Author: Peter Freilinger

The boy and I were watching ABC Nightly News tonight while eating bratwurst and a nice salad with pears and raw onion. The salad was excellent: both of us were surprised. And the brats, boiled in bear and served on brioche buns, were delightful, and as I write this, I’m realising that the bountiful alliteration didn’t hurt.

This isn’t about that, though, because the news tonight was all about the Hamas invasion of southern Israel. The other day the coverage focused on the rocket attacks and the endlessly described “eerie silences” on the streets of Tel Aviv, but tonight was a lot worse, discussing personal stories of people watching their families get shot in front of them while their wives or kids or grandmothers were hauled off to go who knows where and serve likely as human shields, potentially worse. The boy and I talked about it, and I told him in no world is there an excuse for that sort of evil. He’s now eleven, in sixth grade, starting to study things like the Civil War and the like with more than just a patriotic “this is our country’s history” take on things, so I don’t want to sugar coat this particular historical moment.

In my heart of hearts, though, I was struggling a bit. There is no part of my psyche that can manufacture the kind of inhumanity that would allow me to sympathise with the Hamas gunmen over the past few days, but what was somehow easy to bring to mind was a sense of mindless, numbing, and inescapable despair that must go along with being a middle aged dad in the Gaza Strip. Unable to leave, unable to find a job, watching your kids grow up trapped in what is in effect a permanent and inescapable refugee camp, I could easily bring to mind an existential sense of non-being. I couldn’t transfer that to a sense that it would be okay to kill another human being because of it, or take away the child or spouse or loved one of the people who are running the camp to certain death; no, because that would actually separate me from being able to feel despair. The art of being human is, on a certain very basic level, choosing not to commit the willful atrocity in the face of personal hopelessness. Being human is to choose despair over dehumanising another: it is, to use Buber’s language, to always refuse to de-Thou the other.

It got me thinking of Mersault in The Stranger, whose creator would, I think, agree with me but he would make his creation do quite the opposite, in the nihilistic pursuit of being not human; or the coward in The Red Badge of Courage, acting as a human in his flight and ironically returning to his tribe gun in hand – renouncing his sinless cowardice in favour of murderous manufactured bravery.

It also had me thinking of the fact that, for the past few decades, Americans have been bombing, rocketing, and droning to death countless thousands of Arabs across the Middle East. That’s awful, of course, but it’s still no excuse – no reason – to kidnap an Israeli grandmother, rape her for the YouTube value, and then kill her, as one anecdote related on the ABC Nightly News last night. The terrorists even chose their film angles to maximise the intellectual horror: there is only one way to interpret watching young happy men with guns round up Jewish women, hitting them as the go, and loading them onto transports. My guess is the young men with the guns, abusing the prisoners for the cameras, were too stupid to understand the propaganda weapons they were being made to be, but the unseen men behind the smartphones photographing them knew exactly what they were doing, and the fact they never show their faces for all of that makes it even more abhorrent.

And yet: not so abhorrent that I could imagine ever participating in any of it. I can vaguely imagine what it might have been at age 20 to get drafted and serve in the military, and I have enough friends who have served to know that a part of the induction experience is to tone down one’s humanity enough to allow that killing spark of inhumanity to emerge. In battle, it can be the difference between living and dying – to say nothing of victory or defeat.

I wasn’t enjoying myself thinking any of this; it seemed to lead nowhere, or rather, it leads only to a recognition that, even if I can’t imagine it, a substantial portion of the world not only can imagine it but lives it, they choose it. Earlier in the day I had watched the Israeli ambassador to the United Kingdom on Bloomberg TV effectively lose her shit: “never has the Holy Land seen atrocities such as this, never”, she said, ignoring the Israeli massacres during the pre-1947 civil war, ignoring the Crusaders and Saladin, ignoring Masaba, ignoring half the Old Testament. Even as I thought that, though, I thought “well, she’s upset, and this is part of the process by which you recover your humanity.” And then the Israeli defense minister popped up and told a press conference that Palestinians – not Hamas, mind you, but Palestinians – had to be fought without mercy because they were “animalistic”. Oh Buber, where are Thou?

My son interrupted my bleak reverie. “I think the Palestinians have just given up, I mean really just given up. They are probably mostly all going to be killed by the Israelis, Dad, but they don’t seem to care anymore.”

He talked about how someone at camp told him that rats, if you corner them, will attack you, even though they know you’ll kill them, because it doesn’t matter any more. They watched a lot of Ratatouille at camp on the weekends, so I think that’s what he was talking about – I remembered the scene.

I told him people aren’t rats, except when others treat them that way. And even then, I told him, we still get to choose whether or not we want to kill on our way out, like rats, or if we want to forgive, like human beings.

He thought for a moment and said he understood. I told him I hoped he’d never face that choice, but if he did, that he’d forgive in his last moments of life, instead of trying to keep justifying the other person’s desire to kill. He said he wasn’t sure what he’d do, but he understood what I was saying.

There is, of course, a solution to the Palestinian-Israeli conflict, just as there is a solution to racism in the US, and to tribalism in the Great Lakes region of Africa. The answer is for one side to simply stop viewing the moment of their torment as a reason to torment further, even if it means their own death. And if one side does that simultaneously, indeed, it will simply be wiped out – the mechanisms of hatred being so ingrained that they’ll be unable to stop themselves. It won’t even be a sin: it will be a heroic, saintly act on the part of the side that chooses to martyr themselves, and the follow through of the other side to wipe them out will just, simply, be a Pavlovian response. Pure animalism kills pure rationalism dead – it is what it is.

