The American banking failures have led to several ripple effects across the economy and beyond. Now, things have changed and people are wondering what the implications are and more.
We had a sit down with Kristen Ragusin, Senior Vice President, Investments at Raymond James, who gave us insights into the implications of the bank failures and alternative solutions that could be the new normal.
Kristen Ragusin Senior Vice President, Investments at Raymond James
What were the main reasons behind the recent bank failures in the United States?
The main cause was the sudden rise in interest rates–after thirty years of basically lower rates, and the impact of banks’ capital parked in government bonds. The problem is the inverse relationship that bonds have with interest rates – meaning the higher rates go – the lower the price or the value of bonds fall. And the longer maturity of the bonds, the more the value sinks–just like sitting on the edge of a seesaw, the more rates rise the more they tank in value. Banks mind an all important Capital Adequacy Ratio (CAR), typically maintaining a ratio of 8% capital to their Risk Weighted Assets, and when bonds drop in value they threaten insolvency as these thin margins no longer hold.
What recent events involving SVB, Silvergate, and Signature Bank indicate potential risks for other over-extended banks?
SVB, in particular, is the canary in the coal mine. The impetus that triggered its demise is likewise shared by all ﬁnancial institutions, as government bonds make up a large component of assets, which simply can drive ﬁnancial institutions into insolvency—as their Liabilities exceed their Assets.
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How did the 2010 Dodd-Frank Act aim to prevent taxpayer bailouts for insolvent SIFIs?
In a “Fire, Aim, Ready” mode, as the Dodd-Frank Act made it more precarious for many tax paying Americans, particularly those with savings in the bank. Section II of the Act created the Orderly Liquidation Authority or OLA which replaced bail-outs with bail-ins. Savers who stay within the FDIC limits of $250,000 per account should be safe, but the DIF is less than 2% funded, though the implications of allowing the FDIC to fail would be enormous and therefore unlikely. However, it is noteworthy to remember bail-ins were enacted in 2013 in Cyprus, Greece during their great crisis.
How do the rapidly rising interest rates in the financial markets increase concerns about the stability of the banking system?
The need for banks to be profitable, writing as many loans as they can–as quickly as they can means that they are systematically entrained to keep their Capital to Assets ratio, prescribed by the Bank of International Settlements (BIS) for all the banks within the Federal Reserve system, to as thin a margin as possible. Banks are not effectively able to keep plush cushions against failing loans, however they should be hedging and managing investment of their capital to weather changes in the markets, as well loan defaults. The Fed raising rates as much and as quickly as they have done, was the catalyst for this event. Whether banks were proactive, responsive and flexible enough is another story.
What are the currency flaws that contribute to cycles of booms and busts in the economy?
Here is where we can illuminate the key issue as to why booms and busts occur in the economy. We use ‘bank credit’ as our money in the real economy. The Federal Reserve does not print bank credit, it creates reserves which stay within the banking system and do Not enter the real economy. What is bank credit? Mortgages. Of the money that circulates in the real economy, 97% of it is debt or loans created by commercial banks, the vast majority of that is mortgages. So, this itself is why booms and busts occur, because debt, consumer debt, is created as mortgages which acts as the money we use, and when the loans are repaid, the loan is extinguished AND the corresponding ‘money’ is destroyed. Every time a loan is repaid there is less money in circulation, and the economy veers toward recession as there is less ‘money out there’ to earn and run an economy. So, society is completely dependent on the constant cycle of borrowing–ie. Banks need to continually lend to keep things going. If banks stop lending or people are unable to keep borrowing, we get a blowout in our economic system and that’s why a credit crisis is always looming, because the cycle of continual borrow-repay-borrow must continue just like the children’s game of ‘Musical Chairs’– or else.
What are some examples of community currencies, including digital currencies, that can be used for trade in case of massive economic failure?
