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Original & Concise Bullet Point Briefs

Your Bank Account is a Lie

How Banks Operate: Understanding the Money Multiplier and Its Impact on Confidence

  • Banks use the money multiplier effect when customers deposit money
  • Banks only hold a small percentage of total deposits in their vaults, while the majority is used to give out loans and collect interest
  • Banks rely on customers not panicking and withdrawing all their money at once
  • If people panic they can cause a collapse of the banking system as banks don’t actually have all customers’ money
  • Deposits are protected by the government in case of bank failure, so customers can remain confident.

Government Seizes Control of Assets Following Bank Collapse

  • The government raised interest rates to help stave off inflation and stabilize the economy
  • SVB’s customers (startups) weren’t able to raise as much money due to the economic downturn, causing SVB to pull from their reserves
  • To get more money, SVB began selling bonds early at a loss of 2 billion dollars
  • This caused a “run on the bank” where customers withdrew 42 billion dollars in one day, causing the stock to plummet 80%
  • The government stepped in and seized control of assets, making it second largest bank collapse in history
  • The government’s main goal is to protect banks and help Americans have confidence that they are safe.

A Stark Reminder: The 1930s Bank Crisis and the Biden Administrations Intervention

  • The 1930s saw 9000 failed banks and a lack of insurance caused by people taking their money out simultaneously
  • In 2008, 500 banks failed and some were bailed out with taxpayer money to prevent a catastrophe
  • The Biden Administration took measures to ensure those with accounts at collapsed banks would get their money back, regardless of the amount
  • There is debate over whether or not the government should let banks fail or if they should always swoop in and save them
  • The government’s intervention may have successfully calmed people down or could lead to more bank runs, failed banks, and a stark reminder of our mental construct for prosperity
  • Ultimately, when the economy tanks, people tend to blame immigrants and poor people.

