Why didn’t Silicon Valley Bank knock on the Fed’s discount window? 

Make Me Smart March 29, 2023 Transcript

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Kimberly Adams 

I was just gonna say that since you gotta get on your walk, let’s just go ahead and get going. It’s all about me. See? Yeah Jay made it happen. Hello, I’m Kimberly Adams, welcome back to make me smart where we make today make sense.

Amy Scott 

And I’m Amy Scott filling in for Kai Ryssdal. It’s good to be back. And today, of course is what do you want to know Wednesday, the day in the week where we get to answer listener questions. And if you have a question for us, you can leave us a voicemail at 508-U-B-SMART, or you can email us at makemesmart@marketplace.org. Shall we get to it? Hear the first question of the day.

Scott 

Scott here from Knoxville, Tennessee. With the discount window of the Fed open? How can a bank go under if they have access, at least in the short term, to large amounts of cash from the Fed? Did SVB bank, go to the discount window and borrow and attempt to solve these liquidity issues? Thank you. Hope y’all have a great day.

Kimberly Adams 

I love this question so much because every time someone says discount window at the Fed, I literally imagine like an old school bank teller window, but like it being the Fed that like other banks would go and be like, please give us money. No, not at all what it actually is. So to answer Scott’s question, let’s start with first what the discount window actually is because it’s not the picture I have in my head. It’s a part of the central bank that allows it to lend money directly to the banks in sort of a virtual space. And through the discount window, the Fed lends the money to banks for up to 90 days and takes collateral in case those loans aren’t paid back. Why is it called the discount window? Because the Fed takes more collateral than the loan is worth, making it something of a last resort for banks because why would you want to take a loan out from somebody who’s going to take more collateral than they, you know, even are giving you in terms of value of money? Anyhow, banks usually use the discount window when the financial system is freaking out a la the week SVB went under. So yes, that week, banks did indeed freak out and go rushing to the discount window, virtually, and borrowed over $150 billion. And at the same time, the Fed made it easier to borrow after the SVB collapse by offering better deals on those loans. So you know, less of a more collateral the loan is worth in order to prevent more bank runs and basically let the markets know that banks did have access to the money. All right, so back to Scott’s actual question, why didn’t SVB avail itself of this opportunity? They tried. It tried really hard to borrow money from the Fed. If you go and look at the Wall Street Journal, they have a breakdown of the various attempts that SVB made to try to get money from the Fed and a couple of other banks. But the bank run just happened too fast. And the systems to get money to the banks through the discount window, and other mechanisms that you can read about in the Journal if you so desire, they move really slowly. The systems are old, there’s a lot of paperwork to do, you have to jump through all these hoops. And that jumping of hoops took longer than people were able to pull out their money in an app. So SVB was in the process of sort of cobbling together all of the collateral it needed to go to the discount window. They were in the process of doing that when the regulators shut it down. And there’s a quote in the Wall Street Journal piece from one of the banks that SVB was working with, which said, “we were well underway with the transfer of collateral and we were waiting for a call from the Federal Reserve and SVB. And while we were waiting for a call, the FDIC took over SVB.” I know that’s super complicated. But too long, don’t read, they tried, systems are old, it took too long, and people pulled their money out faster. Didn’t work.

Amy Scott 

Such a dramatic story. It’s just kind of like the equivalent of showing up at this store just as they’re closing. They’re like “Sorry, you missed our, our deadline.” And the story in the Journal is really worth reading because it’s a really dramatic story. You’ve got like the CEO of the bank on the phone with the CEO of another bank where they’re trying to make this happen in time. And they just couldn’t do it. Although it does… I mean, I don’t think… it’s not clear that having access to the discount window on that day would have saved Silicon Valley Bank. The run was just too big.

