Every weekday, host Kai Ryssdal helps you make sense of the day’s business and economic news — no econ degree or finance background required. “Marketplace” takes you beyond the numbers, bringing you context. Our team of reporters all over the world speak with CEOs, policymakers and regular people just trying to get by.
Thu, 16 Mar 2023 21:24
“Financial conditions” influence the cost of money, and they’re being made much more complicated by recent bank collapses. Today, we’ll delve into how tightening financial conditions influence the Federal Reserve’s next moves and could make it harder for small businesses and consumers to get loans. Plus, why COVID may have fundamentally reshaped how we spend and what the Silicon Valley Bank collapse means for venture capital.
Alright, listen up everybody. At midnight tonight, our March fundraiser ends and we need your help to reach our $150,000 goal. That's not just a random number we made up. It's what we need to stay on track for the fiscal year. So please give what you can right now to support Marketplace. Go to Marketplace.org slash donate. Hey guys, this is Kenan Thompson. I have a problem with you. Yes, you. None of y'all told me that Auto Trader has millions of new and used cars that I can shop from home. I thought we were friends. I put smiles on your face. But I'm not smiling. No one told me that with Auto Trader, a dealer can deliver cars to my home or that I could shop by price on Auto Trader. No one considered this friendship that you just learned we had officially over. Finally, it's easy. Auto Trader. The program in which it is all about the macroeconomic ecosystem. Some American public media. This is Marketplace. In Los Angeles, I'm Kai. Rizdole is Thursday today. 16 March. Good as always to have you along. Everybody. One could make a case, I suppose, that we in business and economic journalism hang too closely on J. Powell's every word. So stipulated. We do that because the words that Powell and his central bank colleagues use can change what happens in this economy. Case in point. A two word phrase that Powell's been using a whole lot lately, financial conditions. In his last three press conferences, the Fed chair has used that phrase no less than 29 times. Yes, we counted. Financial conditions matter because the Fed's manipulation of short term interest rates don't shape the economy all by itself. Now markets react to Fed policy is just as important. And that gets us to today and how the banking situation of the moment is changing the financial conditions the Fed now has to react to. Here's Marketplaces Mitchell Harman. Financial conditions are the things that influence the cost of money for businesses to make payroll for consumers to buy new furniture with credit cards. Here's J. Hatfield at Infrastructure Capital Advisors. So it includes the banking market, which is clearly under pressure, the bond capital markets and includes equity capital markets. In other words, stocks. Financial conditions have tightened since interest rates started rising. Says former Fed economist Claudia Sam. Banks were being more cautious in their lending. They'd start to kind of tighten up their standards. It gets harder for some people to go out and take out a mortgage or take out a small business loan. Now add bank runs and failures and Fed rescue plans, heightened risk and market instability. Nathan Stovall at S&P Global Market Intelligence says here's what banks are going to do. Before worried about having enough cash on hand, we're going to slow down lending because the easiest way to make sure you have enough cash is keeping it in the bank. But the Fed can't let financial conditions tighten up so much that credit stops flowing altogether, says Joe Bruce Swellas at consulting firm RSM. The Fed has to ensure that trust within the banking system remains while at the same time pooling the economy and allowing inflation to begin to trend down. Bottom line, financial conditions just got a lot more complicated as the Fed plots its next moves. I'm Mitchell Hartman for Marketplace. One of the on-the-ground realities of those tighter financial conditions that Mark Mitchell was just talking about, given Silicon Valley bank and its demise, a lot of banks are going to want to keep more liquid assets on hand so that they can handle any potential rush of withdrawals, which means they might decide to be a little bit pickier about who they lend to. Marketplace's Savannah Mar has that one. Rachel Rosner's business started as a pop-up tee shop in an art museum in Herndon, Virginia. I was a young entrepreneur. I didn't have a lot of capital. But a home equity line of credit from a local bank helped her hire an employee and move Eldon Street tee shop to a permanent space. That money allowed us to pay, it supplement our rent and our expenses for the shop until we could really get off the ground. That's how bank lending works in a healthy economy, says Greg Fairchild, a professor of business administration at the University of Virginia. We hear a