Community currencies have always come front and center during depressions, societal breakdown or during times of declared government money scarcity. Anything that people agree to accept can act as money, but for it to be effective it needs to be able to maintain stable value and the quantity in circulation must be equal to the amount of productivity people using it can and want to trade. In Switzerland, the WIR community currency started in 1934 and still exists today as a stabilizing force providing a means for monetization of trade, and assisting in legitimate access to capital when larger systems struggle from their weaknesses. In Kenya, the Bangla-pesa has made way for more participants to access the economy, as the corresponding amount of it is created by local communities and accepted by those in the network. Gold and silver or other commodities that have value due to their scarcity, and product uses may act as a safety net. The concern with metals, beyond a possible means of retaining wealth as a store of value, is the actual monetary logistics in a modern world. Where would one store the metals safely without attracting modern day pirates raiding homes, questionable effective portability, and the challenges of verifying veracity at the time of exchange. Clearly Bitcoin has many advantages over physical metals in a world with electricity, and a level of functional financial sophistication. Any cryptocurrency with an integral community acting as its guardian could potentially provide some value as a means of exchange or serve as money, but the further the coin is detached from being an integral part of a real use value in the world or the more it is tethered to a debt-as-money national currency the less functional it may be during times of massive upheaval. Loyalty points or rewards money from merchants also can readily be used as money, and are dependent on that issuer’s stability and legal compliance. Production asset-backed currencies would be the most effective and provide the proper foundation to rebuild economies post the destructive disruptions.
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What is the concept of “Labor Dollars” or “Food Dollars” as backing for community currencies?
The idea of Labor Dollars or Food Dollars harkens back to the original and correct design of money as a promise to deliver goods and service by a specific issuer in a set period of time. This is not barter, any more than we barter now; simply we have monetized our exchanges by using the tool of money to evaluate our exchanges, receive payment a receipt for services rendered, and store of value ready to exchange our previous contribution for something we want later.
The founders came to America because they were in debt and gold coins were too scarce to adequately support the money supply, and the real economy could not prosper and grow as people were ready to create new inventions and societies. They understood the true mechanics of money which is that it was dependent on our wealth or all the things we create for and with one another. We are taught that the paper money they used was inflationary, yet Ben Franklin understood well that and they issued money that was backed by productive land. They issued money tickets in equal proportion to the productivity of the people. Britain and France wanting to end ingenuity in proper money creation sent tall ships to the Eastern seaboard with printing presses on them to inflate and destroy the money supply in order to win the Revolutionary War.
The concept of “Labor Dollars” or “Food Dollars” as backing for community currencies refers to the idea of using a specific type of commodity or service as a basis for the value of a local currency. In this system, the value of the currency is based on the amount of labor or food that can be purchased with it. Individuals would earn Labor Dollars by providing labor or services to other members of the community. These Labor Dollars could then be used to purchase goods and services from other members of the community who also accept Labor Dollars as payment. The value of the currency would be tied to the amount of labor that can be purchased with it.
Similarly, Food Dollars, the value of the currency would be tied to the amount of locally produced food that can be purchased with it. Individuals would earn Food Dollars by providing food to other members of the community, and these Food Dollars could then be used to purchase other locally produced goods and services from other members of the community who also accept Food Dollars as payment
Labor Dollars or Producer Credits can be illustrated as a hypothetical Amazon dollar or a hypothetical Apple dollar. Each company would issue as many ‘dollars’ or credits worth a certain amount of their product in the coming production cycle. Customers would buy them for a discount or they would be paid to their employees or suppliers. These credits would act as alternative currencies, people would know the value of the credit dollar relative to the amount of set product/service they would redeem and could be used in society to complete other transactions in the real economy. Following either a circuitous route of money transactions for many parties or being saved to use at some later time with the probability of a production asset backed dollar/credit maintaining its purchasing power far better than national fiat currencies.
Once redeemed by the issuer for the product promised the credit would be extinguished, and a new set of producer credits would be issued for the next production cycle. In the hypothetical example, if Apple issued too few credits in that their demand for their product exceeded the quantity of credits they issued, credit holders’ value would increase by that ratio and they would also have Apple’s profit. Apple would therefore immediately issue more credit by spending any way they saw fit, bringing the ratio of circulating credit and demand back to a 1:1 ratio and naturally keeping producer credit or labor dollars as a self stabilizing stable coin or maintaining stable value. Profits also would flow in the greater society, but the issuer would still have complete choice to spend and invest their money as they determined. Likewise, if an issuer were to issue more credit than the actual market demand, the value of the producer credit would fall and the credit holders value would likewise fall, so the issuer- here in this hypothetical example Apple, would buy back the correct amount to return the ratio of issued credit and real demand to 1:1.
What are intentional communities and how do they use alternative currencies to create a stable financial landscape?
Intentional communities are communities where people are living together in a subset society with certain defined values, practices and goals. They set their own rules about how they operate, and why, and those who choose to join them are philosophically aligned and agree to adhere to them for a common purpose. These communities are ripe to function as prototype communities to test and pilot all forms of self issued alternative currencies, as they would have a greater sense of responsibility and vested purpose upholding proper issue, redemption and accounting. If there is not enough national currency money flowing, they can issue their own alternative currency in certain quantities to fill the gap so business can thrive and people can continue to invest in one another and reach their goals.
