 Good evening. Hi, everyone. I'm Luke Schaefer. I'm the Associate Dean of Academic Affairs and the Herman and Amalia Cohn Professor at the Ford School and Director of Poverty Solutions. I'm delighted to welcome you to this timely event presented as part of the Policy Talk series at the Ford School in partnership with the Center on Finance, Law and Policy. It's the second iteration of what I hope will be an annual forum that brings together economists at the Ford School to talk about the issues, the most pressing crucial issues facing the U.S. economy. The Ford School has a proud and long tradition of economists who serve at the very highest level. This is not an exhaustive count, but I can think of a Ford School-affiliated economist who served in five different White House administrations going back to Richard Nixon. Last year, we talked about inflation, we talked about the economy, all sorts of things, all of that will no doubt come up tonight along with recent news about our banks. I am not an economist, although in a faculty meeting, Justin Wolfers once referred to me as a labor economist equivalent. But even though I'm not an economist, I'm proud to say that some of my best friends are economists and some of them are here tonight with us. We had a last-minute houseman switch, so tonight we have Josh Hausman, who's an Associate Professor of Public Policy and Economics here at the Ford School. He also served as a staff economist at the Council of Economic Advisers during the Obama Administration. You can read his writings, both as scholarly writings as well as some popular writings that he's had in the Atlantic in recent years. Betsy Stevenson is a Professor of Public Policy and Economics. She served as a member of the Council of Economic Advisers during the Obama Administration and Chief Economist for the Department of Labor from 2010 to 2011. Betsy has published widely about the labor market and the impacts of public policies on outcomes both in the labor market and for families as they adjust to changing labor market opportunities. Finally, Justin Wolfers is a Professor of Public Policy and Economics whose research focuses on labor markets, economics, macroeconomics, political economy, law and economics, social policy and behavioral economics. He's also affiliated with the National Bureau of Economic Research, Brookings, the Peterson Institute for International Economics, and he is a contributing colonist for the New York Times. He and Betsy have a podcast that you might like to check out called Think Like an Economist. So I'm going to welcome them all onto stage and I'm going to get started by asking a few questions and my goal tonight is really just to ask questions, keep the conversation going. We're going to have a free flowing conversation and I hope that there will be at least one or two vigorous disagreements. Betsy, we have had recent news of a banking crisis and I imagine lots of people are wondering what's going on and how it might impact them. So would you tell us what the heck is going on? Yeah, you know, a banking crisis sounds both simultaneously boring and terrifying. So I can imagine that a lot of people have trepidation about it. You know what happened here was we had a particular bank, Silicon Valley Bank, where basically everybody wanted their money back at the same time. And to really understand where this came from, I think we wanted to think back to actually the 1930s before we had federal deposit insurance and that's because 95% of the people who had money in the bank at Silicon Valley Bank were businesses with large amounts of money that exceeded what would be covered by that insurance. So was a bank that had mostly uninsured depositors and people got a little bit scared. What did they get scared of? They got scared that Silicon Valley Bank didn't have assets that were going to be sufficient enough to pay them back. So that's the idea of being fearful that they're insolvent, right? Their assets are worth less than their liabilities, what they owe the depositors. And so what do people do when they have that fear? Well, they rush to the bank because they want to be first in line to get their money out. And that's just a good old-fashioned bank run just like you watched in It's a Wonderful Life, except for now we're going to add texting, group chats, and social media to it. And it's going to happen even faster because people can do it with a push of a button rather than having to queue up in some sort of bank line. And that led Silicon Valley Bank to collapse. And then we go to Signature Bank, which was over-invested in crypto. Again, a lot of concern, like, hey, maybe this bank isn't going to stand up so we get the bank run. I think you want to be careful to realize that there are sort of two things that can happen. One is what we call a liquidity crisis, where the bank is worth as much as what they owe people. But it's really hard to liquidate all those assets all at once if everybody comes in and wants their money all at the same time. And as we call the liquidity crisis, and it's really something that's easy for the government to help out with because it can actually provide liquidity to the bank by giving it a loan so that it can say, don't worry, here's your money. There's another kind of problem. And this was the kind of problem we had in 2008, where we've got a lot of banks that have a solvency problem and that they've made a lot of bad risks or mismanagement or assets they didn't know how to appropriately value. And therefore, we see that their assets aren't worth their life as much as their liabilities. And so there's just been a lot of money actually lost. So far it looks like what we're seeing were a few bad apples that had very specific and unique mismanagement and excessive risk taking going on. And that has led to a lot of over scrutinizing of a bunch of other banks to see if they can withstand the heat. And that caused a bunch of these bank runs, which have caused liquidity problems. And that's why we've seen the government step in, the Federal Reserve has opened this line of credit facility, and boy have banks used it as they've had a lot of people show up at the bank and say, I want my money back. And they've been able to meet those demands because they've had access to cash to be able to do so. So that's sort of where we're at right now. I think what we keep being reassured of is your money safe in the bank. I think that's pretty much true for two reasons. For the vast majority of people, all your money is covered by that federal deposit insurance. It covers up to $250,000. If you have more than $250,000, it's a good idea to spread it across multiple banks. And that's where some of this bank run stuff's coming from, because you would be insured if you had money in different banks. But the truth is, even that uninsured amount, they've already come out and told depositors at Silicon Valley Bank at Signature Bank, that they're going to be made whole. They're sort of retroactively giving that insurance. That's causing a lot of disagreement among economists. So