Kimberly Adams 

Yeah, I mean, maybe it would have given them an extra lifeline. But then what would have stopped people from then pulling out all of that money? You know? It was, the scale was kind of out of control. Anyway, I hope that answered the question. I certainly learned a lot as I was going through this research, so lovingly prepared by Courtney. Thank you very much. And so now let us move on to our next question.

John 

Hi, this is John from Rochester, New York. The question that I had was about job openings, how we’ve been hearing that there’s so many job openings compared to the people who are looking. Though, it makes me unsure whether those are real job openings. And how can we really know what are real? And can companies put out jobs if they don’t actually have all of the money to actually hire all of the openings that they have open?

Amy Scott 

Ah, another question… Yeah, right. I learned so much from Courtney’s research on the answer to this question, and a little more that I did, because I found it fascinating. It turns out, it’s actually pretty common for companies to have openings for so called “ghost jobs” posted, which means they’re not actively looking to fill those positions. And there was a survey last summer by a lender called Clarify Capital of over 1000 hiring managers. And they found that 40% of companies had job openings posted that had been up for two to three months, 10% had openings posted for over six months. And of the hiring managers surveyed, 40% said they weren’t planning to fill the positions that they had posted for another two to three months. So yeah. It’s um… it’s kind of easy to slap up a job listing without actually planning to hire anyone or getting around to it. And one of the things that was really interesting is the explanation for this. One, companies say they might want a pool of talent at the ready in case, you know, they do actually need to fill a position. They might want to give the impression that the company is growing, which is a little bit cynical I think. 34% of managers from that study said they keep job postings up to appease overworked employees. Oh my goodness. Which makes me think differently when I get those emails about job postings here at APM. So, you know, the big measure of job openings that we talk about on Marketplace a lot is the job openings and labor turnover survey JOLTS. And that’s an official survey from the Bureau of Labor Statistics. And I was wondering if these ghost jobs can kind of goose that data. Like, is it is that accurate? Apparently, there is some concern that employers might be reporting ghost jobs in that data, which could skew the stats. And actually our colleague, Justin Ho reported on this last fall. I think we can put a link to that on the show page. So to answer the question, if you are looking for a job and you want to know, is this a real job, you can check to see when the opening was originally posted, how long it’s been up. That might give you a sense of whether it’s a real position or not. Plus, you can also call it just ask if the company’s actively hiring.

Kimberly Adams 

Never seen that happen have we?

Amy Scott 

Yeah, but are they going to tell the truth? I mean… Yeah, maybe not. Maybe not. But gosh, I was really surprised by the extent of this.

Kimberly Adams 

I mean, it made sense when I was reading it, because there are just so many postings for jobs. I mean, in our own industry that you see, and they’re up for months and months and months, and you’re just like, wait, they haven’t hired for that job yet. And I know so many people who apply for a job. And it’s like, they’ll hear through the grapevine that they’ve already chosen a finalist and the job is still posted and things like that, or that they’re….

Amy Scott 

Yeah so maybe some of this is just like you forget to take the posting down? I wonder if that is going on as well.

Kimberly Adams 

I was really struck by that bit about, you know, they post the job just to appease overworked employees like. I’ve seen… I don’t I don’t love that. I don’t love it. I believe it. I totally do. But whatever.

Amy Scott 

Right, that interesting. “Don’t worry, help is on the way!” But is it?

Kimberly Adams 

Just kidding, we’re lying.

Amy Scott 

Our next question came in an email from Oliver. Here’s what it says. “I hear all the time that spending by or on behalf of the consumer accounts for two thirds of the economy, but what exactly does that include? Could you make me smart on what is included in the consumer spending umbrella?”

Kimberly Adams 

Well what did you buy this week Oliver? Because It’s all of that stuff. Consumer spending is by definition, goods and services purchased by a person or a household for personal use. So not stuff that you’re buying for the office or for business but for you, for your family, for you know, the cherry blossom party that you may be throwing.

Amy Scott 

Just for instance.

