The American Enterprise institute. We have a very interesting policy session entitled, how has a decade of extreme Monetary Policy changed the Banking System . We have a panel of experts, but before we introduce them let me set the stage. The financial crisis changed the Banking System. Resolutions that happened in the crisis integrated commercial and investment ranking like never before. Createdsolutions todays too big to fail institutions. The fed became the lender of first resort instead of the lender of last resort. Temporarily nationalized the Banking System in congress. Assed the dodd frank act it gave regulators extensive new powers and responsibilities over the Financial System. Deposit insurance limits increased by factor of two and a half. Triggeredope recovery fed stimulus which created massive bank reserves, which required new fat operating procedures. This morning we will discuss all these changes with a panel of experts. And instead of me introducing the panel, i am going to introduce our moderator. Alex j. Pollack is a distinguished fellow. He was previously a fellow at aei. And he was president of the Home Loan Bank of chicago. He is a recognized authority on financial policy issues, including Housing Finance banking, central banking, retirement finance, corporate government, and political responses to financial issues. And his most consultant work is ofwn as pollacks laws finance. , alex jour moderator rea pollack. Alex welcome to our conference. You will remember the famous line about the Federal Reserve, by its long serving and former chairman william martin, which is that the fed is supposed to remove the punch bowl just as the party is really warming up. And the Federal Reserve spikes the punch when the party is warming up, instead, or changing the beverage metaphor. Benjamin strong, the dominant fed personality of his day, said in 1927 that he was giving the stock market a little drink of whiskey. Strong was compared to his successor of seven decades later, then bernanke. Bernanke, who gave the stock markets a barrel of whiskey. The feds long mortgage buying rates,plus zero interest as we all know has set off assetprice inflation of notable magnitudes in stocks, bonds, houses, and how about what is done to the Banking System . Of 5000 5787 with totals insured, assets of 17 trillion, which equals about 90 of gdp. Or, we might argue the banking properly includes the fed itself, which is indeed part of, and an integral part of the Banking System. And then, we would add the feds 4. 5 trillion in assets to the Banking System. And we would have a better Banking System of 21 point 5 trillion, or 112 of gdp. Andver we think of banking the fed, how have years of extreme monetary and onmarket manipulations by the fed, changed the Banking System . Our outstanding panel of experts is about to tell us. Let me introduce them in the order in which they will speak. First will be Christopher Whalen , an investment banker and author and chairman of whalen advisers. Previously, chris was director of research at the crow withrating agency, and was bear stearns prudential securities. Inflated ooks is how money and debt built the american dream. Topic we think about this today, we have plenty of money and debt to consider. Second will be norbert michele, a fellow in Financial Markets and Monetary Policy, including the reform of the dotfrank act, fannie mae and freddie mac. Since both dodd and frank were big proponents of fannie and freddie, these two issue areas go very well together. A norbert also focuses on the best ways to address credit difficulties of twobigtofail that too big to fail institutions. Institutions. Fail of the nellie liang brooking institutions. Nellie is also a consultant to International Monetary fund and is a member of the congressional budget offices panel of economic advisers. Includearch specialties Financial Stability, credit markets, and the intersection of monetary and financial policy. On the topic of today, she was offices director of the of Financial Stability, policy, and research, at the Federal Reserve board. And finally, we have paul kupiec aei. Esident scholar at of focus is on issues Systemic Risk and the impact of regulations on the u. S. Economy. He was previously director of and heldat fdic, positions at the imf, jpmorgan and the Federal Reserve. And he is the organizer of this conference forum, for which we all thank you, paul. Speak withst will opening remarks after which we will give the panel to exchange views, or clarify points. And then we will open the floor to your questions, and we will adjourn promptly at noon. Chris, you have the floor. Chris thanks for organizing todays session. Today im going to talk about the Banking Industry and how it has been affected by Monetary Policy, not just over the last decade or so but really come over many decades. I think that is one of the most interesting things to talk about. Larger is part of a much effort by global Central Banks to essentially take both public and private securities out of the market. They buy the music reserves from banks, or money made up of finnair, but essentially they are taking duration out of the market. If you think of it in technical terms it is like jurassic park. You have big dinosaurs all looking for earning assets to put on their Balance Sheets, and there is less and less available. And this is a deliberate act of social engineering that says, if we cant get you to borrow and engage in Economic Activity merely by lowering the suggested price for benchmark interest rates, then we will forcibly change the pricing of risk, and thereby get investors and intermediaries to boost employment and consumption, and the rest read it is a totally. Eynesian perspective observationobvious is that doctors are the beneficiary of quantitative easing, particularly ebtors. Sector dd on this chart will notice the green bar, that is mortgage securitizations. Countrywide