Baby Busts and Bank Crashes: A Conversation with Demographer Nicholas Eberstadt

>> Uncle Billy: Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run.

>> Bill Whalen: It's Monday, March 13, 2023, and welcome back to GoodFellows, a Hoover Institution broadcast examining social, economic, political and geopolitical concerns.

I'm Bill Whalen, I'm a Hoover distinguished policy fellow. I'll be your moderator today, pleased to report that we are joined by our full complement of all three GoodFellows today. That would include the historian, Niall Ferguson, the economist John Cochran, the Geostrategist, Lieutenant general HR McMaster, the air Hoover institution senior fellows all.

And joining us today for a conversation about demographics is Nicholas Eberstadt. Nick Eberstadt's the Henry went chair and political economy at the American Enterprise Institute. And as I mentioned, a renowned expert in demographics. Nick, welcome to GoodFellows.

>> Nicholas Eberstadt: Hey, thanks for inviting me, gents.

>> Bill Whalen: Well, good to have you on, so let's talk demographics here.

My understanding of demographics, Nick, it is a field that is largely fueled by projections. But when we look at projections, this is not unlike economics or politics, I suppose, but we look at demographic projections. Nick, what is the right window for making guesses about future population changes? Are we talking five to ten years?

Ten to 20 years, 20 to 50 years, 50 to 100 years? What is a legitimate study in your estimation?

>> Nicholas Eberstadt: Well, I like to cheat. And I think that the cheaters way of doing this is looking out no further than about 15 or 20 years, maybe 25 at the max.

Because that way, all of the people who are gonna be around in the future already, mostly for the labor force and everything else overwhelmingly born. Today, when you look at 50 years, when you look out 100 years, you get into this thing of guessing how many babies, the unborn are going to be having.

And not to put too fine a point on that, nobody's ever come up with a method of doing that. So that's kind of what we'd call science fiction population, I don't like to do that part so much.

>> Bill Whalen: Okay and what is the demographic story in 2023?

>> Nicholas Eberstadt: It's the long march towards sub replacement fertility all around the world, for reasons that we think we know but maybe we don't.

We're seeing the crash of births in China, we're seeing declining populations throughout East Asia. We're already seeing a really strong drop in birth rates all through the OMA. And this is going to make for a smaller world than we thought, and also a grayer world than we thought.

 

>> Niall Ferguson: Nick, you're being very circumspect about how far out you look, but others are not so restrained. The United nations does its population projections, and I think it's fair to say that one of the most startling things to have happened in the world of demographic projection over the last few years has been the downward revision of the Chinese future population.

I think the last time I really thought seriously about this was about ten years ago. But when I caught up with it in the last six months, we're suddenly looking at a scenario which the population of China could fall by as much as half between now and the end of the century.

And that's a huge story, it seems to me you've written about this, talked about not only the causes in terms of falling fertility, but also the consequences for Chinese society. This is so important for particularly Americans, but I think the whole of the west that we should dwell on it a bit and let it sink in.

A population decline of about half by the end of the century. Is that plausible to you, even allowing for the fact that it's beyond your 20 year range?

>> Nicholas Eberstadt: Well, I mean, if I'm gonna co author a book with Isaac Asimov, sure. I mean, I think that's fine, I'll take that part.

I mean, we know right now, Niall, that as of today, more or less at lunchtime, birth levels in China, if continued, if childbearing patterns are continued, which is like the, the cheaters, the weasels, if. But if they`re continued, the next generation is gonna be half as big as the current generation.

So, I mean, were already on that escalator, were already definitely on that escalator. And the collapsing fertility levels in China, I think tell us something about the future, about this world were heading into in the next 10 or 20 or more years. But it also tells us something about the dictatorship today, because when you have a country's fertility level drop by 50% in five years during peacetime, something really strange is going on with the national mentality and it's not an explosion of optimism.

So I think this is telling us something about the way the Chinese people are regarding their current circumstances, too.

>> Niall Ferguson: I guess the big question that I keep coming back to is, well, what would cause Chinese fertility to go up again? Help us think about that. I noticed that in the median or middle range projection, the UN assumes that it will in fact recover from its current very low level, half the replacement rate.

But I keep asking myself what, on the basis of past experience would cause such an increase? Can you give us an answer to that?

>> Nicholas Eberstadt: Well, Neil, I don't want to give away the secrets of the guild, but as you probably know, those long term projections. Since nobody actually has ever come up with a reliable method for forecasts of fertility for any population where there's human volition over the kind of a long run, it's kind of like a Rorschach test.

So the people sit around, they say, does this sound median to you? Does this sound low to you? And then they say, okay. And then they get together three years later, and maybe they have to kind of revise it. So there's no theory in there, it's just a kind of a temperature, you might say.

What would do it in the real world? Well, you're the historian, I mean, you've seen big blips in births. There was a blip in births, as I recall in Germany, after some stuff happened in the early 1930s. We had a blip after the end of world War II, we've had more than a blip in Israel since the 90s.

It seems to be kind of sustained. It looks to me like, for an educated country, you have to have a big change in mentality and a big change in optimism, sometimes religiosity, sometimes ideology or politics, but it has to be something big.

