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how-i-think-about-debtI think this is the most practical way to think about debt: As debt increases, you narrow the range of outcomes you can endure in life.
Banks-are-still-where-the-money-isn-tThe traditional view of banks is that they have lots of money: They take deposits from their customers, giving them cheap funding that they then use to make corporate loans and mortgages and credit cards and everything else. [1] But when the actual bankers at Barclays think about how to fund their credit cards, they come up with ideas like “ask Blackstone for the money.” Blackstone has lots of money too, but its money comes not from bank depositors — who can withdraw their money at any time — but, in this case, from insurance customers, who have longer-term and more predictable liabilities. This makes Blackstone’s funding safer: Its customers are not going to ask for their money back all at once, the way that Barclays’ customers theoretically might (and the way that some banks’ customers actually have). Everyone knows this, which is why Barclays is subject to strict banking capital requirements, [2] making it expensive for it to do credit-card loans, while Blackstone is not, [3] making it cheaper for it to provide the money for those loans.
I mean, “cheaper” in some sense; Arroyo and Johnson add that “because non-banks have higher costs of funding, consumers and businesses may see loan rates rise.” The traditional view is that non-banks have higher costs of funding than banks: Blackstone’s insurance customers want to earn a juicy return on their investment in risky credit-card assets, while Barclays’ depositors are happy to get a return of 0% on their checking-account balances. It’s just that those cheap deposits are not actually so cheap anymore, when you take into account their risk, and the regulation designed to confine that risk. Barclays is in the traditional business of lulling depositors into lending it money at 0% so it can turn around and lend money to credit-card customers at 20%, but that trick no longer works as well as it used to.
One thing I wonder about is: If you were designing a financial system from scratch, in 2024, would you come up with banking? That central traditional trick of banks — that they fund themselves with safe short-term demand deposits, and use depositors’ money to invest in risky longer-term loans, with all of the run risk and regulatory supervision and It’s a Wonderful Life-ness that that involves — would you recreate that if you were starting over?
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Comments
First Republic and others that became insolvent were invested mostly in high quality credit. What the older model doesn’t account for is depositor flight. People withdrew deposits in masse because they could pull a higher rate elsewhere (like mm funds). The old model of borrow short and lend long doesn’t work when you have a long running inverted curve. The guest argues that private credit is actually more stable than bank credit which can flee quickly. He did admit to “talking my book” a bit however.
Morgan Housel is pretty good. A lot of down to earth practical logic in his writing.
That's certainly worked for us.
If I understand the term correctly, I think he would be best described as a real bills man.