What’s worked in the past is the symbolic refusal that comes up against a random forgetfulness or arrogance or whatever to act in response. P.W. Botha choosing to let Mandela live – and write, and be his best human self – in prison instead of just killing him like Biko, for example – wrong move for the white nationalists, right move for humanity. Had all of South Africa’s black Africans simply laid themselves down, it would have been a simple bloodbath, and every single one of them doing the same caused a private death. But one guy taking a step back, and facing one evil guy who forgot to be evil that day, and you have the potential for something to spark, something good.

Oddly, though, that requires continuing to care. My son’s right, today: it feels like the men and women and children of Gaza have given up. Some are now wandering aimlessly in their tiny strip of land, trying to avoid getting hit by Israeli shells or found by the inevitable wave of invading soldiers to come sometime soon. Some are arming themselves up with what, in the movies, would be a comic sense of purpose, even though we can guess what the outcome will be. Thousands of Israeli soldiers are girding for a battle with a predetermined narrative arc, getting ready for what will surely be decades of future moralistic PTSD to haunt their dreams.

In and amongst them are plenty of people like me, I think – those who may be called upon to shoot, or called upon to rear up after being cornered, and who are unable to imagine themselves doing anything other than reflect. They’re terrified, I think, but I also think they’re more ready for what will come in the next few hours and days than the barbarians on either side of the barricades. They haven’t given up, the way my son put it, and they haven’t stopped imagining the other side as human. In a place like Israel and Gaza, maybe the numbers of those in the middle, those who can still distinguish themselves by their inabiilty to hate, are approaching limit zero. And if that is the case, then it will not have mattered who started the violence this last time – whether it was the accumulated horror of living in an occupied land, or the immediate horror of living through a pogrom conducted by an amatuerish horde of monsters. Blaming those who respond to the last spark is a pointless exercise.

Far better, though, this evening most of all, to be focused on those in the middle, however few, the ones who haven’t given up, who still radiate warmth towards their fellow man, regardless of past transgressions, and who see themselves in the sins of others. May the bullets not find them, and let them be the ones who emerge tomorrow – and may they face off against others who feel the same. The ones who rape, who kill, who order the shellings, who enjoy targeting the missiles; who perpetuate the hatreds on both sides – I cannot imagine killing them, I cannot imagine doing evil to them. But I can wish them to go away.

After the ABC Nightly News, we watched “Wheel of Fortune”, where an almost unbelieveably dim set of good, happy, honest Americans – one hispanic, one white and (to be honest) quite portly, and one black – did an absolute hack job of guessing some pretty easy clue phrases (it took forever to get “A thing of beauty”, the morons). Alan and I made reentry to our reality, and I was thankful.

Because we both have to get up tomorrow morning and face the world again. Good luck and Godspeed to all of us.

Everyone needs a change of scenery now and again, and unlike Mark, I don’t have a second home in an idyllic Irish village. So, needing a few days of quiet and separation, I booked three nights at the Hotel on North in Pittsfield, Massachusetts.

Pittsfield is the largest city in Berkshire County, Massachusetts. The area is known mostly for twee villages, upscale resorts, “cottages” built by the Gilded Age elite, and now, horribly overpriced liberal arts colleges and the fine arts accoutrements they bring with them to justify the tuition they charge their upper middle class (actually no, upper class and desperately aspirational upper middle class) families to get their degrees from Williams and Amhearst and Bard. But Pittsfield: no, it’s just Pittsfield. It is not Massachusetts, and they know it.

The ex-wife was born in McKeesport, Pennsylvania, and we used to take a drive through its downtown whenever we visited where her parents then lived, Monroeville, and it was sort of like going from a gated community to the netherworld, getting worse as our marriage went along. In the late nineties, it was just a trip from suburbia to a crappy milltown; by the time we were getting close to splitting up, oxycontin was in full swing, and leaving Monroeville and doing the swing through McKeesport was negative poetry: we should have picked up Virgil somewhere on Route 130 to be our guide through perdition. The buildings kept getting more decrepit, even as the traffic stayed constant through downtown, and with the mills closed down, you had to imagine what the people walking across the street, sometimes sullen, sometimes friendly, were marching towards.

Pittsfield had that McKeesport feel to it, and it wasn’t bad, don’t get me wrong. McKeesport today, I’m sure, is both struggling with East Coast bluesville opioid devastation, and also doing its best to attract the kind of middle class aspirational folks that have abandoned Manhattan and Brooklyn because of high rents. The midsized mill towns of New York, Connecticut, Pennsylvania and the like are all in their way renormalizing around the tertiary economy. Come here: the pot is legal, the upper floor loft space is cheap, your parents and grandparents and their disposable income is close enough to buy your bad artwork and probably very high quality foodstuffs. Come back, says McKeesport and Scranton. And post pandemic, the creatives come, out of the laziness that develops from trying to compete too long on the Lower East Side and the New Brooklyn. All good.

I went to Pittsfield because I had to do about 20 hours of online continuing education requirement for my odd gig economy job as senior employee of a mortgage servicing company. The absurdity of the entire situation every now and again give me pause, literally: I have to sit and breathe deeply, marvel at how a decent portion of my living wages are supported by a set of tasks which, if explained to an alien, would make no sense, to the point where I’d rather my job to be something like a civil engineer specializing in sewage systems. At least the value proposition would be obvious: at least the aliens would see clearly what I do to be of real, actual value. As it is, I’m particularly good at estimating the rate at which home owners will pay off their mortgages, and how that will affect the timing of certain cash flows which banks and investors like to trade. I’m good at other stuff too, but for the time being, not many people care about those other things. And the people who want to value the timing of mortgage payments are happy to give me quite a bit of money to tell them what I think.

Also I have some required licenses, which make my thoughts on the timing and value of said mortgage cash flows more valuable for the people I work for because I enable them to buy said cash flows in a highly regulated environment which requires people to be licensed. But I have to keep my licenses every year. And yes, this is rambling, because this was a week where I spent roughly 30 hours completing my annual compliance training, 20 hours of endless recorded redundancy which stretched into 30 hours of actual physical space-time consumed watching online train videos and answering meaningless quizzes designed to ensure I hadn’t simply set up a Linux bot to do this for me, and I wanted a place which was effectively a blank spot so I could conduct what was an effectively blank task in a blank spot.

But the problem is, no real place is blank. I should have gone to Dubai and stayed in a hotel suite, but because I have a dog, I had to go to a place which was dog friendly, and I made a bet that Pittsfield would be it. But it’s not. Pittsfleld is a real place, and the more I walked the dog around thd downtown for morning and late night walks, and found parks and places for the midday long walk, I realized more and more that Pittsfield is a real place. Not like Manhattan, or the West End of London (or alas, much of Shoreditch), but a real place. Don’t get me wrong, Pittsfield is a shitty place – it’s used up, GE having sold out to SUBIC which relocated its real staff to Houston; the General Dynamics plant being a hollow shell; the downtown being just where the county has decided to relocate its abandoned senior and drug addict population where they can be close to diabetes and overdose clinics – yeah, a shitty place, but it’s a place. It’s not globalized, it’s not Disney-fied: it’s its own place, no question about it.

And therefore, it’s not Massachusetts. Massachusetts has loud mouthed Red Sox fans, and bad traffic, three deckers close in to one another but set off the broad boulevards where you find bagels, and bad coffee, and pet grooming, and off-puttingly liberal bookstores. You can find that in Berkshire County, but not in Pittsfield, its largest city. There, you can find a mile long, 100 foot tall manufacturing building that is lying fallow because no one wants to manufacture electric turbines in western Massachusetts anymore (begging the question why anyone wanted to do there, ever, of course… but therein lies the point[:

(I’m going to invent a punctuation form here: [: is the way to break out of a parenthetical comment without having to go through the effort of closing out the nested thoughts explicitly}

Traveling through old New England, you’ll find ancient mills, built of brick or sometimes granite, which are limited in size and scope by the building materials available in the early 1800s, and therefore readily reusable by the mid twenty-first century economy of creatives and financials and crafts. But the mid-Atlantic – the endless shapes of mid 20th century industrial Connecticut and New York (think Rochester, not Brooklyn) and Pennsylvania and Ohio, extending in massive industrial blight from there – the mid-Atlantic isn’t friendly brick and granite: it’s massive steel framing, the kind of metal buildings which grew dark and black from absorbing the acid emissions from too-small smokestacks. These blackscapes are surrouded by paved parking lots and after-thought rail spur lines, the towns around them marked by too much parking, too many lots which used to be poorly thought out diners and used car lots and half-assed stores selling vinyl siding and bad furniture and Thom McCan shoes.

That’s Pittsfield. And oddly, it’s trying, desperately, to emerge from that mire, and become a decent town. It doesn’t have an overpriced liberal arts college; it’s off the Mass Pike by a good 15 miles; it has an oxycontin problem. It has nothing going for it, but it’s trying. It’s not relying on nostalgia from now-middle-aged undergraduates, and it seems to recognize that the nostalgia of its old milltown townies is a losing game.

But it has a couple of good bars, one run by a lesbian couple and another run by just a bog standard bearded Gen Y type. It has a lot of social services downtown which are desperately needed even as they aren’t an encouraging landscape for future tourism or service economy storefronts. It is, thankfully, not Concord, or Lexington, or god forbid Newton. It’s not Massachusetts.

I stayed there for four days, three nights, had great Korean food and a surprisingly good Neopolitan style pizza, hiked the circumference of an abandoned regional mall with the dog (who enjoyed it), passed seven states’ worth of continuing mortgage education requirements, chatted with a number of kidney dialysis patients waiting for treatment on a lovely afternoon, riffed with a nice bartender and tried (but failed) to create a good rye-based yet fruity cocktail, and left my car unlocked and no one broke into it.

It was not Massachusetts. I loved it.

I have, more or less, a day off today. I got up slightly after the sun at 6am or so, had my morning “check email check Financial Times” routine to reassure myself that the world had not, in fact, imploded over night, did the normal morning ablutions, and took the dog for a walk. I prepared the boy’s lunch and, as the hour of departure approached, gave him the morning weather report (quite chilly this morning, almost freezing: shorts are fine because you’re a boy and this is Maine and it’s May, but wear a fleece jacket please) and then, come 7:54, pushed him out the door and down the street to get on the bus.

My day, though, was blessedly free. I had managed to apply a scheduling flamethrower to the day after a couple of past weeks of non-stop activity, travel to Texas last week, 8am to 6pm nonstop calls this week, and I wanted a day off.

It has been lovely. But I’ve also realised that I’m happily, permanently done with the notion of ever having a day off again. It’s not that I have so much to do: I had to swing by the grocery store for some supplies, sure, and I’ve been working at a low level on a few long term projects, but really, the successful construction of a human life consists of having a series of things that require your attention. They may feel trivial to an outside observer – living up to my erstwhile “duties” as a library trustee, or making sure my son’s mother is on the same page as me for upcoming doctor appointments, or even just making sure my water bill is paid, which was the subconscious reason for my waking up substantially earlier than I really had to today. But it strikes me that the slim and fragile interconnectedness we have with others is, in a real way, the high point of being human.

As the boy gets older, I keep marvelling at how he seems to be settling into self-sufficiency with surprisingly little effort on my part. I cook, clean, and do dishes, and this spring, I’ve started giving him more substantial household chores (he’s mowing the front lawn this year, his first big landscaping task; he’s getting schooled in replacing light switches and changing the oil in the MG in coming weeks as well). But all in all, he’s showing all the good signs of realising without explicit education the basic “activities of daily living” which, in coming decades, my future incompetence in which will eventually relegate me to a skilled nursing facility: making tea for himself, cleaning up after himself in the bathroom after a shower, finding clean clothes in the laundry instead of asking me to bring them up. Separating lights from darks, and knowing to aggregate the various hampers upstairs before bringing dirty clothes to the mud room. Keeping his boots off the rugs. I may or may not have told him to do this, don’t do that, but I don’t remember it: he’s just picking up on the simple civil activities that keep my house – will keep his house, already keeps his house – clean and easy to live in.

Similarly, I’m pretty sure I’m not lecturing him or even occasionally sitting him down for Parental Conversations (note the capital lettering, indicating severe significance) on how he should treat other people or how he should react to uncomfortable situations. Instead, I try to demonstrate good behaviour – always treat strangers kindly, and listen to them; once someone is known, however, if they are a jerk, treat the with reciprocal respect and avoid them and redirect others away from them whenever possible. The boy is doing a fine job at that too, albeit sometimes he’s too willing to reveal explicitly who he deems to be deserving of respect and, vice versa, to reveal who he deems to be disreputable. But discretion is a second – or maybe even third-order task. I’m just thrilled that, at age 11, his direct discernment and his polite behaviour is now so routine.

The lesson that puzzles me, right now, as he starts to hit puberty and as my rhetorical and pedagogical skills begin to reach their natural limit, is how to show him what it is to love. I associate love with surrender – not a milquetoast kind of hangdog panting, mind you, but an acceptance of love as an absolute, with me as a fixed, finite, variable being. Embracing love – of a partner most especially, of one individual to another; but even in the way we fall down and embrace our parents, or our children – is an act of surrendering in all of our capable-of-fault individual human selves in front of a concept of absolute love. I want to show the boy that I love him no matter what, even though I’ll continue to monitor and enforce limits on his screen time and will demand that he stay open to trying new things at dinner. I want to show him that he is free and open to explore what love is knowing that I will never, ever stop loving him, no matter what he does to me or doesn’t do to me.

Demonstrating that is an odd trick, especially when I have no one, day to day, in my adult life, who fills that role for me. So I’m caught in an interesting bind, where I wish to reveal to my son the possibility of love for another adult – in all of its messiness, in all of its power, in all of the powerlessness we inevitably feel in the presence of such force – without actually having a subjective magnet in front of me who absorbs, reflects, attracts, and generates my will to surrender.

Instead, I just have him. I’m hoping he sees it all, and I think he is actually smart enough to pick up on the subtleties. Or rather, not smart enough: just aware enough, even at age 11, that there is something worth surrendering too, that his father has seen and recognized and will never abandon, ever, and that merits staying aware, humble, and ready to give oneself up to when the moment and the person demands it.

A midweek day off is a good day to ponder such things. It’s almost over; the boy’s bus will drop him off in about a half hour, and I’ll have to go pick up the dog from day care, and there’s a Zoom call for the town at 4:30pm. But I’ve had the time, and the upcoming connections make me keenly aware that I’m part of the great collective experience that is being a loving, open human being. I’ll be ready for tomorrow when it comes.

Oh, and a quick shout out: I’ll be in London – finally again, for the first time since the pandemic – from 10 to 13 June. I would love to see any and all Essence of Water fans who are in the area. I will pick up the tab.

The Financial Times ran an opinion piece today that posed the question “who gets to create a dollar?” which is a common thought of mine, or at least one way to frame my favourite question ever, which is “what is money.” The topic has been covered several times on this site, but the world at large remains blissfully unaware, really, of the existential nature of money, and as a result, we find new ways to panic about it or, alternatively, to build incredibly silly castles in the air around it.

The latest panic, of course, comes from the failure of a bank on the West Coast, Silicon Valley Bank, which blew itself up in what was frankly one of the most avoidable ways to fail as a bank: they bought a lot of really long duration fixed income securities using deposit money that was highly uncertain to stick around and had only come around to them in the last couple of years. Lots of other banks have bought really long duration fixed income securities, but they did so with very stable retail deposits that had proven their “stickiness” as customer relationships. Silicon Valley Bank’s deposits came from venture capital firms and the startups they financed. The startups themselves should never have been viewed as “sticky money”: 70% of all startups fail in their first two years, and when they do, they famously “burn” through their funding. Thus most of SVB’s startup deposits should have been expected to go away quickly – certainly before their portfolio of low coupon mortgage backed pass-through securities would ever pay off. And a large portion of the rest of their deposits came from rich VC types and their fund vehicles who parked their cash at SVB while they decided what to do with it. With new funding on hold in a rising rate environment, and with VC people famously as interested in buying real estate and Maseratis as they are in keeping robust deposit balances at their friendly VC-oriented bank, again, any kid with a year out of college and the opportunity to take four hours of online banking training would have known that the deposit book was flighty – or “hot”, in the industry parlance.