>> Niall Ferguson: Yeah, that seems the corollary of your argument, that what's happening here is some kind of nationwide pessimism associated with the increasingly illiberal turn that the government has taken.

And for that to change, presumably there'd have to be an equal and opposite improvement, I'll hand over to John.

>> John Cochran: It's not just China, of course, this is everywhere, Korea is under one. I just looked up the numbers for northern Europe, looking for something else. All of Scandinavia is down in the 1.2 range.

Let's just back to the basic question, what do you know about why this is happening across the world? Urbanization, for example.

>> Nicholas Eberstadt: So I think demography was given its name by a Frenchman back in the 1850s. And since then there have been thousands and thousands and thousands of studies trying to explain changes in fertility, patterns in fertility, differentials in fertility.

And when I said we think we know, I was trying to be a little bit ironic about that because everybody knows, but they don't all know the same thing, and a lot of the things they know are patently incorrect.

>> John Cochran: I came from background at the University of Chicago where there was sort of the Gary Becker's cool things and lots of talk about we know what caused fertility, and I was always.

 

>> Nicholas Eberstadt: I loved sainted Gary Becker's tools, I love Ted Schultz's tools, they're great tools and they're good for, as far as they go.

>> John Cochran: Quality versus quantity, trade off, the urbanization, women working and so forth.

>> Nicholas Eberstadt: All those fabulous insights, but it doesn't take us all the way.

So I mean, to my own personal preferences, I am more persuaded by something that Lant Pritchett now of Oxford did back almost 30 years ago than by any other study in that whole like mountain of paper that I was describing. He came up with this really strange and bold idea that the best predictor for fertility was how many children women said that they wanted, I mean, who would have thought?

And it turns out to be really good across ethnicities, across populations, across societies, across historical time periods. To the extent that we've got historical data on this sort of stuff, it doesn't answer the question of why those preferences change. It doesn't answer the question for how desired family size changes, but it's a pretty good way to approach it.

And it shows you that in low income countries, even in countries where a lot of people are illiterate and there's a lot of rural living, you can have a voluntary below replacement childbearing regimen now, like Myanmar or Burma. I mean it's just like the counterexample to all of the modernization theory stuff.

So what changes your mentality, I mean look at what's happening in the Ummah, look at what's happening in Iran, I mean Tehran's birth rate is like Zurich. It's not because it's modernized like Zurich.

>> Niall Ferguson: And that's all happened really fast, if it makes you feel any better, historians dealing with what's already happened have really struggled.

I can remember when I was an undergraduate immersing myself in the great Wrigley and Schofield study on the population of England and Wales before and during the industrial revolution. And that revealed a really important change that happened, which was age at marriage. They just started getting married younger and therefore having more children, big discontinuity is certainly associated with the industrial revolution in some way that nobody can quite define.

At that point, I can remember reading all those at that time state of the art papers on the demographic change, nobody could really explain it. Something just led people in the course of the 18th century to get married younger, and that had enormous consequences for the economic history of the world, but we still don't really know why that happened.

 

>> Nicholas Eberstadt: But Neil, look at where the long march to below replacement fertility began didn't start in Britain, started in France, it started in France around the 1750s. But right before the revolution, not to put too fine a point on it, was poorer than what was to be the UK, more rural, less educated and catholic.

So it kind of, it knocked all of the modernization kind of desiderata kind of off to the side. Yet this was the place where the, we've really, as far as we can tell, we find the origins of the long march to voluntary, below replacement fertility, Ile de France, like around the outside of Paris in the 1750s.

 

>> Niall Ferguson: Can we talk about something that I got very interested in recently, which is that young people saying they're not going to have any children because the planet's coming to an end? I got very interested in the recent literature on mental health in the United States, especially amongst young people, it's quite an alarming picture.

But when trying to dig into the reasons for depression and despondency, one comes across this argument, which seems to be quite widespread to the point of almost being a meme. We're not gonna have children because the planet's dying. When we think about the United States, there seems to be something similar going on here, maybe it can go further, maybe fertility can fall further here.

Talk a little bit about the demographic future of America, there's an increase in mortality, with particularly the deaths of despair story having an impact there. It doesn't feel as if we're as dynamic demographically as we used to be. What's going on and is it gonna get worse?

>> H.R. McMaster: But I would say it even maybe places just in context of catastrophizing generally, right.

And how you have this sort of various forms of hysteria that seem to be amplified by various forms of social media and have taken root, particularly, as Niall mentioned, in the younger generation.

>> Nicholas Eberstadt: Well, I started this population, getting into this population thing about 50 years ago, and at that time there was actually one of your Stanford colleagues was very much in the news in those days because we were supposed to run out of food.

And India was supposed to become a starvation zone by the 70s.

>> H.R. McMaster: And these are, of course, been long predicted, this is the Malthusian sort of approach to predicting the future.

>> Nicholas Eberstadt: Neo-Malthusian view, and there was a big, a very widely accepted, or at least in certain circles, very widely accepted fear of population growth.

I was a commie back then, but even as a commie, I thought that this was kind of preposterous, because human beings kind of seek their own interests, and people do things for reasons. And it's a lot harder to make the argument that we're going to breed ourselves out of existence today.

