 I'll let you explain, you know, what this is, but it's showing in my understanding that the money going from the—there is no money now flowing from the Federal Reserve into the Treasury. So could you give us an explanation of what the situation with the Fed is right now and how it's different from, you know, anything in our memory of what's been going on with the Fed? Sure, the Federal Reserve, you know, as Arnold pointed out, does have a similar problem to a lot of these banks, with the key difference being that they can't do a bank run on the Central Bank. And so, basically, it's in a position where, you know, they've raised their liability side, interest rates much higher compared to their asset side, which are longer duration fixed rate assets. And so, you know, for most of the Fed history, you know, their liabilities are things like bank notes, which don't pay any interest, bank reserves, and reverse repose. And then their asset side is mostly treasuries and mortgage-backed securities, and those are longer duration assets. And so, for most of Fed history for decades, you know, their assets pay a higher average interest rate than their liabilities. And so, they make a profit, they cover their expenses, and then they send the remaining to the Treasury as a remittance. Whereas, what we've seen since September of last year was that because they raised their interest rate side so quickly, now their liabilities are paying a higher interest rate than their assets. It's actually worse than most banks, because most banks, you know, if look at their deposit rates, they're nowhere near as high as current interest rates, whereas the feds are. So, actually, the Fed is operating on a loss, and it has something like a trillion dollars in unrealized losses, with a key difference being that, you know, you know, those like that liability side can't go anywhere, can't get rapidly pulled down. The main kind of downside from that is that the Treasury is no longer getting their remittances anymore. And even if the Fed would become profitable in the future, they still get to pay themselves back before they would resume those remittances. So, it's basically contributing to the fiscal budget deficit. And if we go back to the prior question of, you know, who's to blame here, you know, a lot of, you see a lot of people say just blaming the Fed or just blaming that bank. And it's just kind of a mix of a lot of factors, because the Federal Reserve did create a very difficult operating environment when you have, say, rapid increase in the amount of broad money supply, very low interest rates. And, you know, when asked about the rapid increase in the broad money supply, the Federal Reserve Chairman said he didn't really see this being inflationary. Then, of course, it was inflationary. And then they, you know, they had to pivot their whole monetary policy, they raised rates, they also sucked liquidity back out of the banking system. And so, basically, banks are undergoing this gigantic whipsaw that is just a difficult operating environment to work through. But then, of course, some banks manage that risk better than others. So, there are banks that manage their duration risk very well. And they also choose their depositors. I mean, it's a choice for Silicon Valley Bank to go after those big business depositors that are more of a flight risk. And it was their choice to invest almost exclusively in long duration assets, which have bigger price swings. And so, it's certainly the case that that bank made severe errors of judgment in terms of risk management. But it's also the case that just across the banking sector, it is just a more challenging environment to operate in when you have kind of record swings in interest rates and, you know, just overall cash in the system. You know, bank deposits across the country went up pretty significantly in 2020 and 2021 because of the stimulus being a big increase in the money supply. But some banks got more deposits than others because they were more in like a hot area. So, for example, Silicon Valley Bank had a bigger rise in its deposits than the typical bank because tech startups were a very big, you know, thing in that period. And they did invest in those long duration assets. And what makes it, you know, with that chart you just pulled up, that shows how it's very different than 2008 because 2008, the problem was that so many banks made bad loans. And they had very little exposure to cash and treasuries, which are considered some of their safer assets. And they were instead were heavily involved in subprime mortgage and a lot of those defaulted. This time it shows that in some ways it's the opposite problem. They hold very, very safe assets. It's just the prices of those assets went against them. And in Silicon Valley's case, they made a very big bet on duration. So, banks had to invest their deposits, their new deposits somewhere. And there's some banks like JP Morgan that were conservative and they mostly kept in short duration types of assets, whereas Silicon Valley Bank made a very big bet on those longer duration assets. And so, if you look at banks across the board, Silicon Valley Bank had unrealized losses on their securities that, you know, roughly equaled their total capital. Meaning that if they had to have a bank run them and have to sell those assets for a loss, you know, depositors might not get every dollar back. And, you know, the thing is if they can hold those assets to maturity, you know, some of them are can't default, other ones have a very, very low default risk. But if they get their deposit