Kimberly Adams 

Just for instance. These numbers are tracked by the Bureau of Economic Analysis. And it also calls the spending, personal consumption expenditures, or PCE. You may have heard that on Marketplace, because we often refer to it as the favorite inflation measure by the Federal Reserve because we have favorites of these things, apparently. Anyway. What falls under goods and services? Goods, physical items that you can buy, and then you use. They are divided into durable goods, which are things like your washing machines, refrigerators, stuff that lasts a while. Electronics, cars, things like that. Food, clothing, fuel, things that you might use up relatively quickly, nondurable goods. And then there’s the services sides of things. Services, could include anything from plumbing to insurance, travel agents, getting your nails done, even healthcare as long as people are the ones paying for it. So if you’re paying, you know, for your health insurance, or a copay, or prescription, that might be your personal spending for goods and services. But if your company is paying into, you know, the employee health insurance plan, that is no longer personal consumption. So businesses and governments paying for these things, is no longer considered consumer spending, it’s business spending. Anyway, or government spending. Why do we pay so much attention to it? Because, like Oliver was saying, it’s a huge chunk of the economy. And many economists consider this one of the main drivers of at least short term economic growth. So Amy, you pay so much attention to housing, because you know when someone is buying a house, it triggers all of this new consumer spending. And that, you know, tells us what’s going to happen with economic growth. If lots of people are buying houses, buying condos, they’re probably going to buy a lot of stuff for said houses and condos and coops and whatever’s. And that can tell us a little bit about what the economy is going to do. And like Oliver said, consumer spending makes up about two thirds of our country’s GDP. Businesses also care a lot about consumer spending, especially if they are selling things that they want said consumers to spend upon. And when consumer spending is going up and people are spending more money, it means that companies are more likely to do better financially. Maybe if you see consumer spending numbers doing well, you feel a little bit better about opening another branch of your company, or trying out a new product, or expanding your services. However, other economists kind of have pushed back against consumer spending as this key driver of economic growth because there’s this argument that if consumers are spending too much money, then future economic growth, like longer term, ends up being affected because of low savings and lack of investments. Because if you know, you’re spending all your money on, you know, cherry blossom flavored syrup to go into a cocktail, then I’m not saying… I switched it to I now didn’t I? I’m not saving my money to you know, maybe do a house renovation down the road. I’m in cherry blossom mode. The flowers are still out. It’s so pretty.

Amy Scott 

Yeah, it’s a twist on if you weren’t buying all those lattes, for you cherry blossom. Yeah, I need some cocktail recipes.

Kimberly Adams 

Oh, I can do that for you.

Amy Scott 

Yes, we should Slack about it. What struck me about this message was, he said spending by or on behalf of the consumer and I thought, how much of my spending is on behalf of two little consumers in my house. It would be interesting calculate.

Kimberly Adams 

Do you really want to know that number?

Amy Scott 

Yeah, maybe not.

Kimberly Adams 

Okay, time for the last question of the day.

Leah 

Hi, my name is Leah. I’m calling from Durham, North Carolina. I have a question about financial advisors. Kai always says “please consult your own financial advisor.” And that makes me wonder, how one is supposed to find one? Especially an honest one. But how does one find an advisor who isn’t selling something? Or who has conflicting interests with mine? Make me smart. And thanks for all you do.

Amy Scott 

That’s just to get Kai off the hook.

Kimberly Adams 

I was just gonna say. That’s a CYA statement.