Obviously now, whether we're going to pollute ourselves out of existence, we seem to have some sort of need for metaphysical excitement, as other types of metaphysics kind of vanish from our lives, I guess. But with regard to fertility in our country, we did something very odd for about a generation, which is as an affluent, educated society.

We had more or less replacement level childbearing regimen, almost 2.1 births per woman, which is a lot higher than almost any other affluent country since the financial panic of 2008 or since the election of Obama, you choose your marker. Fertility in the United States has come down pretty strongly, not China strongly, but it's palpably below replacement.

And if you look at the patterns for younger women, women in their early 20s, later 20s, early 30s, they're on a lower trajectory than their older sisters or their mothers. And it's not impossible that we're on a path for 1.6, which used to be kind of a European sort of style, or maybe even a 1.4, which is a little bit above a German sort of style.

But these things, of course, do change. Now, what's going on in the mentality? It's a Rorschach test, and everybody can redo their own story. If I'm going to look at that story, I would point out to you the plummeting religiosity of our rising generation of young Americans. The expounded lack of optimism about the future, the decline in patriotism.

I mean, I'm not sure that patriotism is something that causes people to have babies. But it does seem to kind of correlate with a whole clump of other viewpoints that have at least tracked with that in our Western societies. So that's one thing about the births. The death story is not a very happy one, I mean, we have been kind of stuck for the last decade and more in a very slow pace of improvement in overall life expectancy.

And obviously it dropped ghastly during the COVID calamity. How well we recover and get back on a good track remains to be seen. There are lots of different things, not just deaths of despair, but cardiovascular disease is probably the big anchor slowing us down. It looks a little bit too much like what we saw in Russia a while ago for comfort for me, see some of this stuff that's going on, but leave that aside.

Then we've got migration, and we've been a, we have no migration policy, as far as I can tell, and despite that, we're attracting talent from all over the world. The US and Switzerland are the two big magnets for inventors from all around the world, and people who don't have PhDs like to come here also.

I am concerned that this awful situation we have at our southern border, this heinous, feckless policy towards security at our southern border, may poison popular attitudes towards immigration. We did have a big swing against immigration, as you know, back in the populist era, in the first gilded age.

I would not like to see a big swing against immigration myself. In our second gilded age, I think that everybody would lose from that. But sometimes we seem to be capable of arranging political structures in which everybody loses.

>> John Cochran: The immigrants are the ones who wanna come and pay our Social Security and Medicare taxes, and they also tend to have babies.

So there's some advantages to immigrants.

>> H.R. McMaster: They also tend to be extremely patriotic and have confidence in our market economic system. And they cherished the principles on which our country was founded. Who wants any of that? Even present company of recent immigrants.

>> Niall Ferguson: This clearly isn't the future Paul Ehrlich envisioned when he wrote The Population Bomb.

And at some point, presumably somebody is going to write some opposite version of that book in which the real disaster is that humanity is gonna die out. I think Elon Musk has occasionally expressed that view, that the real danger is population decline. It's worth adding, though, that the decline certainly isn't happening in Africa yet.

And population there is going to continue to grow, as far as we can tell. In fact, I think all the population growth that there remains to be in the world is basically going to be in Africa. And that then feeds into a discussion about migration. There are magnets, as you say, Nick, for talent all over the world, it's not just the US and Switzerland.

The UK and Europe generally are going to attract a lot of these people. So are we looking forward to a world in which the population is gonna hit some kind of plateau and then decline, including even Africa? And there will be very high levels of migration, which will then elicit backlashes, political backlashes, of the sort you allude to is that the kind of 21st century were in.

 

>> Nicholas Eberstadt: There was an awful lot of migration around the world before we had fixed governments. We just didn't follow it very well, I mean, we follow migration now a lot better because we regard it as a sort of an issue of national sovereignty and national security. How much migration different countries will accept, I think in part will have to do with how good their own domestic fabric is at assimilating outsiders and making them into loyal and productive newcomers.

And the anglophone affluent countries seem to be pretty good at doing that by comparison to some others. I mean, not just the US and Canada and Australia and little New Zealand, but the UK too, for better or worse, you may disagree with me about that one. When I look at the continent, it looks to me like a much more mixed picture.

I mean, probably immigration into continental Europe is more of a success story than a lot of the political discussions suggest, but there are also a lot of problems. And the migrant populations into continental Europe don't always have the same work rates as the receiving populations. The subtext, obviously is flows of people from Muslim majority countries coming into continental Europe.

But even if you look at that, it's kind of a mystery to me, some of you all may have parsed this better. There are some receiving countries and some sending countries in the Ummah, where you have much better outcomes than other populations. So you look at the Indonesians going to the Netherlands, you never hear about them.

That's because of things that are actually working out kind of well.

>> John Cochran: A system built around asylum and not around the economic immigration that allows in single men and then denies them work permits is guaranteed to fail. I mean, the problem is an assimilation problem, you wan let in families who want to come to work hard.

And so that's, but let's get off the catastrophe of immigration.

>> H.R. McMaster: If I could just make a quick pitch here, as an American historian, is that was the contrast between Massachusetts Bay Colony and Virginia. Virginia was populated, really, with all young men, and it was families, really, a Massachusetts Bay colony.

And there's a whole literature on why Massachusetts Bay Colony thrived and the early Virginia settlements disappeared.