was the leading issuer then, and we were literally turning over Bank Balance Sheets several times a year with mortgages securing ties asian mortgage securitization. It has been replaced by the u. S. Treasury whose issuance has gone up dramatically, and also by corporations who use the issuance in the lowerrate environment provided by the Central Banks. This is not very productive activity. Was practiced by our friends in japan many decades ago and it is the exact same thing. So, when people say we are not japan, yes, we are. And i think that is reflected in the record of the issuance of the bond market in the u. S. In the past five years. This is a chart from our friends at the st. Louis fed. You can see the big surge in highyield spreads during the crisis. I think chairman bernanke , the real objective of monetary policies to get spreads down. Because highyield spreads tell you whether the economy is working, or not. Today they are very low, very tight. And theyre so tight i would argue that a lot of banks have a hard time making money. When you think that citibank has a 1. 6 spread on their industrial loan book, and the average cost of funds for the bank is 72 basis points, that is not a great debt. Still, they are not getting paid enough. The average for most fdic insured banks is 12 . There still not making a lot of money. In generalwe know, terms, what has been going on for the past three years. But it think the key thing we have to accept is that the last 30 to 40 years, going back to german volcker, chairman of lowerhe use interest rates. To goose Economic Growth has had a cost read and you ca. And you can see the cost, paid by banks. Even though the system is getting bigger, they are making less money on every dollar. That is why larger banks tend to have relatively low spreads. They depend on nonbanking securities, derivatives, etc. Thismost lured into is partly demographics, partly Monetary Policy, but it does have an impact on bank behavior. This is derivatives. You can see jpmorgan in the top, redline. Is blue line, citigroup, once again the largest derivatives house on wall street. They have sold their mortgage business, they have sold their asset management, and there is not a lot left to the bank. Environment where it is difficult to get returns and large assets to feed these Balance Sheets, they tend to go back into synthetics. Citibank Just Announced they are going back into collateralized debt obligations which are purely a synthetic asset. Notice the line on the bottom, that of the average for all large banks in the united states. Most of them dont play in derivatives. It is a highly concentrated market, the top six thanks or so. You could argue that city hankin jp face each other on more than half of those traits. So it is the snake eating its own tail, in many respects. Ofnk about the schizophrenia the fed, on the one hand trying to boost activity through a variety of means, and financial regulators on the other hand, through. Frank, telling banks to take less risk. And in particular, the guidance that has come from regulators over the past 10 years, has been avoid default, and i want to see lower loantovalue ratios on commercial loans, construction loans, this sort of thing. What this means is there is less leverage in the economy. If i come as a homebuilder, have to put up 50 equity in all my projects, instead of 30 , which i could have done before the crisis, i would have to build fewer homes. And that change in the structure of leverage throughout the u. S. Economy gives you less growth. But they dont think about this. There is nobody tickets everybody into room and says, what do we want . There are so many aspects of policy that are not connected and not thought out. Unfortunately we have a lot less leverage on the books today and that his weight is difficult to get growth to where people think we ought to be. This is another part of the story. How did the fed keep the Banking System alive . Two ways. They drove the cost of funds down to almost nothing. At one point, it went down to single digit. If you look at the top of that it was in the actual billions of dollars. The cost of funds for u. S. Banks around the time of the crisis is about 100 billion a quarter, and it went down to less than 10 billion dollars. In the marketplace. And debtorsfunds, have the advantage to that, and that boosted returns to the banks. 20 billion in the last quarter and that gives you how much of a measure it is. It is around 400 billion per year. That is a lot of money. The thing that keeps me up at night is that i see signs of skewing, that we saw in the 2000s, and this is an commercial real estate and other asset classes. First and foremost, this is all bank loans. Lowults are actually pretty. You could see, there have been times when it was also very low but if you look at it, that was the roaring to thousands 2000s and the 90s. Look at family mortgages. One in four family mortgages is at the lowest net loss rate than we have observed. Home prices have gone up doubledigit to many markets, four years. The board of governors refuses to look at it in their deliberations. And there is less leverage on the books. Lgds are lower than they were before the crisis. A more striking book. This is construction and development. Construction and Development Loans are almost off the menu for the banks, today. Regulators have told them not to do it. After the crisis the portfolio got cut in half, from about 600 billion to 300 billion. A lot of those loans were charged off or paid off, whatever. But the banks were discouraged and theyg back there, have been told they will have to have much more capital from the client and they would have to, and easily. When a loan defaults, they are making the entire loan balance back, plus. They are actually making money on the default. And that tells you there is a buyer there ready to purchase the property when the owner runs out of money. Theave not seen this since 2000s, but look a more pronounced it is, than any time going back to 1990. Commercial and industrial loans are a big part of the bank Balance Sheet, 2. 