maybe Justin and Josh want to come jump in at some point and talk about how they feel about this retroactive insurance. And just today, Janet Yellen sort of implied that everybody would get that retroactive insurance if their bank failed. And so that means your money is definitely safe. I think we don't know for sure whether all the banks are safe or whether there's a couple more that will fall. And I think that really does come because of this excess scrutiny that they're going to get. Josh, I believe your work as an economic history has studied previous bank runs. How does this look? Betsy called it a good old-fashioned bank run. How does this look compared to past experiences? And what do they tell us about what we can expect in the future? So I would entirely agree with Betsy that this does look like an old-fashioned bank run. And that way it's sort of refreshingly simple relative to what happened in 2008 where there are a lot of complicated things going on in shadow banks and so on. This is an ordinary bank taking deposits. As Betsy said, most of these deposits were uninsured. So in that way, it was analogous to what you had in the Great Depression where there wasn't deposit insurance. And so everyone was uninsured. And I'm not sure here that there's exactly lessons from history. It's a good question. I think it's a little early to say. I would say that the Great Depression certainly is one of many examples to show us the huge costs of banking panics. And I think one thing we see in the Great Depression, which is a possible concern now, is that it can be very costly when banks close because banks have relationships with local businesses. And so I think there is a worry right now that if deposits leave sort of small banks and, you know, so a rational thing you can imagine someone doing right now is saying, you know, I have a deposit at, you know, I don't know, key bank, America Bank. Maybe the Fed's not going to rescue that. But if I put my money at Chase Bank, that's going to be rescued. No one's going to let Chase fail. And there's a worry that maybe the local bank knows all these businesses, knows who's a good credit risk. And so just moving the money between banks could lead there to be less lending. Because, you know, maybe over a few years, you know, Chase would build those relationships, figure out how to make those loans. But that's not going to happen overnight. And so you can imagine lending declining if deposits really move out of smaller banks into larger banks. And we sort of saw this in the Great Depression where thousands of banks failed. And Ben Bernanke used to famously argue that that was a big reason that the Great Depression became so severe is that even if those deposits ended up in other banks, those other banks couldn't immediately step into the shoes of the banks that failed to make the loans. Let me just add, there's nothing I like more than trying to talk history with Josh because he always knows more than I do. But I think there is actually a really important historical lesson, which is we've solved banking crises. We know how to prevent them. If you look at a chart of bank failures over the past century, tremendous number, even higher through the Great Depression, then we implement deposit insurance, and it falls to zero. And it stays between zero and maybe two or three every year since with a small blip for the savings and loan crisis and actually an even smaller blip for the great recession. So what this says is we literally have solved the problem of bank runs and the solution is simply deposit insurance. The logic of it is exactly as Betsy suggested. Many of you on this stream probably find banking boring as hell and wish you didn't have to pay attention to it. As soon as the government says your savings are safe and they are, you can go back to not paying attention to it. As soon as you're not paying attention to it, you're not withdrawing your money. And so therefore we're not having too many people turn up to take money out of the vault at the same time. So we truly have solved this problem. We've done so at remarkably little cost because the great thing about deposit insurance is it's a form of insurance that actually prevents the bad thing happening. So we actually never end up paying out on deposit insurance or barely at all since the Great Depression. So just an unbelievable insight from simple economic theory that has prevented enormous amounts of problems. And the only problem right now is Silicon Valley Bank forgot the lessons of the Great Depression and regulators allowed them to. And so the first $250,000 of all accounts is insured. Anything above that isn't. Silicon Valley Bank and Signature Bank and very few others have almost entirely super rich depositors. And so therefore they're almost entirely, their best thought of is being uninsured. And so then their best thought of is being prone to bank runs, but the rest of the American financial system is not. And that's really, I think the big lesson from history is we know how to solve this stuff. And I just want to put in one plug. If any of our former students are watching, you will have learned the economic model to help you make sense of this in microwave. We actually work through this. It's in game theory. We show there are two equilibria, one where banks are safe and one where banks aren't. And you add deposit insurance that changes the rules of the game. And all of a sudden everyone ends up in the good outcome and history has borne that out. So I was just going to jump in and say, so what's the policy question? I think there are a lot of policymakers that are debating whether deposit insurance needs to be higher. But then you might have to ask, so why, why did they cap it at all? Why not just have infinite deposit insurance? And the question is who should be vetting the banks? Who should be ensuring that the banks aren't doing excessive risk taking? Now I for one am not going to vet my bank. I'm not, and I'm a pretty knowledgeable person, but I don't want to be going through my bank's balance sheets and figuring out where their portfolio is and then saying, this bank doesn't look very good. I'm going to move to another bank. And small business owners just don't feel that way. I have a friend who they run a small business and they're still banking at Wells Fargo. And I'm like, you're banking at Wells Fargo after all that fraud that went through. And they're like, you're not so hard to move. I don't want to move. Right. And so people, small businesses, if you're my friend's architect or if you're a pet store owner or you're a pediatrician and you're running your practice, you don't want to be in the business of vetting the bank. You just want to be able to pay the rent on the buildings. You want to make payroll. You want to be able to do your business stuff. Now there are probably some businesses that we do think would do their due diligence. And I think that's really the policy question is, where's the amount we cap? Where we can say above this, you really should be checking out whether, you