>> Niall Ferguson: I have a question that links your world, Nics and Hrs, because one of the things you've been writing about very compellingly in your recent work on the US is the pretty unhealthy state of the young American male.

And this shows up in a variety of different ways. It shows up in labour market participation. It shows up in health metrics. And I wanted to connect this with HRs world, where you are finding it harder and harder to recruit able bodied young men into the military. Am I right in thinking that that is the case HR?

I seem to have read somewhere in the past week, and I foolishly didn't write it down, that it's going to be harder and harder to keep recruiting into the military because there are a smaller and smaller share of young men fit for military service, physically fit for it.

Is that right?

>> H.R. McMaster: Yeah, that's right and it is a big problem. I think there are a number of problems that are interacting to create the recruiting challenges that the military is having overall but this is the biggest one. What you really want is you want a large population that qualifies for military service so you can be more selective within that large population.

Now, the numbers that are available because of just not being physically fit, and also criminal records, for example, or patterns of drug abuse, these are all disqualifiers, not finishing secondary education. So that pool is shrinking. So the health of our society is restricting the numbers who are qualified even just to volunteer for military service.

And what I would say to reap the tremendous benefits and rewards, less tangible rewards associated with serving your country and serving as part of cohesive teams committed to one another and a mission bigger than themselves. More young men and women are qualified for military service, but as Nick's work has shown, how about just qualified and willing to work, period.

And so this might be the segue into Nick's scholarship over many years, recently updated post COVID on why people are leaving the workforce.

>> Nicholas Eberstadt: So this flight from the workforce, the flight from the labor market by men, goes back to the mid 1960s, and it's been almost a straight line up from 65, say, to the present.

I did a first edition of this book that you kindly mentioned in 2016, and on the COVID I showed the regression line from 65 to 2016 for percentage of men not in labor force was almost a straight line. It was like 0.96 or something. The eerie thing is that for the second edition, you could just continue that line upwards.

You didn't have to change the slope or the constant or anything. I can't explain that, it's eerie. But we also now, I think, are starting to see a flight from work for women. We may have 7 million guys, 25 to 54 in the US, who are neither working nor looking for work.

But we've got about 3 million girls, women 25 to 54 in that same age group, who have no children at home, who are neither working nor in education or training and aren't married. And this is not the sort of gender equality that I think we want to be seeing in the United States.

And one of the kind of worrisome parts of this gender equality is that they are now starting to say that they take pain medication every day in about the same proportion that the dropout guys do. Which is to say about half of the people in this group, half of the women in this group are saying that they're taking pain medication every day.

Not a good start.

>> John Cochran: You talked about cultural things, and the economist in me is rebelling. There are incentives here. Roughly speaking, once you're into the social program network, you lose a dollar worth of benefits for every dollar that you work, especially bad if you're on Social Security disability or some of these other cliffs.

These people with no jobs and no nothing, somebody's paying the bills somehow. In the old days, men had to go to work because they had to support families. Well, if they're not married, not supporting families. So there are incentives at work here. It's not just sort of a nebulous cultural shift that happened.

 

>> Nicholas Eberstadt: No lo Contendra, I agree with you. But do the thought experiment with me. Let's take our current dysfunctional, crazy quilt social benefit programs in the time machine and take them back to Salem Massachusetts in 1670, and try to guess what proportion of the population there would be enrolled in food stamps.

 

>> John Cochran: I would say exactly what we have now.

>> Nicholas Eberstadt: Well, it's inconclusive because we can't see what would come out. But my guess is it would be a lot lower in puritan New England because there would have been a lot of people there who would have thought that if they did that, they'd be going to hell.

And hell isn't quite as strong a sales item nowadays.

>> John Cochran: Original pilgrims started in a communitarian thing where they were all going to share everything, and they tried that for a year or two and it didn't work at all. Nobody was working. And then they said, you know what?

You're gonna have your own plot and you're gonna eat what comes off your own plot, bingo.

>> H.R. McMaster: Okay, for our viewers, for additional reading on this subject, check out TH Breen's Puritans and Adventurers. So I'll put in that plug for some good old colonial history.

>> Bill Whalen: Okay, well, Nick Eberstadt, thanks for coming on Goodfellows today.

We hope to have you on the show again and come out to Stanford. Come visit us when it stops raining.

>> Nicholas Eberstadt: Force me. If the airplane gobs ever work.

>> Bill Whalen: Let us shift from Catastrophe and Hysteria in Demographics to Catastrophe and Hysteria in the Banking industry. Specifically, implosion of Silicon Valley banker SBB for short, the largest American bank failure since the financial crisis of 2008.

At the moment, the second largest bank failure in US history. The Treasury Department announcing Sunday night that the FDIC will use its deposit insurance fund to pay back account holders at SVB, along with Signature bank in New York, which is heavy in crypto. President Biden went before the cameras this morning, about 30 minutes before the markets opened, to assure us a banking system is sound.

And he called on Congress for more regulation. John, a lot to unpack here. Why did SVB melt down? Where were and where are the regulators? Is this a bailout and the health of the banking industry? But let's begin with this John. SVB is kind of a fabled Silicon Valley story.

