What the Bank Collapses Mean for Tech
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Brian Lehrer: It's the Brian Lehrer Show on WNYC. Good morning again everyone. As we await a Federal Reserve Board decision this afternoon, whether interest rates will be going up some more, let's take a step back and digest how things have changed for the US economy in the last two weeks. According to Jeanna Smialek who covers the Fed for The New York Times and will join us in a minute, just two weeks ago, Federal Reserve officials were hinting that they might consider a large half-point rate increase at their meeting today as the economy, with its ongoing inflation, was showing sustained momentum.
With the bank failure since then, people are questioning whether the Fed will or should raise them at all. That's at the macro level and the national one. Here's a more individual story and a more local one if you're in New York, as the economy has changed in the last year. According to WNYC staffer, last night, someone they know who just got back from a round of fundraising for his business in San Francisco said that in 2020 people were throwing money at his e-commerce business even though he didn't have a team in place.
Now because of rising interest rates, venture capitalists don't feel pressure, I think this guy used the word pressure, to invest anywhere, so getting money to launch a startup is like pulling teeth. Let's talk about the dilemma facing the Fed today and the suddenly transformed environment, not just for shareholders and banks, but for the New York economy and where anyone decides to keep their savings. We have two guests. Jeanna Smialek writes about the economy and the Federal Reserve for The New York Times, and we have Cara Eisenpress, senior technology reporter for Crain's New York Business. Jeanna and Cara, thanks for some time this morning. Welcome back to WNYC.
Jeanna Smialek: Thanks for having us.
Cara Eisenpress: Thank you so much.
Brian Lehrer: Jeanna, I think most of our listeners get by now the dilemma facing the Fed today, but can you lay out for us a little of how they're trying to figure out how to balance the risks of inflation versus the risks of digging the banks and the economy out from there even more?
Jeanna Smialek: Yes, absolutely. I think it's a real challenge. They're very much stuck between a rock and a hard place here in that on one side of the ledger you've got really rapid inflation. In fact, we've had some recent data that suggests that inflation has a little bit more staying power than I think anyone had expected coming into 2023. That would argue for higher interest rates and more aggressive Fed response, but then on the other side, we've got turmoil in the banking system that in some ways does tie back to these rate increases.
There's a phrase that when the Fed raises interest rates something breaks and it seems like we are starting to see that happen. I think from the Fed's perspective, you've got to try and balance those two goals. Think about how can we keep this fight against inflation going, make sure inflation doesn't become a permanent feature of the American economy, but do so in a way that doesn't necessarily wreck the financial system because that's going to make a painful recession much more likely. I think that's really the challenge that they've got to navigate as they go into this meeting today.
Brian Lehrer: Is it your impression, Jeanna, that so many people miss the relationship between rising interest rates and the solvency of the banks who should have been able to see it, this SVB and Signature Bank and First Republic and Credit Suisse issue? We've known where rates were headed for a year. Did nobody see this gradually coming on because of their investment in treasuries that lose value when interest rates go up?
Jeanna Smialek: Yes. I don't think the ink is dry on this one yet. I don't think we actually know what happened here or why they missed it. I will say, and I've just written an entire book about this actually, it's called Limitless and it recently came out. There's been this era that the Fed has been in, in which it has really had to worry about financial instability mostly in the non-bank sector. Think hedge funds, money market mutual funds, some of these more non-traditional places to stash your cash. That's where all the turmoil has come from in recent years.
I think they were very attuned to the risks in that department. Having talked to a lot of Fed officials over the last couple of years, I don't think people were looking for the turmoil as much in the traditional banking sector. It's been a while since we had a banking crisis. This was the second biggest or the biggest bank failure since 2008. It's been a long time. I think the muscles were a little bit out of use and so I think it's possible that things just got missed here. They are doing an independent review. The Fed is doing a review, so we should get some feeling for what got missed, how they overlooked these weaknesses by May 1st, actually.