know, SV Bank or whatever bank you're looking at is making good decisions. And below that, what do we think doesn't make any sense? And let's just add a little bit of meat to this because this is where the debate really gets a little sharper. So ex post, the government has decided that it's going to ensure people who knew they were uninsured, right? The health burned down. I'm actually quite irritated about that. And so my question is, should I just allow it? I mean, obviously, I am apoplectic about it. And so what will happen is rich folks in Silicon Valley are going to say, here's someone with an Etsy store, they deserve to be bailed out. I'll also point out that one, so what happened was, you know, the Fed 20, they wound up the bank, and then the federal government has said, even if we discover once we sell all the assets, there's not enough to repay everyone. We're going to make them whole. There's an argument whether it's the government doing it or not, because the government is going to tax the banking system. But that kind of feels like it's money. And it kind of feels like it's money you could spend on other things like childcare. So then I do think it will bail out. And so sure, that person who is running an Etsy business, and apparently some of them need more than $250,000 in working capital, Betsy might be about to replay dinner, our last night vicious dinner table conversation. She thinks, of course, that people aren't rich unless they have 100 million. There was a time she was a liberal. But at the other end, so that's the sympathetic case, and that's what's getting trotted out. The other end, the crypto firm Circle had $3.3 billion in Silicon Valley Bank. Now, how big is the baler? Let's get it in scale. A reasonable guess is once they sort through all the paperwork, they'll discover enough to pay all the depositors back 90 cents on the dollar. It could actually be as high as 100 cents on the dollar. It's really quite unknown at the moment. And so all of this will depositors get destroyed. Well, first of all, no depositors get to lose more than 10% on funds above $250,000. So, you know, their life's not that bad to start with. And second of all, that they want to use your money and mine to make crypto exchanges whole to the tune of $330 million. When they put their money in Silicon Valley Bank understanding, and it says when you open the account, this amount is not insured, I'm furious. So I want to give the alternative view, and then I'm going to let Josh mediate. Or you can give the, either you take a side or you can be in the middle. But, I mean, I think I just really take a lot of umbrage at that characterization that it's like Etsy shop owners versus like the, you know, crypto. There is actually a lot of, you know, I don't think anyone's confused by the trading technique. You're saying, if you're honest, I'm talking about circle, it's up in between clinics where, yes, they've got, you know, they've got a heavy payroll. They've got a lot of rent. They're running maybe three offices. Maybe there's 15 doctors employed. They had businesses like that. Those guys do not want to be vetting their bank. The crypto people, of course they should have. Should we be bailing them out? No, I would agree. Let's not bail them out. But what about the payroll company that was set to make payroll on a million people's paychecks? Should all those people get a 10% cut on their paycheck that week? Because they happen to be using a company. They haven't been working for a company that had hired a payroll company that had all of their wages for that particular payroll in Silicon Valley Bank. So I think that there is a number above 250,000. And I think there's a question about whether we need to go and, you know, think about whether it's a number that we cap it at or whether we think about other ways to decide like who really should be stewards of the bank and who shouldn't be. Josh. Yeah, I'm very sympathetic to both these positions. I sort of share. We take a position. Well, I share your reaction, Justin, to it being outrageous and that the three or over three billion from the crypto is what most annoys me. But I do feel like not having paid off all the deposits really risks that we would have seen immediately huge deposit withdrawals from banks across the country. So actually, if it was just Silicon Valley and just like their clients not making payroll, I'm not sure how worried about that. I mean, that would have been unfortunate for them, but whether that would have been a huge macro issue, I'm not sure. But I'm worried that suddenly everyone would have woken up that sort of the banking system relies on all these uninsured people basically not paying attention to their bank. And if suddenly people, you know, and no one's going to vet their bank, so they're going to wake up and say, oh my goodness, I need to put this money in Chaser Bank of America. And that we would have seen a sort of widespread collapse of small and medium banks and that that really was as much as I it annoys me that that was worth avoiding. But then there's this question of what does one do ex ante. And I've actually before Silicon Valley Bank, I would have said it made sense to cap deposit insurance. I now wonder whether it would be better just to leave it uncapped that basically it looks like even depositors with huge amount of money don't do the monitoring that I always told my class that they did. But I think I was wrong. And it looks like literally billions of dollars in the bank sometimes don't monitor. And if they don't monitor, then not having deposit insurance seems like all you're doing is sort of adding risk to the system without a lot of benefit. And you might as well just cover everyone and much better to do that ex ante and have the banks, you know, pay the insurance premiums and so on, then then to do it ex post in a in a haphazard way after the crisis has occurred. But I'd be interested in it. Let me just agree with you from fairness to actually incentives. Josh, I want to agree with you there, which is I want to give a different form of the argument. So first of all, you can hear that Josh is a veteran of the 2008 financial crisis. Because back then it was a lot of bad guys who did a lot of bad things and no one wanted to pay him off. But they thought it would harm the rest of us too much if we didn't. So let me take a small point, which is your question should we pay him off to help prevent contagion to the rest of us? That's clearly a judgment question. And I think the most important judgment I would make is are there other banks like Silicon Valley Bank? Are there many of them that are effectively uninsured? And it turns out it really was out in the tails and my judgment, which may well be wrong, is that if they had done nothing, six banks might have gone south. Now, that said, I wouldn't have guessed credit Swiss would have been among them. And the other thing that I think is incredibly hard and incredibly important is my judgment is let them go. It's an argument where if I'm right, I save a couple of