It's a story of a bank that was started by two guys who are playing poker one night. Is this a simple John, it's a story of a bank that was created over a poker game, making a very bad wager on interest rates?

>> John Cochran: Pretty much yes. Which isn't, that's to be expected.

The story, there's a lot of fun with the malfeasance of this bank and what they did. But the big story that I see is the complete failure of the regulatory system, which has been promising us since the Dodd Frank ACT, that all these things are solved. This was an elephant in the room.

This was not complicated toxic derivatives or something strange, or off balance sheet entities. This is the classic way banks have been failing since Niall helped me 1622 whenever we had the first bank. The basic picture was just combine lots of deposits that were bigger than the minimum, the maximum you can get insured.

So lots of uninsured deposits. Companies with literally millions of dollars in bank accounts that know they have a chance of losing, if anything. Plus, the bank takes that money and puts it in long term treasuries and long term mortgage backed securities, which on their own are very nice, safe securities, but not if you've borrowed a bunch of run prone money.

Interest rates go up, though, interest rates go up sometime, the value of those assets, if you need to sell them, falls. And we're at the point. This isn't a magic bank runner illiquidity, it's just plain old insolvent. They cannot sell, if they sell those securities to make good on the depositors who have every incentive to run, then they're out of business and the bank run, it's just the simplest thing in the world.

Now, where were the regulators? Hundreds of thousands of pages of regulation, and they could not see and did not see this most basic thing happening. So, this proves to me that this architecture of regulation is completely failed, as we already saw this in the 2022 stuff, although that wasn't quite so clear to people's minds.

But it's not clear whether it's stupidity, institutional incapacity, or just the rules are so complicated that you can't do a kinda calculation that an undergraduate can do in 20 minutes. If they just look at this massive mismatch of interest rate risk on the assets and run-prone liabilities.

>> Niall Ferguson: Neil, the other thing to say here is that we now know what systemic means, and that is whatever the authorities decide.

It's entirely arbitrary what banks are regarded as being of systemic significance, and the other thing is that everything is implicitly insured, like all deposits are now implicitly insured, rather than up to the threshold. The FDIC had raised it to 250,000, so these are fairly big changes, and they make, as John has rightly said, the entire edifice of regulation created after the financial crisis essentially a pile of meaningless verbiage.

But there's another point which I think we need to focus on, and that is, what does this mean for the Federal Reserve's strategy to bring down inflation? Now, some of us have been saying for months and months and months that with monetary policy and its famous long variable lags, you raise rates, what, four and a half percentage points, at some point something breaks.

The interesting thing is that the central banks kept telling us, you'll remember this, John, it's the non-bank sector that you need to worry about, there are hidden pools of leverage there. So, we're all looking around the non-bank sector, trying to figure out what was gonna break. And the thing that broke was a bank, actually a bunch of banks, cuz it's not just one bank that went down, there were all three have gone down, and more may follow.

So, we gotta banking crisis, this is a further indictment of the regulatory framework. That also makes me wonder, how does the FED now pull off the supposed soft landing, or no landing, that is gonna bring inflation back down towards 2% without a recession, and we all live happily ever after?

Surely, John, let me put this to you, there is now a massive contradiction between what the FED is trying to do to bring down inflation by raising rates. And what it's now doing to prevent a banking crisis by in effect, restarting quantitative easing, cuz, I mean, that seems to me to be what they've done.

Do you agree?

>> John Cochran: Well, it's more than quantitative easing, it is a handout, this is real resources that are going into the pockets of everybody who lost money. And so we are in firmly in the regime of make money in good times by leveraging up, and taxpayers come give you money in the bad times, we are once again ratcheting up, we do this over and over again.

A new class of creditors gets bailed out, and then we'll promise ourselves to pass new rules to not let it happen again, and then it happens again and larger and larger creditors get bailed out. So, yes, effectively, bank deposits are all now insured, and a lot of people who made a lot of money on high-leverage, high-yield stuff got money courtesy of the taxpayer.

 

>> Niall Ferguson: But over and above that, something called the bank term funding program has now been created, this was done on Sunday evening, and that is going to be a new line of credit available to banks. And get this, they'll be able to borrow against collateral that won't need to be marked to market.

Those values be treated as if they haven't lost any value at all since the FED started hiking I'm sorry, but this is kinda crazy.

>> John Cochran: They can borrow literally twice as much as what securities are worth on the open market against these securities as collateral, that's an example of where.

Yes, if the FED wants to raise interest rates, fine, it's just gonna make everybody whole, who put that betting on interest rates not happening?

>> Niall Ferguson: What I can't figure out, John, is does this tighten financial conditions or ease them? I guess its easing them compared with where we would be if they had not bailed out the uninsured depositors, but I don't know whether this makes the inflation risk greater over, lets say, a year.

My gut feeling is that it does, and that if I would go out on a limb, I would say this is the moment the FED blinked and we really are in the 1970s, and he really is Arthur Burns, he is not Paul Volcker. Am I right in thinking about it this way, or is in fact there now enough of a spasm of anxiety in markets for the recession to happen and the pain more or less to be unavoidable now?

I can't quite make up my mind about where we are as the smoke clears.

>> John Cochran: Well, I'll guess that the FED will probably pause raising rates cuz they're worried about it and that this has fiscal consequences which raise inflation. So, I think you're right in both cases, and there is a chance, generally, recessions need a spark, and that spark is usually financial.

So there is a chance of some general-speaking financial pullback that will push us towards the recession and slow down that process. But I think the bigger picture is I'm still more outraged by the abject failure of this financial regulatory system, which we, I mean, the big picture is we are still in the land of the federal government will come and drop money on every single problem that comes.

And that's gotta end, and that's fundamentally why we have so much inflation coming.

>> H.R. McMaster: John and Neil, what I've been hearing is, of course, that they're gonna be able to do all this, that well be able to resolve this problem without any cost at all to the American taxpayer.

True or false? And then if true, how is that possible?

>> John Cochran: False money doesn't grow on trees, this is not about liquidity, this is about people lost money. And that money is gonna come, for example, we're gonna money from the taxpayer, so the Federal Reserve is gonna give people twice what securities are worth as a loan.

You know that since money doesn't come down trees, it eventually comes down to the taxpayer.

>> Bill Whalen: So, John, what will divided Congress end up doing here? Elizabeth Warren said the New York Times with an Op-ed saying it's time to re-regulate, but she's won vote in the Senate, whatever she comes up in the Senate, Republican House for shoot down.

So will we see anything coming out of Congress?

>> John Cochran: I don't know what they will do, it's hard to make the case, we need more than the hundreds of thousands of pages of rules we got, especially when this is so simple. Remember wonderful life when Jimmy Stewart's bank examiner comes in?

 

>> Carter: Carter bank examiner.

>> Uncle Billy: Mister Carter.

>> John Cochran: That guy could have figured this out, his undergraduate assistant could have figured this out. Now, it's possible that the rules are so complicated that they didn't let you see an elephant in the room here, but adding more rules is not the answer to that question.

 

>> Bill Whalen: Neil, what about the culture of Silicon Valley? One word to use for this is humbling, that here's a big swaggering bank takes venture capitalist money and it's collapsed, so, what does that say about the culture of technology?

>> Niall Ferguson: Well, I think there are a couple of things going on here, there's the crypto angle, there's something slightly surreal about the libertarian proponents of crypto currency screaming to be made whole by the FDIC.

But I think it's probably worth seeing this as part of a broad crisis in the tech sector. I mean, I think future financial historians will say things had been pretty ugly already in the tech sector in 2022, and one of the ways that they were ugly was. That a bank like Silicon Valley bank ended up with a pile of deposits from startups that really couldn't do much with the money and it couldn't do much with the money on the other side of the balance sheet because there was no lending to be done.

And therefore they somewhat foolishly parked it all in long term government bonds I think the crisis at this point is mainly a west coast crisis. The reason that I think the feds stepped in to make the uninsured creditors whole, however, was that there was quite a potential for contagion beyond the tech sector.

I'm still trying to work out why certain hedge fund managers were screaming for rescue through the weekend and I wondered if there was some kind of trade going on there because I think the exposure extended far beyond the depositors of Silicon Valley Bank. I think that if those companies that had money with the bank hadn't been able to make payroll today, there would have been quite significant consequences, to say nothing of the run on other banks that were heavily marked down in the markets today.

By the way, I don't think this crisis is over. Financial crises of this sort, if you think back to the 70s, the 80s, or indeed to 2008, 9 can actually play out over weeks, even months. This has been a pretty significant tightening of monetary policy that the Fed has done.

And as I said at the beginning of this discussion, many of us said at some point something will break. We just didn't know what it would be and I certainly can't claim to have foreseen that it would be Silicon Valley bank. But I think we have to remember that this thing has further to run and it's not clear to me that the measures that were taken over the weekend have fact staunch the crisis of confidence in a whole bunch of banks, of which Silicon Valley bank was only one.

So watch this space I don't think it's over.

>> H.R. McMaster: Can I just ask John if you agree with Neil's assessment that this could go on? I remember the chart in your blog where you showed that Silicon Valley bank was an outlier, at least in terms of the degree to which it invested in long term treasuries.

There are others in that sort of extreme category. Do you think its limited to the category of banks that overinvested in long term treasuries or do you think it could be broader?

>> John Cochran: Well, this particular question. So a big interest rate risk exposure unhedged, combined with lots of uninsured deposits who have an incentive to run, seems to be not something common to lots and lots of other banks.

But there is, as Niall will say so I'll once say there's something psychological about it. There's a general, you don't know and if our regulators could not spot this massive elephant in the room, who knows what's going on at the other banks. So this particular problem, from what I have seen, seems to be small but on the other hand, who knows what's out there and all it takes is people going, who knows?

Now, the fact that all deposits are now guaranteed, this astonishing fact, no matter how large you are, your deposits are guaranteed. That should help a lot in stemming additional runs, but now we'll see what else. Most banks are not primarily funded from deposits. Most banks are funded from wholesale money, from short term borrowing in markets that stuff is completely not guaranteed.

Those people could run in a moment if they're, so more banks are risky on that side as well.

>> Niall Ferguson: Final thing to add on this is, I think, by and large, although I haven't gone through this line by line in the wake of a banking crisis like this, it's very rare for the Federal Reserve to continue tightening monetary policy.

