The Liquidity Edition

Summary

Slate Money: The Liquidity Edition – Summary

Date: April 15, 2017
Hosts: Felix Salmon, Jordan Weissmann, Anna Szymanski

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Episode Overview

This episode of Slate Money, titled "The Liquidity Edition," dives deep into the week’s major business and finance stories, with particular focus on bank capital requirements, the recent downgrade of South Africa’s sovereign bonds, and why financial markets don’t seem to react as expected to significant political and economic shockwaves. The episode also features a lively debate around the safety of global banking post-crisis, insights into market psychology, and a “numbers round” with illuminating statistics and stories.

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Key Discussion Points & Insights

1. South Africa’s Sovereign Debt Downgrade

[02:12–12:48]

• Background: South Africa was downgraded to “junk” status by Fitch after President Jacob Zuma sacked the respected finance minister and installed political allies, heightening concerns about governance and fiscal responsibility.

• Why it matters: This move shifts South Africa from the “investment grade” bucket (low risk) to the “high yield/junk” bucket (high risk, higher default potential) in the eyes of global investors.

• Political context: The downgrades are viewed as much a condemnation of South Africa’s government and corruption as of its finances.

  “This is significant. It’s the first downgrade since 2000, and for a lot of the BRICs, it’s a status thing… being downgraded is significant.”
  — Anna Szymanski, [03:33]

• Global implications: The bond market’s muted response highlights a trend: investors keep seeking returns even in risky markets due to a global glut of liquidity.

• Market behavior: Despite dire headlines, there were net inflows into South African sovereign bonds the week of the downgrades. Investors are chasing yield and betting against imminent default, buoyed by central bank interventions and a low-rate environment.

  “When there’s so much liquidity in the market and people needing to put money to work, they’re much more likely to believe the optimistic story than the pessimistic story.”
  — Anna Szymanski, [15:21]

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2. Why Aren’t Markets Reacting to Bad News?

[13:06–25:52]

• Detachment from Reality: Recent seismic political events—Brexit, the election of Trump—haven’t produced the financial chaos that was predicted. Amid bad news, asset prices often rise.

• Main explanation: The panel attributes this to the "global savings glut"—an immense pool of capital looking for returns in a world with very few safe, yielding assets and massive central bank intervention.

• Market psychology: The complexity and ambiguity of political news make it hard for markets to “price in” risk; with so much cash, optimism prevails.

• Currency markets as real signal: Of all markets, the hosts find that currency (FX) markets may still reflect reality best.

  “My standard response for the past eight years or so has been, ‘Never mind the stock market. What really matters is the bond market.’ …My theory is that bonds don’t tell you anything, and stocks really don’t tell you anything. But currencies actually move in interesting and informative ways.” — Felix Salmon, [19:17]

• Stock market risks: With valuations so high, risk is increasing—yet with money continuing to pour in, the rise feels self-perpetuating.

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3. Are Banks Safe Now? The Dimon–Kashkari Debate

[26:20–39:52]

• Jamie Dimon’s position (JP Morgan CEO): In his annual shareholder letter, Dimon claims banking crises are solved, so regulations and capital requirements should be loosened.

• Neel Kashkari’s (Minneapolis Fed President) counterpoint: He argues banks need even higher capital cushions, and that so-called “total loss-absorbing capacity” (TLAC)—new financial instruments designed to absorb losses—is no substitute for real capital.

• Bank balance sheet basics:

  • Assets: loans made by banks (generate income)
  • Liabilities: deposits and debts owed to others
  • Capital: the difference—shareholders’ money, retained profits (the loss-absorbing cushion)

• What if a crisis comes? The panel is skeptical that banks would, in practice, shift pain onto unsecured creditors instead of needing another bailout—especially if a crisis is systemic.

  “History suggests we will not [bail in unsecured creditors]. We have already seen this – frankly, in Italy right now.” — Anna Szymanski, [33:08]

• Key academic insight: More capital won’t prevent financial crises, but it makes post-crisis recessions less severe.

  “What it does do is make the recessions that follow them less painful…That’s actually a powerful argument in favor of Kashkari’s position.”
  — Jordan Weissmann, [37:06]

• Political reality: Bailouts, even if technically profitable for the government, are politically toxic. Capital requirements are the only real buffer.

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4. Numbers Round

[40:11–45:02]

Anna’s Number:

“57.25”

• The USD-to-ruble exchange rate after the U.S. attack on Syria.

• Ruble slightly devalued—helps Russian exporters and the state, which profits when costs are in rubles and revenues in hard currency.

  “When you talk about EM economies, you have to be very precise in the way you talk about financial statistics.”
  — Anna Szymanski, [41:46]

Felix’s Number:

“0.7” (70%)

• From Jeff Bezos’ shareholder letter: Most decisions should be made when you have about 70% of the information you want. Wait for 90%, and you’re too slow.

  “Most decisions should probably be made with somewhere around 70% of the information you wish you had…”
  — Jeff Bezos (quoted by Felix Salmon), [42:34]

Jordan’s Number:

“1.42%”

• The percentage of Mississippi welfare applicants (TANF) who actually get assistance. Indicates severe administrative or political roadblocks to accessing aid.