dollars. And if I'm wrong, I'm risking the whole thing going south. And there's a really big chance I'm wrong because I'm wrong about a lot of things. So that's the argument that the government did the right thing, which is that the left tail risks were catastrophic. I think we've subsequently learned that there really aren't that many banks on the margin of going south. So Silicon Valley. I just think that's the wrong question. I think it's the last word on this one. I'm just going to point out small and medium banks have borrowed $300 billion from the Fed over the last few days. So why did they need that much cash? Because people came and tried to pull their money out. And the Fed propped them all up. Now, you might be saying, yeah, they're at liquid. So we had to solve the liquidity problem. But they're not they're not they're not a solvent. So this issue of deposit insurance doesn't matter as much. I do think that given the reassurances that were given, and we still saw that kind of run, I think we needed to give more reassurances. Now that that said, Janet Yellen stood in front of Congress and said, Oh, actually, we're not going to bail out any of these small, we're not going to make depositors hold at all these small and medium banks. So we just did it for this one, which I found totally confusing. And so did everybody else. And so she walked that back a little bit today. But I do think that that banks are running really scared. And I think it would be a problem if we saw a lot of banks collapse. And, you know, what we haven't seen is it spilling beyond the ones that were in serious trouble. Credit Swiss went down because they've been in trouble for two years. They've been a wreck. They've been and it's shocking that they stayed afloat as long as they did. So I didn't find it shocking. They went down. All right. So from the audience, there was a question about what a regular old citizen or bank person with an account should do with everything going on. And I think the advice is if your deposit amount is under 250,000, you should do nothing. And if you have more than that in one bank, maybe you should move some money to a different bank. We'll get married, because that also doubles the amount. Okay. The first marriage promotion. Really? I thought it was per account. Yeah, I think it's per account, Jess. I don't think it's, it's not per person. So I don't think it's per account holder, I believe. So when you're, when your family asks them about this, don't just get married for this. I think, Luke, the simplest piece of advice that we will all sign off on is the single most important thing for a regular person to do right now is go get a cup of tea. Like, it's just nothing more interesting to do. A drink of your choice. You don't have to be married, but you do, like you could share an account with your mother. So it is per depositor. There's nothing to do with being married, but it does mean how many deposits, it's $250,000 per institution, per depositor. I will add, just Luke, one of the striking things about Silicon Valley Bank is that people were both taking risk with their uninsured deposits and giving up lots of returns. So a puzzling thing to me right now about our banking system is that Americans seem in general very happy to hold bank deposits, paying them zero right now, when you can very easily get an online bank account insured that pays you 4%, or you can buy treasury bills, which are completely safe, which pay you 4.5%. So a bizarre thing to me is that it's actually bizarre to me that there were all these businesses holding millions of dollars who, with two clicks, could buy a money market fund holding treasury bills much safer than an uninsured bank account. Why businesses don't do that and give up lots of interest and take more risk? I actually find it genuinely fascinating. Josh, I feel like you just pivoted us to the topic of inflation. Let's talk about inflation. So Josh, I'm going to start with you. I was on the call in Joe Washington monthly a few weeks ago talking about the impressive child poverty reductions in 2021. And then I ended up being accosted with concerns about inflation for 45 minutes. So tell us about where we are and what the inflation is we've been experiencing. Is it cooling off? Is it staying steady and start us off with some thoughts on what the Fed should be doing going forward? Oh my goodness. Well, that's a lot of things. And I want to help for Betsy and Justin. So I'll say a couple of things. What is as usual, it's much easier to say what has happened in the past than where we are today. So prices are in February 2023 were 16% above where they were in February 2020. So in three years, the price level rose by 16%. The Fed at least claims that they target 2% inflation. I'm not actually sure they do. We might get there. But so prices should be something like 6% higher. So prices are about an extra 10% higher than we would have expected if the Fed had kept inflation at its target. There's two ways of looking at that. One is that we had a pandemic. We had an extremely rapid economic recovery. You're talking about child poverty coming down, an extra 10% increase in the price level over three years. That doesn't seem like a terrible price to pay. Another way of looking at it is that that's a pretty large deviation from what the Fed targets. Certainly enough to be quite upsetting to a lot of people, I think for legitimate reasons. We've seen it associated with real wage declines. So most Americans have not seen their wages keep up with price increases. In terms of where we are now, that is just very murky. I think one can really make a case that inflation is on its way down and that this is a problem that will soon be in the rear view mirror. One could also make the case that we really haven't made very much progress on inflation and that it's down somewhat but not very much and that we still have quite a serious problem. So there are indicators I can point to that would say inflation is running at about a 6% annual rate and there's others that would say it's running at a 3.5% annual rate. I think the Fed, before the banking issues, I would have said the Fed definitely needed to keep hiking interest rates and substantially so. I think the banking issues, this is not a time when I envy the Fed because I think they face a quite difficult circumstance here where inflation is running too high. But what's going on at the banking system and how much that's going to sort of do their work for them maybe more than they would like in terms of cooling the economy that's unclear. Justin Betsy, one way in. Let me just say something parochial which is Josh just mentioned the Fed and it's worth pointing out these are our people. So the man in the hot seat this weekend was our own Michael Barr who is not only a member of the FOMC and voting on what to do with interest rates tomorrow but has spent this weekend coordinating the Fed's response to the banking crisis. And of course my dean before Michael was my dean was Susan Collins who is now the president of the Boston Fed. Susan