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Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.

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Speaker 1: This week on the podcast, I have an extra special guest.

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Speaker 1: His name is Peter Conti Brown, and he is an

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Speaker 1: expert on central banks, financial history, and the Federal Reserve.

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Speaker 1: And if you are interested in those sorts of things,

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Speaker 1: as I am and many of you are well, then

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Speaker 1: sit back and get ready to walk out on some

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Speaker 1: really interesting um stuff. He he really has a in

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Speaker 1: depth grasp on not just central bank operations, but on

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Speaker 1: the history of finance and the history of Federal Reserve

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Speaker 1: in a way that most people simply can't do more

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Speaker 1: than scratch the surface. So if you are at all

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Speaker 1: interested in modern banking regulations, the politics at the FED,

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Speaker 1: what Greenspan and bernanke he did or should have done

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Speaker 1: or didn't do, and how the history of the Fed

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Speaker 1: squares up with the modern era, you're in for a treat.

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Speaker 1: So sit back with no further ado. My conversation with

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Speaker 1: Peter Conti Brown. My guest this week is Peter Conty Brown.

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Speaker 1: He is a professor at the Wharton School at University

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Speaker 1: of Pennsylvania and he is the author of the Power

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Speaker 1: and Independence of the Federal Reserve. He comes to us

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Speaker 1: by Harvard, where he was undergraduate. He got his juris

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Speaker 1: doctor degree at Stanford Law School, and then he earned

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Speaker 1: a PhD at Princeton in am. I remembering this correctly

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Speaker 1: legal history is that it's a financial history. Financial history

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Speaker 1: even better for our purposes. Peter Conti Brown, Welcome to Bloomberg's.

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Speaker 1: Such a pleasure to be here. Thanks Barry So. I

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Speaker 1: read one of your columns some time ago, and I

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Speaker 1: kind of cracked up by a line within it which

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Speaker 1: we're all somewhat guilty of to some degree or another.

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Speaker 1: You note something remarkable in the shelves of an old

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Speaker 1: fashioned library which uses the Dewey decimal system. Go to

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Speaker 1: h G section and you right, the shelves variably grown

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Speaker 1: under the weight of the conspiratorial tomes about the Federal Reserve.

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Speaker 1: Why why are we so conspiracy minded about America's Central Bank?

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Speaker 1: In some sense, it's the founding crisis ideologically, right, militarily,

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Speaker 1: certainly politically, and that is what is money? And who

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Speaker 1: gets to decide? Right? The British said money has to

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Speaker 1: consist of such and such and so and so, with

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Speaker 1: tariffs and stamps and this much silver associated with it

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Speaker 1: while starving the colonies of the resources to deliver on

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Speaker 1: that promise, or so asserts the Declaration of Independence. Right, Well,

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Speaker 1: fast forward a few years, the Revolutionary War is over.

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Speaker 1: But then we get the in the Washington administration Alexander

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Speaker 1: Hamilton's one hand, Thomas Jefferson on the other, Lin Manuel

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Speaker 1: Miranda in the middle, right. Uh, And and the reason

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Speaker 1: I think that Hamilton's musical has succeeded to spectacular lin

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Speaker 1: Manuel Miranda is a genius um but his other musicals

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Speaker 1: like In the Heights right, also fabulous. But hamilton musical

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Speaker 1: gets to this question, what is money? Who gets to decide?

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Speaker 1: We thought about that forever, and we fought about it

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Speaker 1: in ways where that become extremely technical very quickly. Alexander

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Speaker 1: Hamilton's certainly very technical expert on these issues, but on

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Speaker 1: like other areas of technical expertise, like you know, hey,

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Speaker 1: how do you get a satellite into orbit? Right? You

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Speaker 1: don't have a lot of ideology around that. You just say, well,

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Speaker 1: either works or it doesn't. Either your trajectory is accurate

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Speaker 1: or it's not, in which case, now, with all respect

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Speaker 1: to the Flat Earth society, and you know, moon Landing

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Speaker 1: was staged and that sort of thing. They're conspiracy theorists

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Speaker 1: there too. But the difference is is that you don't

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Speaker 1: use satellites to buy groceries, right, You do use money

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Speaker 1: to buy groceries. And so that intuition about what money

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Speaker 1: should be and who gets to decide is shared by

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Speaker 1: a lot of different people. And so there's a gap

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Speaker 1: between what experts who themselves don't agree say should be

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Speaker 1: a proper financial system, a proper monetary system, and what

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Speaker 1: we in all kinds of identitarian factions, whether they're religious

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Speaker 1: or political, or or geographical or or whatever else, you say, well, no,

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Speaker 1: that's wrong. And so I think the FED is just

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Speaker 1: this great collision of expertise, of ideology, of history, of politics,

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Speaker 1: of economics, of law, and that just produces a really

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Speaker 1: pungent potion that attracts conspiratorial thinkers and uh and experts alike.