  “For some reason, Mississippi has just stopped accepting new cases. For all intents and purposes, more than 11,000 people applied last year; 167 actually got cash assistance…”
  — Jordan Weissmann, [44:06]

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Memorable Quotes & Moments

• On the markets ignoring bad news:

  “Mario Draghi trying to stimulate Europe’s economy is indirectly making it easier for a corrupt government in South Africa to keep surviving and not have to deal with the consequences of its actions.”
  — Jordan Weissmann, [12:15]

• On financial crisis politics:

  “There was enormous anger and real suffering in the country around the time of what everyone calls the bank bailouts…If you were a politician, it looked dreadful.” — Felix Salmon, [37:30]

• On bank bailouts:

  “At the end of the day, banks are the linchpin of a capitalist economy. You can’t let the banks fall apart. It destroys the rest of the economy. It’s not like any other industry.”
  — Anna Szymanski, [39:01]

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Timestamps for Important Segments

• 00:05–02:12 – Introduction, setup, recap of main stories
• 02:12–12:48 – South Africa’s downgrade, bond markets’ surprising calm
• 13:06–25:52 – Why markets no longer panic, global “liquidity,” savings glut, biases
• 26:20–39:52 – The Dimon-Kashkari debate: Can bank capital alone prevent bailouts?
• 40:11–45:02 – Numbers round: FX, Jeff Bezos’ decision-making rule, Mississippi welfare

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Tone and Style

The episode stays lively, conversational, and at times irreverently “nerdy.” The hosts enjoy in-jokes, dry humor, and aren’t shy about challenging financial orthodoxy or each other’s expertise. Technical content is often translated into plain language (or poked fun at for being jargon-heavy).

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For listeners who missed the episode, this summary delivers a thorough explanation of the week’s most relevant finance news, contextual debate on banking safety, and insight into global market psychology—with just enough “nerdiness” and wit to match the Slate Money tone.

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello, and welcome to the Liquidity edition of Slate Money, your guide to the business and finance news of the week. It's bank earnings week this week and we are going to be talking all about banks and their total loss absorbing capacity, because that's how we. Nerd. This is Jordan's. He's been waiting for this for three years. He's been waiting for the opportunity to try and explain what the difference is between tier one and tier two capital in words of one syllable.

[A]

This is 100% false. I'm going to do my absolute best to avoid all of those words. Not one of them.

[C]

Deposits, loans.

[A]

No, none. None of those words. They're the worst words anyway.

[B]

Hi. So this is. This is a little. This is a little quiz. Yeah. If you can. If you can. If you know what Basel III is, then you will pass the quiz. If you don't know what Basel III is, here's a little quiz for you. If you have money in the bank, if you have $1,000 in the bank, is that thousand dollars the bank's assets or the bank's liabilities? We will answer that question later on in the show.

[C]

That's quite the teaser, really, people.

[A]

We just lost literally 20,000 listeners. They're going to go, listen, that's how.

[B]

Exciting this show is going to be. No, we are going to have a more exc. We're going to talk about the glorious country of South Africa, which is doing some kind of crazy things right now. And we're going to talk about everybody's favorite topic, which is the beating heart of this show, which is the markets. And why aren't they doing what they're supposed to be doing? I am Felix Salmon of Fusion. Jordan is Jordan Weissman of Slate. Hello, everyone, and welcome back. Anna Shymansky.

[C]

Hello.

[B]

Who has many, many years of emerging markets debt investment under her belt, which I guess means that you're talking to us about South Africa.

[C]

I am talking to you about South Africa.

[B]

So I love South Africa. It's a beautiful country, but it's kind of a little bit falling apart a little bit.

[C]

So that's what Fitch would have you believe.

[B]

So Fitch is the other rating agency.

[A]

It.

[C]

Moody is the other ratings agency. Actually, no, Moody's is the other ratings agency because they use a different terminology than everyone else.

[B]

Fitch is a bit like in auction houses. You have Phillips, right. You know, there's Sotheby's and Christie's and then there's the other one.

[A]

You're like, you're trying to explain like the slightly obscure thing by going for the really obscure. Here's something you might not understand. Let me make you understand it less, even less.

[B]

In rating agencies, there's SMP and Moody's and then there's Fitch. But that's, that's, you know, but they came out and they actually caused headlines.

[C]

They did because they downgraded South Africa's sovereign debt following the S and P downgrade of the sovereign debt. And so I'm sure many people are asking, what does that mean? Why do we care? So essentially, first of all, it was downgraded because the President of South Africa, Jacob Zuma, sacked his finance minister, his very well regarded finance minister. He also got rid of a number of other ministers who were more fiscally responsible, put in a number of cronies, spooked the markets.

[B]

So this isn't just any old downgrade. I mean countries get downgraded every week, right?

[C]

Yeah, but this is significant. It's the first downgrade since 2000 and for a lot of the BRICs it's a, it's a status thing to this idea of not wanting to be downgraded. Granted we've been seeing significant number of downgrades recently but in general, like being downgraded is, it's significant now is, does.

[B]

This mean that South Africa is junk bonds?

[C]

In theory, yes. And so it's important we're talking about the foreign denominated debt here because essentially currently the, the Rand denominated bonds are not yet at junk.

[B]

So this is, this is a really big deal. The emerging markets basically fall into two buckets. You've got the investment grade buckets where you can put your money and know that you'll get it back. And then you have the, what's known as high yield or junk bucket, which is you're taking a bet that you'll get your money back. And what the rating agencies have done, because it's entirely up to them which bucket it's in, is they have said, yeah, if you lend South Africa your money, we can't really guarantee you that you're going to get your money back.