lot about venture capital and we hear a lot about private equity. But when we think about the average business owner in the United States, they're probably hitting up small and mid-sized banks to help start and grow their operations. Banks that are under some extra scrutiny right now. Economist David Maracle with Goldman Sachs says one way banks can insulate themselves from a potential rush of withdrawals is by keeping their assets liquid. They might be somewhat more conservative so that some borrowers who come into the bank are likely to be turned away than before. Maracle says that could put a drag on demand in the economy, which could help team inflation. But on the other hand, says Fairchild at UVA. There's a worry that their businesses that could use these funds and are not in any way risky that won't be able to access them. Like a tee shop that turns its line of credit into a growing business, I'm Savannah Mar for Marketplace. On Wall Street today, SVB, what SVB? We'll have the details when we do the numbers. There are parts of the Silicon Valley bank implosion that are pretty straightforward. More people wanted to get their money out for instance than SVB had on hand. That is digestible. There are other parts of what happened though that are a little technical. Of which one is something called duration risk. Marketplace at Lillie Jamali has this explainer. The Fed has raised its benchmark interest rate from near zero to almost 5% over the last year. That makes these unprecedented times. Says Francis Donald, global chief economist at Manu Life Investment Management. Interest rates have been raised the fastest in modern history. And when interest rates go up, bond prices go down. Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, says this years drop in bond prices has been historic. To think about what that means, the US bond market overall fell over 18% during that period. But some bonds are more sensitive to interest rates than others, depending on how long they take to mature. That so-called duration risk is what got SVB into trouble. The bank was flooded with deposits after the start of the pandemic and it invested a large chunk of them in long-term government bonds and mortgage backed securities, which paid a higher yield than short-term treasuries. The problem, says NYU Stern Finance Professor Marty Subramaniam, is those long-term bonds were more exposed to rising interest rates. Had they invested in two years or less, they were taking a much smaller hit. But I guess they got greedy thinking we got a little more yield. Worth noting, SVB's losses were only on paper. It is until the bank needed to offload those bonds fast as depositors rushed for the exits. I'm Lily Dremali for Marketplace. Just a little bit, in the banking situation we're in the middle of right now, is the fact that inflation is still a high and be thus a problem. And yet Americans keep on spending. Cars travel, eating out, you name it, and that is kind of a puzzle. Because by now we've been talking about both high inflation and the high rate of consumer spending for a long time. Marketplace is Chris Tenschwab tried to reconcile those two economic facts. I've spent the last couple weeks talking to a lot of consumers, aka people like you and me. And in no way is the collection of random conversations of science. But let me tell you, people are busy. Last week went down to Death Valley and then circled around to Tucson and went down to Mexico. We're going in less than two weeks to France and then we're going to get on a Viking cruise on the Rome River. We went to Italy for two weeks last summer. We went on a nine night cruise and then we did an 11 night cruise. There was alcohol involved in that decision. I will say that. That's Mark Pemble, Andy Schott and Jennifer D'Alessandro. I'll say they're spending more than they were before the pandemic, partly because of the bigger financial cushion. Pemble's wage as a grocery store clerk is up. It's now $18 an hour. And the value of his house near Boise, Idaho has doubled. Schott, a retiree in Missoula, Montana saw some investments grow during the market boom. Not all the money is going to travel. Schott is golfing more. And D'Alessandro, an academic in Buffalo, New York, she and her husband are redoing their floors. You know, we're not wealthy by any means, but we're comfortable. We're saving money. What are we saving it for? We just are spending our money differently. Not everyone has extra money lying around. And last month, consumer spending cooled a bit. But economist Aaron Klein at the Brookings Institution doesn't think the party's over. And he's still attributing it to our old friend pent up demand. Given that you've paused a year or more of your life for many folks, when do you finally catch up to where you were before? Klein thinks that time is coming because Americans emergency savings are dwindling and credit card debt is piling up and growing interest rates won't help. But maybe something else is happening here. Maybe the American