[upbeat pop music] [upbeat pop music trails] - Hello and welcome to GZERO World.

I'm Ian Bremmer.

And today, I'm sharing some tips and some tricks for how you, yes, you can be first in line at your next local bank run.

I'll demonstrate the proper way to stuff all your cash under your mattress without making your bed lumpy.

Lower back pain is real my friends.

Just kidding.

But we are going to talk about the recent bank failures that have world global markets and spooked investors from Silicon Valley to Switzerland.

A look at how we got into today's banking mess, whether or not it should be called a banking crisis, not really, and how much more financial turmoil we can expect.

And I'll be joined by inflation whisperer and former U.S. Treasury secretary Larry Summers.

Later, we look back at one of the earliest bank runs in recorded history.

Thanks a lot, history.

Don't worry, I've also got your "Puppet Regime".

- I just feel so old.

- But first award from the folks who help us keep the lights on.

- [Presenter] Major corporate funding provided by founding sponsor, First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by Jerre and Mary Joy Stead.

Carnegie Corporation of New York.

Prologis.

[bright music] And by.

[bright music continues] [tense music] - This talk of another surge.

Walk the city sidewalks of London, New York or San Francisco, you'll catch the same nervous chatter.

The contagion is spreading.

The authorities don't have the outbreak contained.

We've been here before.

I'm talking of course about banking.

So why am I triggering your pandemic PTSD?

In part, because if I start off the show saying stuff like illiquid investments or capital leverage, you're going to change the ch- [comical music] But also because so much of what's driving today's banking drama resulting in the most significant government intervention, this side of the great recession is a virus that's even more contagious than COVID.

[tense music] Panic.

Here's what happened.

The U.S. government's Federal Deposit Insurance Corporation or FDIC provides insurance up to an amount for depositors in case their bank fails.

The up to an amount by the way is important.

On March 10th, the FDIC took control of the major tech lender, Silicon Valley Bank or SVB, the stave off a $42 billion bank run.

SVB customers, many of whom had far more than the FDIC insured limit and deposits, they all wanted their money out immediately.

The move signaled the biggest banking collapse in the country since WaMu, Washington Mutual, failed in 2008 and panic the markets.

Two days later, the FDIC shut down a second U.S. regional lender, Signature Bank, following a run on its deposits by customers who were alarmed by SVB's implosion.

And as the panic spread across the Atlantic, shares its Switzerland's second-largest bank, Credit Suisse, tanked by 30%.

On March 19th, Switzerland's biggest bank, UBS, agreed to buy its little banking brother in an emergency deal intended to calm the global markets, that didn't happen.

Meanwhile, back in San Francisco, spooked customers of another major regional lender and for full disclosure, our show's founding sponsor, First Republic Bank, were rushing to withdraw their deposits.

The urging of U.S. Treasury Secretary Janet Yellen, JP Morgan Chase, CEO, Jamie Diamond organized an infusion of $30 billion from 11 of the nation's biggest banks into First Republic Bank's deposits.

The message to customers from the public and the private sector was the same: do not panic.

Only time will tell if the aggressive public and private intervention will be the vaccine that contains the panic virus, or if what we have seen so far is the first of many waves to come.

If you're not hiding under your couch, here's what you might be asking.

Why did Silicon Valley Bank fail in the first place?

What role did inflation play in the whole mess?

Is capitalism broken?

Here to help me tackle those not at all panicky questions is inflation whisperer and former U.S. Treasury Secretary, Larry Summers.

Larry Summers.

Larry, good to have you back.

- Good to be back, Ian.

- So much to talk about.

I want to start with the banking crisis and ask you to explain just for a moment to our audience why these two banks have failed, Silicon Valley Bank and Signature Bank.

- Like any big accident, there are multiple causes.

The first is that we now live in a digital world with high interest rates.

And that means that people are gonna be much more reluctant to keep their money in places that are paying them zero interest rate when they could get 4 or 5% interest somewhere else.

And they're going to be much more quickly moving to adjust, particularly if they become alarmed about whether they're gonna get their money back.