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a rough week for the banking industrythe collapse of Silicon Valley Bank iscausing shock waves across the entirebusiness worlda big Bank just died we've all heardabout it everyone's talking about it andwe gotta talk about it because somethingbig is going on here as of this morningSilicon Valley Bank or svb has goneunder completely the second biggest bankcollapse in U.S history the bank iscalled the Silicon Valley Bank or ifwe're going to call it svb in this videoit is the epicenter of tech startupsventure capital and it is noweffectively dead the government isscrambling to keep us all calm whilethis Bank fails your deposits will bethere when you need them the Americanbanking system is really safe and wellcapitalized that's because we live in asystem that doesn't work if everyonefreaks out at the same timethe system relies on all of us keeping afeeling of safety if that doesn't happenthe system falls apart and that's whatI'm going to explain today so let meshow you how this happened how this Bankfailed and what it means for you and mebut more importantly how this momentteaches us that our bank accounts arekind of a lie we're gonna have to dosomething different here we're actuallyrescuing depositors in banks that madesome bad decisions over the course ofthe last year or so Americans can haveconfidencethe banking system is safe okay so let'stalk about Banks all this is done withcredit credit created by the bank out ofthe deposits made by all of us banks areactually pretty nuts we think of a bankas like a place where we take our moneyand store it like we give our money tothe bank people and they go put it in agiant Vault and it is safe until we needit but that is not what is happening inreality banks are doing something prettymagical when you give them your moneywhat they do is actually at the heart ofour modern society our modern economyit's what makes a lot of things work letme explain let's get a little bit moreinsight on the collapse of SiliconValley Bank okay for this let's get backto the old collage of the macro economyas we've done in previous videos let'ssay I put ten thousand dollars into mybank what's insane is that the bank onlyhas to keep 10 of that money in theactual bank 10 percentso that's like a thousand dollars of myten thousand dollars the other ninethousand dollars they can go out andinvest with and make money on using mymoney they can go invest it this oftenmeans giving out loans to people andcollecting interests okay so ninethousand of my dollars gets loaned outto let's say a baguette business who isin need of a business loan because theyneed a new oven my bank gives the bakermy money and charges interest on thatloan and they actually give me a littlebit of that interest that they've madeto say like hey thanks for letting meuse your nine thousand dollars so thebaguette business now has nine thousandof my dollars and I don't actually knowthis because I kind of think that mymoney is in a vault somewhere so now thebaker with his new loan goes and buyshis oven for nine thousand dollars andthe oven seller takes that nine thousanddollars and goes and puts it in theirbank and guess whattheir Bank does the exact same thingthat my bank did with my moneybut now they're doing it with theirmoney which is kind of my money theyonly have to keep ten percent in theirvaults so they only have to put ninehundred dollars in the vaultthey've got 8 100 that they can lend outand look there's a family who's lookingto spend money on a home and they need aloan okay wait are you seeing what'sHappening Here I gave 10 grand to mybank and now that money has magicallyduplicated a few times to make moremoney like real money that can be usedto buy things an oven and then a housethis continues to happen over and overand over my 10 grand just keeps gettingused to be lent out put into anotherbank and then lent out again in fact ifyou model this out on a nerdyspreadsheet which is something I like todo you'll see that if I deposited tenthousand dollars in the bank tenthousand dollars is added to the systembut then for each one of thesetransactions more and more money getsadded to the system this is theaggregate of all of the money beingadded to the system my ten thousanddollars turns into this look whathappens lookjust keeps going and going andeventuallyit effectively 10 X's it sort of flatlines out at a hundred thousand dollarswhatmy ten thousand dollars just turned intoa hundred thousand dollars into theeconomy because ofweird mental constructs yes that is ourmodern Financial system it is amazingand it's kind of mind-blowing okaythis magical thing is called the moneymultiplier effect and it relies on thereserve ratio that the requirement thatbanks have like the amount that theyhave to keep in in this case 10 which islike the real Reserve ratio right nowyou can do this calculations like oneover the reserve ratio and it sort ofgives you this multiplier effect of yourmoney the crazy thing is the lower thereserve ratio like if your bank only hadto keep five percent of your money inthe more money would be created out inthe economy but the riskier that wouldbe for you if the reserve ratio was like50 if they had to keep fifty percent ofyour money then like that's safer foryou but now you're not like priming thepump of like giving all of this money tothe economy to like make transactionsand build businesses and buildcapitalism so the reserve ratio is like10 right now which means that a bankthat has a hundred million dollars fromall of its customers really only has tohave 10 million dollars in its vault atall times and the other 90 million isout doing its work in the economymultiplying itself and making a returnfor the bank and giving you a littleinterest rate and the bank is secretlythe whole time like please everyonedon't come withdraw your money at thesame time because we don't actually haveit just please thanks okay so this isslightly scary right like the bank onlyhas 10 of my moneyfeels kind of risky I thought Banks werelike the safest place to put your moneyit's not like I'm doing some hardcorelike risky Stock Investing maybe Ishould take all my money out of my bankaccount and put it under my mattress sothat the bank isn't like playing aroundwith it well no let's actually not dothat please because if we did oureconomy would miss out on this amazingmagical multiplier effect that turns my10 grand into a hundred grand and oureconomy would literally be a fraction asprosperous as it is the reality is wedon't have to worry and I'm going toexplain that to you in a sec but I firstneed to thank the sponsor of today'svideo thanks to today's sponsor incognisome of you may have remembered that afew years ago I made a video about junkmail and like the original framing ofthat video was I was going to go on