will be there. I can't remember if she's currently a voting member. I believe she is. Okay and then my friend Lisa Cook who lives in Ann Arbor but actually teaches at Michigan State is also currently on the Fed. So you might think at the end of all of that that we're going to see very Detroit driven policy. It's all about autos. But it is actually remarkable to see a concentration like that out of a state that is neither California nor New York. And I dare say I'm going to guess it's unheard of. Obviously Ned Gramlich was an important figure prior to all of those. One of the important things to realize look as an associate dean or as a deputy dean I get confused. The standard career path is to go from forward school dean to the Federal Reserve board. Your answers when it comes to inflation. I only have a couple of things to add to what Josh said because he's always right. One is to speak to the issues that reflect public opinion. So when I talk to people as opposed to economists and they are distinct species. People are worried about sky high inflation and they're thinking about numbers like six seven eight nine percent which is what inflation was at its peak. I think right now most honest assessments would say inflation is currently running at four point something. A pessimist might say five point something and an optimist three point something but that's the range of plausible beliefs. So that means the hard edge of inflation is gone and it's going to disappear from the headlines because when we talk about inflation we talk about what happened over the past year. We know what was happening six months ago. What was happening six months ago is really bad. Now you can choose your own adjective. Josh will say pretty bad. I'll say moderate but it's certainly not the crisis look that we were looking at before and so I think that should shape how people make their own decisions. I think Luke next time you're booked on TV you're unlikely to get as if it's in three months time you're unlikely to get as many questions about it. Now the problem with four point something is it's not one point something which is what the Fed wants. And so that's where I think we are going to see a continued. So the good news is things aren't as bad as you might think. The bad news is six weeks ago I was ready to look Josh in the eye and say everything's trending down. It's all looking good and I'm not as convinced that's true anymore. Now I will say three months ago there were economists worried about all sorts of things. We're worried about wage price spirals. We're worried about inflation expectations taking off. We're basically worried about losing control and I think the worst of those outcomes quite clearly are not occurring. Inflation expectations are coming down. Their wage growth remains remarkably modest given the state of inflation. And so it's not that anything super grim is coming down the pike but there are some sort of very difficult decisions ahead. So I think what I wanted to add here is that you know going back to what Josh said and I said he was bringing us into an inflation conversation I think that what makes fighting this inflation so very different from any other experience we've had in the past is that most adults or I don't know some share of adults under 50 have not really experienced inflation before. These aren't used to it. So what do you mean I should move my money Josh to an account that pays interest? I mean like why would anybody be paying four or five percent interest like just we have this inertia that comes because we just don't have any experience with inflation. And I've seen so many people like with the banking crisis say like how could SVB get in trouble investing in the safest asset there is 30 year treasury bill. Well the reason is they didn't take inflation risk into account and inflation risk comes with interest rate risk and as a result bonds that are going to pay you a fixed nominal amount of money in 30 years are worth less if inflation is much faster I think regardless of whether interest rates have gone up by the central bank or not. And so that it just I think what I learned from this banking crisis is people who should know better people who have billions of dollars to know better do not seem to understand that inflation is a real risk that we are supposed to try to protect ourselves against. I think people are waking up to that a little bit today but it's also a reminder that you know the Fed has been saying we will not be deterred from fighting inflation by some people losing their jobs and becoming thrown into poverty and suffering greatly because inflation is terrible and people are really suffering from it so we will bring inflation down. So I would just like to point out that the moral imperative for the Fed to stop because the banks are upset seems like a little to me like let's think hard about this. I mean we need financial stability I get that and I understand that financial stability is important in some sort of broad way for people in a way that you know you might feel like employment or unemployment is doesn't have the same kind of ability to spread like a wildfire the way of banking crisis does but I think that the Fed can't give up on fighting inflation because it's seen a banking crisis. If it does that we're going to end up in a situation where we don't bring inflation down. Now that said the banking crisis has done one thing with certainty it's tightened credit. And what is the Fed trying to do when it raises interest rates? Trying to tighten credit. So the banking crisis just did a bunch of the work for the Fed and for those of you who are in the weeds and the nuts and bolts I've seen estimates anywhere from the credit crunch will be equivalent to 25 basis points all the way to Paul Krugman saying up to 300 basis points. I tend to be more in the 25 to 50 basis points but Josh you laid out a reason why as people are moving to new banks if the local banks are the ones who won't lend any more particularly for small businesses that are growing they might find it much harder to get credit. So I think we you know I think that's why there's a bunch of uncertainty right now is we don't really know how much of a pullback we're going to get from the banking crisis. I think if we hadn't had this crisis we would have said fighting inflation is an incredibly important priority. Now we've got to balance in fighting inflation with a banking crisis and I mean my advice to that is it's time for Congress to join the party because they've been letting the Fed handle it while they you know dither about and threaten things like a debt crisis and you know potentially make things a lot worse. So I mean what happens with inflation is now going to be some it's very linked to what happens with this banking crisis is very linked to how the Fed reacts to this banking crisis. So before I go to Congress I want to stay on the Fed and I'm curious if we have other thoughts Justin I'll kick it over to you but other thoughts on what do they do now acknowledging that although we have friends