[C]

Yeah, you have a higher default risk.

[A]

And the thing about this is it seems like it's kind of a downgrade of like civil society in South Africa. Right. That's essentially what they're saying here is that, you know, this is a government and we'll get to this more. It's being overtaken by a corruption scandal that sort of, you know, this well regarded finance minister who is there to kind of Inspire confidence in the markets, is being shown the door because he wasn't compliant enough. And so, I mean, am I reading that right at least? Is that, is that, is this really a downgrade of, you know, like the.

[C]

Whole government, ratings agencies, at the end of the day, they are concerned about default risk, but the quality of the government and the quality of governance and also how that relates to fiscal policy is very important to overall default risk. So political instability equals greater default risk.

[B]

And then there are two things which they care about. There are two different flavors of default risk. There's ability to pay and then there's willingness to pay. And South Africa, I mean, correct me if I'm wrong here, but the thing which changed when South Africa, when Jacob Zuma fired his finance minister, was not so much the ability to pay, and it was much more. Now South Africa is run by a bunch of like random chaos monkeys, and they could just wake up one morning and decide they don't want to pay their foreign debt.

[A]

Yeah. And I think at this point we probably need to talk a little bit about the story of what's actually going on here. Which is president of South Africa is this man, Jacob Zuma. And he is what you might call a maybe a Zulu nationalist. He's, you know, the South Africa is kind of run by this one political party known as the African National Congress. And they are the anti apartheid party. They were the kind of. They were the party of Nelson Mandela. But it really has these two specific camps. And there's one which is sort of, for lack of a better word, the globalization camp. The sort of the people who are, you know, had PhDs and whatnot and were, you know, educated in finance and whatnot. And then there's the more kind of communist inflected populist camp, and that's also has a very strong threat of Zulu nationalism. And that's one of the ethnic groups there. Zuma comes from that other camp.

[C]

Yes. And we've also seen much more of a fracturing of these camps since the last regional elections where the ANC did very poorly. They lost a number of municipalities that they hadn't lost since 94. And the Democratic alliance, which is another party, has been kind of taking votes from the right, and then the EFF has been taking votes from the left.

[A]

And then the key thing about Zuma is that, you know, on the one hand, he's, you know, part of this sort of populist wing of the party, but then also he's just been beset by corruption scandals pretty much since he entered office, it started off with this arms deal where he was accused of taking a bribe. And that has been an ongoing saga that is actually still, you know, the charges were dropped and then they brought back and yada. And you know, you could spend months reading about this practically. And then there's been another report recently, it was like 400, 350, 400 pages, all about how South Africa is essentially owned by this one very powerful Indian immigrant family, the Guptas, and just how their money has kind of spread throughout the entire government and they are now essentially buying favors and from state and control of state owned industries, things like that. And you know, this finance minister was sort of in some sense is the last line of resistance to all this.

[C]

Yes.

[A]

And now he's been sacked. And so that is what, I guess now the bond markets are looking at and thinking, oh my God, what are we dealing with when we've let all this money to South Africa?

[C]

Right. But one of the things I actually think is interesting is how the bond market has not reacted as one would.

[B]

This is the most interesting.

[C]

Yes. So we have certainly seen some sell off in the Rand, which is the South African currency, but not as much.

[B]

Of a sell off as we have seen in many other periods of South African turmoil, certainly.

[C]

And actually the week of both of the downgrades, we had net inflows into South African sovereign bonds.

[B]

So this is the bit where, and we're going to talk about this more in the next segment, but this is the bit where the market discipline and the price discovery and all of the wonderful things that markets are meant to be good at basically falls apart because you have downgrades and downgrades are dreadful things. And I was covering emerging markets for many years and whenever there was even a hint of a downgrade, let alone an actual downgrade, everyone's hair would burst into fire. Especially if it was a downgrade from investment grade to junk, which is the biggest kind of downgrade that you can get. And markets would be in turmoil and bonds would sell off and currencies would weaken. And this was. If you're of a certain age, you can remember Jim Carville coming out and saying, I want to come back as the bond market, because the bond market controls everything. They have so much ability to discipline countries. And weirdly, none of that seems to have happened.

[C]

And it's not that strange in light of what's been happening over the past 10 years, because again, essentially when you're in a zero rate environment, you have very low volatility, you have very low default rates. You have a lot of investors who are looking for yield. And essentially part of the reason that the Rand had been the best performing currency, part of the reason that we had been seeing it before inflows into this market was because you could get a 9% yield in and at that point was an investment grade. Obviously now it's no longer. What we've seen because of accommodative monetary policy is that you had US investors who were investment grade starting to shift into more high yield instruments in the US and then you had the US and European high yield guys starting to shift into em because again you're just chasing yield. That's how you make money. And we're even seeing this now after this downgrade. You hear investors saying this is an opportunity because they view this, I think the way people have been viewing downgrades because there's so much government support for these assets, people don't actually think they're going to default. So they view it more as this is an opportunity for a sell off. I can potentially pick up some instruments for a better price.

[B]

Okay, so we're going to talk about global savings gluts and liquidity and zero interest rate policies in the next segment. But let me just ask one question about what you just said, which is you said government support for these assets. Which government are you talking about?

[C]

And again I would say it's not necessarily government support for these specific assets, it's government support for bonds in general.

