#151 How Do Bank Failures Affect the Economy, Real Estate Market, and Your Money

Hey, everyone. Today we're going to talk about bank failures, how that affects the economy, how that affects real estate markets, and all of that together, and how you should be thinking about your money and how to keep it safe. So enjoy. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Foreign. So no doubt you've heard all about these bank failures lately. Even my wife, who isn't even into financial news online, she's heard about the bank failures. So I thought it'd be a good time to talk about that today. What happened and what we can do about it. You've heard about Silicon Valley bank, and that's the biggest collapse that people are talking about. That was a bank that had billions of dollars in assets or at least held the billions of dollars of startup money, real estate money, a little less of, but people's personal money as well, all held within this bank. And it's something that in just a short period of time, people say over 48 hours, this thing collapsed and failed. So many of you probably are asking the same question I was asking, how does a bank fail and how does that affect things moving on board? So some of you might be surprised to learn, and this is something I learned a few years ago, is that banks don't just keep your money, hold it, and then just give it back to you when you want. They practice something called fractional reserve banking, where even though they take deposits, a lot of that money is actually lent out in the form of loans elsewhere. So they take your money and give you and promise you a return based on the money they hold. If it's a checking account, probably very little savings, probably very little, depending on some of the banks that you're banking with. And then what they do is they actually lend out some of that money for larger sums. Those loans that you're taking, whether it's mortgage, private loans, business loans, these are all loans that were given to you using other people's money. They make money by essentially splitting the difference on those interest rates. So again, they might give you 0.1% or nothing if it's a checking account, and then lend it out for 7, 8, 10% on some of these personal loans, depending on that, again, they make money on the spread and that's how they make their profits. Problem is, all of this is not risk free to you as the person who is putting your money in the bank. What if you want that money back and it's not there because it's lent out? Well, normally banks are managing this and constantly shifting their cash just to make sure they have enough reserves in case anything like that happens. So that when you want to go to take your money out, you go to the ATM and that cash comes out and it's already free. What they're not prepared for is if people do what's called a bank run and everybody goes in there trying to flood the bank and try to take out their money at the same time. You've probably heard of these things that happened in the Great Depression and other times when big banks have failed. They failed because they didn't have enough money or cash in house to give to the depositors when they wanted it. Now what banks can do in that situation is they can actually get out there and they can sell some of their assets. Maybe they have their own stock that they sell, maybe they have certain bonds that they're able to liquidate or certain types of assets they're able to liquidate in the worst case scenario to give back to depositor in case they want that money. But in a market like today, where interest rates have risen quite a bit, where stock prices have fallen quite a bit, banks like Silicon Valley bank, they just weren't able to get enough money in house fast enough, in a liquid enough way to give and supply to all the depositors who wanted their money back. So the bank essentially went under, it shut down. And what did everybody do? They freaked out because their money was stuck in the bank. And certain companies like Roku had tens of millions of dollars in the bank and they weren't able to take that out. And everyone's worried because if faith in these banks, if it runs low, meaning that people aren't fully secure, that their money is secure, they're going to try to take that money in cash and store it in their homes. And so what happened was that again, there was a bank run for svb, there's a bank run for other banks. And everybody, and especially in the economy and the Fed and the government was worried that this would spill over into other banks that maybe weren't in the greatest financial situation. So you heard a lot of these famous business people like Mark Cuban trying to step in and say something has to happen, the government needs to step in to make sure that the public has confidence in these banks. So they wouldn't do this bank run and Pull their money out. Just so you know, in the United States, there's an organization called the fdic, which is the Federal Deposit Insurance Corporation. What it does is insurance bank deposits up to $250,000. Right. Per depositor for that type of account. And that's to provide some security for your money. If you're in a bank, at the very least $250,000 of that is protected. So what happened in this situation? A lot of people thought they lost a ton of money. I had friends who have startups or at least are advisors for startups or investors in startups. They're venture capital angel investors that basically called me and told me that they're screwed. Their money is stuck in SVB and they weren't sure they were going to get that money out. It was going to affect their ability to pay payroll that week to have money for market whatever it was, to run daily operations. All that money was tied up in the bank. So what happened? The Fed ended up jumping in to bail them out to save people and their deposits, to guarantee those deposits so that people would be able to withdraw that money if they needed. And the hope was that they would restore public confidence in the backing system. Well, another bank had issues called Signature bank because people identified that as a risk as well. There's another prominent bank that, you know, many of us have banked at. And actually I have accounts that. It's called First Republic bank that is now having issues. If you watch the stock prices, it shut down, it shot up, shot down, and now it looks like a bunch of banks have lent them money to make sure that they had enough money in liquid funds to be able to satisfy the depositors and actually operate as they needed to? Hey everyone, have a quick question for you. Have you wondered if it's possible to find true financial freedom while being a present spouse as well as a loving parent? I know. I think about this all the time. Dr. Vikram Rai. He's a cardiologist, he's a serial entrepreneur and the founder of Limitless MD and he's helped countless other doctors take control of their financial lives and time so they can live the life they were created to enjoy. Go to vikramriah.com that's V I K R A M R A Y a dot com gift and get the Limitless Physician's Guide to Building wealth ebook today. Check it out. Okay, so people are asking what happens when these banks fail? So I'm going to talk about a few key points just so you can understand that. And then again, how it might impact you might impact real estate. What you should do about it. Number one, the biggest thing it causes is a loss of confidence in the banking sector. I don't know about you, but it made me relook at where my deposits are. I went and I said, okay, I've got too much in this bank, which again is a good thing problem to have. But I moved it to make sure that we were under those $250,000 FDIC insured amounts. You don't want people to panic and pull money out. But that could happen in a situation like, number two, it causes reduced lending. So banks are probably less likely to lend out money, especially ones that are not collateralized, just the private loans, personal loans, home loans, all of these things might become tighter now that the whole market is worried about what might happen with these banks. That's unfortunate for us who like to use loans to buy businesses, to buy real estate, to build your portfolio. This has also caused ripples all across the stock market. Obviously, bank stocks have fallen, but other stocks have fallen down as a response to all this. Again, this is all inciting a lot of fear for people. And so when people freak out, they take their money and they want to do the most secure thing possible. So they take money out of assets like the stock market, they hide it under the mattress and they wait for a better day. Now people are wondering what effect this might have on inflation. What happens is money gets tighter, sometimes lending goes down, cash isn't flowing as well. So a lot of times this actually might cause downward pressure on inflation, which is probably what the Fed was looking for in the first place. But this might cause that. The only other situation, if a lot of cash comes out, people pull a lot of cash, more likely to use their cash. So it could alter things. So most likely we're going to see a downward pressure when it comes to inflation. Lastly, this might cause a change in the Fed's response. I think we're all seeing what's happening with inflation, with interest rates. These things continue to go up. The Fed keeps saying they're going to push up interest rates. Who knows what's going to happen now People are freaking out. Maybe they're just going to go slower. Different people at Goldman Sachs are predicting one thing. They might be predicting that there's going to be no interest rate increase in the future. We'll see. That's coming up pretty soon. Other people are saying it might be a more tempered response. Instead of going up 0.5, might go up 0.25. Who knows. But either way, the Fed has to respond to this. People are freaking out, and so they're probably going to give a more of a muted response, meaning that less of an increase than they might have done before. Okay, so we talk about a lot of real estate on this channel podcast. So how might this affect the real estate market? Number one, you might have reduced lending, meaning that banks are a little bit tighter now. Their money has to be a little more secure. They might want to keep more of their money in house. The good thing about real estate is that these are secured loans, meaning that there's collateral there, there's assets. So banks are more likely to lend to those type of situations versus ones where there's a personal loan that aren't collateralized, that they aren't able to foreclose on if necessary to get some money back. But if lending stops, could this slow down the market even more and accelerate that? It's a possibility. Obviously, if there's an issue with liquidity, meaning that people are able to not get their money, it could cause a ripple effect where people aren't able to pay their mortgages. Could that lead to more. More foreclosures down the line? That is a possibility. Or people having issues paying their mortgages. Also, real estate and the market, along with stock market and all of the economy, there's a lot of psychological components to it, meaning that if people feel good, they feel optimistic and euphoric, things go up in price. People feel pessimistic or they're scared, things go down in price. So oil prices all over the country might go down as a result of people losing confidence in the economy and market. All right, So I know people are asking, what should we do? What should you do? What should I do? I can only kind of tell you what I'm doing. And ultimately you have to