on the Fed we have no inside knowledge. I want to go back to something Betsy was talking about which is we have a generation of people who've forgotten about inflation risk actually we have a generation who've forgotten that interest rates are positive. Interest rates have been effectively zero since 2008 and so that means everyone who walks into my classroom has you know last time they saw interest rates that were positive they probably were also having a squeezy juice at the same time but you know who it's really quite interesting you know who else forgot about inflation risk is actually the regulators. The bank stress tests which were designed in the wake of 08 say how would your bank survive if we have another economic downturn that looks a lot like 08. They don't say how would your bank survive if we have an inflationary burst as we did in the 1970s or as we're currently experiencing that's not one of the scenarios and so it's a really nice teaching example for my colleagues who teach political economy about how regulation is always about fighting the last war. It shouldn't have been too hard in 2009 to think what are the set of risks that could happen and inflation risk is a big part of what happened to Silicon Valley Bank. They basically bet inflation and interest rates would remain low forever because they were all in diapers last time that was positive and our legislation doesn't require bank stress tests against that assumption. Josh I'll give you the last word. Oh well I mean mainly I want to say that I love everything that Justin and Betsy said and this point about people not thinking about inflation. One thing I'm going to draw from that is I think that also points to some of the real costs of inflation that I think are worth some emphasis. So you know one of many examples that strikes me is that inflation has resulted in significant real wage cuts for government workers. So you know I think a lot of us on this call if a you know Republican president took office and said we're going to cut the salaries of all federal employees we would have said that's terrible but that is exactly what the Biden administration has done. They've reduced real wages of all federal employees and so if if you like me think it's not a good thing for our government I think this is even more true at the state level not a good thing for our government to increasingly lag behind the private sector and the ability to attract attract talent that's the kind of thing inflation has done. It wouldn't have to do that we could index salaries but in practice and this is part of people not not thinking about inflation that's not how you know the people setting these salaries think and so we don't see things indexed to inflation. The other then on fed training I totally agree with with Betsy I mean I think it is a little bit tricky I think what the Fed worries about which I'm somewhat sympathetic to is that sort of the financial distress is a sort of uncontrolled that that you know it could spiral out of control and you can end up with you know a deep recession when you just wanted to slow the economy a little bit so that that's where I think it's tricky but I I do sometimes worry that the Fed thinks too much about say what bond markets think of their actions and are you know too concerned with upsetting bond markets and have too little concern about the the people who are going to lose jobs because of their actions which is why Luke Schaefer should be on the Fed. Somehow I think that's not going to happen for me but you know we'll see. Hey Justin so Betsy wants Congress in the game and but Congress has been you know in recent months having some trouble I don't know raising the debt ceiling electing leadership so what can and should Congress should do and maybe a little bit about what has been going on and what that means for our financial systems. One has tempted to joke that academics always want Congress in the game until they meet a congressman and if you meet this Congress you may be quite disinclined to have them in the game. You know the debt ceiling is the big thing that's coming up. The debt ceiling is America's dumbest law. Congress passes a law that says this is how much money you could raise treasury and then it passes another law that says this is how much you have to spend treasury. If there's a difference between those mathematically that implies this is how much you have to borrow and then it says to treasury you have to spend this much you have to save this much and you're not allowed to borrow more. So this is Congress telling treasury to do the mathematically impossible. The only thing treasury can do when spending exceeds the money coming in and we hit the debt limit is not repay our debts. Now the thing is we all know that we're going to repay our debts or we should repay our debts or that to fail to do so would be a catastrophe and so this just becomes a bargaining chip in a game between it's a game of chicken where you know you're both in the original James Dean movie you go as close as you can to smashing into the other car or driving off the cliff I can't remember which and you basically say I'm crazier than you you have to pass my package of policies or else I'll blow up the economy and the job of people like Betsy used to be to sternly walk out onto the front lawn of the White House and say you'll blow up the economy if you do this and then eventually the business lobby of the Republican Party would call and say you know what really don't mess this up and the Republicans would fall into line that's the history of it and it's basically the view that when you're playing a game of chicken if everyone's rational no one dies and that's been the history. The problem is this is a Congress and a Republican Party where there's a similar game of chicken with electing a leader which is you will do all the business behind closed doors and then you come out and you elect a leader in one vote to do otherwise would be playing a game of chicken where the cost would be enormous damage to the Republican leader and so what we learned is that the Republican Party can't even prevent a Republican collision that hurts only Republicans now we're talking about the debt ceiling and we're asking the Republican Party to prevent damage that won't hurt the people they love the Republican Party but all of us all of a sudden I'm a lot less confident that this is a Congress that is going to steer normally what happens is it goes up till midnight but at 11 p.m the grown-ups walk in the room and solve it and I think what we learned from the leadership debacle is the grown-ups can't solve problems in the Republican Party room after 11 p.m and before midnight and that should lead all of us to be very worried what would happen if we hit the debt ceiling and you know what what happens and why is it bad did you want to take that bet I mean I can yeah good okay um well so two things one they literally have to stop writing checks the church has to stop writing checks to everyone there's a complicated debate could it send out a few checks