What are the benefits of using producer-backed alternative currencies for trade?
Maintaining purchasing power: Producer credits maintain the purchasing power of individuals and businesses by backing the credit with a real world promise to deliver goods and This prevents monetary inflation, leaving people only exposed to real world supply and demand inflation, which will drive more ingenuity.
Access to credit: Producer credits provide access to credit for individuals and businesses without gatekeeper issues found in traditional channels. This supports entrepreneurship and encourages legitimate economic
Stability: Producer credits are backed by goods and services, making them more stable than fiat This stability of generating the proper quantity of money in circulation provides a reliable means of exchange for businesses and consumers, even during times of economic uncertainty.
Producer credits: This protects and maintains economic activity even in the event of a banking crisis or other disruption, as access to capital creation is dependent on the real economy and its demands largely unskewed by the greater contortions of the fiat/bank credit financial system.
Greater ownership and access to one’s wealth stored in producer: This promotes economic empowerment to all who want to participate in the economy and are willing to contribute of their talents. It also reduces the risk of banking centralized financial institutions who could decide to limit or deny access to people’s own bank accounts.
How can alternative currencies help mitigate banking risks and financial instability?
The stability of money and banking is in essence dependent on the Real Economy no matter how far removed the financial markets and banking has become. Money is merely the equal sign between two exchanges of goods, once currently being produced in exchange for value of one previously contributed.
What are some challenges or limitations of using alternative currencies in communities?
Many people don’t know how to get started, and also are missing the basic formula that ‘money’ as a social contract or a technology society created to help people exchange their wealth or contributions with one another, must follow. The formula to create money is simple and easy to follow once understood, and the key factor being that the quantity of money tickets in circulation must be flexible and EQUAL to the productivity of the people, not scare and not in an inflated quantity. People have been taught that money has to be scarce to have value – this is not true. The quantity of money must be fluid matching the real world changing productivity of the people or supply and demand of products and services. Getting started is easy, that’s one of the main reasons I wrote The End of Scarcity to show people how any community or business can begin today. The other challenges are whether people want to adopt the blockchain, or whether they want to stay ‘old school’ with paper vouchers. Regardless, eventually everything will go blockchain proving whether the supply and its demand exist, verifying and protecting credits from counterfeiting. There is a learning curve here, and wallet requirements but the nice part is to get started in a local intentional community paper vouchers can work to get started.
How can individuals keep their money safe in the current banking system?
People should clarify their bank’s policies and make sure they know how much money they have in each account and to verify that all their balances are FDIC insured and best to stay under the limits by 5% to protect the interest earned as well. If an individual has more money in savings beyond the limits, move that money to a new institution and make sure it is insured, or find an Insured Savings Account that automatically moves money to different banks keeping balances fully insured up to certain high limits. Certain ISA funds will insure anywhere between 3 to 50 million, and there may be some liquidity restrictions.
What are some potential risks or concerns for investors in the aftermath of a bank seizure?
Typically it is seamless to savers, especially those with accounts that are fully insured. The FDIC either funds the bank’s liabilities, i.e. deposit accounts or a new institution assumes the failed bank and depositors simply have a new institution where they bank. Investors, if they are bond holding creditors could lose their money if the bonds fail, and equity investors likewise, could lose their investment as bank shares could readily become worthless or pennies on the dollar. Speculative investors might be on the other side of those trades and scoop up bargain prices, typically these are hedge funds or other speculators who engage in high stakes risk taking.
What are the potential consequences of multiple interlinked bank failures?
Total system failure, and a massive depression with loss of valuations everywhere as well as job losses. When we use mortgage debt as money, we cannot have one important bank fail without affecting others, or demanding extreme liquidity measures from the Fed. An interlinked system using mortgage debt as bank credit money, is a very fragile society pushed to run endlessly on a hamster wheel just like the 1994 movie with Sandra Bullock, Speed. Society has to drive full speed creating money as debt, and any taking the foot off the pedal causes potential implosion and threatens system wide destruction.
How can rising interest rates impact the stability of the banking system and the safety of individuals’ money?
If banks were extending credit primarily as loans to the productive economy – the basis of Investment Capitalism, then legitimate growth in the real economy would take place with the creation of money in equal capacity to the expected productivity of industry. Here interest rates could rise providing more stability for the banking system, savers and investors. The main issue is that money is created as NON PRODUCTIVE bank credit or consumer debt which inflates asset bubbles – such as houses, college tuitions, car prices and hospital bills. Housing has risen to 10x salary vs. 3x salary in the 1970s, college used to be free. When money is debt, reasons must be created to create debt. Mortgages used to have large down payments so borrowers were solvent and prices stayed lower in tandem with income. When money is created as mortgage debt or consumer bank credit The American Dream is destroyed and a rentier economy is created as serfdom and feudalism returns to whichever country creates its money supply as consumer ‘bank’ credit. Booms and busts occur every 7-10 years destroying people’s savings and incomes cannot rise as the investment in the productive economy is being drained as banks create loans for mortgages and other consumption faster and more mindlessly, receiving steady revenue detached from doing the original work of banks which was verifying creditworthiness of enterprise which lifted the communities and families up, giving back and building countries for generations to come.
Are there any other regulatory measures or policies in place to prevent banking failures and protect depositors’ assets?
Regulation is not really the issue – we probably have too much regulation, much of which is probably not followed. The problem is not human behavior or greed. The problem is creating money as unproductive, debt which necessitates such cannibalistic behavior from the system as a whole and all its participants. Money should be created as credit – the good a business is set to do, not debt.
Can alternative currencies coexist with traditional currencies in the current financial system?
In fact, this is how you have a healthy financial system, as well as a structurally sound foundation for societies to function. Just as nature shows us, diversity creates resilience and strength in its biospheres, and fertile ground to support new inventions. The stronger the community is, the surrounding region is, the state is, the country is and the world. Strength comes from the ground up in concentric circles out. Weakness comes from top down, and must rely on artificial non self sustaining measures to keep systems functioning as well as totalitarian measures to enforce compliance while the powers that be become progressively less adept and able to avoid total system failure.
What are some advantages of using community currencies for trade within intentional communities?
There are many ranging from encouraging local economic activity, self-sustaining economies that are insulated from many external factors, as well as building more resilient supply
Strengthening community ties and social connections within a community by promoting cooperation and collaboration between individuals and businesses. This can help to build a sense of trust and mutual support within the
Reducing the impact of economic downturns; by creating a local economy that is less dependent on global economic conditions and currency exchange rates, alternative currencies can help to reduce the impact of economic downturns on the
Supporting local producers and sustaining active access to Using producer-backed currencies can provide a direct way for consumers to support local producers and businesses, helping to keep money circulating within the local economy.
How can individuals participate in or support the development of alternative currencies in their communities?
First, they can regain the lost education about what is money, what it is meant to be and the basic mechanic running our society. Here the power of this simple education will empower all people wanting to make a change in their worlds and the world at large.
Second, groups like farmers, ranchers, builders or intentional business and even non profit organizations can decide to become an issuer of production backed alternative currencies.
Just as farmers today offer winter opportunities to invest in farms early with a CSA or purchase of a “farm share” where someone pays $400 and then in the summer qualifies to receive 12-15 weeks of food, this farm share of future promise to deliver food can be monetized into alternative currencies and the surrounding community can begin to accept these tickets worth one box of food (asset backed by production) as money in exchange for other services.
The tickets, or producer credits the farmers issue, are limited in quantity by the farmers’ produce supply and the real demand of it. They function as community currencies or alternative money following either a roundabout route back to the farmer functioning as money in between many different trades in the community prior and before being redeemed for the food promised or a direct path simply being redeemed by the original purchaser of the credit. At the time of redemption for food from the farmer, the credit is destroyed as the promise to deliver is fulfilled. The farmer or issuer then can issue the next set of credits to meet the next product cycle. Money in circulation is thereby automatically meeting the real world demand for it.
How do alternative currencies affect the broader economy and the financial landscape?
They teach people experientially that money only has value from what we produce with and for each other. People see that there is no buyer without a seller with more clarity, and that Both parties need each other and are equally important in thriving self determining societies.
They make sure that credit is available for any product or service that has voracity to be delivered and legitimate demand, making the community or the active people in it able to determine what they value and fund these ventures. People are able to establish credit worthiness of businesses and ventures by the community and access to credit is automatically available because the people decide they want to produce something and they likewise want to consume something.
No massive failures in a detached banking system can interfere with productive people’s society when money is created as Credit to deliver real goods and services, verses the illusion of scarcity that money as mortgage debt entrances society in, shaping behavior to chase a dollar that only exists temporarily prior to the debt being repaid, draining the wealth of nations who focus on capturing poorly designed money while real contributions are starved of proper investment and creative energy. Productive Asset backed alternative currencies create a foundation for society to thrive, and restore humanity to focus on how much we need each other as lived pragmatically and existentially cannot be lived without one another.