John Maxfield Uncovers the Hidden Dynamics Behind Banking Crises

John Maxfield 0:00
When you extend these datasets back to the beginning of the country, so like your population of banks, your failures, your mergers and acquisitions, your bank creation, all those things that you notice some really interesting patterns. And one of the interesting things you notice by going through the data is that there have been give or take 17,000 banks have failed since 1790, which was when George Washington gave his first inaugural address. Okay, there’s like, I don’t know 4600 4800 selling that FDIC insured institutions today. Okay. So just based off of those statistics, that gives you the incidence rate of failures, three and four times that of survival. Right. But then you take in, there’s a whole nother category of kind of like what has happened to bank banks as entities. And that is there’s 22,020 2000, mergers and acquisitions since the beginning of the United States.

Eric Chemi 0:57
Welcome to Wealthion, Eric Chemi. Recently, we’ve been having a lot of conversations about what higher interest rates mean for banks, and are they stable? And do you want your money in banks? Will they survive? We keep hearing about Silicon Valley Bank and a lot of our recent episodes, so I thought we need to bring in the actual banking expert to talk about this. What’s the likelihood of failures? What’s the likelihood of the strength of fiat money, continuing fractional leverage, reserve all of that? So we’ve got John Maxfield. Here, he’s been on Wealthion. Before he’s back again, he’s the the founder, the editor, wherever you call it write your Maxfield on bank substack I know you’re you were the editor in chief at bank director, that publication and an overall business there. And I think you’re still the senior banking specialist at Motley Fool in addition to many other things, maybe you’re the ultimate bank historian in the country. Right. Is that right, John?

John Maxfield 1:49
Yeah, I mean, I don’t know. Like, that doesn’t say much to my social life. But yeah, that’s that I guess I people have said that. I don’t know if that’s true. I don’t know how you gauge that type of thing. But, but I’ve read a few books about banking.

Eric Chemi 2:01
So you read a few books, some of them are there behind you over there. And one thing that that caught my attention we were talking before and you said, and I still don’t know if I understood this right? Or if I can believe it. I misunderstood. You said most banks in America historically have failed. Did I remember that? Right? Is that true? Because it doesn’t it can’t be possibly true?

John Maxfield 2:22
Yeah, no, that’s, that’s true. So if you look at just the data, and so I mean, one of the interesting things about banking is that of all the industries that you can study, banking is probably the one with the most comprehensive set of data that that anybody can access for all institutions, okay. But that data only goes back to like, really, that the comprehensiveness of it only goes back to the early 90s. So what you find is that not a lot of people have extended these datasets all the way back, kind of to the beginning of the country. Well, when you extend these datasets back to the beginning of the country, so like your population of banks, your failures, your mergers and acquisitions, your bank creation, all those things that you notice some really interesting patterns. And one of the interesting things that you notice by going through the data is that there have been give or take 17,000 banks that have failed, since 1790, which was when George Washington gave his first inaugural address, okay, there’s like, I don’t know what 40 648 or something like that FDIC insured institutions today. Okay. So just based off of those statistics, that gives you the accident rate of failure is three to four times that of survival, right? But then you take in, there’s a whole nother category of kind of like what has happened to bank banks as entities. That is, there’s 22,020 2000, mergers and acquisitions since the beginning of the United States. Probably, and this is this is a really rough guesstimate. But probably 5000 6000 of those were mergers in lieu of failure. So like a white knight type of situation. And so you add those together, and so then you’re up at like 22,000. So then your failure rate is five to six times greater. But then if you extend it out even more, and then you say, well, like Mergers Acquisitions, like those are, it’s the entities going extinct. So then you put up, then you’re at 40,000 institutions that have gone extinct, and less than 5000 that are in existence today. So what that means is that there are you know, the incidence rate of extinction is eight times that the incidence rate of survival. And so that’s why this is one of those things where it’s like, bankers don’t like to talk about failure. So I just taught a class to about 100 STUDENTS GRADUATE banking program. And one of the things I asked him I said, like, how many of you study failures in banking? Not a single one, raise their hand. So these are all senior executives at major banks. And it’s interesting because like when you’re concentrating failure, so great, like you think that that’s, that’s the first place to start when you study but, but unfortunately, that’s, that’s not how we’ve been doing so.

Eric Chemi 4:55
But are you the only person that realizes the failure rate is so high because It seems like in this world of cullet, post World War Two, post FDR, although the welfare state stuff, all the social banks that we’ve got FDIC, we’ve got the Fed, we’ve got the too big to fail, we make sure banks don’t fail. How much of the data is 1700s and 1800s? And this just doesn’t matter anymore. That’s what I’m curious about, what if that’s what the bias is of those people that you’re talking to? Or they think, okay, that used to happen, but that was pre Civil War.

John Maxfield 5:30
So I think I think you’re exactly right, Eric. But what they don’t realize is they don’t know what they’re talking about. Okay. And let me give you a very specific example, the very first banks that failed in this country were in 1809. Okay. And they were all based around a situation that was going on in Boston at the time. Okay. So the guy comes in, it’s the best of times in the economy, he decides he wants to build the tallest building in Boston. And at the time, Boston was the biggest, I don’t know if this or Philly, I guess was the biggest city in the country. I think the Boston was the second largest city in the country at the time, the New York was the third largest New York didn’t grow into what it grew into until the Erie Canal was completed, obviously, right. And so this guy decides he’s going to build the tallest building the first basically modern skyscraper in Boston, but it’s at the top of the cycle. So he puts all this money into it gets control of five different banks in different locations, one of the main one in Detroit, a couple of kind of in in Massachusetts, and the Berkshires area, and he gets to control these banks, and then has these banks finance this project, when this project is done, the cycle is already turned, so they can’t least this building up so the building defaults on these loans to all five of these banks, all five of those banks go under. So that’s the very first bankers in this country in 1809. Now you go back to like the financial crisis, you go back to the 1980s, you go back to any of these prices that we’ve had, what is one of the core reasons that banks fail, for that same exact reason people go, and they build these commercial buildings at the top of the cycle, the cycle turns, and it goes down. The point I’m trying to make is that you go if you take the most extreme examples, okay. Of those, you take the longest time period, take the oldest bank failures, and you compare them to the most recent papers, it’s the same thing, the same exact thing. So by not studying those, would that put you in a situation where you’re gonna step on the same rates that everybody else has been stepping on in the past?

Eric Chemi 7:17
That’s interesting, right? Because I’m sure people hear it and they think, Okay, well, but maybe these are small banks, right, that JPMorgan is not going to fail and Wells Fargo is not going to fail. Bank of America is not gonna fill in all the banks that I’ve heard of, are not going to fail. Is there a bias in? Okay, you mentioned the 17,000. But are these just tiny little mom and pop other than, you know, you get an SVP in there, but which we’ll get into? Are these the tiny mom and pop one location type of places?