to good people and just stop writing checks to bad people and then you have to figure out who good people and bad people are business lobby would say bond holders are good people because you don't want to call in the full faith and credit I suspect Luke you would say social security recipients are the good people um it turns out it's just very hard to program your computers to do that quickly for reasons that elude and frustrate me but a probably a reality so first of all some people won't get checks um the second thing that would happen is we stop paying bond holders and at that point the question is is this going to be a technical breach where basically the grown-ups wake up the next morning say what happened and we fix it all by Tuesday or are we going to get one of these long ongoing things and if that's the case and by the way this damage is already being done who wants to lend money to someone who you don't know whether they'll pay you back when I lend money to people like that I either call them family or I charge a really high interest rate um and already people are worried and they should be worried so already they're charging the US government higher interest rates and the thing is we owe a lot of money so a little blip on interest rates multiplied by 20 trillion dollars is a big cost um and so that's the and then there are all sorts of uncertainties which is we know the financial system is interconnected if you're a CEO of a bank you should be making sure that you're not exposed to this but you know you're exposed to a lot of other people and you don't know what they're exposed to and then it starts to sound like 2008 again and it's not that anyone can promise you 2008 will happen again but it's that they can't promise you that it won't and that's the real fear here so I just wanted to add a couple mechanical things so one question is that you know the US government just turns over a lot of its debt a lot of the time right like bond comes due they pay them back and then they borrow from somebody else um and so there is some question about how mechanically will that be able to work and will that have to come first um what happens is every single day the treasury gets money people mail in taxes every day of the week and what will happen when we're in default is they'll just have to hold paying bills until money comes in and then it'll just queue up so it'll be like a backlog right so imagine that you know your bills come in and you're just waiting for the cash to come in and then you pay what you've got and things will accumulate on the bottom until things get later and later and later um you know I wanted to come back to something Josh had said about like real wage cuts for a lot of public sector workers it's actually not just public sector workers you know who has actually seen the slowest wage growth is uh like health care workers why health care workers will cms uh site sets a lot of the wages for reimbursement rates for a lot of these workers and so there's like this mechanical uh thing but also realize that we've got like treasury manages a lot of different kinds of payrolls right there's a lot of doctors reimbursements that goes through treasury I think what that's why everybody's asking well what when the bills are queuing up how will you order them will they be just ordered based on the day they come in will they be separated based on the stream of money that they have access to will they be separated based on some sort of understanding of what we're more or less legally obliged to pay and you know the treasury secretary doesn't really want to answer that question because she doesn't want to be in the business of not paying everybody back um so uh but to step back from all that look we're in the midst of a banking crisis right now and while Justin doesn't want to get congress involved I don't think we have any choice but just tell congress you have to raise the debt ceiling now and stop mucking about because you're you are going to cause further instability in the financial system you can bring some of that instability down right now by just stopping the debate there's some chance that that is is sinking in on the hill I have not ruled that out prior to this banking crisis I was actually more worried that they wouldn't be able to get it done because I was more worried that it would end up like a vote for the speakership where McCarthy doesn't know how to count votes um I think like this is where you get into the messy politics you know there's a different question about whether the speaker can retain his speakership and the debt ceiling can get past those two things may not be able to exist in the same universe but it does seem like like they understand the imperative of this and we we can't really afford to get to three days before right now Josh is the debt ceiling the nation's worst public policy I think or I'm sure it has some competition there but it's definitely in terms of worst large I mean it is the absurdity of it really does sort of boggle the mind um I would just add to what Justin said this is not I'm no expert but I actually think that a 2008 like crisis would be perhaps an optimistic outcome I think if there was literally a prolonged default where treasury bills weren't being paid I mean treasury bills are just the bedrock for you know everyone who's trying to do safe things with lots of money definitely not everyone because some people put it in Silicon Valley bank but people you know the safest thing to do if you have a lot of buddies by treasury bills and if you're thinking about like what are banks doing right now to try to be safer I bet there's a lot of banks buying treasury bills so a world where the government is not paying treasury bills seems to me like a world where the financial system is is in really really deep deep distress I'll also say this is sort of a question in some sense but it I find it very bizarre I mean it's so bizarre because Congress is telling treasury to do contradictory things it's actually interesting to me that it's always assumed that if the debt ceiling is breached that it's spending that's cut because it I'm no lawyer but that's also breaking the law because Congress told them to spend all the day so why exactly that's what you have to do and you can't just ignore that and just keep spending and say well we don't want to break the law and so we had to choose something so we kept spending it is not I'm sure lawyers have some reason you can't do that but it does illustrate the absurdity of this law oh I Josh I've definitely heard people make the argument that there is a requirement that they pay the debt and that that that this is all a show of mirrors like and with if push comes to shove the thing they will ignore is the debt ceiling but I don't know like these are all outsiders who hypothesize it certainly doesn't feel like that on the inside I can tell you that when I was in the the the Biden-Harris tran transition I was working with some of the career folks to try to understand you know like what if we have insolvency you know