6 train dollars. They are edging up. I can tell you why. But i think, given the exuberant credit run that we have seen in the past five years, with double b issuing credit, maybe we have literally run out of customers. We are starting to see some of buriedault risk that is under the comfortable blanket of low interest rates. If you are not charging people anything for loans, it is easy for them to carry it. But if they have to actually start paying the loan and they have inferior resources, they are going to show up as a default. And people keep talking about rates going up, and they do flutter up but i think the dominant trend, even with the fed stopping their purchases and changing some of their behaviors, is going to remain down because the other Central Banks are not going to stop. And the japanese will more than continue expanding the total of assets owned by global the fedbanks, even if were to start selling. I spent a lot of time in the mortgage business. We are down 30 yearoveryear because of the movement of the treasury after the election. Most of the refinance market just went away. And it was long in the tooth anyway, but the pricing change killed it. Selling 50d be billion a month, easily, in Mortgage Backed securities, without it affecting the market, at all. I think they could double that. But unfortunately, the folks at the board, for whatever reason of dickens extremely cautious reproach. I think they should have been coming out the way they went in, i just the portfolio first, and if the market does you the prices go up, fine. But i think current policy today is distorting the markets, even as they try to normalize things, because they dont understand the impact of mortgagebacked securities on options and other aspects of the market that are very important. Thank you, alex. Norbert. Norbert thank you, paul, for inviting me here today. I had an interesting conversation with a colleague the other day, and it is the third fourth when i have had. And it essentially went, i dont understand what the big deal is with the fed. They are paying a quarter point. Banks are not going to divert resources, this is silly. I dont get any of this. I dont agree with that and there are plenty of reasons why. And rather than get into the difference between the marginal averagea loan and the interest margin, i just said you know they are not paying a quarter point. They havent been paying a quarter point and almost two years. They are actually paying one and a quarter point. That is an overnight rate. That is an overnight rate for ks to part cash at the fed park cash at the fed. Where is not only above many other overnight rates are, it is above many other, what we would call safe assets, what those rates are. You can look at one month treasuries, you can look at fremont treasuries, you can go up to a year, to get close. You can get look at a one month cd rate. I am not just try to hide the early portion of the crisis, if you look at other cd rates. Forcally, what you see is, fed hasre time that the been paying interest on excess reserves, it has been doing so with themarket rate, very narrow exception of when the policy was first implemented. It has been paying on an overnight rate relative to longerterm, safe assets. So, the idea that it would not make any difference is a little fishy if you just think about it in terms of what they are paying relative to what else you could get in the market. The fed has been doing a lot of things. Two of the bigger things are the repo program and the interest on reserves. All of that is in the face of the qe programs that chris alluded to. And alex talked a little bit about this, if you look at fairly well back, youre talking about the fed Balance Sheet being in the neighborhood of 10 of the commercial Banking Sector. Ballpark area that has spiked up. And it spiked up again later on, in 2014 and it has come down a little but not very much. It is still over 25 . It was up around 30 . And the fed has held assets roughly equal to one third of the entire commercial Banking Sector. That is not having a minimal footprint in the market, that is having a major footprint. And of course most of that is with the treasuries, longerterm treasuries and Mortgage Backed securities. Where we check to see this shows up in the Banking Sector, you can look at the Monetary Base and the Monetary Base was on a slightly upward trend, going back to the 80s. But you have a very large spike during the initiation of these both the and you have quantitative easing programs and emergency lending programs. Most of those are temporary, most of those are gone, but some of the spike in between the crisis and now is to to the emergency lending programs, as well. If you look closely at the Balance Sheet, you will see that most of this is in excess reserves now. And with this sort of Monetary Base, typically you would see much larger creation of broader money by private. Banks and we dont see that. So that is a big difference, now. , it isis not the case not the case that the Banking Sector has been shrinking. If we look at deposits flung into the Banking Sector, we know that is up. It might be a little hard to tell from back there, but if you look at the decade prior to the crisis, the trend was about double. In other words, deposits in the Banking System just about double. And from the crisis, now, again, they have just about to doubled. Monetarying in the transmission mechanism is definitely not the same. And you can break this down by small banks, large banks, foreign banks, domestic banks, and you pretty much get the same trend. And when you look at the monetary multiplier, as sort of how much broader money has been created relative to what that you see a downward