Why most of our money isn't real

a rough week for the banking industry the collapse of Silicon Valley Bank is causing shock waves across the entire business world a big Bank just died we've all heard about it everyone's talking about it and we gotta talk about it because something big is going on here as of this morning Silicon Valley Bank or svb has gone under completely the second biggest bank collapse in U.S history the bank is called the Silicon Valley Bank or if we're going to call it svb in this video it is the epicenter of tech startups venture capital and it

is now effectively dead the government is scrambling to keep us all calm while this Bank fails your deposits will be there when you need them the American banking system is really safe and well capitalized that's because we live in a system that doesn't work if everyone freaks out at the same time the system relies on all of us keeping a feeling of safety if that doesn't happen the system falls apart and that's what I'm going to explain today so let me show you how this happened how this Bank failed and what it means for you

and me but more importantly how this moment teaches us that our bank accounts are kind of a lie we're gonna have to do something different here we're actually rescuing depositors in banks that made some bad decisions over the course of the last year or so Americans can have confidence the banking system is safe okay so let's talk about Banks all this is done with credit credit created by the bank out of the deposits made by all of us banks are actually pretty nuts we think of a bank as like a place where we take our

money and store it like we give our money to the bank people and they go put it in a giant Vault and it is safe until we need it but that is not what is happening in reality banks are doing something pretty magical when you give them your money what they do is actually at the heart of our modern society our modern economy it's what makes a lot of things work let me explain let's get a little bit more insight on the collapse of Silicon Valley Bank okay for this let's get back to the old

collage of the macro economy as we've done in previous videos let's say I put ten thousand dollars into my bank what's insane is that the bank only has to keep 10 of that money in the actual bank 10 percent so that's like a thousand dollars of my ten thousand dollars the other nine thousand dollars they can go out and invest with and make money on using my money they can go invest it this often means giving out loans to people and collecting interests okay so nine thousand of my dollars gets loaned out to let's say

a baguette business who is in need of a business loan because they need a new oven my bank gives the baker my money and charges interest on that loan and they actually give me a little bit of that interest that they've made to say like hey thanks for letting me use your nine thousand dollars so the baguette business now has nine thousand of my dollars and I don't actually know this because I kind of think that my money is in a vault somewhere so now the baker with his new loan goes and buys his oven

for nine thousand dollars and the oven seller takes that nine thousand dollars and goes and puts it in their bank and guess what their Bank does the exact same thing that my bank did with my money but now they're doing it with their money which is kind of my money they only have to keep ten percent in their vaults so they only have to put nine hundred dollars in the vault they've got 8 100 that they can lend out and look there's a family who's looking to spend money on a home and they need a

loan okay wait are you seeing what's Happening Here I gave 10 grand to my bank and now that money has magically duplicated a few times to make more money like real money that can be used to buy things an oven and then a house this continues to happen over and over and over my 10 grand just keeps getting used to be lent out put into another bank and then lent out again in fact if you model this out on a nerdy spreadsheet which is something I like to do you'll see that if I deposited ten

thousand dollars in the bank ten thousand dollars is added to the system but then for each one of these transactions more and more money gets added to the system this is the aggregate of all of the money being added to the system my ten thousand dollars turns into this look what happens look just keeps going and going and eventually it effectively 10 X's it sort of flat lines out at a hundred thousand dollars what my ten thousand dollars just turned into a hundred thousand dollars into the economy because of weird mental constructs yes that is

our modern Financial system it is amazing and it's kind of mind-blowing okay this magical thing is called the money multiplier effect and it relies on the reserve ratio that the requirement that banks have like the amount that they have to keep in in this case 10 which is like the real Reserve ratio right now you can do this calculations like one over the reserve ratio and it sort of gives you this multiplier effect of your money the crazy thing is the lower the reserve ratio like if your bank only had to keep five percent of

your money in the more money would be created out in the economy but the riskier that would be for you if the reserve ratio was like 50 if they had to keep fifty percent of your money then like that's safer for you but now you're not like priming the pump of like giving all of this money to the economy to like make transactions and build businesses and build capitalism so the reserve ratio is like 10 right now which means that a bank that has a hundred million dollars from all of its customers really only has

to have 10 million dollars in its vault at all times and the other 90 million is out doing its work in the economy multiplying itself and making a return for the bank and giving you a little interest rate and the bank is secretly the whole time like please everyone don't come withdraw your money at the same time because we don't actually have it just please thanks okay so this is slightly scary right like the bank only has 10 of my money feels kind of risky I thought Banks were like the safest place to put your

money it's not like I'm doing some hardcore like risky Stock Investing maybe I should take all my money out of my bank account and put it under my mattress so that the bank isn't like playing around with it well no let's actually not do that please because if we did our economy would miss out on this amazing magical multiplier effect that turns my 10 grand into a hundred grand and our economy would literally be a fraction as prosperous as it is the reality is we don't have to worry and I'm going to explain that to