in something like the Medicare trust fund so I'm like you know which one of these rules are you going to break like don't you have to honor the debt like that's what the law says they're like yeah but we don't have the money well like run up some debt like it it the problem is they don't actually have these contingency plans written down in law so they they don't really know what to do so it would be certainly interesting policy times but that doesn't mean I am ready to experience it because I think it uh it would be pretty much disastrous just just to draw a line under this Josh is predicting a dual financial crisis and constitutional crisis I was I was wondering I just was wishing we had somebody when laws are contradictory that could sort this out for us you finally hey Betsy we got five minutes and you've been doing some great work with poverty solutions I should mention on the labor market so what's going on it seems like maybe the the fed's efforts haven't slowed thing down maybe as much as I'd like well the labor market has been red hot you know we we're seeing job growth every month that looks like we're in the midst of some fantastic expansion but at the same time you know where well we think the fed thinks that we're overheated we're way you know we're producing above capacity essentially right so we could think like you know what is it that society could possibly produce and are we sort of running on fumes think about it as students like you're studying for the exams you can't keep up at that pace for forever and everybody sort of feels like the economy is at that kind of pace so they want to see people you know finish their exams go home for a rest and that's the sense of which we want to see job growth slow but there's a caveat to that as long as more workers are coming into the labor force that's actually expanding our productive capacity and I think that's the really unknown question here which is you know are we at our our maximum productive capacity can we continue to expand and I I think you know when I said I really wanted to see congress do more to fight inflation immigration reform would be a great way to fight inflation strengthen the labor market and reduce some of that tightness in the labor market that means employers have had a hard time finding workers and it would allow us to continue to have this kind of you know really rapid employment growth that we have had you know since the pandemic ended without running you know running out of people to hire so I do think even if we just expanded temporary immigration it could do a lot to allow that kind of job growth to continue you know one of the reasons we're seeing so much job growth and and some of you may be having cognitive dissonance and you're like no no I heard on the news today amazon just laid off 9 000 people it's their second round of layoffs things are terrible everybody's losing their job the media is fascinated with the tech sector it's full of magical thinking and all of a sudden the magical thinking unicorns are losing their jobs and so we're all very upset and sad about it but they are a tiny blip in our labor market everybody else is gaining jobs why is the tech sector losing jobs because they overhired coming out of the pandemic the tech sector expanded more than any other sector if you compare them to february 2020 so we've got a lot of readjustments still going on in the labor market leisure and hospitality is just the little engine that good that hasn't gotten up the hill yet it's still trying to come back from the pandemic but it's going to keep going it's one of our big job creators month after month you know if you look at leisure and hospitality spending it doesn't look like we're in some extraordinary you know place it looks like we're still in a recession in that industry so I think we're going to keep seeing job growth there and if you look at education and health services you know that's a that's kind of a mess if you look at what we would have expected how many people should we have working in health care today if we hadn't had the pandemic it would be millions more and well we've been really short to recover all these workers coming back and then as we just discussed we're not paying the ones that we have there very much so they're having a hard time recruiting people I think that that sector is going to have to continue hiring because we want to move back to the level of service consumption we had prior to the pandemic and we're going to have to pay higher wages and I think that's going to continue to be yeah an inflationary force and I do think that's why we're seeing a little bit of movement on people wanting to make it easier for health care workers to come in from other countries and easily get licensed to to work in the United States we've got one minute left Josh Justin any final thoughts on the labor market I guess I'll just say we've talked about a lot of things that I suppose are a little bit depressing banking crises inflation the debt ceiling the labor market I mean it is just in really good shape and I do want to emphasize but an amazing thing that is and it's a fantastic thing for people to be able to find jobs easily a lot of people are able to find jobs now who you know in the past had difficulty finding jobs so I think that that's a real positive and you know it would be lovely if we could keep that and lower inflation I'm not sure that will be possible but Justin last word I think Josh has got us to exactly the right point so I just want to give advice to anyone who's out there which is that my tribe is trained to look at the bad news because that's our job as economists to worry about what could go wrong as a result if you spend too much of your life listening to economists or reading the news media you may end up with too pessimistic of a view and Josh is right I became an economist because I thought the most important thing was getting people work and we have unemployment at a 50 year low we had job growth last year that was the second highest in US history the first highest being 2021 but in so many ways things are actually really really really good and what's striking is how different that is than media commentary the number of calls I've gotten over the past year is the US economy in a recession during a period in which we were creating 300 000 jobs per month during the second fastest rate of job growth in American history is just extraordinary and so there really is a disjunction but I think you want to be you know all the jokes about two-handed economists if you're a one-handed economist who's only looking at the bad news you're going to get in half the story so be an optimist like Josh well three practitioners of the dismal science and on a very happy note so Josh Hausman Betsy Stevenson Justin Wolffers thanks so much for spending the hour with me I know I learned a lot I think our audience learned a lot audience if you like it you should tell us and I'm going to make the push to make this an annual thing so thanks to the three of you and for everyone for tuning in