So SVB’s depositors – predictably – drew down their balances starting late last year – nothing panicky, mind you, just startups burning through cash as they do and VC folks making poor luxury good purchasing decisions as they do. But SVB quickly ran out of its cash-cash, and had to start selling its really long dated fixed income securities. The trouble was, they had been bought at yields around 1.75%, and yields were inching up towards 5.00%. With an average duration of around 8 years or so, that meant these securities were trading at around 80 cents on the dollar – not because there was a risk that they wouldn’t pay, mind you, it’s just that they’d pay you back at a very low interest rate, so people buying them today aren’t willing to pay par for them in the way SVB paid par for them in 2021 and early 2022.

SVB then had to tell the market “hey, we just had $21 billion in additional deposit run off, no big deal right, sort of normal, but we took over $2 billion in losses when we sold our Treasuries and agency bonds to cover it, wow, sorry, and oh yeah, if we have more deposit runoff the losses on the rest of the book are even bigger in percentage terms, like, a lot more than all of the capital we have, sorry.” Unsurprisingly, other depositors thought “wait, if their capital is less than the current losses on their securities, they might not be able to pay off our deposits – after all, we’ve got a lot more than the $250,000 insured by the FDIC – so let’s get our money out now” and last Thursday, $42 billion of deposits were withdrawn, and sure enough, SVB ran out of value: they could not place enough collateral at the Fed to enable the Fed to release the withdrawn deposits, and the State of California – who regulated SVB – announced that the bank was closed.

As a banking professional, I thought “wow, dumb treasury guys over at SVB – or at least, dumb treasury strategy” and literally thought nothing of it. The good folks at the Fed and FDIC, though, thought “huh, a few other banks are in a similar position” and moved quickly to tell large depositors (not bond holders, and importantly, not all depositors – just ones with deposits that can immediately be called) not to worry, their money was safe, don’t go withdrawing it to put it in money market funds or with JPMorgan Chase, it’s all okay. And they told the folks at SVB that, no matter how much they had on deposit, they’d get their money back – effectively backstopping those uninsured deposits, although in practice, the FDIC will charge for any losses incurred after it figures out what to do with SVB’s bond and loan portfolios, which could easily involve a massive exchange of long dated securities for short dated securities with the Treasury Department in what’s called a debt management operation, normally kind of tricky but since the FDIC is just an instrument of the Treasury Department actually kind of just a paper exercise in this case.

As I mentioned, this happened because SVB did something terribly foolish – namely, pretend that their really “hot” deposit book that was always at risk of fast runoff was somehow stable enough to justify investing in very long dated fixed income securities. What they arguably should have done was invested in short dated securities – say, two years or less – and then if the depositors needed their money back, hey, in any quarter, a decent chunk of securities would be maturing anyway, and no need to sell and produce losses against capital. Had SVB done that, though, those dollars would have stuck around, chasing some new thing to buy. Oddly, by investing in long dated securities, SVB did the economy a huge favour: it destroyed value.

Wait a second, Freilinger – I can hear you say – why is value destruction a good thing? Well, simple: we have too many dollars in “the system” right now. The Fed and the US government created them, beginning back in 2008 during the last crisis and with a huge spike during the pandemic when all the stops got pulled because people were worried about a plague-induced general zombie economic apocalypse; now they need to be destroyed because they are, in essence, the real zombies created by the pandemic: zombie dollars that have nothing, really, to buy, and thus simply chase up the price of all goods through a monetary effect called inflation.

Really, any time someone who bought a long term fixed income security at par in 2021 or early 2022 – when the amount of excess dollars was at its height – was helping the Fed by creating an almost automatic forward destruction of value. In fact, the Fed did this by expanding its balance sheet at the time to buy such securities; it’s now sitting on a gigantic paper loss, but as the central bank, it doesn’t care about paper losses; it’s retained earnings account is utterly meaningless, so it can sit on its losses forever and the economy won’t notice (or it will, but it will be happy about it, because it will limit momentum towards price inflation). Banks who did so are generally a bit annoyed: they’ll have lower earnings for years to come, but as long as they didn’t overindulge – or invest hot deposit money that is unlikely to stick around – it’ll just be a drag on capital accumulation. But that’s also a good thing: bank capital accumulation at least somewhat results in more lending, which results in more dollars being created. Since the Fed wants to bleed all of the excess zombie dollars out of the economy, bank earnings drags are a good thing as long as it isn’t too much of a drag – and viewed across the banking system as a whole, it really isn’t, in fact its a long way from being too much of a drag.

But individual banks may have made poor decisions. Indeed, having taken a look at data from all banks at the end of December 2022, only a couple of other banks with assets above $25 billion or so were even close to the level of “whoa, what a terrible decision to buy so many long dated fixed income securities” of SVB. Signature Bank, which was seized and put into receivership last Friday as well, was one of those. The other half dozen had much, much larger insured, small retail depositor bases, or in one case, had the majority of deposits in forms of trust accounts, which aren’t really at risk for either withdrawal or loss on withdrawal as the purchases are made largely at the direction of specific trustees.

Those individual banks should fail. Perhaps the odd decision on the part of the FDIC was to backstop the uninsured deposits, but taking a look at SVB and Signature Bank’s capital position, it’s not that odd: they each had enough equity and subordinated debt capital to absorb the securities portfolio losses, meaning the actual financial risk to the FDIC was quite small. Indeed, it’s smaller today, as the markets acted predictably against their own interest but directly in line with the Fed’s zombie dollar killing strategy, selling risky assets at a loss and buying government bonds, reducing the amount of money chasing price inflation and making it more likely that banks will just burn off the excess via earnings drags for the next decade or so.

Which brings me to my ultimate point. What is money?