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in the other 90 they are investing in the world and this is kind of scary governments know that this is kind of scary and they also know that our society and our our economy is built on us keeping our money in the bank not freaking out not everyone all of a sudden going and pulling it out so to make us all sleep better at night they promise that if a bank ever does anything Reckless with our money or they accidentally lose it while they're out there investing that the government will make up the difference that

the government will pay us back for any money that we lost at least up to two hundred and fifty thousand dollars it's kind of like a everyone stay calm will pay back if you lose it just don't everyone go at the same time and pull out your money please the whole system relies on it can we just chill and we can chill as long as we don't have more than 250 000 in our bank account anyway this is kind of works for most people most people don't have 250 000 lying around but what about businesses

businesses have to use Banks they have expenses every month like payroll and rent a tech company like Roku had 500 million dollars in Silicon Valley Bank and at this time the company does not know to what extent they'll be able to recover that cash companies like this need way more than 250 000 to cover their costs so the question is how do they feel safe and this is where we get back to Silicon Valley Bank these Dynamics become very strange when you're talking about the customers being a bunch of businesses do you have the money

Jitters ask your nearest Bank of America branch for a jar of soothing instant money okay so Silicon Valley Bank is the bank for businesses particularly Tech startups in California and unsurprisingly ninety percent of their customers had more than the 250 000 sort of Mark where the government will insure you so a lot of that money is not insured by anyone they just trust their bank and that's fine Banks aren't out there taking their customers money and like making super risky Bets with it this bank has been operating for 40 years and it's been doing just

fine but what happens next is a perfect storm of events that led this bank to sink where is he peekaboo let's make a list for this here we go the anatomy of a collapse of a big bang first they invested a lot of their customers money like every Bank does in this case they invested in government bonds which is a totally safe investment it's an investment to put your money in for a certain amount of time like 10 years and the government will pay you interest on that money based on the federal interest rate the

interest rate you know the thing that the FED puts up and down to sort of help put brakes on the economy the thing is though when svb bought these bonds it was like last year and the year before back when rates were very very low okay not a great return for them but it was fine it was a safe investment if they just waited out the time period of the bond they would get all their money back plus a little return okay but then what happens next economist expect a rate hike of three quarters of

a percent to help drive down inflation the government starts to raise interest rates they're doing this to help Stave off inflation stabilize the economy the government is doing this thing called raising interest rates that's fine what it means is that people buying bonds today are going to get a better rate of return those bonds are more valuable now today so svb who bought their bonds a couple years ago when interest rates were super low and if they ever wanted to sell those bonds early they're now competing with interest rates that are a lot higher and

so their bonds are actually worth much less if they had to sell them today they would lose money okay but again that's fine just hold on to your bonds until the the whole maturity schedule happens and then the government will give you all your money back with your little return everything is okay okay but here's the next part of the perfect storm that really starts to heat all this up remember that svb's customers are startups startups raise money from Venture funds and they take that money and they deposit it into svb and that is how

svb gets its money to operate to invest with but during this recent economic downturn startups haven't been able to raise as much money and thus svb hasn't had as much money coming in the door and so they start pulling on their reserves and they realize they kind of have to figure out a way to get more money and it's not going to come from startups because startups aren't raising so they turn to their bonds they're like we've got tons of our customers money in these really safe bonds they're at low interest rates we probably need

to sell some of them off to like get some cash in our reserves to like meet all of our needs and the withdrawals and all of that so they sell off a bunch of their bonds and this is where things start to go really really wrong they announced that they're selling their bonds and they have to sell them early and yes we bought them at a lower interest rate and now the interest rate is higher so we're actually selling them at a loss and that loss is actually two billion dollars okay like again banks have

to deal with this kind of stuff this isn't great for them but it's far from lethal but then this is where it starts to get really bad they go out and announce that they're going to be raising money from other investors they're like going out looking for money they're like hey yeah we sold off the bonds we also need you guys to invest in our bank so that we can just stay good everyone stay calm it's not a big deal we just need to raise a little money everyone stay calm but the best way to

like get people to freak out is to be like stay calm it's actually not the big of a deal we're fine we just need to raise some money and we're selling bonds at a loss oh my God okay it's happening every everybody what's the procedure okay so now the moment that deals the final blow to all of this all of these Founders and Venture firms they're all talking to each other because they're all in the same community in the same area all in the same business they're all in the same WhatsApp groups and they're all

like hey guys uh what's going on with svb all of our bank why are they raising money why are they selling their bonds early is my money not safe and so like a herd of bison frightened by a loud bang a stampede of very wealthy Founders and startups in central California start pulling out their money from svb trying to stay safe what you're seeing behind me is customers of Silicon Valley Bank lined up to make sure that they can get their money they know that their accounts aren't insured by the government because they have way