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Speaker 1: So let's talk about that explicitly because it comes so often. Um,

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Speaker 1: the creature from jack All Islands, that book which is

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Speaker 1: now decades old and it goes through a new edition

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Speaker 1: every few years. That seems to be the source amongst

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Speaker 1: the people I see as the conspiracy theorists. Says, hey,

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Speaker 1: this was doomed from the start. But you're a historian

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Speaker 1: of of financial markets. We could go back to the

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Speaker 1: first Federal Reserve or the second Federal Reserve. In each case,

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Speaker 1: there was a tremendous fear and skepticism in the eighteen

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Speaker 1: hundreds about those banks, and each of them were and

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Speaker 1: I'll ask the question to you, each of those were

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Speaker 1: imbued with a finite lifespan. So why did it take

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Speaker 1: so long before America said, Hey, we can't be the

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Speaker 1: only major country that doesn't have a central man. You know,

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Speaker 1: you asked you know, separately. One of the questions that

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Speaker 1: you asked me was, you know, what are some un

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Speaker 1: unnoted periods in financial histor three that people don't think

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Speaker 1: about that matter a lot, And there's one of them.

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Speaker 1: In NTE Congress passed a statue just on uh right

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Speaker 1: before a Great Depression, look at the Federal Reserve Act

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Speaker 1: and said, the Federal Reserve was created just like the

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Speaker 1: first and second Banks the United States, with a twenty

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Speaker 1: year charter. And so let's do some quick math. Federals

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Speaker 1: are BacT nineteen plus twenty ninety three nineteen thirty three

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Speaker 1: in the midst of the Great Depression, right at a

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Speaker 1: time when Franklin Roosevelt was not uh, you know, representing

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Speaker 1: these uh, these what his cousin Theodore had called the

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Speaker 1: malefactors of great wealth. Right, Um, would the FED have

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Speaker 1: been renewed in nineteen thirty three, I think that's a

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Speaker 1: really fascinating question. We didn't have to ask it because

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Speaker 1: seven uh slipped five years in advance, five years in advance,

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Speaker 1: slipped in you know, uh slipped in two As a

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Speaker 1: writer as a to a much more controversial banking bill,

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Speaker 1: they said, you know what we're going to We're going

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Speaker 1: to eliminate the need for a charter extension. This is

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Speaker 1: going to be in perpetuity. Um. What's so intriguing about

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Speaker 1: that is in the Second Bank of the United States,

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Speaker 1: that's exactly what the Second Bank's president, Nicholas Biddle, tried

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Speaker 1: to do. His charter wasn't up until eighteen thirty six,

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Speaker 1: and he slipped it in early because he thought, you

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Speaker 1: know what, the bank is so popular that we can

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Speaker 1: do this, and we should do it early, as opposed

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Speaker 1: to letting it be a big controversial thing. That was

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Speaker 1: one of the best biggest miscalculations right in the nineteenth

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Speaker 1: century because Andrew Jackson was able to harness his own

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Speaker 1: popularity against the bank. But we sometimes forget when the

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Speaker 1: Second Bank of the United States failed. It failed because

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Speaker 1: the Congress came just short at overwriting Jackson's veto. It

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Speaker 1: was still massively popular, just wasn't so popular that could

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Speaker 1: override a presidential vito. What were the politics of President

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Speaker 1: Andrew Jackson that he was against renewing or turning that

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Speaker 1: into a perpetual money machine. This is this is a

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Speaker 1: great question and should remind our listeners a lot about

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Speaker 1: our present political situation. There are two stories that one

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Speaker 1: tells about Andrew Jackson. So one is as this fierce

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Speaker 1: pugilistic populist right. He wanted to take power and tear

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Speaker 1: it down and push it down into the states and

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Speaker 1: away from the federal government. That's certainly the vision that

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Speaker 1: the Jacksonian Democrats carried with them through the rest of

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Speaker 1: the nineteenth century and into the twentie At certainly, at

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Speaker 1: some points what Andrew Jackson saw himself as is representing

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Speaker 1: those who had been disenfranchised, disempowered by Wall Street and

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Speaker 1: the like. Um, I don't even that that far ago,

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Speaker 1: even still the same conversation, same conversation very similar, and

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Speaker 1: I think that that's, uh, that's a bit of of

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Speaker 1: revisionism by Jackson and his descendants politically, who wanted to

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Speaker 1: make a more coherent narrative than actually existed at the time.

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Speaker 1: At the time, Jackson was much more like other politicians

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Speaker 1: that we are probably going to come up in this

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Speaker 1: conversation and just didn't like to have other power bases

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Speaker 1: that threatened his control. Right, So there were times when

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Speaker 1: he would say, uh, Andrew Jackson would say two different

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Speaker 1: things that were were together incoherent about his own monetary vision,

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Speaker 1: sayings very he hated the idea of paper money, while

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Speaker 1: simultaneously saying, let's uh send the economy a wash in

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Speaker 1: paper money but issued by state banks, right, um, where

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Speaker 1: you'd show real hostility to a gold backed currency, while

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Speaker 1: simultaneously saying it's the only mechanism that he would approve of.

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Speaker 1: So I don't think you can put an economic ideology

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Speaker 1: on Andrew Jackson. I think efforts to do so, uh

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Speaker 1: failed to realize that Andrew Jackson, like Donald Trump, frankly

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Speaker 1: UH say you know, I am the source of decision

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Speaker 1: making the idea that there would be another power base

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Speaker 1: that could threaten my control over the UH system that

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Speaker 1: I can't abide, and so he went to war with

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Speaker 1: Nicholas Biddle and UH. And I think that's the that's

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Speaker 1: the source of that conflict. Fascinating. Um, your your students,

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Speaker 1: grad students or undergrads are both everything and executives and

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Speaker 1: PC students, and so we really teach them all. So

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Speaker 1: so much has been going on in the worlds of

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Speaker 1: banks since the financial crisis. I have to ask you

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Speaker 1: about Dodd frank and and the changes to that. But

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Speaker 1: before we get there, we now live in an era

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Speaker 1: of mega banks. All the banks are really relatively giant

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Speaker 1: compared to before the Financial crisis, a number of pretty

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Speaker 1: substantial banks were either required or or moved over. You

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Speaker 1: you have Washington Mutual and WA Kobe, and you know,

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Speaker 1: look at all these different banks, Bank America and Merrill Lynch, um,

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Speaker 1: all these giant conglomerations. How is the modern ear of

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Speaker 1: banking different then the way it existed prior to the

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Speaker 1: financial crisis? You know, Um, we've seen after the financial

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Speaker 1: crisis essentially an unrivaled concentration in the financial system, financial services,

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Speaker 1: the you know, just looking at commercial deposits, for example,

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Speaker 1: which include personal and commercial deposits about seventeen trillion dollars

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Speaker 1: right in the American that's just checking and savings, checking

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Speaker 1: and saving accounts for individuals and businesses and organizations. Um.

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Speaker 1: Megabanks which will call above two fifty billion dollars, right,

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Speaker 1: So that's things like JP Morgan Chase, Bank America, will Fargo,

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Speaker 1: and and much further down. It goes down to you

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Speaker 1: know US Bank, and uh, you know PNC, and you

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Speaker 1: know Fifth Third and other banks that you might think

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Speaker 1: of as regional, but really, have you know a grown

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Speaker 1: grown in into into great size, right, um, because JP

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Speaker 1: Morgan Chase isn't. It's balanced as trillions of dollars right

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Speaker 1: well as far agoes above trillion dollars. So we're taking

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Speaker 1: down almost a more order of magnitude smaller than that.

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Speaker 1: But these are still very very large banks. And they

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Speaker 1: controlled about thirteen trillion dollars, right, thirteen of the sixteen

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Speaker 1: trillion dollars, and in these deposits. That's an extraordinary concentration,

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Speaker 1: especially given that the number of institutions we're talking about

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Speaker 1: as a couple dozen. Right. This changes as banks balance,

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Speaker 1: she exchange in size at the margin. But we are

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Speaker 1: seeing financial services dominated by a handful of institutions. And

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Speaker 1: and we have not seen that really ever before in

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Speaker 1: our history, um, including the great mergery era of the

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Speaker 1: late nineteenth century where you saw trusts around sugar oil, uh,

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Speaker 1: corn harvesting machines, right and fill in the blank. There

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Speaker 1: are these This is the great trust era. Have a

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Speaker 1: great consolidation era. But interestingly enough, because of the structure

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Speaker 1: of the US political economy, banks were extremely decentralist by law,

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Speaker 1: UM each bank that for a very very long time,

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Speaker 1: a bank couldn't have more than one branch. And even

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Speaker 1: after that was changed in the late nineteen twenties, they

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Speaker 1: couldn't have branching across states. Uh. And that wasn't finally

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Speaker 1: abolished where you would have a bank doing business as

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Speaker 1: its own institution across state lines until after nineteen eighty.

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Speaker 1: What about the repeal of Glass de Eagle, What did

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Speaker 1: that contribute towards banks bulking up? It's a contributed a

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Speaker 1: lot so UM. I mean this is this is a

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Speaker 1: point of some debate among economic historians. It's correlated right

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Speaker 1: with banks uh bulking up in in in pretty breathtaking fashion.

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Speaker 1: What some economic historians say, well, that's correlated, but it

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Speaker 1: wasn't caused by this, and we were Glass Eagle was

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Speaker 1: essentially unrelated to this size. Now that's hard to swallow,

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Speaker 1: at least in the short run after around Glass Eagle's

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Speaker 1: final legislative demise, because of course City Group becomes city

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Speaker 1: Group after exact issue of a city comes the first

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Speaker 1: mega back. Uh. And so but then again, you know,

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Speaker 1: a few years after that that was a pretty disastrous merger.

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Speaker 1: They sold most of their insurance business because the synergies

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Speaker 1: weren't present. And then what becomes really the shining example

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Speaker 1: of a mega bank, JP Morgan Chase. And if we

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Speaker 1: were list all of the names of the banks that

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Speaker 1: they acquired along the way, chemical absolutely you know the

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Speaker 1: bank First Um, what was Jamie Diamonds Bank that in Chicago,

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Speaker 1: First Nationals, that what it's called. And he I believe

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Speaker 1: he was at Smith Barney before that. When he was

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Speaker 1: at City, he was Sandy Wild's right hand man in

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Speaker 1: designing the strata, the mega banking strategy. He loses in

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Speaker 1: a power struggle, goes to manage his bank in Chicago,

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Speaker 1: comes back in UH. JP Morgan Chase's acquisition, which was

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Speaker 1: essentially an employment contract acquisition, Jamie Diamond become CEO, and

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Speaker 1: JP Morgan Chase, with help from the federal government, embarks

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Speaker 1: on this strategy of just becoming as big as it

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Speaker 1: can be. And so we are truly in an unprecedented

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Speaker 1: era in terms of banking consolidation the United States. So

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Speaker 1: everybody used to talk about too big to fail. I

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Speaker 1: like to raise the question, have these banks become too

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Speaker 1: big to succeed? Are they even manageable? When you're running

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Speaker 1: trillions of dollars in deposits? Can these things be managed?

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Speaker 1: And that will segue right into our discussion of Wells Fargo.

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Speaker 1: Such a great question, too big to manage, too big

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Speaker 1: to jail to, too big to succeed, And that the

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Speaker 1: way that you phrase that too big to succeed is

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Speaker 1: so fascinating because it calls into question the time horizon

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Speaker 1: and the short and medium term. I say that we're

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Speaker 1: on on leading into a medium term from the financial crisis. Man,

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Speaker 1: has it been good to be Jamie Diamond? Right? That

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Speaker 1: is that balance sheet is that has been an extremely successful? Right?

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Speaker 1: Fortress Diamond is just it's it's an unassailable They were

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Speaker 1: very fortunate. You're a financial historian, you'll appreciate this. Most

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Speaker 1: people don't realize JP. Moore and Chase had their own

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Speaker 1: derivatives crisis. But they were let's call it lucky enough,

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Speaker 1: were smart enough to have it years before everybody else.

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Speaker 1: So they cleaned up their balance sheet while there was

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Speaker 1: still a bid to hit. When it did everybody else,

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Speaker 1: they had no way to go. Yeah, you know there

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Speaker 1: is This is another occasion in financial history that a

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Speaker 1: lot of people don't recognize. And I think this is

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Speaker 1: Tim Geitner's signal contribution to h to finance in his

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Speaker 1: career and happened before he was Secretary of the Treasury.

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Speaker 1: Uh and that was in two thousand seven, noting on

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Speaker 1: a spectacular back up office problem in derivatives trading. Right,

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Speaker 1: So these are all bespoke derivatives, right, even even though

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Speaker 1: they're not very fancy, these are pretty plain vanilla, but

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Speaker 1: they all are bespoke because there's no you know, there's

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Speaker 1: no market place for them to trade on. It's no

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Speaker 1: exchange age for them. And so you would think sophisticated

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Speaker 1: folks in two thousand five we're not talking about, right,

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Speaker 1: So the I T Revolution has already taken pretty deep root. Um,

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Speaker 1: you'd have some sort of oracle based software system where

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Speaker 1: traders with two headsets on, you know, talking to two

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Speaker 1: different people, or at least punging it into a computer

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Speaker 1: that would clear it and would be universally access And

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Speaker 1: you think that and you'd be wrong, right, And what

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Speaker 1: they were doing instead is on scraps of paper with

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Speaker 1: little golf pencils writing down the nature of the trade

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Speaker 1: as though they were signing. There were doctors signing a prescription,

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Speaker 1: handing it back to a runner who would take that

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Speaker 1: piece of paper and put it in a stack. Right.

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Speaker 1: And what Tim Geitner realized, even though he that the

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Speaker 1: New York had had no supervisory authority over these broker dealers,

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Speaker 1: that's a very important point, realized that the back office

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Speaker 1: back log was about nine months. And so if there's

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Speaker 1: a triggering event is a you know, the International Swaps

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Speaker 1: and Drives Association master agreement, there's a default event within

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Speaker 1: that nine months your trader said, hey, you owe me money?

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Speaker 1: Like do I? They had to go literally back into

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Speaker 1: nine months worth of scraps of paper to find where's

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Speaker 1: this trade? Right? Huge mess. Tim Gotton realizes it, and

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Speaker 1: he does a tremendous effort coordinating the banks to clean

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Speaker 1: up modernize their back office. He succeeded right before the crisis. Amazing,

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Speaker 1: absolutely amazing. So let's jump into a fascinating topic that

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Speaker 1: has been in the news for the past year or

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Speaker 1: or more, and that's been this ongoing scandal at Will's Fargo.

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Speaker 1: We we first learned about it when it was revealed

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Speaker 1: the managements of Wills Fargo greatly incentivized the staff to

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Speaker 1: open new accounts, creating new accounts, but they simultaneously penalized

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Speaker 1: people who didn't do it. They would literally fire people,

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Speaker 1: and it turned out the levels at which they were

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Speaker 1: subsequent and significant consequences were exorbitantly high. Any five or

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Speaker 1: so of the staff, we're not meeting the targets. And

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Speaker 1: so when you incentivize people, they do what you ask.

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Speaker 1: And the staff started creating fake accounts. Not one or

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Speaker 1: two here, but literally I think we're up to three

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Speaker 1: and a half million, is that about right? So so

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Speaker 1: tell us how this came about and who should have

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Speaker 1: been overseeing this. How does something as absurd as three

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Speaker 1: million fake accounts come from a major bank like Wells Fargo?

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Speaker 1: And where you framed this in a in a in

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Speaker 1: a very particular way, and I come a little hostile

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Speaker 1: and my two house. I completely agree with your framing.

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Speaker 1: But John Stump, for the former CEO of Wells, would

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Speaker 1: absolutely reject it. Right. So you flame framed it as

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Speaker 1: a compensation structure and cultural problem and a supervisory one. Right.

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Speaker 1: And what Stump and Wells Fargo they initially said is, no,

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Speaker 1: what you're seeing is less than two percent of our

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Speaker 1: employees engaging in some bad practices. That would be that

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Speaker 1: would happen in any organization of banking eployees. That's a

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Speaker 1: bank that employees what was there at their peak a

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Speaker 1: hundred someone godling them? So two is okay? So only

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Speaker 1: three thousand of our employees are engaging in criminal for

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Speaker 1: can happen to anybody? Yeah? No, And that's what's hilarious

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Speaker 1: about that is that that that statistic is just completely

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Speaker 1: made up. Right? Who who cares about if your denominator

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Speaker 1: includes janitors? Right? And what percentage of the personal bankers

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Speaker 1: who are exposed to individuals were engaging in this kind

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Speaker 1: of a legal activity. And what you you're framing where

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Speaker 1: I completely agree with you, is that's not all we

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Speaker 1: care about, but also aggressive behavior a right. So John

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Speaker 1: Stump built this model. Well's far Ago was with with

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Speaker 1: JP Morgan Chase. These were the two banks that nailed

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Speaker 1: it right. These were the ones. This is not City Group,

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Speaker 1: this is certainly not Washington Mutual, and it's not Bank

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Speaker 1: of America. All right, this is Wells Fargo built its

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Speaker 1: brand on being a phenomenal consumer and commercial bank as

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Speaker 1: opposed to investor hundreds of years old. The stage coach

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Speaker 1: is not a coincidence that it's their corporate logo. They've

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Speaker 1: been around for centuries. They've been around for a very

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Speaker 1: long time, and they've been very good at the work

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Speaker 1: that they've that they've done, or so it was was reported.

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Speaker 1: But that compensation structure and that culture, it's so massively

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Speaker 1: important because it created not only the incentives to engage

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Speaker 1: in bad behavior um, but engaged to engage in in

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Speaker 1: practices that I think most people would say, that's zero

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Speaker 1: sum and you're robbing your customers. You're not creating value here.

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Speaker 1: You're just transferring it from your customers to yourself to yourself,

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Speaker 1: and you're doing it in a way that's trying to

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Speaker 1: deceive your customers as to what the value proposition is here.

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Speaker 1: So let me give you the example, right, This was

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Speaker 1: the Mantra eight is great, right, And the idea here

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Speaker 1: is that cross selling it's distinct from up selling. Up

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Speaker 1: Selling is you know, you go in you want to

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Speaker 1: buy a Toyota Corolla and you walk out with alexis.

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Speaker 1: That's that's upselling. Cross Selling is do you want fries

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Speaker 1: with that? Right? So you come in you want something

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Speaker 1: and they say you want that thing, but you also

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Speaker 1: want all this other stuff too. So that was auto insurance,

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Speaker 1: checking accounts, credit cards. Let's count to eight and I'd

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Speaker 1: invite our listeners do the same thing. What are the

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Speaker 1: eight products or services that you need to have in

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Speaker 1: the same financial institution? All right, let me see if

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Speaker 1: I could guess. So we'll start with saving and checking

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Speaker 1: his account to mortgage. Yeah, so again we're gonna reexamine

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Speaker 1: a why you would want your mortgage to be in

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Speaker 1: the same place you have a checking in staving account.

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Speaker 1: But yes, mortgage certainly count credit cards, credit card counts,

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Speaker 1: bank loans, bank loans, personal loans. There we're up to five.

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Speaker 1: Um insurance. They were doing some insurance products. They had

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Speaker 1: some insurance products, including gap insurance, including auto insurance on

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Speaker 1: your insurance. So meaning if you homeowners insurances, motors insurance

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Speaker 1: as well. So now up to seven and uh, the

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Speaker 1: only other thing I could guess is four o one

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Speaker 1: K retirement accounts. That absolutely would be one. So that

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Speaker 1: would be you would be a very good Wells far

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Speaker 1: Ago banker and being able to say, all right, I

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Speaker 1: got to eight. Now I gotta go sell these right now,

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Speaker 1: let me give you an example. Now, let me tell

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Speaker 1: you the story of a of a company that engages

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Speaker 1: in massive cross selling to my utter delight as a customer,

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Speaker 1: and that's Amazon, right, I have if you like X,

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Speaker 1: you will love why I buy in the same day.

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Speaker 1: I've purchased books and chainsaws from Amazon dot com, right,

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Speaker 1: and I've seen myself going to this thing, and they say, oh,

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Speaker 1: if you want that, then you're gonna need this other

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Speaker 1: thing too, And I'll think about and say yes, please

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Speaker 1: and thank you Jeff Bezos, I will want that thing.

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Speaker 1: But they offer that to you, they don't send it

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Speaker 1: to your house and say, by the way, we sent

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Speaker 1: to you, whether you ask for it or not. Right,

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Speaker 1: So there's no fraud here. My point is that, well,

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Speaker 1: this problem is so much worse than the fraud, right,

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Speaker 1: because what Amazon is offering to me is sometimes these

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Speaker 1: other things that I already wanted less for less money,

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Speaker 1: or even if it's more money than I would get

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Speaker 1: it lows or somewhere else. Uh, the sheer convenience of

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Speaker 1: having it all in a single citys them is extremely high. Now,

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Speaker 1: let me ask you and our listeners, if you are

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Speaker 1: shopping for financial services, whether we're talking about a credit card,

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Speaker 1: a savings account, or a mortgage, what do you care about?

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Speaker 1: Care about the best cost and the highest level of service,

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Speaker 1: highest quality of service. So the best cost first, right,

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Speaker 1: that's an interest rate phenomenon. What service do you need

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Speaker 1: for your mortgage? Well, I I want to know that

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Speaker 1: I could set up an auto pay. I want to

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Speaker 1: know that I'll get credited on a timely basis, and

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Speaker 1: that things like insurance isn't going to be forced down

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Speaker 1: my throat, and that I could prepay my real estate taxes,

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Speaker 1: add that to the monthly little things like that to

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Speaker 1: just make our financial life a little easier. Absolutely, and

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Speaker 1: almost all of that is standardized across the industry, almost everything.

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Speaker 1: Then you're talking costs, so you just you're talking cost

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Speaker 1: interest rates. So credit card absolutely, if you carry consumer debt, absolutely,

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Speaker 1: they're going to be issues of service. For most people,

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Speaker 1: what they want is the lowest in trust rate and

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Speaker 1: the most benefits of a credit card for a savings account.

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Speaker 1: What people are looking for are you know, a suite

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Speaker 1: of bells and whistles? Can I deposit a check using

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Speaker 1: my phone? Can I do this? Sort? Can I do that?

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Speaker 1: But again, t a T M S location. All of

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Speaker 1: this ends up mattering, but by far the most important

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Speaker 1: thing is going to be the price point. And that's

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Speaker 1: where Wells Fargo, I think, stepped into an extremely aggressive territory,

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Speaker 1: well short of fraudulently manufacturing services that you never wanted,

428
00:25:29,080 --> 00:25:32,879
Speaker 1: never asked for, right, that's the fake account scandal. And

429
00:25:33,000 --> 00:25:35,000
Speaker 1: my point is how do we get here? We got

430
00:25:35,000 --> 00:25:39,120
Speaker 1: here from a rotten culture that decided we're going to

431
00:25:39,160 --> 00:25:41,360
Speaker 1: make price point, which is the only thing that most

432
00:25:41,359 --> 00:25:44,480
Speaker 1: consumers really care about, to be a secondary consideration, and

433
00:25:44,560 --> 00:25:46,959
Speaker 1: we're going to try and convince them that while they

434
00:25:46,960 --> 00:25:49,480
Speaker 1: are economies of scale to be had for Wells Fargo

435
00:25:49,520 --> 00:25:53,520
Speaker 1: and consolidating customers, those economies are not really shared with

436
00:25:53,680 --> 00:25:57,320
Speaker 1: the customers themselves. That's what makes me uncomfortable about Wells Fargo,

437
00:25:57,359 --> 00:25:58,959
Speaker 1: and that's why I think I feel a little bit

438
00:25:59,000 --> 00:26:02,680
Speaker 1: more encouraged. And the post Wells era, there not only Wells,

439
00:26:02,720 --> 00:26:05,240
Speaker 1: but other banks too are dialing way back on this

440
00:26:05,320 --> 00:26:08,679
Speaker 1: kind of aggressive marketing because I think that it's pretty

441
00:26:08,680 --> 00:26:11,199
Speaker 1: hard to justify when the thing that people want is

442
00:26:11,720 --> 00:26:14,320
Speaker 1: are you going to beat this by a few basis points,

443
00:26:14,359 --> 00:26:16,640
Speaker 1: Because we're talking about a thirty year mortgage. A few

444
00:26:16,640 --> 00:26:18,879
Speaker 1: basis points matters a lot of huge, huge difference. So

445
00:26:18,920 --> 00:26:24,199
Speaker 1: it'sen we're in the middle of the summer. Has Wells

446
00:26:24,240 --> 00:26:27,200
Speaker 1: Fargo cleaned up their acts because we still see these

447
00:26:27,240 --> 00:26:31,520
Speaker 1: little eruptions every now and then of more things leaking

448
00:26:31,520 --> 00:26:35,320
Speaker 1: out that all date back to the same era, but

449
00:26:35,359 --> 00:26:39,520
Speaker 1: we hadn't previously heard about this to those who are

450
00:26:39,600 --> 00:26:43,840
Speaker 1: in PR crisis management driven the financial institutions itself, I mean,

451
00:26:43,880 --> 00:26:48,040
Speaker 1: Wells Fargo has literally become the textbook case. I teach

452
00:26:48,080 --> 00:26:50,520
Speaker 1: it to my MBA's not to do, What not to do?

453
00:26:50,920 --> 00:26:52,680
Speaker 1: It was death by a thousand cuts. So they didn't

454
00:26:52,680 --> 00:26:54,760
Speaker 1: get out in front of it. You want to disclose

455
00:26:54,800 --> 00:26:58,400
Speaker 1: stuff yourself, so you're beating everybody else from revealing it,

456
00:26:58,840 --> 00:27:03,160
Speaker 1: and then it would there is never really a believable apology.

457
00:27:03,560 --> 00:27:06,000
Speaker 1: And then on top of that, at a certain so

458
00:27:06,160 --> 00:27:08,800
Speaker 1: I've never had a Wells Fargo account. They could be great,

459
00:27:08,800 --> 00:27:11,760
Speaker 1: they could be terrible. I've never experienced it personally, but

460
00:27:12,040 --> 00:27:15,560
Speaker 1: seeing the run of news at a certain point, I

461
00:27:15,600 --> 00:27:17,960
Speaker 1: was saying to a friend, Hey, at this point, if

462
00:27:18,040 --> 00:27:21,720
Speaker 1: you have a Wells Fargo account, still, you've tacitly given

463
00:27:21,760 --> 00:27:24,200
Speaker 1: them permission to do whatever the hell they want. Because

464
00:27:24,240 --> 00:27:26,280
Speaker 1: if they haven't scared you, what what do they have

465
00:27:26,359 --> 00:27:28,920
Speaker 1: to do to chase your way? And it doesn't look

466
00:27:29,000 --> 00:27:32,600
Speaker 1: like that many people hit the eject button with them,

467
00:27:32,800 --> 00:27:35,840
Speaker 1: so they did. Yeah, That's that's what's been so interesting

468
00:27:35,840 --> 00:27:38,399
Speaker 1: to me. I mean, I am not I'm not an

469
00:27:38,480 --> 00:27:41,560
Speaker 1: active investor UM for a lot of different reasons, not

470
00:27:41,680 --> 00:27:43,480
Speaker 1: least because I comment on these things and I want

471
00:27:43,520 --> 00:27:46,159
Speaker 1: conflicts of interest. Well, if you're talking about cost, I'm

472
00:27:46,160 --> 00:27:49,680
Speaker 1: gonna assume you're like many other financial professors and your

473
00:27:49,800 --> 00:27:53,640
Speaker 1: low cost index, Vanguard, et cetera. That's right, that's exactly right.