Brian Lehrer: I apologize for missing your book title in the intro. I'll say it again. It is Limitless: The Federal Reserve Takes on a New Age of Crisis, that is a new book by Jeanna Smialek, New York Times reporter covering the Fed and the economy. Is the premise of the book that the crisis is the post-pandemic era or the inflation that really just is only a year, or a little more than a year old? What's the crisis as you define it in the book?
Jeanna Smialek: The book talks a lot about the fact that we are in this world where the Fed has just become much more central to what happens in the economy and where we are much more prone to financial crises. It specifically talks about the 2008 blowup and then the 2020 blowup, but I think it lays out a lot of the way the Fed thinks about fighting crises, how that's changed in the 21st century because it has changed just drastically. This is not your mother's Fed. How that is likely to shape how crisis-fighting moves forward into the future.
I think actually some of the things that the Fed's doing now, some of the things we've seen even in the last couple of weeks are important not just to these moments of real turmoil, but also important to democracy because we're seeing a world where we're asking the Fed to do a lot. They're fighting inflation, they're fighting these crises, they are stepping in to help borrowers and entities that they never really helped before in times of crisis. It's a really interesting moment in the evolution of this institution, but it's also one that's going to end up mattering for all of us.
Brian Lehrer: All right. Cara Eisenpress from Crain's New York Business, senior technology reporter, let me bring you into this. Can that story I told in the intro of the e-commerce business owner be related to a broader reality in New York City's economy right now? That's one guy having a tough time getting venture capital money when they used to practically throw it at him when interest rates were low just a couple of years ago. Is that a story that you can say is part of a pattern as you cover tech in New York now?
Cara Eisenpress: Yes. The data definitely bear it out. 2021 was really this banner year for companies who wanted to raise VC money. People had the same experience as the e-commerce entrepreneur you mentioned, but then in 2022, those wallets really closed. In New York, venture-backed companies raised 43% less last year than they had the year before. They are now thinking a lot more about efficiency, stability. How do you make sure that you have enough money to continue to build what you want to build? That just has not been the case over the last decade. Plus there was this feeling that for companies with these big scalable ideas that there would basically be the money to build them.
It's similar to what you heard that there weren't good places to store your money and so limited partners in VC funds were okay putting their money in tech. I think that especially since the financial crisis, there was this feeling that tech was not that risky. Seeing how the finance fear had been shaken made tech by contrast seem okay, and so you have a lot of people flooding into this industry excited to build companies. Now remembering once again that actually they're in an industry that has a lot of risk.
I think the other effect that you're seeing was the companies had a really, really stressful weekend two weekends ago. Phones were ringing, in-laws were called in to watch kids when both parents had to be on calls with their portfolio companies or with their investors depending on where they work in the industry. Right now, they're basically okay. The Federal Reserve has backstopped Silicon Valley Bank's deposits, they are looking for bids. They have said that they're going to essentially backstop deposits in other banks. There's a stasis. They're okay, but I think that there's a bedrock that has been shaken. This idea that there's a lot more uncertainty in this moment than many people had accounted for.
Brian Lehrer: Are those rising interest rates, Cara, a factor in the thousands of tech sector layoffs that we've seen, including from the tech giants here in the city?
Cara Eisenpress: I think it relates back, certainly, to the overall economic climate. I think there's just this idea that for founder-- from maybe the first dot-com bubble all the way back before 2000, and then the next one, there was this idea that if you found people with a big idea and you gave them a lot of money, they could withstand this mess and build something great, monumental, and generational. Facebook. Sure. Now there's just a lot more emphasis on efficiency. It's like money costs something now, it's not free anymore.
The question is, "Are you profitable? Do you have money coming in? What's your burn rate? Do you have the right team in place?" There was also a talent war, so there were engineers who were essentially hired so that they wouldn't work somewhere else. Those salaries are now basically being clawed back. People aren't spending money on engineers unless they need engineers.