To begin with, money is different in aggregate than it is in quantum – which makes it a lot like physical reality. Describing quantum behaviour gets into all sorts of weirdness which, when you describe physical systems on a macro level, you don’t see, and indeed you observe certain macro impacts which can’t directly be observed or even proven to exist at the quantum level. So if you think a lot about quantum mechanics, and specifically the boundary conditions between gravity and quantum mechanics, this stuff will probably be like “oh right, I get that”. If not, continue with me.

Money in aggregate is the instantaneous sum of all expressions of value in a given closed human exchange system or what we can call Value, using upper case and bold letters the way mathematicians do when they define special sets like R, the set of all real numbers, and I, the set of all integers. By “closed system”, I mean a system of human value expression and translation – or a “market” in the Adam Smith sense – which allows for fungible instantaneous exchange. A Unit of Money is 1/nth of that Value at a given moment in time, which by convention we describe as a dollar or a pound or what have you. And Units of Money can be created or destroyed, but Value is always an integralised construct of both real things – primary goods, secondary goods – and virtual things – desires, ideas, services, threats, shames. Value is changing constantly based on things like productivity but also based on social and personal sentiment.

Units of Money are also changing: in a world of gold, it changed based on discovering new gold mines and melting down prior gold that had been locked into jewellery and losing gold by having ships get sunk in hurricanes. In a world of fiat or “declared” money, it changes based on what central banks and their agents, private banks, create or destroy – and now in a world of crypto, fiat money can be destroyed by being siphoned into buying nothingness in the form of bitcoin or ethereum, which themselves can be created or destroyed (or rather, for bitcoin, lost to the world of the living due to misplaced passwords). Oh, and Units of Money are the discrete mechanism by which Value_N in a given closed exchange system can be exchanged for Value_M in a separate closed exchange system. At some point, if enough instantaneous exchange takes place between two systems, Value_N and Value_M, the systems can be considered simultaneous and undifferentiated, but that takes time to realise and because human beings are rooted in time and place, usually isn’t recognised until well after it occurs. In any event, back to our story in the Value space of US dollars.

The Fed created more units of money back in 2008 at a time when banks were rapidly destroying it; their desire was to keep the number of Units of Money constant so that psychologically, the observance of deflation – the drop in prices of items of value in the exchange marketplace – wouldn’t accelerate what was already happening in consumer and business sentiment, which itself was destroying Value. This largely worked, although the destruction of Value was severe enough that, for most of the next ten years, central banks and banks themselves found it difficult to restore the ability to grow Value such that people felt good again (remember Value is partially a function of sentiment, not entirely based on actual items). By 2019, though, that long slog was largely over, such that central banks and banks could begin to see a path towards restoring a normalized balance between how Value grows (with population, with innovation, with productivity, with the growth of humanity’s conception of what can be value-able) and the number of Units of Money in existence across the world’s various and not-entirely fungible exchange markets. Then the pandemic hit, which did more than cause a Value crisis – it fragmented the world’s exchange markets in a fundamental way that really hadn’t happened since the 1930s. Central banks sort of panicked – though in fairness, there was no playbook – and they stimulated the production of massive amounts of new Units of Money as a palliative.

We’ve learned since then that this wasn’t as necessary as was thought; Value did not plunge as a result of Covid, and if anything, humanity has used the experience to expand its language of exchange and of how to create value and meaning, even as certain real asset markets have detached from one another. But there are too many Units of Money around even for that expansion, and now prices are climbing as too many Units chase not enough Value. So the central banks need to destroy Units without causing a parallel (but false) psychological or sociological sense that Value is actually contracting, instead of the Units of Money contracting while Value remains constant.

In this exercise, ironically, the failure of banks is a good thing. It destroys Units of Money in that the failed bank will liquidate securities and loans that were created at par for a value below par; the lost Units of Value literally evaporate. It would be less disruptive if the banks just limped along for awhile – zombie banks actually consume zombie Units of Money over time – but that can take a very long time (just ask the Japanese). Arguably – and the US argues this despite much of the rest of the world disagreeing – it’s better to just allow for failure to be clean and simple, to rip the band-aid off quickly and destroy the zombie dollars in one go. We will, on a certain level, play out that thesis over the coming weeks and months, but past banking crises in the US as compared to their evolution in other regimes suggests the US has got it right.

In that sense, even taking emergency measures such as a quick “guarantee but not really” of uninsured deposits at SVB and Signature is quite clever. In a stroke, the Fed and the FDIC wiped out the substantial equity and subordinated capital of the two banks – in aggregate around $40 billion – while the failures themselves made it more unlikely that any further immediately recognised losses would be required. As a counterpoint, Credit Suisse will probably limp along forever, keeping something like $80 billion of zombie dollars trapped inside a balance sheet that someone, really, should shoot with a twelve-guage, a la Woody Harrelson in the B-movie classic Zombieland.

The more pieces I read about money, the more I’m convinced that people feel a need to address it as though it were a real thing. As I hope is clear from this essay, I don’t think it is “real”, certainly not in a classical sense. Money is a purely human construct, and exists simply to fulfil a human need. As such, we should be prepared for its “nature” to transform over time and space, as the needs we experience change and as we charge the thing we designate as “money” with different tasks. I think, though, that at its heart, money is our way of expressing our need to explore how and what we value, and how we desperately hope that we are creating Value across the entirety of our very social species. The special secret of money is that it is nothing more than our purest and very much most human attempt to see whether we’re worth anything at all.