[B]

So this is, the European Central bank is a form of government. It's going out there, it's buying a lot of bonds. And according to the sort of general fungibility of bonds, if you buy one set of bonds, a whole bunch of other bonds are going to rally in value as well in this sort of relative value trade. And so even if the European Central bank is going out there and buying French government debt, somehow that ends up providing a weird kind of bid for junk rated South Africa.

[C]

Right. And how many actual defaults have we been seeing of sovereigns?

[B]

Mozambique.

[C]

But even then you're getting also a kind of super global institutions that will come in things like the imf. So the idea that we're actually going to see a true default is unlikely.

[B]

Which is crazy to me given that like we just come out the other side of the biggest default of all time, which was Greece, which was also a big investment grade country. Defaults are no longer unthinkable. I feel like our time horizon here has shrunk.

[A]

Well, I think part of that Is, you know, Greece doesn't. I mean, it comes back to Greece not controlling its currency. And that's such. That's so baked into the narrative of what went wrong in Greece. So, you know, it's easy to excuse, you know, throwing your money into a deteriorating, you know, government in South Africa. But it is strange when you think that, like, you know, Mario Draghi trying to stimulate Europe's economy is indirectly making it easier for a corrupt government in South Africa to keep surviving and not have to deal with the consequences of its actions, like, you know, sacking the finance minister.

[C]

Right. Because right now it's seen as a heightened risk, but it's not actually being seen as a default is imminent. The idea is they would probably still be able to get liquidity in one way or another. The fact that we still see Venezuela making a payment for Perveza yesterday when essentially have almost no liquid reserves.

[B]

Okay. Which is my perfect segue to the next segment. So staying on this question of the markets and why they don't seem to be doing their job anymore. The idea behind markets is always that you can look at a share price, and if the share price is low, that's the wisdom of crowds basically saying, this is a shitty company. If it looks good in terms of profits, then it's actually bad in terms of how much its profit is going to add up to going forwards. That it's this kind of canary in the coal mine. You can do the same thing in the bond markets, that if the spread on a sovereign is really wide, if the bond yields are high, then that means there's something really dodgy with that country. Or you look at the currency or all of these different indicators. The entire business press is built upon looking at the market, seeing the moves and trying to work out what those moves mean in terms of underlying realities. And what we have seen in, of late, not just in South Africa, not just in Venezuela, but all over the place, including Britain, for instance, after Brexit, everyone's like, this is terrible. This is, you know, a pathetic island voting to fall into the sea and become completely irrelevant. And the markets kind of shrugged it off. We saw it after Trump got elected that, you know, everyone said, this is dreadful. This is terrible. This is like the end of the world. And everyone was saying the market was going to fall 20% and it went up. And then everyone said, well, maybe the market just changed its mind. And they were really, actually optimistic about Trump and they thought that he would do all of these things. And then when it became obvious that he wasn't going to do all of these things, and he's incapable of legislating anything. The market still went up. And so none of this kind of markets reflecting reality seems to be happening right now. And I don't know why. Well, I do know why, Anna. Because it's exactly what you're talking about, Right?

[C]

Exactly. In general, when there's so much liquidity in the market and people needing to put money to work, they're much more likely to believe the optimistic story than the pessimistic story.

[B]

So just jargon. Watch it. When you say liquidity, you just mean money.

[C]

Yes. And it is a fancy way to say money.

[B]

It is a very fancy way to say money. And we've called this the Liquidity edition because we like being fancy.

[A]

We care about liquids other than wine on this show, at least for once. Anyway, sorry, continue.

[B]

So, okay, so there's. This is a version of what Bernanke, Ben Bernanke would call the global savings glut, right? That you basically just have too much money in the world chasing too few assets. And so any kind of asset that you have in the world, whether it's a stock or a bond or a house or even a Jeff Koons sculpture, is likely to just be going up and up in value. Because what else are you going to do with your money?

[A]

I think there's another issue kind of at play, too. I mean, that giant pool of money is just going to elevate the value of everything, right? Everything's going to get driven up by money from. That's been saved by Chinese billionaires. Right? That's. Look, they're looking for a place to invest. But I think one of the questions you're asking is also why aren't markets reacting to political news in a way that seems rational? And I think part of that is just because it's very hard to quantify political news. We talk about markets being efficient and rational and good at integrating new developments into stock prices and such, but that kind of news is something can usually be broken down on a spreadsheet that's quantifiable. There are lots and lots of ways. You can read the development in the US Under Trump. And so I think that that's part of it, is that when there is this ambiguity and there is all this money floating around, you know, optimism, a bias towards optimism seems to take control.

[B]

And has also been paid off, to Anna's point of Venezuela. Venezuela has been a complete basket case and 100% certain to default for what, two years now, right? And it hasn't defaulted. And if you were, they just won't pay their importers. If you, if you were betting on like the obvious thing, which was certainly going to happen, you lost your shirt, right.

[C]

And you could actually make a significant amount of money if you just kept assuming that Venezuela was going to muddle through. But going back to what you were saying as well about the market not reacting or reacting in an interesting way to political events, because I would say it's not that the market hasn't reacted at all, it's just when Brexit happened, the, before it happened, there was uncertainty, so people assumed it would be a negative reaction. But then when it happened, people then created this more optimistic story of this is going to be a risk on, that's then going to be a risk off, because it's going to slow rate hiking schedules. It's going to slow rate hiking schedules. That's going to continue the loose monetary policy that, thus you started to see lots of flows into riskier markets.