And that means that all those people who just a few days ago were saying the terminal rate for Fed funds would be 6.25 are radically retelling their story with the five handle or lower. And indeed, the markets are expecting rate cuts in the second half of the year.

So I think this represents a shift ultimately in monetary policy as well as in financial regulation and my sense is that that must, on balance be inflationary. This is not a number of people drew analogies with Paul Volcker and the failure of continental Illinois in 1984. They forget that was two years after Volcker had broken the back of inflation, whereas this thing is happening with inflation still at 6%.

We'll see what it is tomorrow and I think in that sense, for the Fed to blink now, that suggests to me that we're gonna have a longer lasting inflation problem than many people were assuming just a few weeks ago.

>> Bill Whalen: John, final thoughts.

>> John Cochran: Who knows what's gonna happen?

I agree with Niall, Bagehot said lend freely at a penalty rate somehow we went into the lend freely, but not the penalty rate part. So Neil's forecast that the Fed will probably stop raising rates and lower them, I think is correct, that they're gonna be worried. Niall's also right, Bear Stearns happened a long time before layman.

These things play out over time, and they only really turn into a crisis on the third, fourth and fifth one. Who knows what, maybe this is over, maybe this is, MF global went down and nobody seemed to care. So there's, there's certainly a lot more uncertainty about what will happen next and I absolutely agree with Neil on that one.

 

>> Bill Whalen: It's a good time to be blogging on economics and John Cochran's blog, if you're not familiar is called The Grumpy Economist by all means, check it out he has brilliant post already up on SVB. Gentlemen, one final segment, and last night, the Academy Awards. We talked about this a couple of days ago.

We all were interested in the plight of one movie and that was all quiet on the western front, which had a successful night. It walked away with 4 Oscars, best original score, best production design, best cinematography. Niall Ferguson pointing out what cinema graphic was great and best international feature.

It was not named best picture, but it was named best film at the British Film Academy Awards. Niall, I wanna turn to you, this is the second World War one movie up for a best picture in the last 3 years, 1917 being up for the award in 2020.

Niall, you wrote the book The Pity of War, which re examined the great War, the causes of it. You're someone who proudly wears a red poppy every fall in commemoration of the young men who lost their lives in that struggle. Is there something about World War I, Niall, that is particularly cinematic?

 

>> Niall Ferguson: Well, you might say it's almost the opposite. It's so horrific, that you're eye is in some ways glued to the horror. The western front had some of the ugliest warfare of all time. And this new version of all quiet on the western front depicts it very graphically and harrowingly.

And I think that explains why over a century after the event, filmmakers are still drawn to it. I thought it was a fantastic film technically, the cinematography's absolutely striking and I also thought that performance by the young central character, Felix Cameron, who plays Powell, The Central Figure in the book, was worthy of an Oscar.

It was a terrific and completely captivating performance. There were things about the film I didn't like so much. Compared with the original adaptation of the book, Lewis milestones black and white, all quiet, in which the characters are essentially Americans. I mean, they're played by American actors and they speak with American accents and I suspect that that earlier version therefore connects more powerfully with an American audience, and it ends up being a somewhat pro German account of the end of the war.

The thing that got me slightly was the way in which the French and German delegations in the armistice negotiations were portrayed. The French as supercilious and insufferable, the militarists and the Germans as civilians asking for humane treatment, it wasn't like that. And I thought that was off. There was also a very implausible final assault, which is what gets the hero killed.

I don't think that can have happened, it was impossible to motivate German soldiers to engage in those kinds of attacks. By the end, they'd basically gone and strike by late summer of 1918. But those are the kinds of things historians always say about films, no matter how good they are as a film, it's terrific, even if there's history, I have a few problems.

 

>> Bill Whalen: Let's hear from somebody who's actually been in combat, HR.

>> H.R. McMaster: Well, the movie is about the futility of World War I and the stalemate and the lack of sense of agency that soldiers and units had. And of course, anybody who has been exposed to the traumas of war, the inhumaneness of war, you could be potentially scarred by that experience or carry those difficult memories with them.

But I think what is actually most damaging to those who emerge from those harrowing experiences is a sense that they had no control over the events. And you see this with the detachment of the senior command, for example, senior command that is incompetent. That is willing to sacrifice soldiers lives for meaningless tactical gains, if even that, the vast carnage of the war.

You get a sense for the degree to which conscripted forces or volunteer forces, many of them in this case, were thrown into battle ill prepared, having not been trained adequately for combat. And I did think a little bit about just the importance of the psychological and the moral and ethical preparation of soldiers and units for combat.

There's important lessons there as well. I mean, that one scene in the crater where the protagonist stabs a French soldier and then laments the fact that he stabbed a relatively defenseless French soldier at that moment. And I think that it's important to preserve kind of a warrior ethos that is important to combat effectiveness.

But also, it is also what makes war less inhumane is the discipline, the professionalism of forces that fight as cohesive teams and expect ethical conduct from one another as well.

>> Bill Whalen: John.

>> John Cochran: Well, that was great. World War I is not cinematic, I disagree with your premise, and that's the whole point.

It was the unheroic war, very hard to make movies about it. We make movies about World War II and pretend that it was easy to be heroic. But I think it's important for people like me who did not have the privilege to serve, I've never seen what combat is like, to understand what war is.