consumer is changing because Harvard history professor Liz Cohen says big crises can shake things up. There was World War One, which was followed by a growth in mass consumption and chain stores. There was World War Two and the picture asked American Dream, a single family suburban home filled with stuff. And after 9-11, the message we got from President George Bush was, let's show the world that we have not been bowed by these terrorist attacks. And we can show that by buying. We cannot let the terrorists achieve the objective of frightening our nation to the point where we don't conduct business. Where people don't show up. And I think that was the message that people got after COVID. People were encouraged to spend not just for themselves, but for the good of the nation. You want to keep that restaurant in your neighborhood alive? Eat there more often and tip well. Remember 70% of our GDP does come from us, our spending. It makes consumerism part of our national identity and how we feel about ourselves. Christina Duranty is a social psychologist and marketing professor at Rutgers. I think most of our spending patterns are emotional related. And that can make us handle our money in different ways. One of them is that when you're stressed you save money and the other one is that when you're stressed you spend money. COVID stress didn't just make us spend more. It made us spend differently. The pandemic really did focus us to descend to the here and the now. That's one thing that threats in the environment too is they sort of cut off our future vision. The people you heard at the beginning of this story they all say this that they're not just making up for lost time, but that they're spending to feel alive. So many people lost loved ones during that pandemic and they were saving money and they we had plans and they didn't get to do those things. The fact that we're getting closer to death every day whether we like it or not, what am I saving for? I want to feel as little isolated as possible and I'm willing to spend to feel that connection with the rest of the world. Yeah, you only live once, but the pandemic has made a lot of people feel like they've been given a second chance. I'm Kristen Schwab for Marketplace. Kristen was talking there about services spending, right? Goods, of course, are the other part of how we spend and a lot of stuff that we buy comes to us on container ships. So for today's installment in our series of unsung economic indicators, the drury world container index, it averages the price on eight different trade routes for getting a 40 foot shipping container from one part of the world to another. At the peak of all those backlogs, we spend so much time talking about and all time high on the index of $10,377. So to get around the traffic jams and the prices, a lot of importers re-rooted their stuff away from those eight major shipping routes that are in the index, the Portus Ivana handled 20% more cargo in 2021 than it did in 2020. If Georgia, or even our country, was a body, the Georgia Port is the heart of it and everybody relies on it. Real joiner is a part of that everybody. He's been using the Portus Ivana for something like 25 years for his furniture business, 24 E design company. We've went for Georgia Port's Christmas would have been in a mess. It's been, now days the world container index is south of $2,000 down 83% from that peak that I mentioned earlier. It's a terrible signal long curve. And that is not great. But first though, let's do the numbers. Dowendusher was lifted 371 points today, 1 in 2, 10th percent finished at 32,246 like I said, SBB, what SBB? NASDAQ, up 283 points, almost 2 and a half percent 11,717, the S&P 500 gained 68, that's 0.134 percent 3960. The CD Group is up 1 in 3 quarters percent today, Bank of America added 1 and 7, 10th percent Wells Fargo expanded 1 and 1 10th of 1 percent. Bud Price's fell, the yield on the 10 year T notes rose to 3.58 percent and you're a listening marketplace. The Shameemba Bacon Story Series 2 of I'm Not a Monster. Custom Inc can help you recognize employees, show customer appreciation and outfit your teams with your favorite products and brands, customized with your logo. At customink.com you can easily make your mark on all sorts of products including water bottles, backpacks, polos, jackets, and so much more. Make customink your go-to custom gear partner with great customer service, quality products, and all in pricing along with personalized help when you need it and an easy to use website when you don't. All backed by a 100 percent satisfaction guarantee. Go to customink.com to get started today. This is Marketplace, I'm Kai Rizdhalz. SBB was before it was no longer the financial home for much of the venture capital ecosystem in this country, that big thinking engine of innovation. Which to a degree it is sure. But in the wake of the failure of venture's favorite bank, it might be time to revisit that image that VC has of itself and that a lot of the rest of us might have of it