[B]

And so this is, this is the bad news is good news. Trade.

[C]

Yes. And then Trump, similarly, it was interesting because immediately after Trump, you did actually have some sell off in riskier assets, some shifts toward safe havens. And then the market structured a new narrative and then all of a sudden inflows came right back in.

[B]

And tell me about these narratives. Are these just things which financial journalists dream up because they need to explain market moves or are they actually, do they have explanatory potential?

[C]

There's some reality. I mean, if there, if Trump had been able to, or at some point is able to actually push through tax reform, is actually able to push through infrastructure spending, this could have an inflationary impact. At this point, I think a lot of us think that's less, less likely to happen. But there, there is a logic behind that argument.

[B]

So I have this theory. I, I'm, I'm famous. I appear every so often on Marketplace, this radio show where the standard shtick is. The host, Kyrie Isdahl, asked me about the stock market. And my standard response for the past eight years or so has been never mind the stock market. What really matters is the bond market. Just look at the bonds. And my theory is that looking at the bond market is actually not particularly useful anymore. And bonds really don't tell you anything, and stocks really don't tell you anything. But there is still one market which tells you something, and that is the FX market. That currencies actually move in interesting and informative ways. The Mexican peso reacting to Trump the pound reacting to Brexit, the dollar reacting to Trump. We have a very strong dollar right now for interesting and informative reasons.

[A]

I mean, to what extent is the FX market just kind of a general confidence barometer that like a country is or isn't fucked? And to what extent can you really like read like particular narratives?

[C]

And it's complicated, especially if you talk about like the Mex peso because that's often, it's a very liquid currency. So it's often used as a way for investors to say whether they are kind of more bullish or bearish about em in general. So often when the peso either sells off or kind of inflates, it often has very little to do with what's actually going on in Mexico. So that's where it's a little complicated when you start to talk about fx.

[B]

Because FX is all about rates and carry trades and you know, and it is difficult to isolate a stock price is easy if you have one stock which goes down when all the other stocks are going up. You know, all that's because there's something specific about that company. But yeah, if one, if the Mexican peso goes down, you don't know if that's not just a broader, you know, carry trade unwind or something.

[C]

Yeah. And I do think it's interesting right now though if you look at the difference between how the bond market very recently has been reacting versus the stock market. Because right now what we're seeing are these kind of soft confidence indicators that have been very positive both for investment business consumers. But the actual hard data that's coming in has not been so positive. And the bond market seems to be reacting a little bit more rationally to that. You're starting to see kind of a pull from that reflation trade. The equity market is not. But I would actually argue that that's because the equity market right now is being driven frankly less by kind of Trump narrative and more by earnings.

[B]

So I have one question about the stock market, which is what are we looking at when we look at the stock market? Do we look at the price of stocks and how eye bogglingly expensive they are? Is that the main number one thing that we're looking at or, or do we do this thing that most people do when they look at the stock market, which is look at the Delta, look at the first derivative and say are stocks going up or are stocks going down? And if they're very expensive and they go down a little bit and they're still very expensive, is that like A bad sign. Should we be looking at movements in the stock market to see quote unquote what the market thinks or should we just be like taking a step back and saying it's still really high?

[C]

I mean, I think there's a truth to both of those. I mean, I would argue right now the market is risky in the sense that when valuations are so high, your potential a for capital appreciation in general is just going to be less. And anytime your, your cost basis, the amount of money you're spending is higher, your, your risk is essentially then higher. So I do think there is just an overall level of. The markets do seem a little too frothy right now. I guess the question is how much higher can we go at this point? When, like, when do we start to see pullback in some of the areas that we know are over? Like there's, if you're talking about energy or financials right now, there's some evidence that frankly like earnings are coming in fairly strong. There's some fundamental improvement there. If you're talking about say industrials or.

[B]

Small cap or Tesla.

[C]

Yeah, well, tech stocks, Tech stock valuation is a whole other animal. There's a sense that that has to start pulling back at some point because there's a reality of the fundamentals of the company. Are they improving? Are they not? And at a certain point you assume that even if the narrative is there, eventually in the long run the fundamentals will win out.

[A]

I find myself wondering a lot to what extent the market at this point or betting on the market is just a bet that that giant pool of money keeps growing. This is not something I frankly have nearly enough expertise to reason. I think Anna, maybe you do. To what extent is just, can you hope for trends like inequality and the growth of the global rich to keep funneling money into things like equity and bond markets? And do you think that is maybe, possibly part of what explains just the maybe somewhat odd behavior that people expect it to keep?

[C]

Yeah, I mean this is that way. This is a question that I often have is what is the engine of global growth moving forward? Because for about 10 years we had this commodity super cycle from Chinese investment and development and then that fueled EM growth. EM growth then through fueled DM growth because you had new markets that you could sell your products to. My question is, as China rebalances, as they shift from this heavy infrastructure, heavy commodity based economy to in theory this more service oriented economy, where is that engine of growth?

[B]

Although I think Jordan's question is a little bit different. It's not so much the global economy and whether it's growing, it's more the amount of cash looking for investments and whether that's growing. And those are two importantly different things.

[A]

And I am definitely asking more along what Felix is asking. How much money is in the hands of a few very wealthy people? How much of it is in sovereign wealth funds? How much of it is just money floating around, looking for? And again, does that pool just continue to grow? And if so, is that just something that's going to support asset values, even if there's no underlying rationale for why a specific company should be going up or down?