That's the first part.

The second part is that the banks that held these accounts invested their money in assets that went way down in value.

They made risky loans.

And much more importantly, they invested in long-term bonds.

And when interest rates went up, the value of those long-term bonds went down.

So depositors looked around and they saw that the assets backing their deposits were going down in value, they saw that it was easier than ever before to move their money somewhere else, and they saw that they could get higher returns elsewhere, and they saw that because of digital procedures it was easier to open accounts elsewhere and all of that came together to cause massive withdrawals.

And just as a hundred people all trying to get out of a theater at the same time in a big hurry would cause the other thousand people in the theater, even if they didn't really know what was going on, to try to rush out as well.

That kind of mob bank run psychology took over at these banks.

And then we had the situation that we did of a mass run that required the government to step into the situation.

- Who has acted most irresponsibly around this?

- It's a race.

There are a variety of candidates, but I would say the gold medal for incompetence goes to the management of SVB, which grew its deposits at a spectacular rate, didn't have a chief risk officer for nine months, ignored a multiplicity of warnings about its interest rate mismatch, didn't engage in the most basic kind of bank planning that junior analysts are taught.

And had the hubris to regard itself as a heroic worthy institution.

I think the silver medal for incompetence probably goes to the Federal Reserve system in its regulation of Silicon Valley Bank and beyond.

Because that regulation didn't stop this accident that was waiting to happen.

And the authorities had plenty of authority to have forced it to raise capital much earlier, to have stopped it from paying dividends, to have forced it to interest rate hedge, to have done a whole variety of things.

The progressive critics are right, that almost everything in the Trump era legislation that Congress passed, moving to later touch regulation was misguided.

- [Ian] Not the biggest banks, this was on, like, the medium size banks, yeah?

- On the medium size bank.

- [Ian] Yeah, right?

- [Larry] That was bad, misguided legislation.

- For most of the people that are watching this right now who don't have money directly at stake, why should they care?

- They have a stake in the broad economy.

And when there are challenges to the banking system, that affects the flow of credit, which affects everything from their mortgage, to the financing of the inventory at the stores where they shop, to the ability of their employer to get credit.

You know, in many ways, the financial system is a little bit like an anesthesiologist.

Nobody much notices the job they're doing until something screws up and then it becomes highly salient and highly visible and that's what happened for people who were worried about meeting payroll at SVB a couple of Mondays ago.

And that's why we regulate and ensure financial institutions so that people can go out, go about their business without worrying about whether they're going to be major failures.

- So let me turn for just a couple of moments to the policy response so far.

I guess one question I'd wanna ask is how do you rate Biden administration, Yellen, Fed?

- I think on the positive side, the decision to guarantee the depositors in SVB was very much a proper action and to have not taken it would've been to have courted substantial risks.

I was not so enthusiastic about the way the SVB bailout has been handled.

$20 billion of, and let's face it, banks aren't people.

When banks pay taxes, people ultimately pay taxes and fees.

So $20 billion for the resolution of SVB seems like an extraordinary sum and I wonder if that couldn't have been done considerably more inexpensively.

I'm concerned that there's still too much ambiguity out there in the system about what will happen to uninsured bank deposits.

And I wish there were a bit more stepping back to think about the final set of developments.

Looking across the economy right now, I'm probably particularly worried about real estate and within real estate about the office building sector.

I've got considerable apprehensions about corporate lending to mid-size businesses.

The activities that were heavy areas of emphasis for regional banks are, I think, particularly problematic.

- Isn't it surprising that commercial real estate hasn't blown up given the fact that the biggest change in the economy in the U.S. post-pandemic is the fact that people just aren't going directly to their places of work the way they used to?

- Remember Ian, that only about 20% of commercial real estate is office buildings.

Remember also that if people come to work three days a week, that doesn't mean I only need 60% as much space as I did when they worked five days a week, because I need to have the capacity to accommodate them all on the days when they're all coming in order to be together.

- I wanna ask you some other global questions.