trend and then you see a cliff. In history it has only been matched by something you saw around the great depression. It took 30 or 40 years for to get back on trends, then. It seems like it is starting to come up a little bit now but it is obviously nowhere near where was. So, what that means in laymans terms is that banks are doing Something Else with their funds. There is a lot of funds with in the Banking System and the banks are not normally doing what they do, with funds. So that has changed. And if you look at other measures, as well, prior to the crisis, you can split to doubt or combine it with repose or optically. , that is fundare not doing fed lending anymore. That is a completely different market now. Withre not doing repos other banks. That is completely off the table not. And you can do this with small and large banks, domestic and foreign, is premature same trend line. So, what are they doing . Axis and loanight share on your left axis. So if you look at the bank Balance Sheet, and you look at where the shares are. Relative tohuge where it used to be. It was on a downward trend, read rent 3 of the Balance Sheet, and it has spiked up to almost 20 . It is well elevated compared to where it was precrisis precrisis, and you can see on as right side of this graph, the loan share drops that is when the cash share is rising. That is what is going on. They are investing more, if you will, in cash. If you wanted to do a face asset measure, were you love caching treasuries all in there, you get the same effect. It just doesnt show up on the graph is what but it is there. And if you just look at cash and lined it up with excess reserves, it is almost 141. Almost one for one. If we look at this, ill try to summarize this quickly, think about the precrisis system. Everybody was talking about the fed funds market. What was that . Borrowing tos, meet their reserve needs. Ditto need to do that anymore. That is gone. Banks are taking and borrowing and putting it into the fed and excess the interest in reserve. That is all that is happening the fed funds market. So, the transmission mechanism that depended on those reserve balance and keeping those reserves relatively scarce, has fundamentally changed. Banks are not doing that, at all, anymore. And there are a larger share of their Balance Sheets in cash than they used to. That is a different monetary control aspect, for the fed. The fed has been doing that, as ator of the economy, is just by putting cash there. It isnt a mechanism, it is an interaction of financial entities driven by financial minds and strategies. And we keep fooling ourselves by thinking the fed operates a mechanism, a machine. None of these things are machines. They are markets, which are a different form of reality. So much for my foot note on that very interesting presentation. Aei. , welcome to thank you very much, for having me here today. I think i will offer a different perspective and hopefully it conversation interesting. Im going to talk about monetary Monetary Policy, banks, and Financial Stability. And i take this broader perspective since the reason we care about banks, the primary reason we care about banks is that we expect them to provide to prevent we want systemic fallout if any bank were to fail. Are behaving differently now. The precrisi. Period is not the way we expect them to behave. Extraordinary monetary policies in my view have improved Financial Stability, not undermine it, by supporting growth. And today i think banks are strong and they are vil viable, and financialstability risks are not high. There are risks that are increasing given the high value given the highend said highasset valuation. I will start by defining what we mean. A common operational definition is a Financial System that doesnt amplify financial shocks and prevent negative spillovers. Stable Financial System as one that is resilient, that can continue to perform its functions even when it has been hit by reasonably large, negative shocks. What this definition does, is it highlights the Financial Stability risks of two different factors, one is shocks and the other factor is vulnerability. Bigger shocks and bigger vulnerabilities typically mean bigger financialstability risks. Of the things that are always possible that you cant really predict or control. Oil price shocks, raptures and geopolitical tensions, debt crisis and the like. They hit the economy they are transmitted through financial can nations financial conditions. Effects of shocks can be larger and more prolonged. Bethese vulnerabilities can high bank leverage, low liquidity. Liquidity mismatch, or high debt when these are high they can generate fire sales, investor runs, and these have negative externalities. Couldnt even repo treasury to fund itself because of its leverage, that revealed these fragilitys and vulnerabilities. Financial stability is not the same thing as low market volatility. Consistentsearch is with that volatility paradox. Lower volatility risktaking can lead to higher volatility in the future, and that is the kind of framework you try to avoid. Let me turn to the Current Crisis to set the stage. I prefer financialstability risks not to be high, despite measures including quantitative easing. Financial vulnerability in the core of the Financial System are this is consistent what the fed has set in its Monetary Policy reports and in its meeting minutes. We know Financial Leverage his lowest capital is high, and nonperforming loans of declined substantially, as banks dealt quickly with legacy assets. And second, banks have ample liquid assets. We dont have a lot of risks for run risks. Even with higher capital and liquidity requirements, banks have beenassets, steady. About 1 a year. This is lower than precrisis periods, but if you go back it is not unusually low. And to the right, you can see margins have been falling and they are quite low. There are three