decide what's best for you. So the first thing I'm doing is taking a look at where all my cash is, which banks are my cash in. Again, I have different deposits. I want to see what limits I'm at, what the FDIC, whether it fits under $250,000 limit for that insurance, and make sure I can spread it across so that's all protected in case some of these banks may not be solvent. Right. In case something might. May not be very stable and something happens to them. There are some accounts out there just so that people know. I've noticed something like at Wealthfront, I don't get paid by Wealthfront, but if you go there, what they do is they Split up your deposits among different banks. So they say they're actually. They're actually up to about $2 million insured when it comes to FDIC deposits. So that's one place where people can put their money in a large amount. But most banks, like I'm at Bank of America, at American Express, I'm an ally. All of these things have $250,000 limits. So I'm making sure that my money is spread across to make sure it's safe again under that FDIC insured limit. So that if anything happens with these bank runs, if anything else should happen, I'm secure with all my cash. That's the first thing I'm going to do. And that's my recommendation for you as well. What I'm also doing is making sure that all of my investments right now are well diversified. This market is pretty crazy. There are a lot of things that are happening. I think there are going to be some amazing opportunities on the backside that I've talked about. But right now I want to make sure I understand exactly where all of my assets are, what are the investments out there, and make sure I'm well diversified. If all of your eggs are in one basket, as I've seen in a lot of people's portfolio, my father's portfolio and other people, then you're going to be riding along with this economy. You're going to be going, when it goes down, you're going to feel horrible. When it goes up, you're going to feel great. It's most likely during this time of volatility, there's probably going to be a good amount of pain, at least for the next 12 to 18 months. So it's nice to have that diversified portfolio. We've talked about the holy Grail of investing, where you have 10 to 15 uncorrelated assets, where if you have all of those things together, it's going to help smooth out returns while minimizing risk. So take a look at your portfolio. What do you have? I'm looking at it. I have real estate, I have gold, I have stocks, I have cash, I have mineral rights, I have businesses. I have it in different startups, all these different things in my own businesses. And then so I have all these money in different places so that I know that no matter what happens, that I'm secure with because I have a lot of different streams of income coming in. The other thing I'm doing right now is I'm taking this time to learn. I'm learning so much about how the financial Institute work, I haven't been there that in my recent memory that I actually cared where there was a big bank collapse. So I'm learning all about this right now. I'm learning what it means, how to actually use it to my advantage in a lot of ways again, to see what's coming up to be safe during these times. And this has been a big wake up call for me. I don't know if it's been a wake up call for you. And so now I feel like I'm learning a ton. I'd say this period in the economy right now, it's all about mitigating risk, making sure that in a down economy like this, you're set up so that your portfolio, your assets, your real estate, all of these things will be secure. You'll be able to pay off all your debts, like as you need to, your obligations, and then on the backside, I want to make sure that I have money available. Talk about cash and liquid cash. To be able to invest in opportunities. When we hit that point of maximum financial opportunity, which is coming up very soon, this is the time to educate yourself, set up your resources, start learning how to do the proper due diligence for these type of investments so that when the opportunity comes, you're ready to pull the trigger. You have the confidence and you're ready to go. I hope this has been helpful. But one last thing before I go, I want to just really shout out the people that I met over the last few weeks. I've met so many people at these conferences. They've come up to me, let me know they listen to this podcast or watch me on YouTube. If you're one of those people, know that I really appreciate connecting with you again. This is a community that I'm trying to build and I'm trying to support. And knowing that you're out there listening, sharing it with others, that it means something to you, that you're getting something out of it in terms of value. Again, that means the world to me. So thank you for all that you do. And I'm going to continue to try to support you as much as I can through these channels. Thank you so much. Take care. Bye. Hey, everyone, I have a quick question for you. Are you ready to expand your life and level up your impact? Well, I wanted to tell you about something called the Leverage and Growth Accelerator. We created this exclusive community just for physicians who want to expand their identities without giving up their doctor identities. Well, we hosted our very first, first Leveraging Growth Summit. We realized that so many Doctors were inspired by the what and the why of entrepreneurship but needed help with the how and the when. And that's why we created LGA to provide a community where doctors can learn how to start, grow or scale and scale a thriving business and connect with like minded individuals who also want to make a positive contribution to the world. So with LGA you can experience a life of greater fulfillment. 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