John Maxfield 7:46
Yeah, a lot of them are certainly certainly a lot of them are. But these also include banks like Continental Illinois, okay. Continental Illinois is the sixth largest bank in the country without fail. It also includes Washington Mutual, Washington Mutual, also, coincidentally, was the sixth largest bank in the country when it failed. Includes a bank United States, which also was the sixth largest bank in the country when it failed in 1930. So like, this includes, this includes everybody, let me let me draw a finer point to this. So you go to the 1980s. Okay, there are two decades in banking that are like, the best way to think about themselves. They’re like beehives that have been agitated. There’s like these bees flying everywhere. It’s like, it’s there’s so much going on that you almost can’t figure it all out, right. And so the the 1920s in the 1980s, were kind of both those time periods, but you go to the 1980s. And one of the things you’ll find is that literally, every single one of the largest money center banks in this country, were insolvent, every single one of them, okay. And the reason that they were insolvent was because they’ve gotten it, they’ve been making loans to less developed countries in the 1980s, the global trade patterns of all switched in the 1980s, or the 1970s. And so then they’re dealing with this in the 1980s. And so they’re lending all this money to these these countries, these oil producer, these countries that need to be buying oil after the oil crisis in 1973 in 1979, because the price of oil to go way up all those countries that eventually defaulted on those on those loans. And so we have all of our major banks are sitting basically fail. Okay, but the regulators aren’t going to fail them because if you fail all your major banks in the country, you can imagine what you’re going to Yeah, another Great Depression type of situation. Right? So like, if JP Morgan campus, Citigroup, Campo Wells Fargo, Kansas, Bank of America cantos, Citigroup was the largest bank going into 2008. And it would have failed but for regulatory forbearance, and even in Citigroup’s case, you go back and tie like you can find multiple historical precedents for the exact same thing that they were doing. Let me give you just one more stat to like, kind of draw find a point to this like, instead, they’re going to sit what let’s call it 22,000 bank failure since the beginning of this country, there’s literally Eric only about a dozen reasons that banks fail. Okay, so what that means is that That, for every bank that fails today, there could be as many as 1000 or 2000 banks that fail for the exact same reason in the past. But we’re not using that wisdom that’s locked in banking. To to avoid that in the future, and there are reasons for that, and we’ll talk about that. But, but it’s an important insight for bankers their boot to appreciate,

Eric Chemi 10:20
What are the 12 reasons and I don’t know, you might have some screens, you can share us, you can show us or we can talk through. But I’m curious if you’re saying there’s only 12 reasons, you’ve got a very specific, I guess, the post mortem autopsy on what happened to these banks.

John Maxfield 10:34
Think about what a bank is, okay, a bank is not nothing more than a leverage highly leveraged fund. Okay. And it’s, it’s leveraged, it’s not just the amount of leverage that banks use, because your typical bank nowadays is leverage 10x Right there $10 of debt, or $1. Equity, used to be 20. Sometimes it was 40, we Lehman went down their leverage 40x Ray. So the 10x leverage is a lot of leverage, that means that just on that alone, the value of your assets decreased by 10%, which happens all the time, right, and the cycles, the value of your assets to create, you’re totally insolvent. But there’s an even bigger problem with banking. And that is not just the quantity of leverage that you’re using. It’s also the type of leverage that you’re using. And so your typical bank doesn’t hear most of their financing comes from deposits, right. And where deposits deposits are callable funds. They’re immediately callable. Right. So if there’s anything that gets out there about these banks, any bad news, and depositors catch wind of that, I mean, your liquidity dries up, we saw this with some of our bank, we saw the First Republic we saw was silvergate we saw was signature, I mean, your liquidity can dry up a little bit, first post a $70 billion in a day. Okay, and so like, so you have to, you have to go into banking to depreciating how fragile these institutions are by nature, design, and we want them to be like that. And that’s all that credit, all that leverage is the reason our economy grows the way our economy grows, right? So so that’s kind of the the fundamental foundation needed to depreciate going into this. So now, you say, okay, so what are the mistakes of these banks, these banks make? Well, it’s basically up to reduce it. It’s all about chasing returns, imprudently. So you can chase returns and prudently in a variety of different ways. You can do it by cutting your credit standards on your loans. And so commercial real estate tends to be the, if you’re looking at all the failures in the history of the United States, I would guess that real estate is probably responsible for 70% of it, okay. And there’s different mistakes you can make in commercial real estate, you can go out of your market, and you can land in markets that you don’t know anything about. So that’s a big mistake that you can make. You can do, if you’re in CNI lending, one of the mistakes they make is that they’re not doing the proper cash flow analysis. You can do things like you can do the same thing with securities portfolio that you’re doing your loan portfolio, so you can go out and buy securities that have a higher yield, but higher risk, and just think that you can skate through the cycle. And sometimes you can, but if you get caught, you can, you can take duration risk. You can like that’s what Silicon Valley did. That’s the first republic did. You can do fraud, insider abuse, a huge, huge aspect of bank failures ended up coming like natural disasters, there were blizzards in Kansas that a bunch of banks failed after there’s a huge hurricane in Florida 1926 that a bunch of banks failed after there’s like the the earthquake in San Francisco in 1906. Like, so then you have the natural disasters element. And then there’s another element that that banks are particularly prone to. And that is interference by the government or changes in the regulatory system that causes banks to do things that are imprudent. Let me give you an example. In the early 1980s, so in 1970s, when oil prices that oil prices caused the price of oil is shoot way up as a result of a an embargo on exports of oil out of OPEC countries to the United States as a result of our support of Israel in the war. Well, that caused the you know, the inflation to shoot up, which caused the Federal Reserve to jack up interest rates when they jack up interest rates that could thrifts or savings and loans into a situation where they’re earning 30 or 8% on their book of a fixed rate mortgages, but they’re paying 18% on their deposits to finance with mortgages to expect that doesn’t work. So then the Congress comes in and changes the law. And they say okay, thrifts it or savings and loans can go invest in anything. It’s not just more than to take an investment care, they can have a commercial real estate, they can invest in junk bonds, all sorts of stuff. So then these banks that are kind of underwater, they didn’t try to like get back into the game by doing these totally irresponsible things by investing in things that have higher yields. And so that was a response. Another example of this is In the 1980s, when the 90s I mean, it was such a, like a wasteland for banking, so many banks fail. And the policymakers, the regulators, just like just looking anywhere for solutions to this. And one of the things that they said was like, Look, if we let these big thrifts fail, like our, the FDIC Deposit Insurance Fund is just going to be gone like tomorrow. So what’s an alternative? Well, let’s let them merge together, these these troubled institutions merged together. And then what we’ll do is the the purchasing organization, the purchasing entity, will give them the, you know, back to pay premium to buy this thing. That premium is then reflected in goodwill on your balance sheet, which is an intangible asset. So what the regulator’s did is they said, Well, anyone who goes and tries to save another institution, by acquiring them, that goodwill that goes onto your balance sheet as a result of the premium on the purchase price, you can count that as regulatory capital. Okay, that’s a that’s a, that’s a big deal in banking. So that’s the right what the regulator’s said, in 1987, the Congress comes out and change the law. They say, Now, you can’t use that as regulatory capital. So all these all these threats, just like immediately collapsed, as a result of that change in the law. And then the Supreme Court, the years later, came back and said, the government can’t do that. But by then the story has already written. So that kind of covers those kinds of general topics cover kind of the the universe of bank failures.

Eric Chemi 16:29
There’s a lot, there’s a lot to ponder there is, on one hand, I’m thinking why would Congress just immediately change law, knowing that all these banks would collapse, immediately? Knowing that, will we let them do this so that we could prevent them from collapsing? Right? We knew they were going to collapse. So we said, Okay, you probably shouldn’t count as regulatory capital. So just do it. Because we’re trying to encourage you to buy those other banks, so that you can all stay in business. I get that even though we might see that improvement, but at least it keeps going longer. Why would they come in and just say, No, nevermind, you’re done.

John Maxfield 17:02
I think that I think that, you know, everybody’s playing a slightly different game in this world. Do you know what I mean? Like everyone’s playing slightly different game. The regulator’s playing a different game than than the policymakers in Congress, right? policymaking in Congress come in this is late in the decade, right. So we’re starting to get we’ve started to move through some of these issues. And they probably, you know, there’s nothing that right that that politicians like more than slamming on bankers in the wake of a financial crisis, whether it regardless of what policy and what role policymakers would have played in it, United me. And so like, it’s just, it’s just a popular thing for, for politicians to do. And so they just kind of just kind of a part of that. But yeah, I mean, it’s curious that, that they will do that. But the thing is, that’s what happened is the case of a called win trust cases. And what the supreme court basically said is that the government cannot give, and then just take away, you know, what I mean, you got to choose, you’re gonna give when you give, you’re gonna take away the note given the first place.

Eric Chemi 18:01
Right, right. So I, it reminds me of everything you’re saying reminds me of Silicon Valley Bank as the main right? No, you mentioned the other ones, but that one, for some, you know, has the big brand name of the big failure. And a lot of people say, This is what happens when the Fed raises rates, banks can’t handle it, but only a couple of banks failed out of 1000s that we currently have. So is it this is the Feds fault? Or is this the bank’s fault? If you can’t handle 5% rates, but 1000s of other banks can? Whose fault is that? Because a conversation we’re having a lot of times is, oh, well, the Feds not gonna be able to keep rates higher, because banks will go out of business, but whose fault is it really?

John Maxfield 18:39
So this is how I would answer that question. It’s nobody’s fault. Okay, it’s just like, a cheap way to answer that question. But let me explain. This is this is a function of how the system works. Okay? Like this, the banks that failed this year. So how they always felt, it’s always a system, as always a product of how the system works. So let me explain. So why did Silicon Valley fail? The simple, simple, they just wait much the past, they know what to do with them. They did stupid stuff. And the stupid stuff that you know that more stuff that like Eric, and you and I run in that bank can easily see us do master the anatomy, like it’s the mistake that they made was was an easy mistake to make. But one of the things one of the things you learn when you go back to history banking is what is the primary constraint that a typical business face the typical business, the primary constraint they face is scarcity. Scarcity, demand, scarcity, Spy scarcity, real estate, scarcity, labor, right scarcity, scarcity, scarcity is all about like, who is dealing the best with scarcity that that’s your typical business. That’s, that’s that’s the key. Banking is completely opposite. It’s completely opposite. Okay? A lot of people will compare banks like retail like a bank is nothing more than like a shoe store. But instead of buying and selling shoes, here’s buying and selling money, right, same exact concept. You buy money cheap from depositors, you sell it to your deposit All right, same thing at the shoe store. The problem is that when you think about it like that, you don’t realize that the the gravitational forces in the banking industry are diametrically opposed to the gravitational forces in business. Like, they, here’s the best way to think about it. Your typical business is like on planet Earth, where gravity is pulling you down, holding you down. So all of your effort is, is on getting up off the ground, right? All of the efforts on that, in banking is the exact opposite, you’re on the moon with gravitational forces are totally different. All of your energy has got to be staying on the ground. And that’s why when they talk about banking, like, you know, it’s one of the things that upsets people about banking, but it’s an important aspect of it, like saying no is so much more important than banking and saying yes, and it’s for those reasons, because of the gravitational forces are different.

Eric Chemi 20:48
So when you look at that, then what do you foresee in terms of bank failures, either companies, sectors, parts of the country sizes? What what are you forecasting now that we’ve gone through bank failures keep happening, they will continue to happen. But, you know, we saw in the last 12 months, and we have these higher interest rates. So what are you looking at? What are you predicting?

John Maxfield 21:12
Okay, so, so I’m not in the business of predictions, that’s important to appreciate. Okay, like, I don’t, I am not somebody who believes that you that you can make predictions in a systematic way that is anything beyond just like blood, okay. But you can you can get a sense for kind of what the things are going to happen in the industry, you just don’t know when exactly. So let me talk through how the system works. And then then that’ll kind of answer your question. In a kind of a roundabout way, but but in a more kind of fundamental way. So if you go back to the beginning of time in banking, so this the the screen I’m showing right now, this is a chart of the bank population in the United States, going back to the very beginning. And charts like this, I mean, data like I mean, it takes like, I’m just like, hundreds of hours. I mean, God only knows how long I spent, like just aggregating this data, going back to the beginning.

Eric Chemi 22:04
Do you draw these charts yourself, the font, it looks good, it’s got that cool, artsy, informal vibe to it.

John Maxfield 22:11
I’m just being a total dork. Yeah, I mean, just like, the I do these myself, but like, I taught myself, yeah, the I did this. So at the beginning of 2022, I sat down and I said, I’ve been studying banking for 14 years at that point, I think 2020. Yeah, about 14 years at that point. And when I first started studying banking, like, I don’t, literally since I was like five years old, I’ve like spent my life just doing subject matter by subject matter, and then intellectually kind of conquering them. And the way that I know that I’ve gotten to that point is when I can reduce the subject matter to a robust fundamental principle that that is robust enough to explain everything that happens, okay. And that takes a long time to dig down to the essence of something.

Eric Chemi 22:54
What’s an example? What’s an example of one that you did prior to banking.

John Maxfield 22:58
Geopolitics, pile to mountaineering, maritime disasters, and then he knocked on, like, certain aspects of certain areas in history, or certain places in history, you know, I’ve gone through like African history of anti Asian history, I’ve gone through like all these, you know, history, geopolitics, all sorts of religion, I spent, I went to law school, and once I figured out how law school work, you don’t have to study as much as you think you do. And so I spent like, an entire semester studying the existence of God, like, like, trying to settle that in my head, like, physics, all sorts of stuff. So when I got to banking, I thought like, this isn’t going to take very long because banking is a complicated,

Eric Chemi 23:38
it’s good deposits and loans, like what else is there? Yeah,

John Maxfield 23:41
it’s like, what else is there? You know, I mean, my family, we grew up investing in banks and private banks and capitalizing banks. And so I know bankers. I have like, you know, not a complicated, but 14 years later, I thought that it takes six months or a year, based on like, all the other things I’ve studied and seen a 14 years later, I was like, Why haven’t I been able to do this? And by that point, I knew personally, like, all, most of the top banks in this country,

Eric Chemi 24:07
Wait so you figure out if God exists, or not quicker than you can figure out what’s going on with banks. Yeah,

John Maxfield 24:12
well, I figured that I didn’t know that’s where I’m in that situation. I just realized I didn’t I put there’s no way I could, like, logically, you have to make a leap of faith. You know, this is where you get you get to the place where you’re like, Oh, I would have known that common sense would have told me where I spent six months studying, you know, but yeah, and I realized that like, there’s no way that I just the way my brain processes information, there’s no way it would it like I can make that I can get over that.

Eric Chemi 24:37
Finally, the geopolitics seems much more complex than banking. It

John Maxfield 24:42
is. But it’s also when you reduce these things to their essence are also quite simple. geopolitics is all about what control over or access to natural resources.

Unknown Speaker 24:53
That’s it. Yeah,

John Maxfield 24:54
that’s what that’s that’s my interpretation of what God uses to have high altitude mountain air well Just how to the death rate, the mortality rate and how to run hearings is, is quite high. Because you’re in it, you’re in a situation where like, life is eroded every minute, you’re up there, right? So like, what is the thing that allows the folks to survive versus the ones not striving? It’s being cognizant of, and responding to your instincts can your instinctual feelings, like if you think it’s too late in the data store, then don’t start? Do you not I mean, and so I think that with banking, and I couldn’t figure it out, and so like a beginning of 2022, I said, I’m gonna get myself one year to figure this out. If I can’t figure it out, by that point, I’m going to move on to something else. And you’re still here. I’m still here. And so what I said is, I’ll give myself 18 hours a day, for every single day, all basketball, allow myself for three or six, five days, give myself one hour to play pass on my 11 year old twin boys. And that was the only kind of like brief that I gave myself. I started in 1790. And I read contemporary materials all the way through today, the thought process being that if I do this, I will know I will have more in my head that’s accessible at any particular point in time that anyone ever before. And that will allow me to then see the pieces in my head and then move them around and the places where I need to move them to see that see what I was missing. And if I can find what I was missing, then I fix that, then I’ll like, I’ll be able to do what I need to do, you know, reduce it. So typically about three months to find the thing that I was missing. When I found a fix it now I was able to reduce banking to 10 stitches essence. So what was that thing? Okay, this is gonna sound academic, but it’s incredibly, incredibly important. And the real world implications are quite significant. So the thing I’m showing right now is this just a chart of the population, American banks going back to the beginning, the number one is the total number of banks in the country that exist at any particular point in time. Exactly. And what and then overlaid on top of this is this thing called periodization. And periodization, is when you take a historical subject matter and you break, break it down into eras, you do that like, again, that’s not academic, but in a subject matter, like banking, or the history is like, it’s the same thing going all the way back to the beginning. So hundreds of years 10s of 1000s of institutions, wars, all these things going on going on off gold standard, all these things, but the only way to distill a subject matter like that is to reduce it down into errors, that then like this, there’s the mat. Okay, well, so the way that the scholars have broken this down in the past by the presence or absence of a central bank like authority, that’s how I define how they broke the presence or absence of central bank life authority. And that’s how it broke down into four different eras. Okay, first, Eric goes from 7091 1837, Second Era 37 to 1863, and 86 to 9013. And then at 13, all the way through to today. Well, you look at this chart, you say like, what’s the problem with this? The problem is that you look at that 1913 line. It doesn’t explain anything. Right? See that? It doesn’t explain it,

Eric Chemi 27:57
because it keeps going up. And then it only goes down way after that. It’s like a

John Maxfield 28:01
train that’s used, like the train doesn’t slow down to the station, it certainly doesn’t stop at the station. It’s like it’s picks up one of those mail bags and just barrels through, right, just like it just doesn’t care that like the train of history doesn’t care about this thing that they’re saying was the big deal. Right? Because this is the most simple chart banking, the number of institutions and the most simple chart banking, if how you break it down doesn’t correspond to the data. You got a problem.

Eric Chemi 28:28
Oh, I see. This is not your periodization This is conventional wisdoms. This is

John Maxfield 28:32
the scholars periodization. Okay. So once I, and I have these data sets for all these elements, and so I put all these datasets together, and I layered the periodization on top. And that’s our list of the periodization of all. So why does the periodization right, for I’m not an academic and that we’re all I’m not a theory guy. I’m just like, I’m like I have really good bankers be really good bankers. Like these guys need, like more than theory they need like, practical stuff. Well, here’s why it matters. So it’s like, let’s say you have a huge pile of Legos in the middle of your living room. If

Eric Chemi 29:05
you step on them, and they hurt your feet and the whole thing. Yeah, yeah.

John Maxfield 29:08
And then you want to, like don’t pay for your kids college and stuff like that. I mean, there’s some success, significant consequences for that, you know, but, um, but it’s like, let’s say you have a huge pile of Legos in the middle of your living room. And they’re like, the pirate pieces, and the castle pieces and the Star Wars piece, and they’re all mixed together. And then someone comes up to you says, Eric, build me a castle. And you’re like, well, it’s gonna take me a long time to sort out Castle pieces, as opposed to get the, the pieces are already sorted appropriately. Like, yeah, I’m just gonna build the castle piece, right? Yeah, I’ll just there’s the castle pieces right there. You know what I mean? When the problem is that, like, when you have this, you have the periodization wrong, you have a big pile of Legos that are intermixed, right? So you can’t make use of the data because that’s what makes sense. Right? It’s sorted wrong. Right? And so that’s why when you talk about like when I was like in my classes, like competing with study, there’s not it’s like there’s because it’s so arduous to go through an order all this stuff because everybody’s got to do it on their own because the Scott, it wasn’t done correctly.

Eric Chemi 30:04
But you could say, when you look at this, you could say, okay, in that yellow area, it peaks then it starts to go down when the the pink comes up, and it goes up when the purple comes up. So you could say, you know, okay, maybe the real issue is what happened there in 1930, and then the peak in 1980s. And then you can make a question for, but is BenQ population, even the thing that matters? Is that the thing that we care about?

John Maxfield 30:30
No, it’s one of the things right, because it’s a product of all of these other things. Creation, don’t creation is the thing that matters, this being creation creates credit, which creates grow, right? That’s captured that ultimately reduces to the population, right? failures, failures impact population, do you know what I mean? So like, you want to understand, like, if you want to understand subject matter, you have to understand the shapes the purpose, you have to understand the shapes the curves. And if you don’t send a shift to the curve, and you don’t understand the thing, you know, what I mean? So the question is, how do you redo the periodization. So it accounts for these curves that explains these curves. And here is here is, this is how I think, like, my confidence level in this time, and I’ve studied this long time, and in a serious way, like, this is how I believe the characterization looks like. So what you see is, see, it’s that big chunk in the middle, that’s a really important one, right? Because you got to explain that up, up for the dome, and the down for the dome, you can’t just explain one part of it, these things are cycles, you got to take the whole thing, and you got to capture all the cycles, you know, to me. So this is this is how this is how I think it needs it should be broken down. And so what is the thing that breaks that it causes one air to switch to another word air, that’s really important, because in periodization, it’s got to be the same thing, it’s gonna be the same thing that breaks down from one year to another, and then subsequently, when when the SEC that next era changes to the air after that, it’s gonna be the same thing. Okay. So presence or absence of a central bank authority, like authority is what the scholars that what you realize is that what the true thing that explains these curves is what I call novel liquidity flows. Okay? Novel liquidity flows is when so novel means new liquidity is basically just money flows is obviously the verb, right? It’s flowing, when a ton of money, new liquidity and novel credit comes into the system, or leaves the system that starts the series of events that can last as long as 100 years. Let me give you an example. So you see that big, you see that big that the big build up there that kind of looks like the dome of that that Florence cathedral, right? What caused that? That big bump, right, there was a product of the birth of disposable income, which is here in the United States. Okay, so 1884, the average American have $4 on deposit. Okay, so you just got for inflation with 27 bucks today.

Eric Chemi 32:58
That’s nothing, right? four bucks. Yeah.

