal. It’s going to be different.” (Kathy O’Neill, [13:08])
• “Is no one in charge better than Boris Johnson in charge, though?” (Jordan Weissman, [12:38])
• The banter is lively, and each segment is framed with clear frustration at both market panic and political inaction.

Conclusion

This episode elegantly ties together the array of financial repercussions from Brexit, from the concrete (frozen UK property funds) to the abstract (shifting financial sentiment), to structural problems in Italy and the wider EU. The recurring theme: when confidence evaporates and rules get rigid, the financial system creaks—and policy paralysis can make everything worse.

Memorable Final Thoughts

• “The entire world is becoming Japan.” — Felix Salmon [20:17]
• “They are being paid to borrow and try to save the world.” — Jordan Weissman [32:48]
• “We shouldn’t get alarmed by [randomness in data], and this kind of large fluctuation is what I kind of feel the jobs report series should do.” — Felix Salmon [35:50]