Brian Lehrer: Listeners with a financial dog in this fight, should the Fed raise interest rates to fight inflation or put that on pause while seeing how much the economy is hurt by the failing banks? 212-433-WNYC or any question or thought you want to share for our guests from Crain's New York Business, Cara Eisenpress, and the New York Times, Jeanna Smialek. Jeanna is also author of the new book called Limitless: The Federal Reserve Takes on a New Age of Crisis. 212-433-WNYC.
Jeanna, there's the Federal Reserve, which by definition we think of as federal, but there are also local outposts of it. You report that some Republicans are trying to blame the San Francisco Fed in particular for failing to see what was happening with Silicon Valley Bank out there. What's the difference between the Fed and the San Francisco Fed?
Jeanna Smialek: They're all part of the same system. We talk about the Fed like it's a single entity, but actually, it's a pretty complicated structure. We've got seven board members who sit here in Washington who are presidentially appointed in very much the public component of the Fed. We call that the Board of Governors, or the Federal Reserve Board, depending on how people are talking about it. That's the Washington-based organization that we all think of when we see the picture of the building. I think it's the thing that I will be at today when they do their press conference. That's the board.
Then there are 12 regional feds. They're scattered throughout the country. They're actually privately owned, technically, but they operate in the public interest. They are these weird semi-private, quasi-public entities who are in charge of things like funneling money around the system and doing day-to-day oversight of banks. The reason that that's so relevant in this moment is the San Francisco Federal Reserve, which is one of the important banks within this 12-bank system. It was in charge of overseeing Silicon Valley Bank.
They did the day-to-day monitoring to make sure that the regulations that the Fed board in Washington was setting out were being put in place appropriately, and that this bank was operating in a safe and sound manner. Now, it seems like something clearly went wrong either in the monitoring or in the big-time oversight that happens out of Washington, because, obviously, this bank shouldn't have blown up. It does seem like it had some pretty obvious vulnerabilities that were growing in plain sight.
I think the question now is, who dropped the ball here? Why did that happen? Was it because the supervisors on the ground just weren't seeing things, or were they not flagging them aggressively enough, or was it the case that the board in Washington just wasn't putting enough muscle behind whatever the supervisors were yelling at the bank for? I don't think we know the answer to all of those questions yet. We're still working to sort this all out.
Brian Lehrer: I saw a headline that said Republicans are saying the San Francisco Fed ignored warning signs because they're woke, or the businesses they were letting slide were woke. Do you understand that argument?
Jeanna Smialek: Yes. This is a pretty common Republican argument when it comes to the Fed, and I think they see the San Francisco Fed as a particularly good [laughs], good place to land this argument because the San Francisco Fed has done things like look at climate change and the role it plays in the economy, or focus on inequality. I think they're an easy place to say woke is a problem in the central bank system, and San Francisco is the foster child for that.
This is not a new argument. We've heard Republicans make it for years. I think in the case of this bank, there's this argument that maybe San Francisco was letting them slide because they were doing things like ESG sorts of investments that San Francisco would have favored. I will say, based on all of my reporting, that that is just not how bank supervision works. The supervisors sit in the bank, they report back to Washington. It's a very system-wide effort, and they have pretty clear rubrics that they grade these banks on.
It would seem very unlikely to me, and I don't think we have a lot of it. I have seen basically no evidence on this up to this stage. I think it's probably premature to make those kinds of accusations. I will say we should get a lot more information about what happened here because the Fed is carrying out an independent or a review of what just went wrong. We already know that the San Francisco Fed was alert to some problems at Silicon Valley Bank. I think the timeline of how that alertness played out and the follow up, what they did about it, those are going to be really important questions to answer as we go forward.
Brian Lehrer: Let's take a phone call. Looks like Atcheson in Jericho on Long Island has an opinion about what the Fed should do with interest rates this afternoon. Atcheson, you're on WNYC. Hello.