John Maxfield 33:01
What you had is, then you have wars in Europe, you have a trade at the change in the global trade patterns. And we the United States goes from basically a century of deficits to basically a century of surpluses. Okay. And when you have legal from a big deficit to big surplus and a huge economy, just imagine the torrent of money that you’re turning around, right? So all this money floods into the United States, and where does that money go? That goes to because of the American Industrial Revolution. So you have all these workers that are being empowered, and they’re making all this money, so that money is flowing into consumer banking accounts. So all this money flows into consumer bank accounts, and then all these banks are like, whoa, like we arbitrage money, like, we want to go get control of that. And so that set into motion, like all these things in house, and then all you have all these banks sitting on all of this money, and there’s paying interest on the money. The question is like, what are they going to do to like, make an economically viable situation for them, where they can invest that money. And so that caused them because they have so much stuff? They have so much money to invest? They’re just like, do you do stupid stuff, but it just burns holes in your pocket. And so that’s what we saw. That’s what we saw here. So that peaks peaks in 1921. And then it just craters for the 1920s. You have about 1000 bank failures a year. And then of course, you hit the Great Depression, and then you go to as many as I think they’re two to 3000 a year, I think, in 1933, I think was the worst year. So what’s going on there? What’s going on? There’s you have all this money floods in and it puts the whole system out of equilibrium. Okay, because you have money and you have goods and services. And so the question is, how do you get these things back into equilibrium? Right? Well, you can increase your goods and services because they’re fixed for the most part, and you can increase them over time, but it’s slow, right? So what’s the way you get back into equilibrium? You destroy liquidity. You destroy liquidity. That’s how you get it back into system. How do you destroy liquidity? Well, the most effective liquidity destruction event is a bank failure. It just it just cleans out that liquidity. Another effect of liquidity destruction of it is a stock market crash, because you’re sucking all that liquidity out of system. So you’re moving it back. You’re in chunks, you’re moving it back into equilibrium. Right. And so you saw so now let’s talk about what happened this year. When March what happens Coronavirus? The government comes in. So annualized GDP falls by 30%, which is greater than the great depression at the beginning Great Depression, right? Policymakers come in to say, this is a frickin disaster as they should have, right? That’s the right response. So they just put, they just give everything to it. I mean, there’s bonds to this crisis compared to the financial crisis of 2008. I mean, it’s like magnitudes larger, say, flood all this liquidity into the system, where does that liquidity go? It goes to banks, but where it specifically with banks, because the banks are on the cutting edge of the stuff that is most speculative? Because when in this type of market, that’s where it goes, your VC market, all that kind of stuff. And who’s doing your VC your your your cryptocurrency, who’s doing cryptocurrency? VC silvergate Silicon Valley, rice signature, right? So all this money flooding into these banks in particular, here’s an index of deposits for this is Silicon Valley Bank, versus the index of deposits for the industry overall. You see how little the industry changed. See that in the dark blue on the bottom? See, deposits in the industry did go up as a result of Coronavirus, but nothing like the what Silicon Valley,

Eric Chemi 36:26
right? This is just the last couple years that big spike is 2020. Yeah, that’s right.

John Maxfield 36:30
They were sitting on the end of 2019. They were sitting on $60 billion in deposits 18 months later, there are 190 billion

Eric Chemi 36:39
it suggest, though, that the government gave away too much money for COVID. Right, we’re seeing with the inflation that suggests that the response, like said magnitude is bigger than the recession was unnecessarily large, right? Like when this is a chart of a, we don’t need to put more money into speculative VC kind of stuff, when we were just trying to get you back to work from COVID. Right. It seemed like too much money was put back in

John Maxfield 37:02
you. Yes. In hindsight, yes. But of course, hindsight biases, wherever, wherever the thing is 2020 2020. But like, it’s certainly it gives you puts you in an advantageous position in terms of like judging a decision made in the past. But when you’re making the decision at the time, and you’re looking at a 30% annualized GDP decline? I mean, it Yeah. are a few bank failures this year bad. Yeah, I mean, whatever, you know, it, but it’s a hell of a lot better than great pressure. Right? You don’t need to like we can we can criticize what they did. And certainly they made mistakes, and everybody makes mistakes, because we’re all human, and we’re all prone to that. But it’s it’s a hell of a lot better than the mistake that could have made have not done it. You know what I mean?

Eric Chemi 37:43
So, so we’re looking at these charts. And I know you’re not making predictions, but what do you foresee, then, kind of going forward? And what does the historical pattern tell you? Because when you go back to that other chart with your periodization, we’re seeing this shrinkage of the number of banks over the last couple of years, the one that that one, that yellow chunk, that’s a downward line here, the most recent yellow chunk? Yeah,

John Maxfield 38:05
well, so what this allows us to do is, is this allows us to do a number of things, to resort to data, which is a project I’m working on with some business partners, and we’re we’re, we have an idea, we’re going to basically make a LexisNexis advantage because you get the Lexus, you’ve used LexisNexis. Alright, well, if you don’t use it in law, in a really effective way, and efficient way to make really, really accurate decisions, it’s a different type of decision making paradigm that you think you need apply decision by analogy. Well, you only we can tap into decision by analogy is to be having analogies readily at hand. And we didn’t have the analogies ready to hand because there’s all sorts of incorrectly, right now that we sorted to correct. But you can go through all the failures and go through all the success analogues, and you can sort the data correctly. And then you can help to address you can help to address these issues. But what this allows us to do is, once you realize what you focus in on the fact that it is not the presence or absence of a central bank like authority that causes big change in the industry, but instead these novel liquidity flows, that allows you to understand where we’re at today,

Eric Chemi 39:03
you got to repeat that. It’s not about the central bank. It’s about these. It’s the liquidity flows. I think what you said, is so important that it’s it merits repeating.

John Maxfield 39:12
Yeah, so let’s see. Yeah. So again, the thing that causes the big, the big waves, there’s big waves in the little waves, right? In any sort of industry cycles, right? And the thing that causes the big waves in the banking industry are novel liquidity flows. So liquidity coming into the system, and it can come in two different ways. It can come in from another system or like a geyser from the Federal Reserve, right? So the Federal Reserve does play a role in that. Right, but it’s not the only way that that that liquidity surge can come about. So then they say, Okay, well, where are we today? Right? Where are we today? And this is why this is where it gets to be where it matters for if you’re actually running a bank. What this allows us to do is say like, oh, that thing that happened in 2020 wasn’t just some like, random thing that’s gonna like go away. This, we’re gonna live with this for 50 years, probably, I mean, we’re going to be, we got to wrap it up, we have to burn it, it’ll take 50 years, 6070 years, that cycle between 1879 97, it was nearly a century. That’s how long it takes to burn off that wood that it can take burn off that will burn off liquidity. And so like, this puts us in a situation where we know we’re back at the top, this thing is back and fully loaded again. And so we know what’s going down. And so in an industry like banking, where the it’s basically a war of attrition, and just surviving is winning to a certain extent, right, because you’re just automatically gaining market share, you’re surviving, and everyone else is going on, right? Like it, it focuses your you on acting prudently, and not taking risk at the wrong time. Because we know it’s loaded into the system right now. Now it’s about behaving, and it is getting to the next shot. You know what I mean? You get the next shock, they’ll drop you more banks, like you’ll get more share. Like, that’s what banking is all about. And that’s one of the reasons that this is so helpful, because he realized like this, we’re out, right?

Eric Chemi 41:04
This makes me think about one of the guests we had on recently talking about, you gotta get your money out of banks, you know, m two is dropping, people are giving up on French fractional reserve banking, they’re going into treasuries, they don’t feel it’s as safe as it used to be. I see you shaking your head. Yeah.