Amy Scott 

Yeah, but it’s true. I mean, you know, we are not, we don’t give financial advice. But what I’ve always heard is that you want a fee based financial advisor, not someone who makes a commission for selling you stuff. So we actually reached out to a personal finance expert, Laura Adams who is host of the “Money Girl Podcast”, to help us answer this question. And here’s what she said. Understanding how your financial advisor is paid is key to preventing potential conflicts of interest. So like I mentioned, fee only advisors may charge an hourly rate, a flat annual rate, or a percentage of assets under management. And then you’re basically paying them to do a service. And they do, if you have a percentage fee, they do have an incentive to grow your portfolio value because then they make money. It’s kind of like a real estate agent, you know, wanting to get the most for your house. There are also commission and fee based advisors who may charge you a percentage to manage your portfolio, but also sell investment projects on commission. So just be sure that, you know, their incentives are aligned with yours, and they’re not, you know, selling you products that they that may benefit them without benefiting you. She also offered some questions to ask a potential advisor. Like what type of clients do you typically work with? How do you make your money? Are you a fiduciary? Which is a person required by law to manage a persons money and property for that person’s benefit, not their own. Not every financial adviser is a fiduciary. And ask them you know what their approach to financial planning is and see if it aligns with what you would like to get from the experience. Overall, Adams says that while using an expert financial advisor does cost money, they can help you stay disciplined to follow a sound investing strategy, maximize returns, minimize taxes, plan for retirement, save time, and avoid costly mistakes. All things that totally make sense and yet, I’ve never managed to actually work with a professional myself. I probably shouldn’t admit that, but it’s true. Good luck and let us know what you find out Leah.

Kimberly Adams 

Yeah, the fiduciary thing is really important. Because like, you may hear us sometimes talk about how boards of directors have a fiduciary responsibility. That means that you are legally obligated to look out for the financial interests of the person that you’re supposed to be representing. So if you’re sitting on a board, you have a fiduciary responsibility to be, to do what’s best for that company or organization. If your financial advisor has a fiduciary responsibility to you and who is and is not required to be a fiduciary gets into some like actual government regulations and there has been an ongoing fight over a fiduciary rule. But that can be a story for another day. But you know, those those questions are really important. I actually have worked with a financial planner in the past, but I was much younger.

Amy Scott 

Because you’re so smart.

Kimberly Adams 

No because my sister, not the one who shows up in chat, told me to, and it was a commission based financial planner. And I ended up in all sorts of products that had extremely high fees, extremely high commissions, they were not aligned with my values. And when I ended up finally pulling, you know, the money that I had out of it, I ended up losing quite a bit of money once I realized that it was just not for me. But you know, that’s that’s one experience. And lots of people have good experiences with commission based financial planners. But Michelle Singletary over at The Washington Post also has written a lot about this and also recommends fee based financial planners, you know, you’re not going to hear us on here telling you what kind of financial planner to hire. That’s just like outside of our wheelhouse. But you know, definitely, when we’re saying consult your own financial planner, what we’re really saying is: not every piece of financial advice works for every person. So when we’re talking about sort of larger financial themes, or things having to do with taxes or things having to do with whether or not you should put solar panels on your house, because it might, you know, help you save money. It’s all going to be an individual thing. So when we’re saying consult your own financial advisor, what we’re really saying is recognize that your situation may not match up with the average or with what’s common, or with even what is considered bad for a lot of people. Maybe you are that person who will do great with a commission based financial planner. Maybe you’re that person who really some fee based financial planners can be quite expensive. I actually was looking at one a couple of months ago and they wanted five grand up front just to work with him and I was like not for me. But there are others that are a lot more affordable and there are also a lot of no cost, or very low cost services provided by nonprofits that do some of the work of financial advisors as well. So there are a lot of resources out there. Yeah.

Amy Scott 

And also don’t sue us.

Kimberly Adams 

Amy’s still stuck. Yes please don’t. Please don’t. All right. That I think is as much as we’re gonna get to today. If you have a question about business, tech, or the economy that we actually can safely answer, you know how to get a hold of us. We’re at 508-U-B-SMART. Also makemesmart@marketplace.org.. The fade in.

Amy Scott 

Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Our intern is Antonio Barreras. Today’s program was engineered by Jay Siebold.

Kimberly Adams 

Ben Tolliday and Daniel Ramirez composed our theme music. Our acting senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital.