Anat Admati on Debt, Equity, and Financial Instability

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David Beckworth: Anat, welcome to the show.

Anat Admati: Thank you.

Beckworth: Well, let's begin by asking, how did you get into finance?

Admati: Well, I wasn't even an economist originally. I kind of found my way into economics and then into finance back when I was in graduate school. It just was a matter of an advisor who told me finance was the most wonderful part of economics, Steve Ross, who was at Yale for many years and wanted to convert everybody to and, in fact, is responsible for a number of people active in academic finance today.

Beckworth: So you had an influential teacher shape your path, yeah. A number of our guests have mentioned teachers along the way that really pushed them that direction. Now, you were in finance and then in 2008, time of the crisis, you really switched your focus. Tell us about that.

Admati: Well, I was in finance doing research at the time moving from market micro structure over to some more contracts and then shareholder activism and corporate governance and thinking a little bit about corporations and how they're governed. Then there was a financial crisis, so I started wondering how what I know applies to what happened in the financial crisis. So I started listening to what people say and then started reading a little more of the academic literature and also of what was being said. Because I was a citizen reading the newspapers and wondering what just happened and what was it about and what subprime...

Admati: We know about the subprime from 2007, so the crisis was just this sort of implosion that happened. But especially after that implosion, even before that, I started wondering about Bear Stearns and what was going on. As it was clear that this was serious harm that was going on and extraordinary measures that were taken and all that, I started looking at what was going to then happen afterwards. The more I read, the more disturbed I was by what I was reading at every level. As a citizen, as an academic, I just felt like there was more. It was just misguided the way it was presented, what the policy was, most importantly, because the policy matters in this case actually. I can connect it to immediate events about how it's still causing harm, even some of them invisible harm.

Beckworth: Today. And that's what led to your book, “The Bankers' New Clothes,” and a whole new chapter in your life where you've been an advocate, a public intellectual helping shape policy, pushing it. As you said, it's an ongoing struggle, never ending struggle. A lot of us have learned a lot about the banking industry, the all mysterious word capital. We'll talk about in a minute what that actually means when we talk about bank capital.

Beckworth: But let's go back and start from the beginning. The key point of your book is that there was this inordinate amount of debt held by banks and more generally in the economy that set us up for 2008. You make this point in the book. I want you to share with us whenever an individual, a bank or an economy is levered up or highly indebted, it's more susceptible to shocks. Can you explain that to us?

High Debt Levels Made the 2007-08 Economy Vulnerable

Admati: Well, you see it on zero down payment mortgages right away. What happens to a zero down payment mortgage? The equity starts at zero and then it might build up if the house price goes up, which everybody is hoping. Of course, they can pump up the price, and so for a while that seems to work very well. They go to the homeowner when the equity builds up a little bit and say, "Hey, take your house on vacation. Take another mortgage, a second mortgage, and take out some dividend out of your house and keep the debt there." Then oops, when the house price goes down, there is no way to absorb those losses except for going sort of underwater. Of course, if there's a recession, then the debt cannot be paid whether the house is on over water too.

Admati: But anyway, that was the household kind of leverage, that kind of house of debt. Too much private debt at the household level, but of course, you might not be able to fund the house except through a mortgage. But the banks that are in the middle of this system are actually corporations, and corporations don't need to borrow, certainly don't need to borrow a lot. First of all, they have their retained earnings to use and that's part of capital. It's not what you'd think about, retained earnings, but it's just money that's not owed to anybody. Yeah, like your equity in the house when you sell it, what's left.

Beckworth: During the housing boom, and people were playing off of this, these interest-only mortgages where they would flip a home. In your book you do a good job talking about leverage. Leverage is taking this debt, taking a little bit of your own stake, your own money, and then leveraging it up. It has potential for great gains, right. In 2003, 2004, I lived in DC. I had a job here. One of the regrets I had is I didn't lever up. I could've got an apartment with 100% financing and I could've doubled it.

Beckworth: I lived in another apartment where I rented, and one of the other residents in there told me that they had bought a condo right along the metro line and in six months it had doubled. It hadn't been built yet. It was still finishing being built and there I was paying rent. I was like, "Ugh. I could've financed 100%." But the flip side of that is, if the housing market had tanked, I would've held a note, a liability, that would've been greater than the asset, my property.

Admati: Buying a house with mortgage is like buying stock on margin. I mean it's basically using a small base to gamble, to make a big gamble, which on the small base, if the gamble works out, gets magnified on the outside. That is just a big high, the juiced up returns that you can make when, especially if you put zero in. That's like it seems like it's a money machine at that point, and that's what you'd find in the banking literature.

Admati: They're going to say, "Well, if I need to hold more capital... " The crazy way in which they talk about it, if I need to have less debt funding and a little more of my own money and my shareholders' money, I will have less return. That statement is only true on the upside. The downside is just for somebody else to worry about in banking.

Beckworth: Yeah, okay. I want to ask before we get into banking, because banking's really the crux of your book, I mean that's the bigger point, but how it applies to banking. But I just want to know your general sense of debt in general and leading up to the housing crisis. Most people would agree, I think, today there's a lot of excess of debt, household, banks and so forth. Do you think above and beyond the policies we'll talk about in a minute in your book that Fed policy contributed to it? John Taylor, your colleague at Stanford, has argued the Fed kept rates too low for too long. Did that fuel the debt bubble, you think?

Did Low-Interest-Rate Policy Fuel a Debt Bubble?

Admati: It may have. I mean low interest rates feed into all assets, not just debt. So they make all funding cheaper. Because even for risky things, there's the risk premium plus the risk-free rate. So if that's the risk-free rate, it enters all investments overall. That's why we have low interest is supposedly to stimulate investment. Whether they're used for just borrowing more, if that's the way that it spurs borrowing, that's one thing. But it's not completely clear that...

Admati: There were other things going on because it was more about the terms of the way it was lent, whom it was lent. Look at, you can lend to somebody or you can invest in their startup with equity. And the key question of however you fund things is whether the right things are funded. Should this homeowner have bought a house? Because that exposed that homeowner to a lot of risk, and of course the lender as well. Part of it is whether they were investments that were wasteful, whether the allocation of money to things, whether they were spending too much money on existing assets or investing in innovation. That's the bigger question about the allocation of everybody's savings into stuff, not just debt.

Beckworth: Fed policy. Yeah. So Fed policy is one piece of a bigger puzzle. All right. Let's move into banks and let's talk specifically about this very confused term that you do a good job explaining in your book, and that's bank capital. What is bank capital and what is some of the confusion that arises over it?

Admati: The confusion starts with the fact that they use the word capital, which is used in many, many ways in economics and usually not in this way. Only in banking in this particular way. No other firm do we say that Apple holds 100% capital. We don't say that, but that was sort of what would be the equivalent of saying, banks hold 5, 10% capital. Okay. It's about the way they fund in banking, bank capital. And then there is the really awful stuff about what's called regulatory capital.

Admati: Capital requirements were supposed to make banks safer by making sure that they don't fund everything with a deposit or generally I.O.U.s, that they have a little bit of way to absorb their downside because they do take risks with that money. It's just a question of the people get the upside are the shareholders, who are juiced up returns and the whole thing, and then oops, what happens on the downside? That's all.

Admati: Now, the way it translates to the regulation is the biggest mess of all, and that creates a lot of confusion as well. First of all, to say hold capital gives people the impression that it's like a pile of cash that you're setting aside. You could have a lobbyist say to a politician, "Every dollar of capital is a dollar taken out of the economy," which is complete and utter nonsense.

Beckworth: Right.

Admati: Then they come and say, "If you make me hold more capital, I won't lend." Okay, now that needs unpacking. That same bank, that same lobbyist that said that came from a bank that just paid out a dividend, so they could very well have used that money, which is perfectly good capital that would've satisfied every single capital requirement in the world to lend. It's complete nonsense when they at the same time make payouts to their shareholders with money that they could perfectly well lend. Then you can talk about costs of funding and other things and I can unpack that as well, but by that point the politician has moved on. They just heard that threat.

Admati: It was Paul Volcker who said to a senator back in 2010, apparently quoted in a book called Payoff: Why Wall Street Always wins, he said, "Anytime you just start that conversation, anytime you want to do something to the banks, they always come out and say, it's the same threat for politicians, credit will suffer. Growth will suffer." He claimed to apparently a fact checker that he said, "BS." In the book, it's quoted as bullshit, so you know, I said that word. I'm quoting.

Admati: But the point is that for example, the word credit, so some of it is about use of words. The word credit, you just said debt, debt has a dark side. We have a chapter in the book about all the things that can happen when things don't work out and you funded them with some borrowed money. When you use the word credit, it's a very positive word. You have credit at the end of a book. Credit is such a wonderful word. The instinctive thing is to think that all credit is good, so even you heard Mnuchin now say, "Credit, credit. We need to make sure there's credit." Well, all this credit to subprimes, that was good credit? In other words, people getting five credit cards in the mail, all credit is good? No. You could have the wrong kind of credit. That's the point.

Admati: Does the bank want to make a business loan or do they prefer the riskier kind of loan? That's exactly what part of the dark side of borrowing is, is that a borrower, somebody who borrowed a lot who has a lot of what's called debt overhang becomes very biased towards risk and against some very safe investments. Safe investments like going back to the house example, is like remodeling your kitchen. That's the investment that the underwater homeowner or the very distressed homeowner is not going to do because that's a gift, unless they can renegotiate the mortgage, because it's a gift to the creditor. If they're about to walk away from the house or default, they're not going to remodel. In fact, they're going to take the windows out. That's the inefficiency of foreclosures and underwater houses. That just is in the inefficiencies of all the bad things that happen when debt is close to not being payable.

Admati: Again, the use of the word debt hides the fact that if I sell you credit, if I produce credit for you, you owe me money. Both of us stand to lose if you don't pay it and then what's the rate? You can give somebody five credit cards and they will live on revolving credit at 25% or give them a payday loan. There's a lot of issues there about how much credit the economy needs and what's a useful thing. Subprime car, why are people borrowing at these rates? What's going on? What is really it about? Consenting adults, but still could there be too much of a good thing?

Beckworth: Absolutely. That's interesting. So they've framed it as this term as pejorative. It's capital, like ugh, capital regulations. Whereas you're saying on the other side, credit can also be problematic if it's excessive. Credit generally has more positive...

Admati: Connotation.

Beckworth: ... connotation, where capital, you think, ugh, it's something horrible. Therefore, a soundbite is remembered before...

Admati: Terrible things will happen and there's trade off, they say. Well, the trade offs are entirely private. This is where on the issue of equity, I don't hate the word capital. On the issue of indebtedness, how much you owe versus how much you have, how close you are to insolvency, how much of a zombie are you, on that issue there's just fundamental conflict of interest between privately what's costly for the bank, which is to take on themselves or on their shareholders risk that they can put on others or give up some tax subsidy and what's good for society in terms of a safe, reasonable way to price things.

Admati: In other words, if you have a business model in this economy in any industry, you have to go to investors and fund it at the cost of funding. Well, the banks do not have the right cost of funding. They have subsidized funding in the hope that they will do something good with it. That's the crazy situation we've gotten confused into allowing.

Beckworth: Well, let's go to that question. How did we get to this point where banks' capital buffers, they were so small, continue to be small, but particularly they were so small in 2008? What led us to that point?

Admati: It was all legal. It was all according to these regulations that allowed the banks to do all kinds of things like create all of these off-balance sheets, securitizations and claim that it's all safe or that if they insured it with AIG, it's all safe because credit rating agencies gave certain things, AAA, and that regulation treated it as safe because the regulation was trying to be risk sensitive or something.

Admati: The worst was essentially regulating the investment banks under Basel. Actually, what saved us a little bit in the US was that Sheila Bair refused to do the kind of fancy-schmancy risk weights that Europe did with its banks. European banks were more harmed than some American banks, or at least the part of the bank holding company, so the part of Citigroup that's actually Citibank was really the only part of Citigroup that was barely-

Beckworth: This is Basel II?

Admati: Yes. Basel II is really responsible for a lot of the excessive complexity, the shadow bank. In other words, if you say, "Oh, I'm afraid of the shadow banking system," it was the kinds of things like Basel II that created that system in the first place and other regulatory arbitrage, money market funds and other things that we can go into. But in other words, a lot of these complications were just from trying to evade some, not evade, but just get around.

Beckworth: Play the system.

Admati: To satisfy the regulation but actually take a lot of risks. The way they used the complex regulation is to find ways to use the way the regulation was framed to actually increase indebtedness to the degrees that in European banks you had half percent by some measures. It was basically living only on debt. When a little shock came, they imploded.

Beckworth: Right. They couldn't handle it. Just to be clear and going back to what we were saying earlier here, so the question is how do banks fund themselves? The key issue is how do banks fund themselves. Do they fund themselves by borrowing, which they mostly did do, short-term markets, or do they use their own money, their own resource? Do they have skin in the game? When you got skin in the game, you behave differently. You behave better because it's your money you're going to lose, not someone else's money.

Source of Corporate Funding

Admati: But I want to say something else. In corporate finance, which I actually taught for many years, the gold standard in terms of less distortions in investment is the all-equity firm because then the upside and downside and it's making decision, except for the manager-shareholder thing, it's making the decisions on the right net present value. Whereas the indebted firm has distortions even if it's gets a tax subsidy, which is completely crazy by the way. But the point about banks which you forgot to mention, you said money markets. What about deposits?

Beckworth: Yes.

Admati: Now the bank, when I wake up in the morning and open the paper, there's going to be some real nonsense there a lot of the time. Here was one morning where I opened the paper in which the nonsense was the following. The CEO of my bank, now no longer the CEO of Wells Fargo Bank, tells a reporter that in Wells Fargo Bank they have a lot of retail debt, retail deposit. That's my money, by the way. "Therefore, we don't have a lot of debt," he says. Now, I could not make this up.

Beckworth: Interesting.

Admati: In my book, we don't take this kind of statement on because we couldn't make up a bank CEO forgetting that he owes the depositors the money. But the key about this statement that's why it's so useful to just ponder what he was saying, he was saying that it doesn't feel to him like debt is really what he was saying because the depositors are not behaving like creditors even though they think the money's there. So here you have this really strange form of borrowing that the banks do from all of us, which is we walk in the bank, we give them the money no questions asked. I mean no investor behaves like that. Now, of course we created deposit insurance that makes that really rational for us to give them the money with no contract, with no collateral, with nothing, okay.

Admati: So you have a set of creditors who feel completely safe, who are, in fact, safe, not bothering them. So they get to think this is play money. This is wonderful. That's the start of my leverage. From now on, once you are leveraged, you want more leverage. That's the addictiveness of leverage is, and we explore this in a recent working paper, exactly the adjustments. Once the debt is in place, that's like the taking second mortgage. When you take a second mortgage, you actually risk foreclosures on the first mortgage.

Beckworth: First mortgage, okay.

Admati: So you always want to subject your previous creditors to more risk. That's like gambling for resurrection, all the ways you become biased towards risk, including towards more borrowing. From the perspective of the bank when they have so much overhang to the point that they might be insolvent, we just don't really know because of the way they measure things, equity's hated because if they can get money from some I.O.U. that somebody will come and give them with the collateral or with deposit insurance or something, that's the way to fund. Equity's hated with a passion because equity investors ask more questions.

Beckworth: Well, that's interesting. So you're comparing our deposits, which are liabilities to a bank, like a first mortgage on a home. Once you taste that, once your appetites whetted, why not go back for a second round?

Admati: Exactly.

Beckworth: And for us it'd be a second mortgage maybe to remodel or to add a pool in the backyard. But for the bank it'd be, let's look at some money market funds.

Admati: Or worse, to consume. You could take your house on vacation, then the money's gone.

Beckworth: Right.

Admati: You didn't invest it.

Beckworth: True, true.

Admati: That's the dividends coming out, and they're not invested in anything anymore. They're not in a house.

Beckworth: In other words, you're saying once they had those deposits in a form that people didn't treat them truly like they were creditors to the bank, it set them up for further bad behavior?

Admati: From the beginning of time, the bankers competed with the depositors over risk and over how much equity they would put in. Because if they take risk, which we want them to make loans and all of that, which is fine. I come from Silicon Valley, so risk is wonderful if you fund it correctly, if it's diversified. If it's you win some, you lose some kind of thing, that's fine. But when you take deposit money into risk, into risky loans, into credit card lines, into subprime car loans or whatever, then what about the downside?

Beckworth: Yeah. I ask my students, and I've left academia, but when I was teaching I'd ask them, "How many of you look at your bank's balance sheet regularly?" No one ever raises their hands.

Admati: They trust those regulators.

Beckworth: They do. They just put it in there and thanks to the FDIC and-

Admati: Who has time for this? That's why we created FDIC so they don't have to worry about it. Because the only defense of the depositor is to run, and we saw in the Depression that runs are inefficient, so we created deposit insurance so they'll stop worrying. So they can just do other productive things in the economy. But at the time that we put that in, we made it the conflict of interest much worse. We enabled and Fed that addicting to borrowing.

Admati: Here we are feeding an addiction and being unable to counter the incentives that come with it. So you're addicted to something. It works for you, and we just subsidize and guarantee and drop all your creditors from worrying. Nobody worries about your creditors. So you think this is the normal way for a corporation to live, and in fact when you look outside banking with no regulation at all, no corporation lives like that even though we give a tax subsidy to that.

Beckworth: Right. Now, you mention in your book that banks, they finance such a large percent of their activity with debt. And compared to any other corporation, it's just an anomaly, right?

Admati: There's no even comparison. I gave a TED Talk in which I was trying to explain to a lay audience with just 15 minutes and I color coded a house or a tall building. The red was debt and the green was equity. I just put next to each other Google and banks. And then the average non-financial company, and they have incentives to borrow. They'll get a tax subsidy. Of course, they can avoid taxes in other ways, so maybe they don't need to go there because the creditors will actually put conditions and all of that.

Admati: So it's kind of a baggage, so much so that companies don't bother. But most companies retain their earnings. That we say is the first source of funding. You don't even go to investors, so you're not going to pay out if you have a good investment. Look at Berkshire Hathaway, Warren Buffett never pays dividend. He just invests. The stock price is high. Everything is fine. It's only in banking that their behavior only tells you that they're too indebted because that's not how normal-

Beckworth: Interesting.

Admati: ... how normal companies behave. But with no regulation, they don't have any regulation telling them to not pay dividends or to not borrow. If they can find a lender, they can borrow, corporations. We even encourage borrowing because we give them a tax deduction for interest that we don't give them if they pay dividends.

Admati: We teach our students, we have them calculate the tax shield of debt, and it's money left on the table by, not Apple, maybe avoids taxes anyway in other ways. But some companies, students calculate in an exam how much they could save in taxes if they borrow more. And yet, they don't. It's uncommon.

Beckworth: That's interesting.

Admati: Most companies actually have market value of equity that way exceeds their book value, so for innovative companies, the market value of the equity just way more than... They could pay off their debt in a day and be fine. Most companies that you look at, Walgreens or any company.

Beckworth: Very interesting. Now, one of the complaints that bankers will put forth when suggestions like yours that they need to fund more through capital, through retained earnings or maybe issuing of shares, and interesting that you mention in your book that even during the crisis and right afterwards they were still issuing dividends. Banks were issuing dividends instead of retaining the earnings, building up their capital, which just blows your mind.

Admati: What blows your mind is the following. I had an oped recently. I mean I got tired of writing op-eds, but I did have to write this one, which is about my ex-colleague, Ben Bernanke, who wrote a book called The Courage to Act. His courage was to save the system when it came near implosion. He was a student of the Depression. All of a sudden that button got pushed, big crisis, meltdown, pull out all the stops. Okay, just open up another window and another window so they can all have liquidity. But he doesn't talk about the courage to stop a dividend for a bank right head of its implosion.

Beckworth: Courage to stop a dividend.

Admati: So for example, in summer 2007 the crisis was already here. Subprime, the fall started in summer 2007. Bear Stearns happened in March 2008. Well, what were the banks doing all this time paying dividends just ahead of something that you know might happen. Paying dividends is easy. You can always decide to increase your equity. You're speeding as you're approaching a curve. It's just the craziest thing.

Admati: Now even worse, if you look at how it transpired with the bailouts, it was the Federal Reserve of Boston that did this study on dividends, Eric Rosengren. They calculated that 19 banks, the top 19 banks that won the stress test banks from 2009, these banks paid nearly $80 billion of dividends from summer 2007 through the end of 2008, including through the financial crisis while this amount was about half of the amount, I'm not talking about Federal Reserve supports, I'm talking about government supports in the form of TARP.

Admati: In other words, the bailout, the $700 billion, 160 billion of that went to these 19 banks. They said they didn't want it, but what was interesting about this is when they gave them $160 billion across these 19 banks, and of course they gave a whole bunch of other funding to other banks to recapitalize them, that money was not quite common equity. It was kind of you have to pay me back my bailout money because otherwise politically it's not very pretty. So it came sort of as a preferred share, sort of as a form of debt, and it came with restrictions. It came with restrictions finally on common dividends. In other words, the government had to be paid first before they could pay dividends. And it came, importantly, with some restrictions on bonuses, because that's also a payout. You can pay executives-

Beckworth: Right. AIG had that big scandal.

Admati: Yeah. You can pay executives the newly issued equity but not cash, so the cash depletes your ability to lend. They're telling us that credit is frozen, meanwhile they're paying cash bonuses and cash dividends. So the government when they give them TARP said, "Wait a minute. I'm now a lender. I'm going to behave like a creditor in the terms of TARP." If you look at the banks that received TARP, they did not use it for lending. What they really wanted to do most was to pay back the government, so then they can come back and say, "Run some stress tests on me again and let me pay dividends again, because now I don't owe you anything."

Admati: That was the kind of round trip we did with public money. Okay, so it stopped people from panicking maybe, but you just have to stop and wonder, why were we there in the first place? Could they have done something while the subprime is really in front of us to at least bolster the banks a little bit, at least stop the dividends, put your hand on that faucet?

Beckworth: Build up the capital buffer, yeah. My question is, and this is something that the bankers will claim, is that funding through equity is expensive. Now, I want to encourage listeners to read the book if you haven't already. Great discussion in there, but what you show in there and you argue very eloquently is that the cost of funding through equity is not some fixed amount. It's conditional or depends upon how much debt you have. Speak to that.

Conditional Cost of Equity Funding

Admati: Well, the kinds of things that they say in banking, every day people fail in corporate finance class for saying those things, literally.

Beckworth: Nice.

Admati: This is like the basic stuff people got Nobel Prize for years ago that we've known since the 50s, but banks say it doesn't apply to them. Well, they might have some special debt funding, but the economics of equity funding is the same for everybody. Which means that if you have a lot of risk, so we already discussed how when you lever, when you have a lot of leverage, the risk of the equity, of every dollar of equity is higher. Now if the risk is higher, then financial markets would usually compensate you more for that. When you want to fund with risky equity versus with more levered equity versus with less levered equity, the cost of funding has got to adjust to the fact that the risk of the less levered equity, the less indebted equity is lower. The risk is lower, therefore the cost of funding it in terms of required return is lower.

Admati: When you average all of that out, what we teach students in corporate finance that in perfect markets where you don't have this deposit debt and all these reasons to put debt on the balance sheet, there's no reason to even start borrowing for a corporation. They could just fund the 100% equity. Now, that does not apply to banks because they do have the deposit already built in there. For other corporations we have trade offs between bankruptcy costs and the kinds of bad things that will happen, the inefficiencies of high lever, versus the tax advantage that we gave to debt completely with no justification. There's no reason the tax code should really prefer debt over equity for corporations.

Admati: Now for banks, they already have part of their business involves borrowing, involves using debt like deposits. But from that point on, that's where they leverage. When they say costly, what they mean is from their perspective in the comparison between equity and debt for the extra dollar that they're going to fund, equity's expensive and debt is cheap, also subsidized. That's the private cost, but the right question to ask for us for the regulation is from society's perspective, banks with more equity versus banks with less equity, if the only way that it's expensive for them to fund with equity is that with less equity they're able to pass on more cost and more risks to other people, that's not a cost to us because we're the ones subsidizing that.

Admati: In other words, who are they passing it to? To somebody. So what they are saying is, "Give me cheap funding and then let me do what I want with it, okay. And I'll tell you that if you don't give me those subsidies, I won't do the lending that you want me to do. And now I'm going to go play in derivatives or do other things." In other words, think that we were subsidizing somebody to use a polluting process to produce something when they have an equally costly clean process. They would say, "If you take away the subsidy," they'd say, "Wait a minute. It may make it more expensive. My chemical is going to cost you more. The dye is going to cost more."

Admati: I'm subsidizing you so you can sell me something cheap and then I have to clean the river for you for free that you didn't pay me for that. So what kind of deal is that for me? I paid cheap for the dye, but I was the one who subsidized you to sell it cheaply to me, and then I got this extra pollution to deal with. It's like a false calculation. In other words. The private cost is entirely private here and the social costs are completely reversed cost and benefit. We only have benefits as far as the eye could see from them funding with more equity and there's no social cost. The cost, if you want to put in quotation mark, the "cost" is their less ability to take advantage of subsidies. Is that a cost?

Beckworth: Yeah. I think Nouriel Roubini put it great when he put it in this case that they are privatizing the gains, socializing the losses.

Admati: Exactly. That notion of it's expensive for me to privatize my costs, but I love the privatization of the profits. That's where it's at precisely.

Beckworth: Yeah. That's a great analogy in the book too, what you just mentioned about a chemical producer polluting a river that's being subsidized by the government. I mean you take away that subsidy, they complain, but the world's a better place because they're not measuring their social cost, or like you said, the private costs. You outline in the book I think fairly well that all the subsidies are implicit supports. We talked about FDIC already and we also talked about the tax benefits to debt. Just briefly, corporations have a tax incentive to issue bonds over stocks in that they can write off the interest. Is that right?

Admati: Yeah. It's similar to the mortgage tax deductibility.

Beckworth: Okay.

Admati: It's very similar. Again, going back to housing, we do the same for housing. The point is we're subsidizing housing, or you could say we're subsidizing lending, although we end up subsidizing derivatives and trading and commodities and everything else that they do. We subsidize housing but only if you borrow. So your rent when you rented back in the days, you also gave up a tax subsidy that comes with buying a house that only if you borrow to buy a house you will get to deduct the mortgage interest. That is a crazy subsidy because you could decide who should be subsidized to buy a house, but why are you subsidizing only borrowing to buy a house?

Admati: That actually is a completely distorted subsidy that goes to the people who buy the bigger house, to the richer people. It's a completely misguided subsidy that again, because we're so fixated on housing and on home ownership, we left there partly because a lot of these subsidies, and especially implicit subsidies, are invisible and convenient for the politicians. That's why I'm now much more in political economy saying okay, so what's the politician's real objective and what's the politician's real horizon and who are they for in the end? Then you get into the political issues about corporate power, bank power, pharmaceutical power, every other industry.

Beckworth: To make it concrete what you're saying about the housing distortion from this interest rate deduction on your mortgage, if you had the cash to buy your house outright, it'd make more sense to actually borrow the money and invest your money in the market or somewhere else because you could earn a higher return that way, right?

Admati: Exactly. No, so it's-

Beckworth: It's a crazy-

Admati: It's exactly the same. In other words, even if you can buy a house outright, that's not the smart way to use it. You should buy it with 100% debt to get the tax deduction, but that doesn't make any sense. You're going to buy the same house. You're going to buy the bigger the house, the bigger the mortgage you take, the more taxes you save. It makes no sense, absolutely no sense. Economists have written about this. It seems just so politically ingrained because you see, if you thought that home ownership is a priority for society, that's fine.

Admati: You can decide in policy that we want certain investments that people might not make, and so we want to subsidize certain things. That's okay, but decide who you're going to support and then decide how to deliver the subsidies. The way we're doing it is completely wrong. We want to subsidize all home ownership, and we're subsidizing the biggest home and the richest people to borrow to buy houses. Instead, we could target certain population if we decided and give them outright support to pay equity in the house, to put equity in the house. Apparently, Australia has a program where first-time homeowners get a little money but only for down payment.

Beckworth: I understand.

Admati: You can give the subsidies, so take the same amount. The Economist called the debt subsidies the biggest distortion in the economy. It was called The Great Distortion. It was a big article in the economist within the last year or two called The Great Distortion, which is how come governments encourage debt through taxes? I mean here we're saying there's too much of it and we encourage it with taxes. They calculated numbers about the tax losses from just giving those deductions. Think of using even a fraction of that money differently for your policy priorities.

Beckworth: That's interesting. So if you're going to do this, do it smartly. Maybe first-time owners, get them in the housing market, but not continually...

Admati: Or SME. If you want small-medium enterprise lending, because that's why you subsidize. You need them to lend to businesses. Because of the high indebtedness and because of the way the risk weights work, these stupid regulations, the capital regulations, sometimes some of these investments that take some effort, like lending to a business, are disfavored so they wouldn't do that.

Admati: You can give them all the cheap funding you want, but they're going to do what they want where the return is high, where it's derivative, whatever. In other words, we throw subsidies, blanket subsidies at them, and then give them a lot of discretion on how to use the money. So they can tell you, "Oh, I won't do what you want me to do," but they do what they do anyway.

Beckworth: Just to recap, we got these explicit subsidies such as the tax incentives. We have FDIC, but we also have some implicit ones. I think back to the crisis in particular. We'll talk more about this in a minute, the shadow banking system. It was bailed out. So if I'm a shadow banker, I'm a big money market, Wall Street firm, I now expect that same bailout in the future, right? That's an implicit subsidy which further encourages me to do the same kind of behavior, right?

Admati: This implicit subsidy is industry wide, and it flows through the system. If AIG is bailed out, that bailed out the counterparties of AIG, Goldman, Citi.

Beckworth: Good point.

Admati: All of that. When they orchestrated the AIG bailout, all these banks that took enormous risks with AIG, they got paid in full. Well, you didn't have to do that, but it was your banker friends that were already dying, so you bailed them out. I'll give you another example of implicit subsidies from Europe. This is a story that is not told in all the politics of the European debt crisis, Greece for example.

Admati: If you ask yourself why the banks made all these subprime loans, part of it was because they could package them and they could sell them and they could give them AAA and all kinds. And they could do bets on bets on bets and all these other things that they could do while satisfying the regulations. So making the system very complicated, very opaque. Then at the point of time that the government got scared about the ripple effects and all of that, they bailed everybody out even if they were not explicitly bailed out because then it was sky was falling and it would've been worse if we didn't. Okay, so I'm not judging that. I'm just wanting to learn from what happened here.

Admati: Here's Europe for you. This is where it gets really nasty, okay. Who made loans to the Greek government? Let's not go back to where Greece was accepted into the euro, which again as a meta observation, you always find the smiling banker that helped them cheat the Europeans into their government balance sheet or wherever. Okay. So they did that. They're in the euro and now of course all these European banks are lending to the Greek government. Now, the Greek government is not credit worthy. I mean the Greek government cannot collect taxes, all kinds of problems there, but French and German banks and Swiss banks happily lending to Greece with just a little bit of spread, but why? Because lending to Greece is considered riskless like AAA.

Admati: It's like putting money in treasuries. It's got risk, but the regulation doesn't recognize it. So it doesn't require any equity for that. They could take deposit money. This is what Cyprus banks did. Deposit money, promised 4.5% to Russian oligarchs that turn around. By that time Greece was already like junk, paying 15, 20% on its interest. Now, why then couldn't Greece in 2010, '11, when the problem started just default? The contract, the I.O.U.s were under Greek debt. They could just say, "I'm defaulting, come catch me," under Greek law. Well, no. The Europeans wouldn't let them default. Why? Because systemic, because their banks were failed.

Admati: In other words, you couldn't let Greece default back when it was clear they couldn't pay these debts because you wanted to bail out the lenders. So in 2010, French banks owned 40% of the Greek government debt and German banks a big fraction. The Swiss banks exited Greek government bonds in 2009 because they were already licking their wounds from the subprime investments that they made and needed bailouts and all of that. But the French and German banks did not get out, and so when Greece came near default, we had to orchestrate a bailout. That was the bailout where European bailout fund and the ECB and IMF ended up supporting Greece so that it could pay its creditors and sending the right memo, except they forgot to send it to Cyprus, that the banks would get out because then Greece could actually do some adjustment.

Admati: After the banks were safely out of there, then Greece actually defaulted, reduced the value of its obligation by maybe 60, 70%, 75% depending on how you do it. That's when Cyprus banks didn't have any loss absorption because they didn't get the memo to get out. Now, last year, so what happened to the debt, so if you look there is a Council of Foreign Relation paper that traces exactly what happened to that same debt that was made, loans that were made to the Greek government by the French, German, other banks in Europe, which were the main lenders to Greece. Well, it got scattered between all these official creditors essentially, and so now that debt is owed to the official creditors, to the bailout fund, to the ECB and to IMF.

Admati: Well, these official creditors just politically hate to lose, so they will do austerity upon austerity, but they will not tell their citizens. So the Germans are not telling their citizens that they failed to regulate their banks. They're telling them that the Greeks are lazy. Now, there could be truth in that too, but they're not taking any responsibility...

Beckworth: Responsibility, right.

Admati: ... for the fact that too many loans were made to Greece by the banks that they were regulating. The question again is why did the banks excessively lend to homeowners and why did the European banks excessively lend to the Greek government? Bad regulation.

Beckworth: What do we do then moving forward? You have a prescription for the United States. Let's speak about that. You would like to see the capital buffer rise to what level and how would we do it?

How to Increase the Capital Buffer

Admati: Oh, now you're getting to the numbers. Now they're going to say okay, it's all well and nice, but where's your modeling; where are your numbers and where's your calibration? I got a DSGE model and it's producing this number and such a number, and it's putting costs in that are not even there. But it's coming up with numbers and therefore my numbers make sense and you don't have numbers. Well, where we are is not at the ridge. It's as if you take the analogy of speed limits, we're driving now at 150 miles an hour and you're telling me, "Where's your model for whether it should be 67.5 or 65.4?" I just know 150 is unsafe.

Beckworth: Right.

Admati: In other words, I just don't begin to see the cost from where we are to a bank retaining earnings. Now, obviously the issues is transitions to a system and the fact that you could have now a situation in which some of these institutions and, in fact, the industry as a whole, because it's been so heavily subsidized, is just bloated. In Europe, for sure you have excess capacity in banking, so you have to reduce capacity. In Europe, for example, no bank can ever die. I mean here we at least let some small banks die occasionally. We have thousands of those. But it's an unnatural thing for an industry to never be able to fail.

Admati: How many stupid acquisitions can make if you're a Citi or a Bank of America and live to tell another day. Three bailouts to Citi and all of that, so it's like you can never do anything wrong if you're Citi. You can invest in Latin America, in Mexico. Whatever you do over years, sometime it's going to work out, so you can come back from the death basically. That's by the way, the thing about banks. If you have depositors, you'll never know that you're insolvent because there's no creditor breathing down your neck. The state of mind in banking is one of sort of near permanent insolvency by the symptoms anyway.

Admati: I see symptoms. The intense hate of equity is one of those symptoms of just having too much overhang. I want to move them so they begin to behave like a company that cares about the upside and the downside, not the talk that they have, which suggests that in their heads they're only thinking the risk culture, being paid to gamble that risk is good and anything boring is bad. I just want to move to a completely different place.

Admati: Now, numbers are complicated because it's a question of measurement, so now you opened a whole can of worms because they're using accounting numbers that have thousands of convention issues around them, including the fact of when you say a ratio, say capital ratio, you have to have a denominator. So in the denominator there's thousands of details because some assets have zero weight, some assets are not included at all because they're off balance sheet. So they get netted out, but is there no exposure? Is there nothing that can happen from all these trillions of dollars of derivatives that are netted out? Well, it's a lot of risk off balance sheet that we don't quite know how to include.

Admati: So the measurement issue, that's why I avoid talking about numbers. I just know something is super wrong. The reason I know that something's super wrong is because it's too big to fail. In other words, usually companies don't get this big and usually companies don't get as indebted in the markets. So I see signs that they don't live in market, and I want to push them back in markets. My stress test, so they run these stress tests that are completely ridiculous to certify them safe and pay dividends, for example, routinely.

Admati: I have a different stress test. I say, what would people give you for your equity right now? Now of course they'll get money for their equity because there's still an implicit subsidy in it and they have some business model. They have lots of ways to make money, fees and interest income and derivative and proprietary trading. They have thousands of ways. The bank holding companies are massive conglomerates that have a lot of non-financial business too, so they have thousands of different business. So sure, there's a value to the equity. But the more they get diluted, the more the value of the equity is lower upon issuing more, the more you know that the risk is right now somewhere else.

Admati: I say a bank, say, in Europe that says, "I'm dying. I can't raise equity. I don't have profits," that's the sign that something's very wrong with that bank. So you need to just clean up this system, clean out the excess from this system. The system has just gotten used to the subsidies, and they hate to give it up. All industries are like that. When you subsidize sugar, they also hate to give those up and that's also a stupid subsidy in the same way that we know sugar is bad for you.

Beckworth: That's interesting. So we know there's too little capital simply by the symptoms that they've become a beast that you wouldn't naturally see in the marketplace.

Admati: Exactly. I see, how do you even live? I don't see anybody else like you. Then you see the secret sauces, basically.

Beckworth: Yeah, right. So we need more capital.

Admati: More equity.

Beckworth: I'm sorry.

Admati: Please don't use that word.

Beckworth: Yeah, okay. We need more equity.

Admati: Meaningful equity.

Beckworth: Meaningful. Well, that's one I want to go to because in your book you criticize Basel III because Basel III still, it increases the amount of equity but it still has this complicated risk-weighted measure. Would you go to something similar? Would you just toss out the risk-weighted measures and some kind of simple metric?

Admati: It depends on how many. See, the reason that the risk weights matter is because the overall level is so low of the amount of equity. So once you have that, then you're already in a domain where I'm going to try to get around it. If you give me a crude ratio, I'm going to take more risk to take advantage of the fact that I can leverage so much. That's not good either. They say, "Oh, you can't use leverage ratio, that's crude. But that's because you are only going from 3% to 4% or 5% and you're already still in that space. Now you say, well, I'm going to adjust for risk, so the more risk you take, the more it counts in your denominator, sure. But then who can decide what the risk weight is.

Admati: Right now, we have internal models that can use it. We use credit rating agencies and all of that is highly manipulable. That's what Sheila Bair didn't like about the risk weights from the beginning, and she fought for simpler ratios. The FDIC's always applied some safer and cruder methods, at least this one. So you have to use maybe a combination measure given that you are already in this bad place. When it didn't matter, so when John Cochrane reviewed our book, he ended by saying, "How much capital, how much equity should they issue?" He said, "Until it doesn't matter." That captured the fact that we're moving the risk back into private markets from the government, from the public.

Beckworth: Yeah. So we want to get banks to the point where they themselves go to a level of equity that is safe.

Admati: So they can live. So they can withstand. In other words, as the ups and the downs of the markets and the world happen, are they still there or are they always so close to the edge that we have to always worry about giving them a big fine or something for misconduct. We didn't even go to how above the law too big to fail makes you. If you're too big to fail, but a lot of corporations are too big to jail in the sense that if you kill them like we killed out Arthur Andersen, there'll be collateral harm on the employees or somebody else. So we end up having no power as a legal system over these beasts that we've created called corporations.

Beckworth: One intriguing idea I've heard, and I know enough to be dangerous. I want to ask you, the expert, about this, is everyone I think agrees we need to get towards more bank equity, but how do we do it in a way that banks buy in to it, get their own skin in the game? One of the proposals, and it's an historical approach, is to have double liability or triple liability, so align the incentives of the shareholders with the creditors. Is there any hope in that or is that a dead end?

Admati: My very first paper on this issue was precisely that. It said, let's have increased liability equity, but equity that has a lot of liability can't trade in markets. You cannot have it in the stock market, so you have to have a name with it because where is the liability? In other words, that's why we have limited liability shares, they are tradable. Once you increase the liability of the equity, you got to trace them. Now, we had double and triple and unlimited liability equity before the FDIC. So through the Depression we could go after bank shareholders when the bank, and this was the case in... So if you go back to the 19th century in UK, banks were partnerships with 50% equity and the owners, the partners, were liable with their personal wealth. Okay.

Admati: Of course, only certain people could own banks and, of course, if you're a poor person and you have equity, it doesn't buy much. In the Depression, so there was a banking crisis in Europe, in UK, where the shareholders went broke personally because they had to cover for the depositors. They were the deposit insurance. In this country in the Depression they tried to go after, but people were going personally bankrupt so it didn't help. Then the question becomes, who's the shareholder who's going to expose their wealth to what the banker does? You start having those problems of getting into people's personal assets and of course, you give them incentives, but the question is what can they do to manage the bank? The question is, can banks get funding then?

Admati: I'm all in the space of find the right funding. And Silicon Valley people go to venture capitalists and pitch their business. I want the banks to have to do the same, but if you put increased liability, there is some problem with that. Now, we proposed and that was my only Law Review paper that I wrote back before I realized that that was way too clever for this debate, and the debate was and the language, a lot of nonsense, not in this fancy-schmancy hold the managers to account, but not the creditors have to do.

Admati: I have a paper. It's a little complicated to explain right now, but we were having an all equity funded company have more assets and hold that increased liability equity so it wasn't trading in the market. So we had our clever solution for it, but of course, we're not there. I can make that work. I have an idea for how to make something like that work.

Beckworth: Okay. Well, it's interesting historically, I've seen some papers where it seemed to work in the past up until the Great Depression. One question about the Great Depression is would any system have made it through the Great Depression because it was so bad? But you're right, it went away. It's a historical thought.

Admati: But the point is that people say banks were always fragile and look at all these crises over the years. Yes, banks have always been fragile because there was always this conflict of interest in banking. If you look at all these inherent instabilities, they're inherent because there are incentives to do that. So in other words, banking can never be efficient unless it's effectively regulated to counter those incentives. Because by the time you need a payment system, the bank owes money.

Admati: In other words, just to have the payment system, you need to have some debt flowing in those pipes and that's I.O.U.s. So except for the pieces of paper that the Central Bank prints, which is nobody's debt, doesn't have credit risk, everything else that we consider money is somebody's debt. That's why debt versus equity becomes important because if it's very fragile debt, then it stops being effective. You can get freezes and then we've got runs and we've got bank holidays. But there was a lot of recklessness before the Depression, so this was the roaring 20s and then it had a lot of similarities, just different labels, with the recklessness.

Admati: When Reinhart and Rogoff say this time is no different, they say precisely this, we keep getting high on that debt and then we crash. Why it's so difficult to recover is precisely because the banks, they are so unhealthy for so long and they don't make the loans you want. In other words, you'll be suffering because it allows and supports sick banks all over Europe.

Beckworth: And Japan's had that problem too.

Admati: Exactly, exactly.

Beckworth: They never will cure the bad loans.

Admati: If you don't face once it happens, if you just let them and let them recover and you don't force them out of their misery or kill some of them, which is sort of a little bit what Sweden did in the 90s when they had a crisis, then you're going to just let them meddle and the rest of the economy meddling with them, partly. I mean it's not all that's going on, but it's part of what's going on.

Beckworth: Yeah. Well, let's talk about what the future holds going forward. We have a new president-elect waiting his turn to run the country, Donald Trump. One of the possibilities under him might be the Choice Act. The Choice Act, as I understand it, says we're not going to completely do away with Dodd-Frank, but we're going to give banks the opportunity to have an off ramp from the regulatory burdens if they have enough capital, if they hold enough equity. So you incentivize them, if you guys increase your capital buffers, we'll cut the regulations. Do you see that happening and do you see potential issues with it?

Understanding the Choice Act

Admati: Well, in some respect I've been saying kind of that because I'm looking at some other regulations, for example, including what they call, it's part of Basel II, liquidity regulation, which I think just don't have the same cost-benefit. They're just costly without a lot of benefit. I can elaborate, but we don't have time. The notion that this is the best bargain in regulation, that you should start there because there's no cost and there's lots of benefit to society from doing that and then you see what else you need to do, certainly in principle is the right approach. But what worries me about this is, first of all, the measurements of that 10%.

Beckworth: Devil's in the details.

Admati: The devil is very much in those details, especially if you're going to get rid of some things that really useful. So some parts of Dodd-Frank are not as useful as other parts, but for example, to take a better look at derivatives and also to do some consumer protection, because there's a lot of abuse in the consumer area and there's more to say about that, that would be wrong, especially the derivatives. The derivatives remain opaque. I know a little bit about the CFTC's effort and the clearing and all of that, but once again there's more to it when you look closely.

Admati: To say, oh, derivatives are cleared, and I think even Timothy Massad said the other day, I just read it. I saw a headline literally on the way here, that it's not a panacea. In other words, just to say that it's going through a clearinghouse, you created a whole other systemic institution. What about that institution? It works while it works, but when it doesn't all of a sudden the world comes to an end and we have an emergency. I think that it's too quick to say. We have to look very carefully at different pieces and try to...

Admati: Dodd-Frank is a very complicated regulation. Some parts of it are wasteful. Some parts of it got complicated because of the way they were written, like the Volcker Rule. There are other proposals related to the Volcker Rule in terms of controlling what they can do with that subsidized funding, so it's not that simple basically. I think the idea that more equity is a more reasonable approach than some other approaches certainly is true no matter what else you do, but it's not the case that you need to do nothing else.

Beckworth: It's interesting-

Admati: It's not a silver bullet.

Beckworth: Yeah. Larry Summers and Natasha Sarin had a paper recently where they look at Dodd-Frank and they conclude it really hasn't made us safer.

Admati: Yep. I agree.

Beckworth: By most standards, we're just as susceptible today as we were in 2008 to a shock.

Admati: Exactly. There's just a lot of spin around a lot of these things. In other words, saying well, it's better than before. Well, better. Better, the speed limit was 150 and now it's 145. I mean, you know, better. Good? Better is not good. In other words, what's reasonable? What's cost effective? What are we trying to do? We can drive fast and then when we say stuff happens, you can do that, but there's so much that's preventable at a reasonable cost about this system. There's so much more you can do literally just by doing the very costly things less and doing the cost-effective things, the beneficial things more. There you'll have it.

Beckworth: Well, we have a few minutes left and you have a new paper out I want to touch on briefly before we close. We'll have a link to this on our website. The title of this new paper of yours is called It Takes a Village to Maintain a Dangerous Financial System. So quickly, tell us about that and what it means for us today.

Admati: I was asked to write a chapter for a book entitled Just Financial Markets, so it was about justice, financing a just society. It was sort of touching on ethics. Now, it was around that time the movie... The sentence saying, it takes a village to maintain a dangerous financial system is inspired by the movie Spotlight. The movie Spotlight was about a very grim situation actually, the church sexual abuse by priests. Now, in that movie there's a sentence that was said, "If it takes a village to raise a child, it takes a village to abuse a child." So it was about codes of silence in Boston and in other cities that allowed the church to rotate priests and to maintain a system in which kids were harmed but nobody was saying. It didn't rise to attention of authorities or the public that this was going on.

Admati: That's my line here. We don't have much time, but I will just say what I do in this paper is I try to basically reflect on my experiences in the last eight years to say, well, why has it been so hard for me to get through when I'm saying things that seem so sensible to me. And I've thought about them over and over again, and I did more academic research about them, so now I understand ever better. Why is it so hard? That was my attempt to say okay, who are all these people? Who are the people who say it's expensive, terrible things will happen? Okay. I can see the private incentives.

Admati: Then I go to the policymakers and say, well, why aren't they doing what I thought when I started? It's just a little confusion here. We'll just straighten it out. So why aren't they doing it? Why are we here? Why am I feeling frustrated and what's going on? It's sort of this combination of it's very abstract risk. I compare it, it's really about safety in banking versus in other areas. We have safe bridges. We have safe flying. I just landed here. I fly internationally, and I don't give it a second thought. Does it take a village to fly a plane from California to Rome? Of course, it does across international collaboration. But in aviation it works.

Admati: In building bridges and buildings, we demand safety. Okay. I was in New Zealand. There was an earthquake. There was safety codes. People talk about these things and there are real trade offs in safety there. Do you retrofit? Serious trade offs. In banking, it's about reshuffling pieces of paper. It's about nothing. There's no real resources in making it safe, yet it's in the interest of a lot of people to keep it dangerous. They benefit and the public doesn't understand. Then the politicians in between and including the academics who can spin a story, so it's about spinning narratives in how we're here.

Admati: With the move Spotlight competing on the Oscar was a movie, The Big Short, which was about the financial crisis. Now, The Big Short, which also came out about a year ago, made people angry, which was very useful, managed to explain some things about securitization, all of that, which was amazing, and about mortgages and taking 15 mortgages in the hot tub or whatever. At the end of the movie, and there was a guy in the movie who's very angry all the time as he's betting on the system imploding, which it did, and making money at the end and having an ethical dilemma about that. Then the movie ends by nobody went to jail. Now, that's what people get angry about, but that's not where the problem is.

Admati: The problem is about the things that you won't go to jail for. It's about bad regulation. Who's accountable for that? In other words, saying things and hawing and hemming or just standing by, what about that? In other words, why is the speed limit 150 miles an hour and the drunken driver could kill people. There was no policeman. In other words, why didn't we prevent... Why is the system so dangerous? Does it have to be so dangerous? Well, it doesn't but it works for too many people. And the public does not understand the issue, so the public gets told that terrible things will happen, that it's costly.

Admati: Lots and lots of things the public is told that they don't understand the issues, so it becomes an issue of fooling the public. That to me is even ethically, if you go back to justice, is really unfair. The people who are uninformed, who are not powerful, are being confused by people who do know better or should know better. So the word I use is something I learned about willful blindness. In other words, see no evil, hear no evil. "I don't know what you're talking about. I got a model," whatever is the spin. It's about that. It's about actual economics, and it's about the story people tell about it.

Beckworth: It sounds like a real political economy kind of rent seeking, public choice paper. Again, we'll have it up on our website. Well, our guest today has been Anat Admati. Anat, thank you for being on the show.

Admati: Thank you. Thanks much.