John Maxfield 41:24
And like, you hear that stuff? I mean, you have to understand, like, I’ve read like 7090 becoming to today. I’ve heard this argument when he times throughout history made, and it’s never comes to fruition. And people are always saying banks have debt. They’re always saying banks are debt, right? They’re always saying there’s going to be some sort of like, new system for financial intermediation. Like, it just has never come true. You know, Morgan, you need no more than house. Good buddy. You wrote, this book is my latest book. Oh, let me give it a pitch actually. Because his mortgage is like one of the he’s one of the finest writers in America right now, not just finance. He wrote this book, his latest book is same as ever. Okay. And what Morgan is it kind of goes to the point that Jeff Bezos makes that like, in Warren Buffett makes the same point. It’s everybody’s focused on what changes? But like, why not focus on the things that don’t change? Right? Because the things that don’t change are just as important as the things that change. Right? That’s kind of the message with bankers and I talk about this a lot with bankers, I’m talking about in the context of innovate innovation. Good. What does everybody say about banking today? innovator, dot, innovator, dot, innovator dot, right? What’s the purpose of that saying? The purpose of saying that is to hijack the decision making process of a banker, take it over with fear, right? And then maybe have them make irresponsible decisions to invest in your FinTech or whatever. Do you know what I mean? But you go back to the history, and you don’t you find I have, I’ve gone to 1000s of bank failures, Eric, and I haven’t found a single one. That was the result of a bank because it didn’t innovate. Not a single one. Okay. But I’ve found a lot of them. A lot of them have banks that got out ahead of themselves and innovation and failed as a result of that. And so it’s in die. Yeah, they innovate and die easy. Yes, that’s exactly right, in banking, because the margin for error are so slim, when Washington Mutual failed. And in October 2008, the biggest bank in the United States is not performing loan ratio was three and a half percent. That means it got 96 and a half percent on its test, and it didn’t get a beat and failed. That’s how slim your margins for error are in this industry. Right? And so if you’re allowing fear to make the decisions as opposed to rationality, that’s where it’s going to take you, right. But like, there’s all these beliefs in banking, that you go back through time, and you realize, Oh, this isn’t accurate. Let me give you another example. After every crisis, what does everybody say? banks need more capital? Banks, they’re giving up on fractional reserve lending, they need more capital, that kind of stuff, right? Again, you go back through time. Like, I rarely rarely does a sock a dozen insolvent banks fail. Most banks that fail are solvent. How

Eric Chemi 44:11
does that work? The insolvent bank doesn’t fail? Or isn’t the of the banks that fail? Most of them were solvents? That’s it.

John Maxfield 44:19
Most of them are solid. Yeah. Yeah, nothing to do with capital. It has nothing to do with capital. I was just reading, like, all the books are saying all the old say he did vaccine recap for me. So they’re basically saying that if you go from 11%, capital, to 12% capital, that somehow that’s going to save a bank that’s making bad loans. When you have a when you have like that this big pile, that huge pile of loans and pile of equity and you’re going to add 1% of equity. That doesn’t make any difference. Right? Doesn’t make any difference. So could

Eric Chemi 44:49
you go down to 1% that instead of 11%? Like,

John Maxfield 44:52
I mean, you go down? That would make that honestly, we don’t want to make that big of a difference. If you’re doing stupid stuff with your assets. In your asset, but you’re doing stupid stuff in your asset. You don’t say like, like, you just can’t do stupid stuff here on the set, but it’s not how much capital you because if you do as if you didn’t know amount of capital in the world is gonna save Washington Mutual raised $9 billion, like just a few months before they fail, they were the highest they were the best capitalized a big bank in the country, that higher capital ratio than JP Morgan in fact Appalachian was a compilation Bank of America. It just capital has nothing to do it. I mean, that’s that’s a slight overstatement. But like, that’s, if you’re gonna think that’s where you should think and then backed up from there not think that capital helps and to go that way? You know, you got to go the other way.

Eric Chemi 45:41
So what about people watching that are concerned? Like you said it could take 60 years for this liquidity to unwind itself, and they don’t want to be a depositor at the next. Washington Mutual. They don’t want to be deposited with the next first republic, or a Silicon Valley Bank, where how do they make these decisions? Where should they put their money? If they say, Okay, I trust banking in general, but I don’t know if I trust my bank.

John Maxfield 46:04
Who cares? That’s what Federal Deposit Insurance is for.

Eric Chemi 46:08
But only up to that only up to that limit? No,

John Maxfield 46:11
that’s not true. That’s that’s not the case. They typically that FDIC will will insure all deposits of these banks. And that’s exactly what they did was still valid. If you think about how that weekend went down. They lost all that money in that runoff. Right. So Goldman Sachs that that often didn’t go right, right? And so then they often doesn’t know. Right? So that scares the that scares people and hit folks right in the VC world. So they then run on the bank on Friday, the FDIC comes in and seizes it, what does the FDIC says we’re not going to insure the uninsured deposits? And then what what does that cause that causes a cascade of potential runs on all of these other banks. So then on Sunday, that Sunday, what are the what is the FDIC commanded? And the Fed come in? And do they insure all deposits? So they stop all that stuff? And so you see this with each crisis? Like, you’ll see them doing the same exact thing. If

Eric Chemi 47:05
they insure all deposits, then doesn’t just go back to what we saw in OA, where everyone hates the bankers, because they make millions of dollars, but there’s no downside. They get all the upside. And we the taxpayers cover their downside. So in reality, go do stupid stuff. Go take risks, go do VC, go do crazy things. Like you said, it’s people making bad decisions, but the government is going to backstop you and no one’s going to jail anyway.

John Maxfield 47:30
So the thought that bankers should be perfect people rest policemen and plumbers and lawn men, lawn people and teachers and then they can all have laws, but bankers can’t have doesn’t. This is not bankers are

Eric Chemi 47:47
humans. But no one bails out. No one bails out the other guys.

John Maxfield 47:50
That’s not true. I mean, like Chrysler has been bailed out that the auto me the auto industry was just build it out in the last year. I mean, like, oh, we bailed out Locky marketing time. I mean, like, oh, no, bailouts happen all the time in all in a bunch of different industries. Banking is slightly different, because banking is you’re dealing with the money supply. And so like, that’s the government’s province. And so you’re gonna have a lot more involvement in the banking industry. And just because like, the leverage that’s used, there’s more opportunities, there’s more opportunities for the government to come in and bail out these companies. But this happens, this is industry agnostic, that type of thing is industry agnostic.

Eric Chemi 48:24
But the people who just feel like, Hey, I’m a normal employee, I’m a, I’m a plumber, I’m a small business person, if I screw up, I’m out of business, right? Or if I, you know, I’ll get a car foreclosed on, I’ll get my house foreclosed on those kinds of things. But these bankers can walk away with millions, and the FDIC will insure all deposits. So if I can put my money in any bank, then I should put my money in the highest yielding bank right, I should always go to the I should chase the yield, because all my money is safe. So it skews the competition and excuse my risk tolerance and my risk assessment of the banks. Yeah, yes.