When a bank blows up, therefore – even if it’s your bank, and even if some dogmatic deposit insurance bureaucrat limits your claim to the statutory maximum – you shouldn’t really feel anything, any more than you “feel” anything when you drop a vase and it breaks. Your sentiment and your emotional state may change, but the world in its vastness has not, and if anything, the act of destruction – of a vase or of dollars – is the world giving you, and itself, and opportunity to change the function of what meaning is and can be. Pick up the pieces, tear up the checkbook, and create anew.

I was speaking to some old colleagues not long ago about hedge funds, in the context of how many fund managers had fallen for the siren song of “investing” in crypto and, given the open nature of their fund mandates (which can in many ways be boiled down to “make money in ways that aren’t boring so investors feel justified paying higher fees than in a mutual fund”), there were effectively no brakes on them piling in. One lamented the fact that he had never been given the opportunity to have such an open investment policy; he had been an equity fund manager and was limited to buying public common stock, listed on major exchanges, with limits as to single name concentration and industry concentrations and minimum holding periods. Another guy (alas, we were all men) talked about how fixed income was quite different: sure, you could take credit bets here and there, but ultimately, the general level and shape of the yield curve drove your returns, and since the Fed was essentially “the house” and could whipsaw the curve at will, he felt like his decisions were always just different shades of lipstick on the proverbial pig.

I took a somewhat different stance. I’ve never run a full-bore hedge fund, but back when I started my career, I had a somewhat hybrid experience of running a general purpose arbitrage fund. The mandate was to beat the return of money market funds, with the same risk profile (ie., effectively none). But there were no real constraints on what we could do in pursuit of that goal. A core strategy, for example, was futures arbitrage: we bought the underlying stocks or bonds of a given futures contract and shorted the futures against it – or at least, we did so when the market implied a carry rate on the contract in excess of regular money market returns. As long as we held on to the underlying and delivered into expiration of the futures, we had a “guaranteed” return – although I was taught, both formally and by experience, that the guarantee required holding the position to maturity, required confidence that the underlying you had bought was, in fact, properly deliverable, that your futures broker didn’t go under during the life of the contract, and that you and your management had full faith and confidence in the Chicago clearinghouses to make good on the contracts at expiry.

What I explained to my friends, though, was that it was the constraints – the career maintenance requirement that at no time would I lose money relative to just buying and rolling overnight time deposits – that made the job incredibly fun. I was supposed to find what in markets should be imaginary creatures – riskless performance superior to the performance of a riskless asset – and do so with billions of dollars, over and over again. And for seven years, I did it. Indeed, what eventually ended that halcyon period was being given the reins of a higher risk fund, which by definition would take bigger risks and would thus theoretically potentially have losses in excess of that theoretical money market fund comparator. I took bigger risks; I lost a bit of returns; and it turned out that management didn’t really buy into the idea that losses were okay and I found it expedient to look for employment elsewhere.

Subsequently to that, I managed bank balance sheets, and having brought the experience of that first career stint with me, I took pains to understand exactly what the constraints were – in other words, what losses were acceptable and what losses were not. I quickly realised that banks, in managing their balance sheets, don’t worry so much about whether a single investment loses money, especially due to changes in rates. They worry about the net gain or loss between what the bank is earning on its assets and what it pays on its liabilities. My job was to balance those two with the broader objective of increasing the net return over time. The constraints, moreover, were orders of magnitude more complex that what investment managers face in the “regular” funds world. I was using maybe 20% of the balance sheet to augment and diversify the other 80% of the assets – mortgages, credit card loans, lines of credit – and was trying to raise about 50% of the balance sheet in institutional funding markets while keeping a strong eye on what the deposit people were doing to bring in customer funds. When times were good, it felt like ice skating blindfolded on good smooth ice, but you always knew the ice might start getting chewed up – and you were never sure how thick the ice was and whether it would hold your weight if you fell down. I loved it, but to be sure, the ice broke more than once.

I’ve thought about this quite a lot recently, though not so much for what I do – I consult with banks on how to manage their balance sheet, but I’m no longer doing the skating, and I manage a small hedge fund, but it’s simpler conceptually than any investing I’ve ever done, even if what I’m buying and selling is intricate and complex to value and trade. Where it’s come into my thinking has been in thinking of the Fed and how it’s managing the money markets these days.

It should be noted that every bank treasurer I’ve ever met who’s worth his or her salt ultimately wants to be either a Fed governor, ideally the Chair, or running the open market operations desk for the New York Fed, essentially the head of portfolio management for the largest and most significant bank balance sheet on earth. I’m no different; that latter job, in New York, from an investor perspective is actually a bit boring – the market knows how you need to trade before you do – but it’s the interaction with the market, and the influence of being the go-to person for the rest of the Fed on the constant question of “so what’s the market really thinking about us?”. My fellow traveler here on the site, Mark, once served in that role for the Bank of England on their short term money desk – admittedly a bit of a junior currency regime relative to the US dollar system, but still, a part of me will always be green with envy that he had that desk for a period of time. I think often about what I would be doing today, at 9am on a Wednesday in February 2023, if I were sat at the screens in lower Manhattan instead of in front of my laptop on holiday in the Hamptons.

The Fed doesn’t just operate the largest single balance sheet on earth; it also sets the price of overnight money for the rest of the US dollar banking system. It is, after all, both the marginal buyer and seller of dollars to all other parts of the market – either directly, through its discounting and repo operations with banks and primary dealers in the US Treasury markets, or indirectly, as the rest of the market ultimately transacts with those banks and dealers and their capacity is set by what the Fed demands of them or they demand of the Fed. But in operating the rest of the balance sheet – funded by deposits from member banks, by currency outstanding, and by excess government balances – it creates ongoing indirect impacts on the demand for money and, thus, for the stability of the rate which it sets on money. If the balance sheet gets too big, the Fed can inadvertently distort the long term price of money, which then creates pressures on the short term demand for money depending on how they set the overnight rate. If the balance sheet gets too small, banks may be forced to place excess deposits in riskier assets, which can result in inflationary pressures which ultimately may require an increase in the short term rate, which in turn can stifle economic growth.