Don't not take all of our time about the banks, since I have you here.

One, I know you're not an AI expert, but we're all talking about it.

And I'm wondering if you were treasury secretary right now and you saw coming this AI explosion, what would you be watching for in terms of impact on jobs, impact on productivity in the United States?

I mean, are you yet seeing anything that makes this feel truly transformative from an economic perspective?

- Things happen slower than you thought they would and then they happen faster than you thought they could.

A good example of that is driverless cars.

Six or seven years ago on shows like this, we would've been confident that they were gonna be transforming the taxi and chauffeur industry by now, but they've really had almost no effect yet.

Sooner or later, they will.

And I think there are many examples like that.

So I suspect there's gonna be less impact than many people fear in most sectors over the next three years, and more impacts over the next 10 or 15 years.

For example, my guess is that AI will change what doctors do, diagnose people on the basis of complex information sooner and harder than it will change what nurses do, giving people basic medical treatments and giving them comfort and compassion.

So I think there are a lot of traditional hierarchies and ways of thinking about the way organizations work that's likely to be quite profoundly changed here.

- I've got two more topics I want to ask you about quickly.

One, on Russia, I've seen you talking a little bit about the idea that the frozen assets of Russia should be seized to help rebuild Ukraine.

And I wonder, I've heard from Europeans that they think that that's legally not doable.

And of course also if it is doable, it also leads to the possibility that these sorts of levers can be used against other countries potentially freezing investments and causing unexpected knock on consequences.

Wondering your thoughts there.

- So this is a rare case where the right thing to do and the expedient thing to do are the same thing.

As between American taxpayers paying for Ukraine, and Russia, who has a debt to Ukraine for all the damage it has done, having its collateral on that debt, namely the frozen Russian assets seized, it seems to me very clear that the assets are the better means of supporting Ukraine.

What I'm told by pretty authoritative lawyers is that the legal claim here is very strong.

These are assets that are already frozen.

Frozen assets in the context of the Iraq war were used for this purpose.

Certainly, Russia has seized any number of foreign assets that are currently located in Russia.

Russia certainly didn't have any compunction about German or Japanese assets in the context of the Second World War.

So I think the legalities here are actually very clear.

And if we set a precedent that countries that engage in such wanted aggression, that their heads of state are labeled as war criminals, that the official state assets of those countries are gonna be used to mitigate the damage that their aggression caused, that feels like a very good precedent to set in the world.

And I don't believe that that's gonna point towards the seizure of our country's assets.

And even if it did, we don't have any significant level of foreign reserves that are currently held abroad.

- The last question I want to ask you is one that disturbs me a lot, and this is these stats about U.S. demographics and life expectancy.

The U.S. continues to slip farther and farther down the OECD league tables for so many reasons.

And I'm just wondering what you think, if anything, the doable policy inputs to make a difference?

Since here we're talking really about the future of the country, the future of the youth, it strikes me as something doesn't get nearly as much play as it really should in the discussions of our policymakers.

- I think that's right.

I think it is not primarily about the healthcare system and access to healthcare.

I think that the single most important thing we can do, and I'm not an expert on policy in this area at all, is find effective things to do about fentanyl, which is the single largest cause of the declining life expectancy.

This is related to deaths of despair.

And finding ways of generating more hope in some of the more depressed parts of the country is also a way in which we could make substantial progress.

Tied up with the fraction of people who believe in patriotism having gone down, the fraction of people who believe in community having gone down, the fraction of people who believe that their kids are not going to live as well as they did, has gone way up.

That's something we need to think a lot about.

- Larry, you fear that American society is in structural decline?

- I think there is the risk of that, and I am torn between seeing a variety of disturbing indicators like the life expectancy that you mentioned.

So I think what we need to do is find a balance in which there is warranted alarm, but that warranted alarm must never be allowed to become pessimism or fatalism or a source of encouragement and hope to our adversaries who I think have much more profound problems- - And a lot of willingness to amplify those sentiments as well.

Larry, really important topic for us to close on to be continued.