[C]

I mean, it's a good question. And then that also then factors into how global monetary policy shifts and the kind of money multiplying effect. It's a good question.

[B]

Moving forward, I would just say that you need a lot of money flowing in. And even if you have a lot of money flowing in, prices can still fall. There's. There's not. Of course, It's. It's not like some kind of swimming pool where you just pour the money in and the level just rises. You can have inflows and price falls at the same time. It. It's not easy, but it can be done.

[C]

Definitely.

[B]

Yeah. Jordan.

[A]

So there was a fight between two of, I think, our favorite figures on Wall street recently. Two the best people in all of Wall Street. It was a little, I guess it was almost a blog fight, I would say, between Jamie Dimon, the CEO of JP Morgan and maybe the most famous banker in the world, and Neel Kashkari, who's the president of the Minneapolis Federal Reserve Bank. We talk about him fairly frequently on the show. And he's definitely the best, I think, Fed president right now. Felix, would you agree he's at least the most entertaining Fed president right now?

[B]

Yeah. Because there's always the Minneapolis Fed, which has to be entertaining. But he replaced the other NK Narayana Coach Lakota, who was, frankly more entertaining. But if we can't have Narayana Coach Lakota, we can at least have Neel Kashkari.

[A]

Yeah. So Neel Kashkari has been on this whole, you know, how to deal with too big to fail in the future. Do we break up the banks and whatnot? He's also been writing little personal essays about why he dissents on Fed decisions. He's colorful. But anyway, so Jamie Dimon put out his annual shareholder letter. It was so long, it was like 46 pages.

[B]

I'm sure he wrote every word himself.

[A]

Yeah, exactly. Every single apostrophe.

[C]

He's written many quarterly letters. I actually think the longer it is, the more likely the person wrote it.

[A]

Really?

[C]

Yes.

[A]

Because it's like a passion project.

[C]

Yes. And because no one will edit them.

[A]

Oh, Jesus.

[C]

If it's short and concise, you know, somebody else wrote it.

[A]

So he wrote. He at least had a hand in editing or overseeing this 46 page letter that had a really interesting section where he was like, hey, guys, good news, you know, too big to fail. Bailouts. It's all been solved. It has all been fixed. The US Government's never going to have to bail out another bank during a financial crisis. And oh, by the way, since we've solved it, I think the regulations are a little too stringent and we should start rethinking some of those regulations. Maybe we should dial back some things like, I don't know, capital liquidity requirements, yada, yada, yada. And this is, to begin with sort of a strange posture, I think, for a letter saying we've solved one of the big crises of, you know, in banking, but now we should undo the things that solved them to some extent anyway.

[B]

I mean, let's just interject here and cast our minds back to the fcic, the Financial Crisis Inquiry Commission, when Jamie Dimon gets hauled in front of the Senate and gets asked about his actions during the crisis. And at some point someone says, well, what is a financial crisis, Mr. Dimon? And he replies by saying, ho, ha ha. My daughter asked me that just last week and I said, a crisis is something which happens in financial markets about once every seven years. And now he's saying, oh, crisis, we'll never get another crisis.

[A]

No, but he. It's to his credit, he at least says that maybe we will have crises, we'll have panics, but we won't have bailouts. They've been solved, he says. And then Neel Kashkari basically responded on Medium because he's very in tune with millennials. And he, oh, no, you didn't. And this is basically, he wrote this long post responding to Diamond's theory, outlining all of the reasons why he thought it was complete bs and a lot of it. And this is where we get to the extremely nerdy stuff that Felix was gesturing towards earlier in the show, down to this idea of how banks are, to what extent banks have kind of safeguarded themselves, what kind of cushions they've built into their balance sheets, and what counts as a cushion is it, you know, what do they have to do? They have to have something like what we call capital or are there other things they can have to, you know, protect themselves in the event of a downturn? Now Felix, do you want the honors of talking about total loss absorption capacity or should I do it right now? How do we want to break this down?

[B]

I'm going to take a stab at this and you can tell me that I'm nerding out. Stop me if I get too nerdy, but it's ultimately banks have two things. They have assets and liabilities. And this is where we answer the question at the top of the show. The assets are basically everything which pays the money. So that's loans. If, if you have a mortgage, you're paying back the bank interest every month and you owe the bank a big principal repayment, that's a loan and that's something which makes the bank money. So that's an asset for the bank. They also have liabilities, that's deposits. If with a deposit, you're basically lending the bank money at effectively a zero interest rate and you can demand it back from the bank anytime you like. And so that's money they owe you, that's the liability. And so with a bank the size of JP Morgan, you have $2 trillion of assets and $2 trillion of liabilities. These are mind bogglingly enormous numbers. And you take the difference between those two numbers, if you take the assets and subtract the liabilities, what you are left with is this thing called equity. And so if the liabilities go down in value, if some of the loans default or they go bad, then the assets minus liabilities can still remain positive just as long as it was big enough to begin with.

[A]

And that's what we often call, you hear, called capital. That's bank capital, right? And another sort of simple way I like to think about it is, is that capital is the money banks use to fund their business that they don't have to pay back to anyone, they didn't borrow it. It's money that, you know, they got from shareholders when they bought stock. It's money that they got from retaining their profits, things like that. And the idea is that when you fund your business with capital, it's a lot safer essentially than if you fund it with debt. If things go wrong and you have debt, everything might go bust.