And the Fed has two missions. The first – to maintain long term stability in the value of US dollars – gets the most press, or at least it does for me because I’ve lived in the financial markets for going on thirty years now. The second, though – to enable monetary conditions consistent with the maintenance of full employment in the US economy – is the real kicker. Those objectives aren’t always in alignment, even if over the long run, there’s good reason to believe that economic systems engender optimal employment conditions when price stability is maintained. In the short run, however, Fed governors get appointed, confirmed, reappointed, and retire; in the short run, there are elections of the presidents who choose the governors and of the senators who confirm them; in the short run, the financial and popular press (and in today’s world, social media) interpret for the voters whether there is or is not alignment and regularly tell the Fed just what they think of the balancing act. If, back in the day of running a short-term arbitrage fund, I was ice skating blindfolded, then the Fed (and its system manager) ice skates blindfolded, with a rhino strapped to their back, as the warm springtime sunshine is starting to melt the ice.

Twelve months ago, as inflation started to spiral upwards, plenty of commentators (and politicians) blamed the Fed for “waiting too long” to rein in inflationary pressures in the monetary system as the economy returned to normal after COVID lockdowns and as the cumulative impact of $5 trillion in fiscal stimulus started hitting the economy with full force. Such criticism was ridiculous: most of the nattering nabobs of the publishing classes found it convenient to forget that there had been quite recently a pandemic which resulted in the largest two-quarter decline in GDP in history; anything the Fed would have done would have been at least somewhat wrong, and to have gotten it “wrong” in a way which maintained broad employment stability should have been cause for celebration, not whinging. But even beyond that, the short term blinders which focused on “inflation surging higher” ignored the prior decade of below target inflation, which had led the Fed to attempt monetary stimulus that led to the disruptive asset bubbles in real estate and other long-term assets which were beginning to harm household balance sheets. If anything, it was to the good that the Fed let inflation run up a bit – especially since the resulting sectoral decline in real and financial asset prices which we’re still observing is doing much to normalise wealth imbalances in the US domestic economy.

Now, with unemployment at historical lows – so low, in fact, that wage pressures continue to build – and with inflation still running well above historical averages, let alone its own target, the Fed is being criticised for potentially “overshooting” on rate hikes. Or worse yet: some observers believe the Fed will be “forced” to engender a recession in the US in order to get to the long-term target inflation level of 2%, with a number of articles in the past couple of weeks suggesting that the Fed should do away with the 2% target and allow inflation to run higher, longer, so as to ensure no job losses.

This all serves to remind me of that first job I had, running derivatives arbitrage strategies. There was one objective, well understood: beat the returns on overnight deposits. There was one iron clad constraint: don’t lose money, ever. That meant the returns were rarely stellar, but management also didn’t have to ever go back to investors and explain a loss. Then I was given what in theory was a “more fun” job: beat returns on overnight deposits by a lot – clear enough – but the constraint got squirrelly. It wasn’t “don’t lose money, ever”; rather it was “try not to lose money, but you’ll only know that a loss was too big after the fact”. That second job sucked.

At the banks I managed as treasurer, the objectives were actually quite tricky: some mix of meeting risk targets, “optimising” net interest margin, maintaining adequate ready liquidity, but the constraint was back to iron clad: always make sure your capital levels exceeded minimums with a cushion, and always have enough cash to pay the bank’s obligations on demand. I love that world of hard constraints – even if they are multi-dimensional, even if they sometimes were contradictory. The lack of ironclad objectives meant that there was always room for someone – a head of commercial lending, say, who thought they were being charged too much to fund their loans – to complain about how well I was doing my job, but with hard constraints to fall back on, I could find a way to navigate the bank with firm knowledge of, as it were, where the ice was getting thin.

The Fed has its constraints, loosely worded as they are, and the very size of the Fed and of the US dollar economy at which it stands at the centre mean by definition the job of managing their balance sheet is impossible to get right. Indeed, as the press reminds us (in particular with its own lack of memory), if you get it right in one period, it’s assumed you’ve planted the seeds of failure in the following one. Managing with such background noise as that must be intensely stressful, but the Fed’s governors have done an admirable job, and show no signs of cracking or falling prey to obvious mistakes. And arguably, they’ve done better than most other central banks – Japan, Canada, UK, the EU – despite the external noise, and despite being the obvious magnet for global monetary criticism. I think, though, it’s the fact of their constraints that enables such success.

Hedge fund managers often seem like the ubermenschen of the capital markets. The press avidly tracks their yacht and real estate purchases, and hangs on their pronouncements, whether it be on corporate governance or management style or talent selection. But in reality, most hedge funds die and fold quietly, and for every Citadel, there’s a dozen crypto and meme fund blowups. On the other side of the coin, the constraints we place on banks, on money market funds, and on our central bank are the unspoken key to their long term sustainability and success.

As we think about what may be required to face larger global challenges – global warming, for example, regardless of what you think its origins may be, or pollution control, or demographic changes – it’s worth reminding ourselves that the constraints are what bring out the most creativity and, ultimately, the most consistent success. We might miss out on the next upside trade, but knowing how to skate the thin ice is what will keep us alive.