Now, I'll grant HR's point, this was a bad war, an incompetently fought war, but nonetheless what we're seeing in modern cinematography. Private Ryan was very influential, to me, it's just some sense for normal people like us. This is what war is, this is what Ukrainians are suffering right now.

And one reason why I think we ought to get that over with quickly, but we need to understand that. And back to HR's point in the previous segment, one of the problems with military recruiting is that Stanford undergrads have no idea what war is, both positive and negative.

We don't live in a society where normal people serve their country in the military come back, and that that is a way towards a high status or a part of society. So it's walled off for most of us. So I think it's very important to see the ugly reality of what war is, whether fought well or fought poorly.

And I think that's one of the best things to just meditate on when you see this.

>> Niall Ferguson: Can I add something, John? This film, of course, came out at the time of the Russian invasion of Ukraine. And in some ways it was unfortunate that a German director should produce a version of the great anti war book.

I mean, all quite on the western front was one of the most powerful anti war books to come out of the interwar period. You might be forgiven for thinking the message of this film is just that war is bad. I don't think that's how a Ukrainian audience would see it.

I think from a Ukrainian vantage point, this is a film shot from the vantage point of the invaders. It is not shot from the vantage point of the French, whom we only really see very briefly towards the end. But remember, the French were fighting to defend their country from an invader that had occupied a very large part of it, just as the Russians have occupied a large part of Ukraine.

 

>> H.R. McMaster: And you get a sense of this with this tragedy at the very end, right, where two of the protagonists who had survived so much and seen so many of their buddies killed. They go to rob a farmhouse or to liberate a goose and some eggs to have a decent meal.

And German soldiers were starving toward the end of the war, in part because of a very successful blockade that the Allies had put in at the end of the war. And what happens is the farmer's son kills the main protagonist's best friend for having stolen from his farm, and you get a sense of the outrage of the French people and the younger generation.

And, of course, the grudge that they will hold against the Germans. And that will be magnified again after the reinvasion of France in June of 1940.

>> John Cochran: I don't think that's the message of all quiet on the Western front. I did have not seen the movie, I'm sorry to say, but it's about the tragedy and the dehumanizing effect of war on both sides.

These were young German conscripts who didn't know much of what they were going to, as the young French conscripts didn't. And yes, France was defending itself against inflation at that point. But remember, the way this started, plan Dixette was, let's get to Berlin before they get to Paris.

So it's not at that point, yes, but not entirely through the war. So I think the real message here is there is an awfulness to war. So let it, if we have to do it, let it be done well, as HR emphasizes and professionally, and with excellent civilian reasons for doing the war and excellent military commands.

And let us also remember how horrible it is if it goes badly.

>> Bill Whalen: Final question, we'll call it a day. HR, the most powerful war movie you've ever seen would be?

>> H.R. McMaster: My gosh. I mean, there's so many, it's hard to say, Bill. I mean, I like the Longest Day a lot.

I think that's great. I also like a bridge too far because it gets at intelligence failures and groupthink. And I love Gettysburg because of the role of contingency in battle and the actions that Buford takes at Seminary Ridge and his visualization of the battle. Gosh, I'll tell you, I think in general, though, war films don't do a good job of explaining the human dimension of war, of what motivates warriors, what animates their souls, why they fight and do what they do in combat.

I mean, there are a number of great war movies, but none of them really stands out in my mind above all others.

>> Bill Whalen: John, you mentioned Private Ryan, would that get your vote or do you have another film in mind?

>> John Cochran: I can't outdo HR on the review of all the many war movies.

I watch them with this interest of a civilian in just what is this, and what is this experience so vastly different from my everyday life, that's what I get out of it.

>> Bill Whalen: Okay, and Niall, your choice.

>> Niall Ferguson: Well, the movie that made the biggest impact on me when I was a boy was 633 Squadron, which is a film about World War II Royal Air Force pilot crews, who essentially are assigned an enormously dangerous mission, suffer tremendous casualties as a result, but carry out the mission successfully.

The last line of that film will always stay with me. The commanding officer watches the last surviving planes limp home and, lighting his pipe, utters the immortal line, you can't kill a squadron. And there's a tremendously powerful message there about the nature of military sacrifice and pursuit of an objective.

However, in later life, I saw one of the old time achievements of cinematography, which is the Soviet version of War and Peace. And if you've never seen that, you've missed out on some of the great battle scenes ever filmed where the director, Bondarchuk, had the entire Red Army at his disposal, and that's absolutely to be seen.

It's a wonderful adaptation of the greatest novel ever written, and it doesn't get seen by nearly enough people in the anglosphere.

>> Bill Whalen: Sounds good, well, gentlemen, we're going to leave it there. Thank you for a spirited conversation today for our loyal viewers. We'll be back later this month with a new episode.

On behalf of the good fellows, Niall Ferguson, John Cochran, H.R. McMaster, our guest today, Nick Eberstedt, we hope you enjoyed the show and we'll see you soon. Till then, take care. Thanks for watching.

>> Speaker 1: If you enjoyed this show and are interested in watching more content featuring HR McMaster, watch Battlegrounds, also available@hoover.org.