awar on junk mail I was going to try tounsubscribe from everything and see if Icould rid my life of junk mailunfortunately the video turned into justan explainer about how my data is boughtand 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existing I'm very appreciative let'sget back to the video okay so Banks onlyhold on to 10 of my money in the other90 they are investing in the world andthis is kind of scary governments knowthat this is kind of scary and they alsoknow that our society and our oureconomy is built on us keeping our moneyin the bank not freaking out noteveryone all of a sudden going andpulling it out so to make us all sleepbetter at night they promise that if abank ever does anything Reckless withour money or they accidentally lose itwhile they're out there investing thatthe government will make up thedifference that the government will payus back for any money that we lost atleast up to two hundred and fiftythousand dollars it's kind of like aeveryone stay calm will pay back if youlose it just don't everyone go at thesame time and pull out your money pleasethe whole system relies on it can wejust chill and we can chill as long aswe don't have more than 250 000 in ourbank account anyway this is kind ofworks for most people most people don'thave 250 000 lying aroundbut what about businesses businesseshave to use Banks they have expensesevery month like payroll and rent a techcompany like Roku had 500 milliondollars in Silicon Valley Bank and atthis time the company does not know towhat extent they'll be able to recoverthat cash companies like this need waymore than 250 000 to cover their costsso the question is how do they feel safeand this is where we get back to SiliconValley Bank these Dynamics become verystrange when you're talking about thecustomers being a bunch of businesses doyou have the money Jitters ask yournearest Bank of America branch for a jarof soothing instant money okay soSilicon Valley Bank is the bank forbusinesses particularly Tech startups inCalifornia and unsurprisingly ninetypercent of their customers had more thanthe 250 000 sort of Mark where thegovernment will insure you so a lot ofthat money is not insured by anyone theyjust trust their bank and that's fineBanks aren't out there taking theircustomers money and like making superrisky Bets with it this bank has beenoperating for 40 years and it's beendoing just fine but what happens next isa perfect storm of events that led thisbank to sink where is he peekaboo let'smake a list for this here we go theanatomy of a collapse of a big bangfirst they invested a lot of theircustomers money like every Bank does inthis case they invested in governmentbonds which is a totally safe investmentit's an investment to put your money infor a certain amount of time like 10years and the government will pay youinterest on that money based on thefederal interest rate the interest rateyou know the thing that the FED puts upand down to sort of help put brakes onthe economy the thing is though when svbbought these bonds it was like last yearand the year before back when rates werevery very low okay not a great returnfor them but it was fine it was a safeinvestment if they just waited out thetime period of the bond they would getall their money back plus a littlereturn okay but then what happens nexteconomist expect a rate hike of threequarters of a percent to help drive downinflation the government starts to raiseinterest rates they're doing this tohelp Stave off inflation stabilize theeconomy the government is doing thisthing called raising interest ratesthat's fine what it means is that peoplebuying bonds today are going to get abetter rate of return those bonds aremore valuable now today so svb whobought their bonds a couple years agowhen interest rates were super low andif they ever wanted to sell those bondsearly they're now competing withinterest rates that are a lot higher andso their bonds are actually worth muchless if they had to sell them today theywould lose money okay but again that'sfine just hold on to your bonds untilthe the whole maturity schedule happensand then the government will give youall your money back with your littlereturn everything is okay okay buthere's the next part of the perfectstorm that really starts to heat allthis up remember that svb's customersare startups startups raise money fromVenture funds and they take that moneyand they deposit it into svb and that ishow svb gets its money to operate toinvest with but during this recenteconomic downturn startups haven't beenable to raise as much money and thus svbhasn't had as much money coming in thedoor and so they start pulling on theirreserves and they realize they kind ofhave to figure out a way to get moremoney and it's not going to come fromstartups because startups aren't raisingso they turn to their bonds they're likewe've got tons of our customers money inthese really safe bonds they're at lowinterest rates we probably need to sellsome of them off to like get some cashin our reserves to like meet all of ourneeds and the withdrawals and all ofthat so they sell off a bunch of theirbonds and this is where things start togo really really wrong they announcedthat they're selling their bonds andthey have to sell them early and yes webought them at a lower interest rate andnow the interest rate is higher so we'reactually selling them at a loss and thatloss is actually two billion dollarsokay like again banks have to deal withthis kind of stuff this isn't great forthem but it's far from lethal but thenthis is where it starts to get reallybad they go out and announce thatthey're going to be raising money fromother investors they're like going outlooking for money they're like hey yeahwe sold off the bonds we also need youguys to invest in our bank so that wecan just stay good everyone stay calmit's not a big deal we just need toraise a little moneyeveryone stay calm but the best way tolike get people to freak out is to belike stay calm it's actually not the bigof a deal we're fine we just need toraise some money and we're selling bondsat a loss oh my God okay it's happeningevery everybodywhat's the procedure okay so now themoment that deals the final blow to allof this all of these Founders andVenture firms they're all talking toeach other because they're all in thesame community in the same area all inthe same business they're all in thesame WhatsApp groups and they're alllike hey guys uh what's going on withsvb all of our bank why are they raisingmoney why are they selling their bondsearly is my money not safe and so like aherd of bison frightened by a loud banga stampede of very wealthy Founders andstartups in central California startpulling out their money from svb tryingto stay safe what you're seeing behindme is customers of Silicon Valley Banklined up to make