too much money and so they don't feel like their money is safe and they take it all out I need money how am I going to live until the bank opens to play I need cash how much do you need on Wednesday alone customers pulled out 42 billion dollars which was a quarter of what the bank was worth word spreads to Wall Street that this is happening and svb's stock begins to tank the bank stock lost 80 percent of its value this week 60 in one day alone yesterday which makes it even harder for them

to go out and raise new money to meet all of the demands of people withdrawing drawing drawing their money there is a panic or as we call it a run on the bank and so just like that svb ran out of cash because all of their customers tried to get their money out at the same time and were reminded that the modern banking system is built off of banks only having a fraction of your money while the rest of it is out in the economy turning into more money we don't want to be reminded of

this very often but when we are it's kind of scary so the government swoops in to take over the ship oh but not before the bank Executives could pay themselves a bunch of bonuses because they're banking people and this is what banking people tend to do so yes by Friday Federal Regulators stepped in and seized control of svb's assets it'll go down as the second largest bank collapse in history right behind 2008's Washington Mutual meltdown so since the very beginning of the modern Financial system the government has played an important role in making us feel

safe about our bank accounts even though our bank accounts are a bunch of mental constructs and really just a list of ious plus 10 of your actual money they don't want us to think that way because if we do chaos happens and the system collapses you're you're thinking of this place all wrong as if I had the money back on a safe the money's not here well your money's in Joe's house that's right next to you doors and in the Kennedy house on Mrs maclin's house and a hundred others so when a bank actually does

collapse they have to go into hyper mode this is why all the like government people were like working overtime on the weekends and the first round of intervention the first thing they need to do is just words Americans can have confidence that the banking system is safe today is about not sinking the boat that we are all in like this is really important they need to say that like the government is there to protect this money like you don't need to go panic and take all your money out of the bank you are fine you

are insured because Panic spreads like a contagion you know this feeling like when you feel a sense of panic it will just spread you don't want to be the last person to act because and we have some cautionary tales in the 1930s 9 000 banks failed there were huge runs on all of these Banks there was no 250 000 insurance so people got worried and took all their money out at the same time and the whole thing collapsed in the aftermath of the 2008 financial crisis 500 banks failed and if you remember there were some

banks that were so big that would have been so catastrophic if they failed that taxpayers came and bailed them out gave them all the money to make good on all of their needs this is how important it is and in this case the government pulled out all the stops to get everyone their money back over the weekend the Biden Administration took Extraordinary Measures to guarantee anyone who had accounts with the collapse Banks would be able to get back all of their money regardless of the amount again 90 of the customers of svb had accounts of

over 250 000 and they weren't insured and yet the government was able to give them their money back technically they didn't use taxpayer money to do this we don't think we're not sure but it was actually like a fund that all the banks paid into so whether or not this is like another bailout bailout bailout bailout bailout is hotly debated and it will continue to be debated anyway the big debate that I'm thinking about here is whether or not the government should let Banks fail or if they should always swoop in and save them when

you let Banks fail you force them to feel the consequences of their decisions on how they manage their Banks but when you let Banks fail you also create this feeling of anxiety that is contagious and right now there already is a bit of an economic anxiety flooding around our country inflation is high there's war there's increased competition with China and trade barriers people are slightly on edge and so the government swooped in with 150 percent of their might to make everyone feel safe they didn't want to ignite this into another 2008 style meltdown this was

the safer approach I guess for me I'm slightly concerned that this may lead to just more Reckless risk-taking because we're kind of sending a signal to these banks that like hey if you fail even the kind of smaller ones we will probably bail you out which again is a good thing this helps quell any chaos especially in the short term we don't have people freaking out we have no reason to go run and pull out all of our money now and importantly people who have money in small Regional Banks feel secure they're not going to

take out all their money and put it in like banks that are too big to fail but in the long run it could just mean banks will feel emboldened to continue with bigger and bigger bets knowing that the government will bail them out knowing that there's not real consequences knowing that they'll get their bonuses so the debate is heating up now in a new way you're going to see a lot of fighting you're gonna see a lot of Elizabeth Warren who's very smart on this stuff and also very bullish about regulating Banks there will be

another financial crisis of course when the crash comes the big banks will throw up their hands and say it's not their fault nobody could have seen it coming and then they'll run to Congress and beg for bailout money and let's be blocked I'll probably get it and what happens next is we will witness if this government intervention actually worked if the government successfully calmed us all down so that the system can keep going or if this Panic will continue to spread leading to more Bank runs more failed Banks and a stark reminder that our modern

Financial system is a mental construct that leads us to all work together for the prosperity and growth of our society until that is The Dominoes start to fall they knew the taxpayers would bail them out they weren't being stupid they just didn't care yeah because they're [ __ ] Crooks but at least we're going to see some of them go to jail right we didn't have to break up the banks party's over I don't know I don't know I have a feeling that in a few years people are going to be doing what they always

do when the economy tanks they will be blaming immigrants and poor people