funding pulled and they have to sell a loss, then they basically, you know, that gets marked a market and they have a problem. And the last point I'll make is that, you know, because FDIC ensures deposits up to 250,000, you know, a typical bank that just has a lot of retail deposits, that's a pretty solid deposit base because people are not going to freak out too much if they think their bank has a problem. Whereas the issue with Silicon Valley Bank is they had an higher than normal percentage of uninsured deposits. And that's because most of their depositors were businesses. So there are some businesses that would hold even tens of millions of dollars in an account. You know, the average deposit was not that big, but they, you know, they could be half a million, could be a million, could be a million and a half, could be five million. And so if they received that combination of high unrealized losses, which Silicon Valley Bank had more of than normal, and they have the combination of mostly uninsured deposits, which, which again, Silicon Valley Bank was a standout, then that's a prime target for a bank run because people have a greater incentive to pull out and then it causes a problem. If you look back in the 1940s, which was the last time that federal debt, the GDP was as high as it is now, banks did become basically these vehicles where just a lot of government debt was, was monetized in there. And that's, it's unfortunately kind of common to happen in countries that have this level of deficit and debt spending, where the banks essentially become like utilities in that regard. We've also seen as a multi decade trend of bank consolidation. You know, it used to be like tens of thousands of banks. Now there's like 4,000 banks. The top 10 banks have like half of all assets. Right now there's a depositor flight from small banks to big banks. So that's a continuing trend. I'm curious to ask Lynn about, you know, the, what you think about the future of banking and there's, you've argued in, let me pull it up here. There's, you've said that ironically regulators want banks to be reasonably safe, but not too safe. And that there's this kind of deeper question that nobody's really talking about, which is one way to avoid bank runs would actually to just be to hold more cash reserves, but that because of the way that the Federal Reserve and the FDIC and just banking regulation works, it's a lot harder to set up and get an approved charter if you run a bank that way. One example of that is Custodia Bank, which I'm showing here, which I believe holds actually over, it holds like 108% of its deposits in cash. So people can always get the bank or always get their money out theoretically and they pay, they fund this through fees instead of, you know, loans. So could you talk a little bit about that, that issue, Lynn, of fractional reserve banking? Yeah, there have been a number of attempts over the years for people to try to create full reserve banks where, you know, instead of having just a percentage of deposits in cash, they would have at least 100% of deposits in cash. And, you know, one of the main examples was the narrow bank, you know, these start as state charter banks and what they do is they apply to have access to the Federal Reserve. And the narrow bank basically just, you know, they wanted to take deposits and then put them on deposit with the Fed as a bank reserve. And therefore, from depositors perspective, you just have like, you know, you'd be basically banking with the Federal Reserve, except you'd have a thin layer of administrative overhead between you and the Fed because they'd be operating, you know, the basic banking services that you need. And their application was kind of held in stasis for a number of years. There's been court, you know, court things over that. It's like, ironically, they're trying to make, from a depositor perspective, about as safe as a bank you can make, but they get criticized as it contributing to systemic problems because then it could suck deposits out from fraction reserve banks towards that one, at least for certain types of depositors. And then the more recent case just this past year was Custodia Bank led by Caitlin Long. And they want to do more than just that. But from the depositor perspective, they do plan, they plan on putting 108% of deposits at the Fed so that they could withstand 100% deposit bank run if it were to recur. Again, they would do other services on the side, but in terms of that deposit and what they do with it. And they were also held for a long time in stasis and then ultimately denied. And so there's been other attempts like that in other countries too. And in a low interest rate environment, they'd have to charge, you know, they'd have to charge a deposit or some sort of fee for those services. In the current environment, they actually wouldn't have to because banks get paid pretty high interest rates on their reserves. And so they could essentially cover that overhead with those and then even even potentially pass some deposit interest on to depositors. Yeah. And it's just it's not something that the Federal Reserve has wanted to exist for a variety of reasons. Hey, thanks for watching that excerpt from my conversation with Lynn Alden and Arnold Kling about the Silicon Valley bank meltdown and what caused it? Who's to blame? What to expect next for the U.S. banking sector? You can watch the full conversation by clicking here or on the link in the description below and subscribe to Reason TV and watch these conversations live every Thursday at 1 p.m. Eastern.