Atcheson: Oh, hello, Brian. Thank you for taking my call. I love your show. I think the Fed should raise the interest rates for at least a quarter percent. Feeling that if they don't raise it, it sends a bad signal out to the economy, to people out there. If they raise it a half percent, it also sends a bad message to investors. I think right now we need stability and the best way to do is keep it quarter percent, monitored from here on.
We need to do more supervision of smaller and intermediate banks. I think we have to make sure that the marketplace is ripe for investors. The marketplace is ripe for people who want to invest, be it the small guy on Wall Street or venture capitalists and big companies who want to go out there and grow their businesses. Thank you for taking my call.
Brian Lehrer: Thank you for making it. Call us again. Atcheson's opinion is send a moderate message to both sides. "Yes, we still care about inflation. We're going to raise rates a little bit, but we care about the banks and growth as well, and so we're not going to raise them much," and maybe that's what they'll do this afternoon. We'll see. Cara, would it be fair to say that New York's tech sector, which you cover is rooting for the Fed to stop raising interest rates now?
Cara Eisenpress: That's a good question. I haven't heard them rooting exactly one way or another. Inflation is painful for everyone and for companies that whether they serve businesses or they serve consumers, they want a healthy economy where people spending power isn't being decimated by inflation. At the same time, we now have this backstop, and so the immediate worry about banks' balance sheets is off the table. I think what we're seeing them pay a lot closer attention to are these nitty-gritty questions of cash management, which was not something that many were particularly strategic about beforehand.
We're seeing both the city's FinTech companies provide different kinds of innovations about cash sweep accounts or security for payroll processing, or being able to work with many different banks to provide different services, or creative lending. Assets like lending money against accounts receivable, for example. These really nitty-gritty strategies that were maybe not on the radar is something that I see coming forward more than something really particular about interest rates.
Brian Lehrer: Maria in Sunset Park, you're on WNYC. Hi, Maria.
Maria: I'm--
Brian Lehrer: Whoops. We just lost Maria's line. I don't know what happened there. Let's try Mark in Norwalk. Mark, you're on WNYC. Hello.
Mark: Hello. It seems to me that there is a lot of privatization of profits and a socialization of risk and this bailout of the Silicon Bank is just another example of that. Why are those depositors being made whole and the bank not being required to pay back the fund that is making those people whole in the first place. Without consequences, irresponsible behavior will continue to happen.
Brian Lehrer: Mark, thank you. Jeanna.
Jeanna Smialek: Yes. I think this is a really interesting question, actually. We've been talking about my book a little bit. This is actually a big theme of it, is this idea that we have socialized a lot of the risk in the financial system in effect because we basically swoop in and backstop investors in moments of crisis. No, there's a good reason for that, and there was a reason in this case.
Which is that people in the government looked at the Silicon Valley Bank example and they thought, "Oh, if we let these depositors, these uninsured depositors who hold more than $250,000 in accounts in Silicon Valley Bank, if we let them take all of these losses, if they feel like their money wasn't safe, then that's going to send a message to the rest of the depositors in the system who have more than that amount, that their money might not be safe at these regional banks." They are going to pull that money out of regional banks and throw it in the too-big-to-fail institutions that we are all really familiar with. The Bank of Americas and Goldman Sachses of the world. That would be really destabilizing for the banking system.
The reason that they bailed out those big depositors is exactly that. They didn't want to create some knock-on effect that became catastrophic for the rest of the banking system. It's worth noting that those uninsured depositors make up a big chunk of depositors in America. Something like 40% of people, or 40% of deposits in the system are over that $250,000 mark. Whether you think it's a good idea or a bad idea, I think it was that systemic risk that they were really looking at when they made this choice.
Brian Lehrer: Is the problem with the banks threatening to become a Main Street problem, not just a Wall Street problem considering that all the bank depositors are being bailed out, the implications for regular people's jobs, not just losses for shareholders in these banks in play here, Jeanna?