John Maxfield 48:59
So that’s true. They have the moral hazard problem right. And that’s, that’s that’s part of the system is as part of the situation so you have to like each other to build laws around that like to kind of control that. But let me let me reframe the whole bankers conversation, cuz I think this would be helpful. So American America since the very beginning has hated big banks, we hated big banks, because we hated England, right? And bank we hit in that model, the Bank of England model which given monopoly right, so you’ve always hated big banks, and there’s a struggle early on between like the Andrew Jackson type of action and kind of the Federalist faction, right about all that stuff. And so um, but what’s interesting is that like, and you go back to like history like and you read the media reports of bankers and as they are I really fat cats are just like, using all these money to like, make money for themselves. But then you start digging in and you say, like, let’s be responsible about this. Like, let’s, let’s like, why don’t we just be responsible about this? Let’s take a look at the facts. Why don’t we just go do that? It’s gonna take some time to take a couple of years to figure out how this works. But what are the facts say? Here’s what the facts say. The first big bang in this country was guy by name of Steve draw it. So Steve Jobs got up and build up and he was born in Bordeaux, France. His dad was like a ship captain. And Steven Gerrard became like, easily the number six. He’s like one of those brilliant guys. Like those guys who like then go off and like, be like traders. They’re amazing traders like a Soros type, you know what I mean? He was that type of get it that kind of brain you have stuck on in the Caribbean, because during the American Revolution, because there’s the British for blockade on shipping back and forth, particularly between France United States. So he came up to Philadelphia, he becomes the most successful merchant in Philadelphia, in 1792. I mean, he just got rich, okay, like superduper as like a warren buffett at the time. Okay. In 1792, there’s a yellow fever epidemic in the city of Philadelphia, which at the time was the the capital of the United States, and 40% of the population left. And then of the, the, anybody who could leave Mark Washington, George Washington, they left and Hamilton left all the all the big players left and left kind of like kind of just the regular people. They got so bad, and they’re really bodies in the street that the mayor called conference, kind of like a meeting among all the residents of the city said, We desperately need help, right? It can be any volunteer to help only 10 People volunteer. One of them is Steven Gerrard, who by the time was like, literally the richest guy in the city, okay. And he goes up, and he goes, and he’s going to be helped with the hospital for yellow fever patients that’s on the outskirts of the city, but he’s not going to administer it. He’s going to actually act as a nurse cleaning up vomit, like comforting people, like helping them, you know, bathing them, like, this is the he’s act literally bathing people, you know what I mean? He does, he helps them he survives, he then gets this amazing award from the city of Philadelphia, Will 20 years later, what happens a world 1812 It breaks breaks out. And we the year before 1811, we’d gotten rid of the second bank, the United States, which was basically a central bank, kind of at the time. And so we didn’t have a way to finance the war making 12. Well, Steven Gerrard when they didn’t redo that charter in 1811, he bought that bank. Okay. And then so that was the only source of capital in the country that was large enough to finance the war. So they went to see him and George Siemens are personally fine. So we’re making 12 by personally financing the War of 1812. Like, we’re now an independent country, because whenever we lost that the British were proud, but it just taken us back. Right. So then he dies. So he becomes a richest man in America in 1811. And he’s richest man in America until 1831. When he dies, when he dies, he gives the entirety of his fortune to found a school for poor orphans in the city of Philadelphia, that will educate them from kindergarten through high school, all expenses paid and supporting school. That school is still going today based upon his endowment. Okay. So you have the first big bank in the country. Like he’s not acting like some sort of greedy fat cat he gives everything to help society. Now the sport fast forwards like your mark II, big banker, Fat Cat, JP Morgan himself, J. Pierpont Morgan. Right. Couldn’t be a bigger fat cat back there. Right. You know, Rockefeller said when when when Morgan died. He said, so to effect. I’m sure this accent is totally wrong, but like, like, whoa, we thought he oversaw, he wasn’t even a rich man. He left so much money on the table. Morgan could have been as rich as Vanderbilt. He could have been an enriched Rockefeller. I mean, like, he put the trust together that own these things. And he loves so much my own table that like yeah, he made good money. But you don’t you don’t run around seeing Morgans today, like you see Vanderbilt through you see rocky like, right. There’s no fellas out. You know what I mean? Like, we’re going to do that. You go to APG, the founder of Bank of America. Okay, he sounds like American 1904. Why is he found Bank of America, because the existing banks won’t serve. The little guy, particularly implements the Italian immigrants. So he says, Well screw this, I’m going to start a bank called Bank of Italy. It’s going to serve a little guy. So he starts it later changed the name to Bank of America. By 1949. When he died, it was the biggest bank, not the country. He was the biggest bank in the world. Okay, he built the biggest bank in the world. And he also had built this other huge bank that would later go on to be the second largest bank in the country, which is under the Transamerica umbrella at the time that then became the first interstate. Okay, so if you go to the biggest banks in the country, and even when his estate was worth when he died in 1949 $550,000, that’s it. How is that possible? Let’s say so that today in about six and a half million dollars, he didn’t care about money. He just cared about what what like what he was doing. He just love banking. You love you love serving you. So you go in the go. Now let’s take it all the way to today. The top banker in America for the modern era, was to get involved homeowners at m&t bank, then a mid Blahnik at Glacier bank up in Kalispell, Montana. Bob died at the end of 2017 MC retired at the end of 2016. Okay, these guys create more shareholder value than any other bank in the United States in the modern era by a alongwith Okay, What if you look at like the characteristics of these guys who did this myth born and grew up so poor, that they literally didn’t have food in their house, a lot of times, his dad worked the copper smelter, his dad drove a forklift at the copper smelter in Anaconda, Montana for 40 years. Focused, okay. They and then make those on. Tap is in his bank doesn’t it doesn’t this amazing thing. And he was the lowest paid banker in his peer group, not by a little bit. But by law. If you look at two in 2011, which is basically his board and in pushing him like, we want to give you a raise, we want to give you a lot of buy a plane for you let us you don’t drive around all the time. They said no plane, no rates for years and years and years. When she doesn’t 12 the board finally forced him to accept rates because they needed to hire a new replacement for him to attract a replacement for him. They said, Well, if we’re not paying market rates, directly, we’ll be able to attract replacement. And that year, Mick made $240,000, the highest paid guy in his peer group made $4.2 million. And there’s no comparison for their performance. Bob Wilmers, the same exact situation. So it’s like, what you realize is that the really good bangers are really, really good people. And we have missed, we’ve kind of like, put bankers for historical reasons around how we think about banking and who was involved in banking particularly long time ago, there’s this kind of innate societal bias against them that just is, is not supported by backs.

Eric Chemi 56:31
I think because we see right now the the Jamie diamond guys or the Tim Sloan Titans, like, these guys are billionaires from all the equity that they’ve got in their 2030 $40 million a year that they’re getting, you know, the sandy wild types. I think that’s the moment most people see.

John Maxfield 56:49
Yeah, I mean, like, humans like to look at negative things that other people do, right? You don’t like to look at, like, you don’t want to celebrate the things that other people do. Because that makes you feel like you’re inferior, you want to make yourself feel superior. So like you do that by just focusing on the things that they do wrong, and ignoring the things that you do wrong. Do you know what I mean? Like bankers are humans, okay? Until we figured out how to fix humans, we’re not gonna be able to fix banking. That’s just that’s just how it is. In America, in particular, a country that prides itself on economic growth, that this is the cost of economic growth. These are societal choices. These are not bankers, choices, even societal choices, right? And bankers, just humans trying to operate in that environment, not to make too many mistakes.

Eric Chemi 57:29
So So you think it’s fine. So when you hear people saying, get your money out of banks, get out of fiat money, go buy a bunch of crypto, go buy a bunch of gold? Do you think that’s all crazy talk? Yeah,

John Maxfield 57:39
I mean, because first of all, there’s no risk replace to go. Okay. You know, it could be an environment where there’s inflation. So when you take it out of the batch, where Where are you going to put it? You’re putting crypto Do you see what happened? Crypto, you can put on real estate, you see what happened, real estate. I mean, like, every asset fluctuates in value unit, it means like, there’s there’s risk everywhere. And the fact that there’s just like, look, every single crisis, that the conversation we’re having right now takes place in the wake of every single crisis. Okay? And what do we know? Again, this is about not things about change. It’s about things that stay the same. And so ever after every crisis, we’ve probably had, we’ve had nine major banking crisis, the United States history, a couple dozen prices, if you factor in minor crises, and the fact that this conversation is taking place after every one of those prices, and yet you still have banks that are still doing just fine. Like, you know, like, the smart person is going to put the bet on on the fact that everything stayed the same as opposed. It never changed, even though every cent is going to change. You know, I just it seems logical, yes, rationally.