too. Peter Lee is a professor of law at UC Davis where he studies that VC ecosystem. Professor Lee, thanks for being here. Thanks for having me. Could you as briefly as is reasonable describe the venture capitalist ecosystem formula? Sure. So first, social ties are really critical to Silicon Valley and social ties are particularly important to connecting entrepreneurs and VCs. Basically, who you know matters more than what you know. Secondly, VC's exhibit a significant degree of herd mentality. So they tend to cluster investments in the same trendy technologies. There's a lot of kind of group think in their investments. And finally, the VC business model really favors, and this is not entirely surprising, big upside in the medium term time frame. So one of the upshots of this is that this effectively excludes large swaths of potentially socially valuable innovations from really being attractive from the perspective of VC investors. Okay. So with that as academic backdrop then, were you at all surprised when on Friday morning you heard SVB had been seized by regulators? So I was not actually that surprised. And I think this actually reflects one phenomenon just described, which is this herd mentality. So just as VCs tend to cluster their investments in particular areas of technology, it did not surprise me that in fact, you had a significant movement on the part of VCs to advise their portfolio companies to get out of SVB. Right. Okay. But and this is the part of the conversation that I really wanted to get through. Here's the thing that amazes me about this. And this isn't my original thought. I've very good friend who's in venture capital who repeated this to me on Friday afternoon. These guys, because most of the Marguise in venture capital, basically cannibalized their own bank by urging their portfolio companies or directing their portfolio companies to get out of SVB, they made the bank that they were instrumental in helping create and live on crash. That's true. That's true. And doesn't that seem, sorry, doesn't that seem, I mean, are you kidding? Well, you know, I think that in the long term and in a macroscopic sense, this obviously had very kind of negative impacts. But in terms of what you're doing in the moment, it actually makes sense to withdraw your money as quickly and as soon as possible before the bank fails and taking out your money no longer becomes viable. What do you make then of the, it was a very large handful of very high pro-faventure capitalists saying on Twitter and publicly elsewhere, you must save us or Armageddon will be nigh. Right. So this I think is somewhat ironic, given that, you know, there is this ethos of kind of individualism, libertarianism, with Silicon Valley, you know, this is kind of supposed to represent free-building market economy. But in fact, they're basically saying we need to have government intervention a step in to first all a major crisis. We should say here, the government smiles on the venture capital community. Yes. You know, in many ways, the venture capital community has benefited substantially from government intervention. And I would say that the government has actually looked to the VC markets as an important tool in industrial policy. With the understanding that you devoted some portion of your professional life to studying this group of people, this whole episode doesn't really reflect well on them, does it? It doesn't actually. And I think we need to think a bit carefully about the role of VC in society, the role of VC in the economy. So I think, you know, one of the reasons I was actually interested in studying the VC community is that they enjoyed this almost mythic reputation, right, for innovation, for individuality, for creating long-term value. But I think that the collapse of SVB and other incidents really kind of poked some holes in that image. And I think that we might think a bit more carefully about how we might want to regulate the VCs in the future. Peter Lee is a professor of law at the University of California Davis, the paper about which he spoke, which is recently published in the Yale Journal of Law and Technology. Professor Lee, thanks for your time, so I appreciate it. For better or worse, actually really just for the worse. The situation that we're having in global banking right now with credit suites and signature and mostly Silicon Valley Bank has resurrected some of those financial crisis era buzzwords we really, really were hoping we wouldn't have to use again. Words like bailout and emergency lending facilities and credit the fault swaps. Another one of those, oh no phrases you probably heard a time or two over the past week, moral hazard. You know, you probably remember what that is, but just in case it comes up in conversation, here's Marketplace in Mount Leaven. Honestly, you're not going to get a better example of moral hazard than this clip from Seinfeld. Just to set it up, a car rental company didn't have the midsize sedan jury had booked. So you know how to take the