[B]

Because what the last thing you want to do as a bank is ever default on your debts. This is the one big lesson that we learned in the financial crisis, that even the debts, which theoretically you should be able to default on and survive in practice in a crisis situation, if you even hint that you might default on them. Suddenly all of your funding dries up and you go bust.

[A]

And so then thanks to all the post crisis regulatory reforms, banks have been forced to have more capital. However, there are other ways that a bank can kind of build itself a cushion. Right? And then we get into this idea called total loss absorbing capacity. This is the thing, this is the other parts of the cushion. This is stuff that's not capital that still is, like, okay, it can absorb some of your losses if things go really bad. And Jamie Dimon thinks this stuff will work. Having all this other stuff, this other kind of cushion will be enough to safeguard the banks and be part of what prevents bailouts in the future. And Neel Kashkari is like, that's bullshit. We need higher capital.

[B]

So, Anna, who's right, you know, I'm.

[C]

Going to kind of cut this down the middle in that I do think I agree with Kashkari that the idea that we will bail in unsecured debt, history suggests we will not. We have already seen this right now and what's going on, frankly, in Italy.

[B]

And just to de jargonize, when you say bail in unsecured debt, you mean.

[C]

You can bring the debt to equity?

[B]

Well, I mean, to be really clear about this, unsecured debt is just debt.

[C]

That does not have a claim to the assets of the bank or the financial institution.

[B]

And that includes deposits.

[C]

Yes.

[B]

So when you say bail in unsecured debt, what you mean is, If I have $1,000 in the bank, then maybe I would. The bank would just turn around one day and say, you've only got 500.

[C]

No, no, I mean, if we're talking about unsecured debt is a different instrument than deposits.

[B]

So it gets you. But basically it gets complicated. But yes, there are a bunch of instruments which in theory can default or get turned into equity. Or like, you start hearing weird terms like cocos, which we weren't really talk about, and convertible bonds.

[A]

Man, I do. I kind of want to talk about cocos.

[C]

Anyway, sorry, yeah, at some point I would love to have that discussion.

[B]

But in theory there are lots of things which, as Jordan says, can absorb things. The question is, Neel Kashkari's question is. My question is, when push comes to shove in a crisis situation, is there any reason to believe that a bank can actually do that, can put that pain onto lenders and still survive?

[C]

Yeah, and that's a really good question because as I've said right now we are seeing in real time that, you know, in Italy, they are essentially doing everything they can to not have to essentially bail in creditors.

[B]

And now is not a crisis time. No, I mean, but this is, this is a key thing. I think that what Jamie Dimon is basically saying, or at least the way I read it, is, hey, you know, we have these mechanisms for resolving ourselves and for continuing to live and survive and thrive and bail in and debt to equity and all of this kind of stuff. And my feeling is that works when it's only you that's in trouble. When the entire system is in trouble. When you have a crisis which is a national crisis or an international crisis, that doesn't work anymore.

[C]

Because the biggest worry is contagion, frankly, that if a bank starts to bail in its creditors, the creditors at other banks are going to get spooked and start pulling out capital, depositors are going to start pulling out and then it's just going to exacerbate the crisis and.

[B]

You get a massive institutional bank run. All of the money gets sucked out of all of the banks, there's a huge amount of short term funding and basically all of the banks fail. Because even a healthy bank cannot survive a bank run.

[C]

Yes.

[A]

There's at the risk of bringing up an economics paper which I know some.

[C]

People might be like, I love white papers.

[A]

Yeah, this was a working paper. It was a paper recently came out on the National Bureau of Economics Research and it kind of asked the questions like, does capital actually make banks safer or does it make it less likely that we'll have a financial crisis? It was kind of testing the Kashkari theory that if you just jack up bank capital, everything will be safe. And what I found was kind of discouraging and kind of encouraging at the same time, which was that banks having lots and lots of capital doesn't necessarily stop financial crises. In fact, there's no suggestion that it does if you look at the historical record. But what it does do is make the recessions that follow them less painful. And what I think applying that now to the kind of Daimon Kashkari feud. Right. To me that's actually a pretty powerful argument in favor of Kashkari's position because it's like, well, we don't really know exactly how to stop a financial crisis. We really don't know if regulations work until they finally are tested and the shit hits the fan. But if the historical record at least tells us that jacking up capital will make the pain or should probably make the pain less awful for everyone in the aftermath, that's good. And we should probably subordinate the needs of banks and their desire to have more flexibility to just safeguarding the rest of the economy.

[B]

And the other thing which is very important is the political considerations. There was enormous anger and real suffering in the country around the time of what everyone calls the bank bailouts. Now, there were. What you had at the time was a banker in charge of the Treasury, Hank Paulson, who made a perfectly financially legitimate decision that the banks needed a bunch of liquidity and that it would be a very bad idea to try and just single out the bad banks. So he was going to force them all to take a bunch of liquidity and this was going to help them get through the crisis. This was all perfectly logical. If you weren't a politician, if you were a banker, if you were a politician, it looked dreadful. And what Neel Kashkari is really big into is this idea of we shouldn't have any more bailouts, even though the last bailout wound up being profitable for the government. That doesn't matter. It's just politically untouchable. And for the question of bailouts, let's say the question of crises. But I feel it's. You can't deny that a bailout becomes less likely the more capital you start.

[C]

With, of course, but I think the idea that we will ever get to a point where we won't bail out our banks is absurd.