Larry Summers, thanks so much for joining.

- Thank you.

[melodious techno music] Bank runs.

Market volatility.

Panic in the streets.

When I say we've been in before, I don't just mean 2008 or 1929, one of the earliest recorded bank runs dates back to the 14th century.

You remember that.

Italian city states like Florence and Venice sat at the crossroads of trade routes between Asia and Europe and were financial hubs.

In the early 1300s, that's the 14th century.

The Peruzzi family quickly became one of the most wealthy in Florence through a highly profitable textile trade that focused on imported English wool.

[sheep bleats] As their wealth grew, so did their banking network extending throughout Europe and even to England's King Edward III.

King Edward at the time was embroiled in a series of expensive wars with France, which the Peruzzis increasingly bankrolled.

Unfortunately, King Edwards appetite for battle and glory was bigger than his purse.

And when he failed to pay his debts in 1343, the Peruzzi Bank took a massive financial hit.

Words soon got back to Florence about the deadbeat English king depositors panicked, rushing to withdraw their Florence before the Bank of Peruzzi ran out of funds.

And soon after, the House of Peruzzi was ruined.

No more.

The reason you probably never heard of the Peruzzi until just now has quite a bit to do with the Florentine family that rose to power soon after their fall.

The House of Medici, Medici, that's how we say it, became one of the wealthiest families in Renaissance Europe.

In part, by learning from the Peruzzi's mistakes.

Where the Peruzzis focused heavily on speculative investments in individual clients, ahem, Edward III, the Medicis diversified their portfolio across a range of industries and regions which protected them from risk and market volatility.

Fast-forward to today in the same pitfalls that the Peruzzi faced exist for modern banks that rely on over-extended credit and speculation.

I mean, what is crypto, if not today's version of English wool.

And whether you are the House of Peruzzi or Silicon Valley Bank, one thing is clear.

Stay away from the King of England.

[enlightening techno music] And now the puppet regime where banks aren't the only ones experiencing a crisis, a midlife crisis, that is, we head to puppet Pyongyang for more.

- According to a recent report, Kim Jong-un is suffering a midlife crisis, drinking heavily, staying up late and crying a lot.

What is going on over there?

[somber music] - [sniffles] I killed my uncle.

I killed my uncle's sister.

I kill my uncle's sister's husband.

But no one tells you you can't kill the passage of time.

I need help.

I need to reach out to my friend.

[dial tone beeping] Okay.

My good pal, Xi, answers the call.

- [Puppet Xi] This is President Xi.

I can't come to the phone right now, but I do follow you on TikTok.

[line beeps] - Ah, who am I kidding?

You never respected me.

You just use me like everybody else.

Disgusting.

[sighs] Okay.

There's one more person I think I can call.

[line trills] - Kim.

Hello?

- Oh, you picked up, I assumed you- - I'm learning to live a life of sulking isolation as I wage senseless war.

[chuckles] Why, yes.

Yes, I was.

What can I do for you?

- Oh, Vlad.

I just feel so old and sad and old.

- Oh, don't be sad, little buddy.

You are a great and inspiring person.

- Oh, really?

- Yes.

Really.

I can only dream of Russia being like North Korea one day and I'm doing the best I can.

- I thank you.

I feel alive again.

Alive!

- Yes, and while I have you online, I was wondering if I could ask for favor.

- Oh, anything you want.

- You wouldn't happen to have... Oh, I don't know.

Some spare artillery shells lying around.

- Oh, why do you exploit my pain?

♪ Puppet Regime ♪ - That's our show this week.

Come back next week and if you like what you see or even if you don't, we go, "Hey, I'd want more bank runs."

You know where you can go.

You can check us out at gzeromedia.com.

[lively dance music] [lively dance music continues] [lively dance music continues] [lively dance music trails] [enlightening music] - [Presenter] Major corporate funding provided by founding sponsor, First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by Jerre and Mary Joy Stead.

Carnegie Corporation of New York.

Prologis.

[bright music] And by.

[bright music continues] [bright music]