Percentage Points. Note, the decline has been falling for quite a while and period ofuring the extraordinary Monetary Policy. Andnflation has fallen inflation riskpremiums have senseown, this gives us a of the vulnerability of u. S. Banking sector. On the credit side banks have also been extending loans, and loans have been growing about 7 a year, this is despite mortgages which have been extremely weak. So if we look more broadly at credit, all credit to households and businesses from banks, markets, etc. , you can see the credit and then the scale by gdp. The credit to gdp ratio for households, the blue line that peaked in 20082009, during the recession, that line has been falling for quite a while now and has flattened out. And the orange line is for the business sector, and that his credit to gdp and it has been rising the past few years. And the weight chart transforms this into growth rates, threeyear average growth rate. , thise orange line is credit growing pretty quickly. And higher debt burdens suggest there could be vulnerabilities. What attracted a lot of attention recently is, the feds assessment and the Market Participants assessment that asset valuations have increased. Includingvers academics and policy makers, have been very critical of extraordinary measures taken by Central Banks. Because it could lead to financial excesses that may not translate to spending growth. They could generate behavior by investors who have minimal nonreturn target second lead to meet these targets, and pushing assets to unforeseen levels. So, there are two valuation measures that i show here. On the left are Corporate Bond spreads. Corporate bond spreads are narrow. For junkine is the one bonds, speculative rate bonds, and they are below four Percentage Points them. This is the 10 year, which are neither store close. Generally when they get this low, investors compensation for risk is viewed as inadequate. To the right, treasury yields are low. The topline is the 10 year treasury yield and the green line is an estimatedterm premium. That is currently below zero. Measures,s of lowterm premiums and lowrisks spreads, suggest there is a potential that losses could be larger than expected. Because the response to any price shock, any shock, will be larger. I seeg all this together, the u. S. Financial system as much stronger. Credit is growing, but there are asset valuations that are high. To the initial question of whether extraordinary Monetary Policy actions over the past decade have harmed tanks and financial banks and harmed Financial Stability, i would say no. Hasy view, Monetary Policy reduced risk to financial security, it has lowered risk to borrows, it has effectively reduced debt burdens and bank Balance Sheet. This was done in combination with new regulations, financial and with changes that firms willingly took on their own to change the riskmanagement practices. But combined, Monetary Policy and Financial Stability in my view, have achieved a positive feedback loop, which is strong banks and a strong economy. That said, i do think there are risks that could increase Financial Stability and risk in future quarters. With the, qe was done intent of reducing term premiums and raising the prices of risky assets, but the policy definitely carried some risks. Thegiven policy valuations, risk of any overshoot is higher. While the fed is doing whatever i can by being transparent, shocks by definition are unexpected. Highest set prices is another factor. Prices is another factor. , liquidityprices midmatch, liquidity mismatch, it could mean vulnerabilities are higher than we think they are. And finally, increased pressures to significantly scale back financial regulations, i think good significantly jeopardize the Financial Sector yo. But i think, significant financial policies have improved risk, and not undermined it. Has a decade of extreme Monetary Policy changed the Banking System . Quite a lot, actually. The 2008 financial crisis created todays too big to fail institutions, known today as significantlyimportant Financial Institutions. Response Congress Passed the dotfrank act which gave regulators new powers over, and responsibilities. Regulators have exercised these responsibilities in the form of liquidity, with the goal of reducing Systemic Risk. Act theotfrank doddfrank act and the regulations imposed under it, the largest significantly important Financial Institutions fell. The first front row of blue columns, that you see here, is actually quarter fourth 2012. 2012 quarter for i took the four Largest Holding companies and then i tracked where they were, size wise, until 2017, quarter to. That is the green column, in the very back. The dark blue column in front of that would be 2016 quarter to. So those are annual snapshots. As you can see, the largest institutions have not grown very much, at all. Aig is missing from this because aig did not actually file any Holding Company reports until 2013. You can also see that ge capital disappeared. S that did not have major deposits are the ones that restructured to get out of city designations, so if he didnt have a lot of deposits you tend to be really unhappy, as a sifi. Growe top box i have the th rates of the macroeconomy. The second line is the nonfinancial corporate liabilities in the last his household credit. You can see they get have grown you can see they have grown by five half percent. And if you look at the sifis, goldman sachs, bank of mellon, they actually shrunk. Bank of america grew a lesbian the inflation rate grew at ess than the inflation rate. So. Frank cap institutions from doddg frank cap institutions from growing. Sifis constrain Economic Growth, or was it the reverse . Best of my knowledge, no matter how hard you try to beat the data, i dont think you can identify which of those uses correct. I dont think the Data Analysis can cleanly identify which side is right. If we go to the Banking System, equity is up and those are the headline numbers the regulators always tout. But the biggest change in the Banking System is the use of deposit funding. What i have here is my living, breathing, Banking System. It continues to run. Iat i do every quarter is, of the depositm to asset ratio of banks larger than 100 billion. Technical guys are supposed to be making that move. Somebody click on that, downstairs, to get that to move. Anyway, i smooth it with an estimator and you can actually watch the Banking System change through time. You probably missed it earlier. That whole thing that looks like an inch warm will crawl to the right. It crawls to the right as we move through time, and a very noticeable way. If it were closer to halloween, that would be my frankenstein. Whited banksned, increase their funding why did banks increase their funding . In 2012 there was a new deposit insurance assessment scheme doddfrank under the act. Expanded their use of deposit without paying anything at your for deposit insurance premiums. If you look at small banks, Smaller Banks, they already used a lot of deposits in their capital structure. Are theom charts, smallest banks, 500 million. And you can see they increased their deposit funding a little bit, but not a lot. That is the top row. At the bottom is what happened to their equity positions. The equity just went up in tiny, tiny bit. If you look at the bigger banks he can see the changes are quite erratic. The blue line is 2007 in the red is 2016. In thegest banks are column on the far right and they are banks by different sizes. You can see the larger banks using a whole lot of deposit funding, and the deposit funding was replacing wholesale liabilities. They replaced their wholesale, uninsured liabilities with deposits. Fancy can do econometrics with this and what you find is, just what we said. Small banks increased their use of deposits a little bit, about 3. 9 Percentage Points. The deposit to asset ratio went up. Banks went upt 7. 6 Percentage Points. So, the banks took on a lot more. Now, let me go to the next slide. Why does this matter . Wholesale bank funding is the canary in the coal mine. Wholesale money runs when the banks get into trouble, deposits, not so much. Deposits run nowhere near wholesale money. It was the wholesale funding run in the last crisis that alerted regulators that they had a problem. They didnt realize subprime mortgages were a big deal until the wholesale money started to run. Monitoring by wholesale investors brings banking muchems to the fourre, sooner than the regulators. You wait before they are dignified and something is done of about them, the bigger the problems become. So, with the regulatory solution to take the canary out of the coal mines . In thetalk to folks mutual fund industry, they say yes, it was. The feds really wanted banks to and they wanted to get out of wholesale funding because it caused them so much difficulty last time. Janet yellen calls the system safer because banks have increased their use of core deposits. Core deposits are another name for government insured deposits, i. E. , taxpayerbacked funds. So with this new Balance Sheet mix, the taxpayer is really on the hook for banks more than it has ever been. On balance, deposits are a we bigger percentage so if the banks get into trouble and the taxpayers have to stand behind the banks, we are not any better protected than we were before the crisis. We are in a worse position. Wholesale liabilities are not there to take losses if the banks should fail. This isn we talk about not just the taxpayer on the hook, it is the taxpayer paying the bill. If you think the fed iowa are or payments, they cover this. The fed is paying the banks roughly 30 billion annually. Banksterest rates that pay on their deposits, according to the fdic national survey, it is 4 on checking accounts and 6 on savings. So, lets call it 6 and put it on about 11. 5 trillion of that is about 7 billion annually. 7 billion. Deposit insurance premiums in 2016 were just under 10 billion. So that is 17 billion. So banks have 13 billion left over to cover regulatory cost, the regulatory costs of doddfrank. Nobody really knows how much. Frank costs. Bloomberg did a piece earlier in the year and they had estimates of the total cost of implementation at ranging billion and 36 billion. That was the total cost of frank overg odd manymany years. Whats the regulations are put in place, the annual cost of doddfrank is a fraction of that. Billion. Maybe 5 imminence more more thannsatin payments, compensating the banks. So, taxpayers literally are paying for all these things. The sifis . T it was the institutions that had no deposits. Aig just got out last week. Metlife has very little deposit base. So the institutions that had no iorosits and got no payments from the fed were the ones that really found this system so onerous that they had to get out of the financial business altogether, to get out of the sifi designation. So i think the Banking System is now a lot different than it was. When they look at return on assets, somehow deposits look like an asset now,. I will stop there. Thank you, paul. I think it is important to remember that stable deposits mean government insured deposits and taxpayer risk area i want to give the panel chance, before we to eitherr questions, react to something somebody else has said or provide alternate views or just expand on points you want to emphasize. Two or three minutes each. We will go down the panel in the same order. Chris. The thing i think of, listening to the presentations morning, is that the solution that comes from washington every time there is a market problem is to reduce the market. Going back to 1998, when the sec changed the rules for nonbanks to sell securities to money market funds, the objective there was to prevent Systemic Risk. Created problem is that a monopoly on shortterm funding in the united states, for banks. The sec staff didnt like being beingce inconvenienced. A way ofneed to have raising money separate from the commercial Banking System, whichise you get 2008, was when citibank took their monopoly and rent the bank into the ground. The interest on excess reserve, yes, they should have raised the price. They dont understand what they are doing. This just shows you how regulation by experts, as alex has told me over the years, inevitably goes wrong because they dont know what they are doing. When you replace a market mechanism, i am sorry, i shouldnt use the word mechanism. But when you replace the market with the discretion of a bureaucrat who doesnt have perfect knowledge, you end up with a situation like we have in the reserves, which should generally speaking be below the see oneate, unless you of the big banks exercising market power and forcing rates down. There are times when the fed should be able to pay above as when they first started in rates were about zero. Because you know what happened the next day, there was a bit about jpmorgan and wealth, and if you were one of the Smaller Banks that was kind of nice. I suppose i could concede that maybe for a day they should pay and above market otherwise, all of the world with other Central Banks you see this. You have governmentsponsored monopolies. Norbert we are on the same page there. I think the system should shrink and they should get all of this stuff out. They have to balance the contractionary and expansionary forces that they have created now, to not create a disaster. But i dont think they should keep the system going. Witht really disagree sense. In this stability storyat brings to mind a which was about a 14th century , which is very stable. But there is just not a lot going on there. And you have in a norm is cash sitting there in government interest you have and of cash sitting there, getting government interest. That they develop what banks are going to do it they take money from savers and they try to lend it made that is going to be launders. Do need to deposits deposits that are with the insurance scheme. They are open to having no insurance. You are working in a system like deposits are not necessarily bad. That is what banks do. Get a thing they try to do is they offer transactions. So i think a lot of this goes on to the banks partly because they have left the money fund. I dont see that as being a absolute negative. Are ioer payment to the bank. They hope i can reduce that range. The payment unreserved is higher than the banks cost. They are probably higher than the rates you earn on checking. The market rate could be 1 . Then you add the capital requirement, the ficc insurance premium. Federal once they get the system in place. They may be able to narrow that gap. One and ae down to quarter. Billy would be much less funds given. Which theyost are reserves, they have to be funded somehow. It is a asset that you have to be funded on the liability side. On the narrow and bid they are not the entire. 5. Paul the fed has had this argument that bank deposit rates customer retail rights rates will always come around. We have been paying interest on those reserves for a while now. It is pretty slow. I am not willing to wait another bit. If the fed normalizes their Balance Sheet and if you believe the president s words they are going to keep access around 1 trillion. 3 that iste at still 30 billion. That is a lot of money. I dont think any of this was intended. I think they got into this position trying to do all of the right things to. Most people do not understand that these payments are taxpayer payments. They are payment that would lower the federal government deficit if they were not paid to the banks. It is a transfer payment point and simple. If more than covers the cost of insurance and regulatory compliance. Banks said they are great happy quite happy with. Frank right now. I dont see this as politically sustainable right now. I think eventually there is a day of reckoning where people will figure this all out. It is going to take a while. First chris. A lot of his users came about because the plant was buying secures. Bank if i was the taking security a from them. What is the net cost of this . Basically that is a plus. The fed does make more money on these banks. From 1914 october 2008 the reserve was a tax trade that is my reserve requirements were tiny. The residence actually became a earning asset not a tax. The goal of your charts show banks realize this and are holding a lot more reserves for cash. They can certainly do so. Getting paid a overnight great that is equal to a annual rate. With my credit card fun that is a pretty easy choice. I would agree with paul there is no size for a bank. With his extraordinary policies they have to have a certain size. They expected to look a little bigger. There is not change for decades. Is what in which fully agree with is it puts the central bank into the political sphere. That is a issue. Their extra that pay to the treasury, right now between 2009 and now they have put and 50asury billion. I was thinking about the question where do you come out as a positive or negative. It will not matter. We arent talking about the fed and the federal government being involved in the Banking Sector. I dont agree. I dont think the fed has to have a certain size Balance Sheet. Is the only money system we have. They are the only ones who can increase or decrease the reserves. Much less have a bigger Balance Sheet. The banks are going to keep having a balance system. I dont think we have to have in a to what we have at all. The biggest beneficiaries of government. I cant believe i am sitting on a panel with freemarket advocates. We are sitting in a building created to fight fascism and economic tyranny this weekend at cspan3 on of0 p. M. Eastern the author southern morale after black troops were assigned to guard confederate prisoners. One may assume that is why they chose the spec black troops. Were not counted enough to fight raided they were not brave enough to fight. After lectures in history a professor on native americans and trade. They are cowboys. They are dressed very nicely. That candidate shows you the values that missionaries place. Toy would not be allowed ride horses. They kind of dress nice. On oral histories we continue our series on photojournalists with the White House Photo office. Something about his hair and i take his photo no one will ever believe that this was set up. I just took the photo and wound up running to full pages in life magazine. So ithe next 20 years or was when of the best moments in life. In one it was selected of the best issues of life magazine for the past 75 years. American history tv, all weekend every weekend on cspan3. Cspan washington journal, live every day with news and policy issues that impact you. Coming up sunday Morning Tea Party patriot cofounder discusses her groups call for Mitch Mcconnell to resign. Politico reporter on the epa decision to roll back the Obama Administration clean power plan. Former cbs and nbc chief Diplomatic Correspondent and author talks about his new book on russia and communism. Be sure to watch washington journal live at 7 00 a. M. Eastern. Join the discussion. This Week National security adviser h. R. Mcmaster sat down with three of his predecessors to discuss the role of the Security Council and the future. Among the speakers was in the kissinger. For strategicrs studies this is about one hour. Well we are getting ourselves organized of here, let me say that i am delighted to have everyone with us. Always when we do public events, we have a little safety and and. I am responsible for your safety tonight, so if i ask you to follow the instructions, please do that. The exits are right behind us and i will take care of h. R. Mcmaster first. He does have other people here to help him. [laughter] i will come back for everybody. The stairs will take us down and the we will make to left and get to the street and across national geographic, i have ordered ice cream and we will thing a song of praise. [laughter] will happen, but i used be ready in case i ask you to do something. This is an extraordinary evening, and i want to say thank you to general mcmaster who gave us the opportunity to celebrate this 70th anniversary, a remarkable institution, the National Security council. You have before you for gentlemen that have been National Security advisers. I have about three or four more in the audience, i could not get everybody on the table, but we have remarkable talent. My goal tonight is to help all of you understand how the institution works and im of the Big Questions are in a way. I will just be the moderator and try to stay out of the way with my questions. The first thing i would like to ask you, is, the National Security council really sits at the fault line of american constitutional governance. That is no question congress has a right to oversee , stateions of department department, Defense Department and there is no question that the president has a right of privacy in his decisionmaking. We call that executive privilege. In the National Security council, it sits right on top of that. You are there for the president to health will the government together but you are also coordinating the activities of agencies that have accountability to congress. I would like to ask each of you to reflect on that from your own he has aerience, trump card so he can interrupt you whatever you want. I will start with you, h. R. Thank you. It is important for the president and for all of us that we ensure congress fulfills its role which is vital to our democracy because the congress represents the american people, but is also the role Critical Role for congress. And for the administration to be able to access the great work about their staff does. It is a responsibility [indiscernible] attempted to do, as a National Security council is have conversations with senators and congressmen and staffers about key policy initiatives and early on in the development of what we call in the best integrated strategies. We found that helpful, because a lot of the problems are facing require legislative remedies. And all of them require resources. Has been oneffort early consultation from the National Security council. Obviously, continued coordination between the department the relevant departments, and the fill and the relevant committees. Havech of you, administrations that had somewhat contentious relations with congress. Therethis issue would obviously want to know what you are saying and thinking, but you have an obligation to the president to be his advisor. Jim, how about you . I think the most important thing is that the National Security adviser and the nsc is of National Security, to project an image of bipartisanship. In my relationship with president obama, i asked him for , to resist putting a political spin on big issues until such time that they had been developed. Obviously, it was a political decision. During my time, which followed , we decide to come by National Security and homeland staff andnto one that was a big difference in terms of the value volume of the staff. I think it is extremely important. In my military career, i had the good fortune of spending a few years on capitol hill as a marine liaison officer. Do foro was always to the majority what you do for the minority, and vice versa. Then i found out, when i became National Security adviser that all of a sudden, i was a democrat, and i did not know that i was. [laughter] you have to get through that, and even only get through that are working at it and by making sure that you reach out to both sides. I think that was extraordinarily important especially on security issues. Of course, the National Security adviser is not confirmed by the senate, he does not