[B]

There is no doubt that the big four banks are too big to fail. And if they need a bailout, they will get one.

[C]

And if they were smaller, they would still. At the end of the day, banks are the linchpin of a capitalist economy. You can't let the banks fall apart. It destroys the rest of the economy. It's not like any other industry.

[B]

The only way to prevent a bailout is to make sure they have so much capital that they don't require one.

[C]

But of course, just like anything in econ, you do one thing, it's going to have other effects, which is there, there is a point to be made that the more capital you, you force the banks to hold, the less money they can then essentially lend out. So then that is going to be a little bit of breaks on the economy.

[B]

Certainly.

[A]

I think there are some academics who might challenge the idea that banks couldn't lend just as profitably if, while holding higher capital. But that, that probably is how the real world incentives work right now. I guess that's true.

[B]

And, and I feel like we're moving further and further away from the world where economic growth is a function of bank Lending. But anyway, that's a question for another topic. You know what we should do? What we really should do is have a numbers round. Anna, do you have a number?

[C]

I do.

[B]

Awesome.

[C]

57 spot 25. Okay, so that is the USD ruble FX rate the Friday after the attack on Syria.

[B]

So, okay, so that's the number of rubles per dollar. Yes. Russian rubles.

[C]

Yes.

[B]

57.25 is a lot of rubles.

[C]

It is. So that was a slight devaluation, essentially. But the reason I think this number is interesting is that the way the financial media was discussing it was often just as one more reason why the Russian Syrian position had negative effects on their economy. But what I think is actually interesting, and this is why I think when you deal financial statistics, you have to be really precise, is actually the ruble had been a bit overvalued and that was actually hurting Russian exporters and it was also hurting the Russian government itself because the Russian government essentially also functions like an exporter to a certain extent because they own the oil companies. So they earn revenue in hard currency. Their costs are mostly in local currency. So when the ruble devalues, they actually can improve essentially their balance sheet a little bit.

[B]

So what you're saying is airstrikes. Putin was like, awesome, this has hurt the ruble. I have a weaker currency, which is what I want.

[C]

I'm not saying that that was the plan, but more that I find it interesting that when you talk about EM economies, you have to be very precise in the way you talk about financial statistics.

[B]

My number is 0.7 70%. Since we were talking about Jamie Dimon's shareholder letter, the other big shareholder letter that came out was Jeff Bezos's shareholder letter. The CEO and founder of Amazon.com, much shorter, much easier to read. And he was. Bezos has now been around long enough and been a billionaire, multi billionaire for long enough that he's sort of, he's, that he's entered the wise old sage phase of his career. And so he, instead of talking about Amazon, he'll just say, let me give you some hard earned management advice. And so this was his little sort of like management book, you know, or management letter, I guess. And he said, quote, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90% in most cases, you're probably being slow. So this is his number. If you're making a decision, you work out what information you need to make the decision. And then once you reach 70% of that information. Just go ahead and make it.

[A]

You know, I actually found that inspiring. I'm going to be honest. I am a person who always overstudied for the test and that has extended way into my life. And I always still end up making the wrong decision, consistently make the wrong decision in most aspects of my so this I'm going to try and live by these words.

[B]

It's actually it is a good thing because no decision can be the right decision with any kind of certainty. And if you know that you have a 30% chance of being wrong, then you're going to by you're always going to have some kind of a plan B and a certain amount of flexibility. Whereas if you go in there pretty sure of yourself, then when things blow up, you wind up shit creep.

[A]

Indeed. All right, my turn.

[B]

Your turn.

[A]

My turn. My turn. My my number is not very financing, but made me sad. My number is 1.42% and that is the percentage of applicants for welfare in Mississippi who are getting applications accepted. You know, or to be specific, it's tanf Cash Assistance Temporary Assistance for Needy Families, the modern version of what most people commonly know as welfare. For some reason, Mississippi has just stopped accepting new cases. For all intents and purposes, more than 11,000 people applied last year. It's 167 actually got cash assistance. These are typically mothers with children, single mothers. Think Progress did a report on this and couldn't get any answers from the state agency there. Nobody in the state can get any answers about why it's happening. And it kind of points to this broader problem with America's welfare system. Now that I think we talked about on an episode almost a year ago, which is that essentially a lot of states now have an incentive not to accept people because they are allowed to then use that money elsewhere in their budgets. And that's been sort of taken to its logical or its logical and yet absurd conclusion in Mississippi.

[B]

On which depressing note we will wrap this thing up. Thanks Jordan, for ending it so upbeat and jolly. Guys, can you email us? The email is slate moneylate.com and like try and give us some upbeat and jolly things to talk about because Jordan will bring us down with a thump otherwise. So yeah, I'm not going to thank Jordan this week because honestly, you know, really, that was just depressing. I am going to thank Zach Dynastyn and Steve Lichti and Andy Bowers and June Thomas and the whole Panoply crew. I am going to thank Anna Shymansky, who is in the middle of an amazing masterclass on all things emerging markets. Stick around. This is not going to end this week, although I'm sure we'll fit some other stuff in there as well. And I am going to urge you to check out all of the other Panoply podcasts, which are at Panoply fm. But for the time being, that's it. And we will talk to you next week on Slate.

[C]

Money Pata Pata is the name of the dance we do down Johannesburg way and everybody starts to move as soon as Pada Pada starts to play.