Jeanna Smialek: Yes. I think that's precisely the hope here, basically, is that by stepping in to make sure that big depositors would feel more comfortable, and by stepping in to make sure that a lot of banks had recourse that could help them avoid getting into a situation like Silicon Valley Bank did, government regulators are hoping that this will not percolate into a bigger problem that does come back to hit Main Street.
I think the fear is if you let this cross through the rest of the banking system, if you let it grow into something bigger, that would come back to hit the little guy. It would push up unemployment, it would lead to fewer loans going out to businesses. It could be really problematic. I think that that was very much at the core of this push.
Brian Lehrer: All right. I know we're going to run out of time in a minute, but Maria in Sunset Park, who got disconnected, called us back. Maria, I'm glad you got through because all our lines have been full on this topic. Very active, no surprise, but hi.
Maria: I know, I know. I really appreciate that I was able to get a second chance. I don't know if you heard anything at all from what I initially said, and I will go back. Sunset Park and other neighborhoods that I know of that have traditionally been working-class neighborhoods have co-ops, have one, two family houses that are under a million co-ops, particularly, 750, 700,000, 650 that are still available out there.
What has happened is that when the interest rates were lower, you saw a bigger number of people at the lower middle-class range of our residents be able to move into those properties as we used to be able to do in this neighborhood where then family wealth and prosperity and stability was created, that as the interest rates went up again, it has totally stopped. My question is, are the Feds or even New York State in its own capacity able to make more interest rates carve-outs for certain properties that are under a certain amount, and then facilitate that upper mobility? That is what keeps our cities really safe and secure and stable.
Brian Lehrer: Maria, thank you. That's such an interesting question, and I know we're over time, but if you have a second to answer that, Jeanna, I guess that one's for you too since you're the Fed interest rates reporter. Can there be carve-outs so that interest rates go up for some things, but not for home mortgages or home mortgages for people in certain financial situations?
Jeanna Smialek: It's a really interesting question and, unfortunately, I think this is one of the very harsh realities of central banking is that, basically, the way Fed policy works is by slowing the mortgage market. This is the design. It's not a side effect. The idea is that if you slow home buying, you're going to slow all of the knock-on spending that comes out of home buying. When you buy a house, you renovate it, you buy new furniture, you do all those things. By raising the interest rates and discouraging that kind of behavior, the Fed is able to slow demand in the economy, slow all the knock-on effects, and help inflation to come under control. It is a painful process.
The Fed, I think, is the first to admit that this is not a pleasant thing. We would prefer to not be in a world where we had to slow down inflation, but they think that that's the reality we're in, and they think that they have basically this one very blunt, very unfortunate, very uncomfortable tool to handle it. I think that is not a pleasant message, but it is the truth.
Brian Lehrer: Cara, if you have time, do you have anything on that as the New York reporter in the room?
Cara Eisenpress: I also think it's a very interesting question. Of course, with the Federal Reserve controls is the rate at which banks borrow from the federal government. The mortgage rates are set by the banks, they're just in reaction to that. Jeanna would know better than I, but it doesn't seem like totally pie in the sky that somebody could come up with some kind of instrument that could work for certain populations or certain locations on some discount on interest rates.
Brian Lehrer: Yes, and I've seen reports in the last couple of days that say for the first time in a long time, home prices have actually come down. That's a good thing. It's becoming more affordable, but they're not necessarily becoming more affordable because the interest rates are going up. The monthly payments that would be required may not have actually gone down, but that will be the last word with Cara Eisenpress, senior tech reporter at Crain's New York Business, and Jeanna Smialek, reporter covering the Fed and the economy for The New York Times and author of the new book, Limitless: The Federal Reserve Takes on a New Age of Crisis. Thank you both so much for your reporting and your smarts.
Jeanna Smialek: Thank you.
Cara Eisenpress: Thank you.
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