sure that they can gettheir money they know that theiraccounts aren't insured by thegovernment because they have way toomuch moneyand so they don't feel like their moneyis safe and they take it all out I needmoney how am I going to live until thebank opens to play I need cashhow much do you need on Wednesday alonecustomers pulled out 42 billion dollarswhich was a quarter of what the bank wasworth word spreads to Wall Street thatthis is happening and svb's stock beginsto tank the bank stock lost 80 percentof its value this week 60 in one dayalone yesterday which makes it evenharder for them to go out and raise newmoney to meet all of the demands ofpeople withdrawing drawing drawing theirmoney there is a panic or as we call ita run on the bank and so just like thatsvb ran out of cash because all of theircustomers tried to get their money outat the same time and were reminded thatthe modern banking system is built offof banks only having a fraction of yourmoney while the rest of it is out in theeconomy turning into more moneywe don't want to be reminded of thisvery often but when we are it's kind ofscary so the government swoops in totake over the ship oh but not before thebank Executives could pay themselves abunch of bonuses because they're bankingpeople and this is what banking peopletend to do so yes by Friday FederalRegulators stepped in and seized controlof svb's assets it'll go down as thesecond largest bank collapse in historyright behind 2008's Washington Mutualmeltdown so since the very beginning ofthe modern Financial system thegovernment has played an important rolein making us feel safe about our bankaccounts even though our bank accountsare a bunch of mental constructs andreally just a list of ious plus 10 ofyour actual money they don't want us tothink that way because if we do chaoshappens and the system collapses you'reyou're thinking of this place all wrongas if I had the money back on a safe themoney's not here well your money's inJoe's house that's right next to youdoors and in the Kennedy house on Mrsmaclin's house and a hundred others sowhen a bank actually does collapse theyhave to go into hyper mode this is whyall the like government people were likeworking overtime on the weekends and thefirst round of intervention the firstthing they need to do is just wordsAmericans can have confidence that thebanking system is safe today is aboutnot sinking the boat that we are all inlike this is really important they needto say that like the government is thereto protect this money like you don'tneed to go panic and take all your moneyout of the bank you are fine you areinsured because Panic spreads like acontagion you know this feeling likewhen you feel a sense of panic it willjust spread you don't want to be thelast person to act because and we havesome cautionary tales in the 1930s 9 000banks failed there were huge runs on allof these Banks there was no 250 000insurance so people got worried and tookall their money out at the same time andthe whole thing collapsed in theaftermath of the 2008 financial crisis500 banks failed and if you rememberthere were some banks that were so bigthat would have been so catastrophic ifthey failed that taxpayers came andbailed them out gave them all the moneyto make good on all of their needs thisis how important it is and in this casethe government pulled out all the stopsto get everyone their money back overthe weekend the Biden Administrationtook Extraordinary Measures to guaranteeanyone who had accounts with thecollapse Banks would be able to get backall of their money regardless of theamount again 90 of the customers of svbhad accounts of over 250 000 and theyweren't insured and yet the governmentwas able to give them their money backtechnically they didn't use taxpayermoney to do this we don't think we'renot sure but it was actually like a fundthat all the banks paid into so whetheror not this is like another bailoutbailout bailout bailout bailout is hotlydebated and it will continue to bedebated anyway the big debate that I'mthinking about here is whether or notthe government should let Banks fail orif they should always swoop in and savethem when you let Banks fail you forcethem to feel the consequences of theirdecisions on how they manage their Banksbut when you let Banks fail you alsocreate this feeling of anxiety that iscontagious and right now there alreadyis a bit of an economic anxiety floodingaround our country inflation is highthere's war there's increasedcompetition with China and tradebarriers people are slightly on edge andso the government swooped in with 150percent of their might to make everyonefeel safe they didn't want to ignitethis into another 2008 style meltdownthis was the safer approach I guess forme I'm slightly concerned that this maylead to just more Reckless risk-takingbecause we're kind of sending a signalto these banks that like hey if you faileven the kind of smaller ones we willprobably bail you out which again is agood thing this helps quell any chaosespecially in the short term we don'thave people freaking out we have noreason to go run and pull out all of ourmoney now and importantly people whohave money in small Regional Banks feelsecure they're not going to take out alltheir money and put it in like banksthat are too big to fail but in the longrun it could just mean banks will feelemboldened to continue with bigger andbigger bets knowing that the governmentwill bail them out knowing that there'snot real consequences knowing thatthey'll get their bonuses so the debateis heating up now in a new way you'regoing to see a lot of fighting you'regonna see a lot of Elizabeth Warrenwho's very smart on this stuff and alsovery bullish about regulating Banksthere will be another financial crisisof course when the crash comes the bigbanks will throw up their hands and sayit's not their fault nobody could haveseen it coming and then they'll run toCongress and beg for bailout money andlet's be blocked I'll probably get itand what happens next is we will witnessif this government intervention actuallyworked if the government successfullycalmed us all down so that the systemcan keep going or if this Panic willcontinue to spread leading to more Bankruns more failed Banks and a starkreminder that our modern Financialsystem is a mental construct that leadsus to all work together for theprosperity and growth of our societyuntil that is The Dominoes start to fallthey knew the taxpayers would bail themout they weren't being stupid they justdidn't care yeah because they're [ __ ]Crooksbut at least we're going to see some ofthem go to jailrightwe didn't have to break up the banksparty's over I don't knowI don't knowI have a feeling that in a few yearspeople are going to be doing what theyalways do when the economy tanksthey will be blaming immigrants and poorpeople