Eric Chemi 58:42
Yeah, like your point about things mostly stay the same. Right? Certainly human behavior stays the same fear and greed stays the same. Over You know, the overindulgence on the risk appetite sighs like you said that, that first baby 1809 failure. Okay, Carnegie’s Great. I’m gonna build this huge building and then all of a sudden, it blows up. There’s always a story about whenever someone is trying to build the biggest building somewhere. That’s usually the top of the market.

John Maxfield 59:09
That’s when you go to any city in this country. And you look at their buildings. Yeah, you’re almost all built tops. And most of them have defaulted. afterwards. Yeah, you don’t Dallas. The entire Skyline was that situation is all built in the

Eric Chemi 59:26
inland building standoff, right? Somebody made somebody made some money on it. Yeah.

John Maxfield 59:31
Buildings are a great way to destroy liquidity. It sounds like it kind of works for the system and mixing gets back into equilibrium.

Eric Chemi 59:39
So you said you’re doing 18 hours a day of reading so how little Are you sleeping when you’re doing all your banking work?

John Maxfield 59:46
Well, this the I mean, like I’ve gotten back into a little bit worse. I mean, my wife I mean, like, no joke, my wife like Damn, you’re divorcing last deservedly. So But, but she didn’t. She’s an amazing person. But yeah, I pulled him up to all night, all nighters with us last year.

Eric Chemi 1:00:09
I’m sure it was, I’m sure when all that stuff was happening, Silicon Valley Bank and signature at first republic and all of that. I’m sure that was a great time for you, right? Like the history is writing itself in the moment there.

John Maxfield 1:00:21
Well, to your point area. So like, again, you know, how I feel about predictions. But I will say this, again, I had an event in Philadelphia in March, is the first or second week of March,

Eric Chemi 1:00:35
March of 22. That’s just when everything was blowing up. It was March of 22, march 20. through March, we’re in 20, through March of 23. Write down,

John Maxfield 1:00:44
and I’m explaining it this on Tuesday. And I have like literally like, kind of like the top bankers in the audience of this topic. So he goes in a country like I’m explaining how the system works. And I’ll explain how the novel Quiddity flows work. And once the liquidity comes through, the system is locked and loaded to these liquidity destruction events. And we know they’re going to happen soon. And such this, all these bankers, and they’re like, Oh, my God, like this is, this is sound. And this is the proper soak, and then supplement sales for that exact reason, three days late. And so they think like, Oh, John, predict, it’s like one of those things like you. You didn’t hear about predictions that happen in the past, but like, you just got lucky. I didn’t predict it. But I explained it to work. And they explain explanation, explain exactly why the banks fail. But it was yeah, it turned out to be it was career changing for me,

Eric Chemi 1:01:30
accidentally, to accidentally predicted the same week. Well, I didn’t

John Maxfield 1:01:34
just to say these words, and then it happened to be in the same week as this thing that happened, you know what I mean, but like I see, and I hadn’t looked at self about it, because I was so busy building up this model. But I couldn’t bring myself up to the current day, by the time I had that event. So like, I didn’t have time to look to the head, I had gone and looked at what had happened with their deposits. Because I know multiple instances in the past when that exact same things happen. And so like in the CFO of Silicon Valley Bank had read about it, like, it’s unfair to think that they can do this because it takes so much time, you have to be a clown, like me doesn’t have a real job to be able to do this kind of thing, you know. And so like the silica and the Silicon Valley Bank, I had this knowledge that was locked in the history of banking, because the improper periodization how to get access to what had happened in like the 1840s, for example. When, in the 1830s, when Andrew Jackson vetoes Charter, the second bank, the United States, took all the deposits of the United States government and put it into the state banks, inject it into the state banks instead. So all these, all these busts don’t tilt on the top of his head, I’ll be talking these banks heads. But what happens to those banks, they either all fail, or they would have failed both regulatory forbearance for the exact same reason that Silicon Valley upheld. So you can go back if this the CFO of Silicon Valley had access to a thing or says like, Oh, my God, like, he’s just a one page thing of why these banks fail. Like, you just read and be like, okay, like, banks fail when they have a bunch of deposits come in, because they do stupid stuff. Now, maybe that would have changed how how they deployed all that capital? Maybe not. But they wouldn’t be flying blind. You know, and they wouldn’t be flying blind. And they would, they wouldn’t be an unforced error. You’re basically a self worth. They’re, on

Eric Chemi 1:03:24
some level, could people say, because of FDIC deposit insurance? It doesn’t matter if they fail. So go do whatever you want. That’s right. Yeah. And so you’re, you’re trying to say, like, let’s not have failures, here are the things that do cause them to fail. Let’s keep them in business. And somebody might say, it doesn’t matter because you’re gonna get your money back anyway.

John Maxfield 1:03:45
So you’re gonna get your money back. And here’s why it matters. Because there’s a there’s a theory in finance called buried string. Okay. And burying strain, you probably knows way better than I do, right? So very strong. And what that tells you is you have two portfolios that earn the same exact average annual return over a period of time, let’s say over 10 years, same exact, average annual return over 10 years, the one with more volatility. At the end of the day, despite the fact that they have the same average and return the will of more volatility will produce a lower total return. Okay. And so that matters, because value creation matters. It also the other stuff also matters because these cycles can be quite detrimental. Right? When you catch them on downside, right, you know, like, people can go broke, people commit suicide, I mean, they’re the real world implications of these of these cycles. So, you know, the constant striving in all of finance, is to get control over the cycles, right? That’s the constant fight and all finances to understand the cycle to predict the cycles to protect yourself from the cycles, right? What if you can if you understand how the system works, and how these novel pretty close men and how you need to behave, you Can action, you’ll behave differently and you can kind of moderate the site. It’s just an incremental moderation of disciple. And that’s, that’s all this is about, because there’s gonna be 1000s of years of humans after a certain, you know, 10s of 1000s. And millions, like, like for us, like, we’re just one little chunk, but we want to incrementally improve it. You know what I mean? And so understanding how stuff works is one way incremental improvement. Where

Eric Chemi 1:05:21
can people find you? So like the substack? Is there a book? Is there a podcast where all the places that people want to try to learn more, they want to follow John Maxwell directly?

John Maxfield 1:05:33
Yeah, well, my condolences if you do to the kind of I mean, let me just like you can just, they can just google me if you’re interested in like, if you love banking, okay. And you want to understand it. You should read my stuff, because it’s different than any other stuff out there. I’ll come at the industry in a different way. But I don’t like to self promote the anatomy. You know, I’m a private I’m a private person. I don’t like to come on here to self promote. That’s not what this is about. For me. You know, me this is about like, kind of like sharing what I know. But if what I talked about was of interest, then yeah, I have a substack. You can find me on Twitter. You can find me a lot of places online.

Eric Chemi 1:06:12
My thanks to John Maxfield for joining us here really eye opening on on how banking works, how it doesn’t work sometimes and what we’re looking at past and future on what changes and what doesn’t change. So you know, thank you again for watching. If you liked this video, please like it subscribe, it shared all those good things right, the podcast the audio version as well, then more people can see it more people can learn. And of course, if you’re hearing all this and you’re a little freaked out about your finances, and like like John said, you don’t want to spend your life worrying about it. You want someone else to do it, you can go to wealthion.com quick form there, put your email in, we can connect you with some investment advisors that we endorse, it’s free, there’s no obligation, no commitment, you can just have a conversation. If you’re trying to put the worry on to somebody else so you’re not the one worried about it yourself. That’s wealthion.com So thanks again for watching this episode of John Maxfield and I talking about thanks, we’ll see you next time.