reservation? You just don't know how to hold the reservation. And that's really the most important part of the reservation. The hold. I miss this show. Anyway, that's not the moral hazard part. This is. Well, we have a blue Ford Escort for you, Mr. Seinfeld. Would you like insurance? Yeah, you better give me the insurance because I am going to beat the hell out of this one. The idea of moral hazard is when someone behaves differently is less careful because they know that the consequences of their action are going to be insured. They're not going to bear the cost themselves. Some bakers, a law professor at the University of Pennsylvania, and kind of a moral hazard historian. The term really gained traction in the 19th century. That's when fire insurance companies didn't want to ensure the type of person who leaves the caracene lamp on at home when they head to the tavern. It was in sort of character underwriting. And then in their mantra of never again through loss. Never again through loss. That was the moral and moral hazard. But in modern economics, the phrase is more about how all types of insurance create perverse incentives. Got good health insurance? Sure, Doc. Give me all the tests you got. Got good car insurance on that gelopy? Maybe you don't double check you locked the doors. Or if you're Silicon Valley bank. The bank may have made the wager that because the federal government did cover uninsured deposits in 2008. That it might do so again. It was right. It was right. Patricia McCoy is a law professor at Boston College. She says it's unlikely the exacts at Silicon Valley bank literally set out loud. The feds will rescue us. So let's not worry about all those problematic treasuries on our books. But maybe they felt a little less worried because of what the feds did in 2008 and then again during the pandemic. The federal government has said read my lips no more bailouts too many times. It's it's simply not believable. So when push comes to shove and a bank with 175 billion in deposits with deep ties to tech gets wobbly, everyone kind of expects the feds will do something. There has been pain SVB shareholders and bondholders lost their shirts and SVB execs. Well, let's just say they're not going to introduce themselves at cocktail parties as former SVB execs. But the FDIC did cover all those startups who kept money above that 250 grand insurance cap warning more moral hazard ahead. It's a terrible signal long term Arthur will mark is a law professor at George Washington University because it's crazy that people will now absolutely believe that all deposits are protected. But if the FDIC didn't send that message, well, maybe everyone panics and withdraws their uninsured deposits from every regional bank in the country and the financial world falls apart again. Wilmar says the real antidote to moral hazard in the banking sector is preemptive regulation, preventing the banks from taking bad risks in the first place. I'm Matt Levin for Marketplace. This final note on the way out today, a little Wall Street collective action to stave off another bank run. I think we mentioned the other day that first republic was in some trouble deposits leaving stock falling bad for a bank anytime, especially not good right now. Well, that's how we got to this 11 other big banks, including some of the big EastJP Morgan Chase and Bank of America among them are going to put a collective $30 billion on deposit at first republic to be clear. That's deposits as in what you and I can do walking off the street if we had $30 billion in our pocket. Equity is not preferred debt. It's deposits. And if we've all learned anything from the past week of banking news, we've all learned that deposits are insured only up to Matt Levin just said this $250,000. So this is a big deal, a very high dollar vote of confidence in first republic. Off we go, not though without your moment of economic context with an eye toward the Fed meeting next week. We have mentioned time or two, I'm sure that central banks from most of the big economies have been, if not openly coordinating on interest rates, then certainly watching what the others are doing real, real closely. Well to that point, the European Central Bank stuck to its rate-hiking promises today, raising its benchmark rate a half a percentage point. What will J. Powell do? John Buckley, John Gordon Riccar, Dan At the park, I'm into Peter and Stephanie Seek are the marketplace editing staff. Premier Bibawi is the managing editor, I'm Kyle Rizdole, we will see you tomorrow, everybody. This is APM. Hi, I'm John Kim, the host of the Angry Therapist podcast. I'm a therapist who went through my own rebirth many years ago and I've been documenting my journey ever since. I believe in casual over clinical, with you instead of at you, I come unrehearsed on purpose because self-help doesn't have to be so complicated. Our podcast episodes are short and easy to jump into, I encourage you to check out the Angry Therapist podcast now whenever you listen to podcasts.