474
00:27:53,960 --> 00:27:56,479
Speaker 1: Not that I'm UM. I don't take that as an

475
00:27:56,480 --> 00:27:59,440
Speaker 1: absolute dogma like some of my colleagues do. UM. There

476
00:27:59,440 --> 00:28:03,200
Speaker 1: have been time somewhere I've been tempted into markets UM,

477
00:28:03,240 --> 00:28:05,480
Speaker 1: and one of them was to short Wells Fargo. I

478
00:28:05,480 --> 00:28:09,159
Speaker 1: didn't do it, but been in two thousand fourteen or

479
00:28:09,200 --> 00:28:11,199
Speaker 1: some things. It's about a year. The l A Times

480
00:28:11,200 --> 00:28:13,760
Speaker 1: broke the story in two thousand thirteen. We didn't get

481
00:28:13,800 --> 00:28:16,600
Speaker 1: the settlement with a CFPB and the control of the

482
00:28:16,640 --> 00:28:19,679
Speaker 1: currency until two thousand fifteen. So in these two years,

483
00:28:20,119 --> 00:28:24,040
Speaker 1: that's another very important question about supervisors. What was taking

484
00:28:24,040 --> 00:28:27,160
Speaker 1: So along with the journalists, knew this right, but it

485
00:28:27,200 --> 00:28:30,040
Speaker 1: was not. Uh, we didn't get a good sense of it,

486
00:28:30,280 --> 00:28:33,600
Speaker 1: not just by two fifteen, but we're still getting the

487
00:28:33,680 --> 00:28:37,080
Speaker 1: news later. But if I had shorted Wells Fargo stock,

488
00:28:37,160 --> 00:28:39,920
Speaker 1: I would have lost money. Right, Their stock has done well.

489
00:28:40,440 --> 00:28:42,440
Speaker 1: This has been a boom time. Right. I might have

490
00:28:42,480 --> 00:28:44,120
Speaker 1: been able to hedge it and still short of the

491
00:28:44,120 --> 00:28:48,880
Speaker 1: stock relative to places like JP morgan Um or Goldman,

492
00:28:48,920 --> 00:28:50,760
Speaker 1: and maybe I would have made some money then. But

493
00:28:50,840 --> 00:28:54,560
Speaker 1: it's been extraordinary how much of their brand, equity and

494
00:28:54,600 --> 00:28:57,880
Speaker 1: their business has not been compromised by what has been

495
00:28:58,080 --> 00:29:01,360
Speaker 1: a stunning turn of headlines week after week. The old

496
00:29:01,440 --> 00:29:03,480
Speaker 1: joke is news as old. By the time it's in

497
00:29:03,520 --> 00:29:07,360
Speaker 1: the papers, lots of people already figured out and probably

498
00:29:07,440 --> 00:29:10,080
Speaker 1: made their bets based on that. I think that tells

499
00:29:10,160 --> 00:29:12,280
Speaker 1: us a few different things. Number One, there's a good

500
00:29:12,320 --> 00:29:13,840
Speaker 1: version and bad version of what we can how we

501
00:29:13,840 --> 00:29:18,200
Speaker 1: can interpret those events. The good version for Wells is

502
00:29:18,240 --> 00:29:22,080
Speaker 1: that it does have an extremely robust balance sheet and

503
00:29:22,360 --> 00:29:26,000
Speaker 1: business such that this scandal, although lots of people are

504
00:29:26,040 --> 00:29:28,280
Speaker 1: reading about and talking about it, ends up not mattering

505
00:29:28,320 --> 00:29:30,840
Speaker 1: that much for the overall value of the franchise. You know,

506
00:29:30,960 --> 00:29:33,120
Speaker 1: she just keeps people where they are. It's listen, I

507
00:29:33,200 --> 00:29:35,320
Speaker 1: got everything on auto pay to move my account as

508
00:29:35,320 --> 00:29:37,240
Speaker 1: a big pan in the butt. I'm not gonna bother.

509
00:29:37,360 --> 00:29:41,440
Speaker 1: I'm not gonna bother. Right. The bad version, in other words,

510
00:29:41,440 --> 00:29:44,480
Speaker 1: saying that the size and diversification of their businesses and

511
00:29:45,600 --> 00:29:49,680
Speaker 1: on whatever parameters you want to choose, geography, business lines,

512
00:29:49,720 --> 00:29:53,240
Speaker 1: other things, has protected them from scandal. That's the version

513
00:29:53,280 --> 00:29:56,680
Speaker 1: that's good for Wells. The version is bad for Wells

514
00:29:57,160 --> 00:29:59,840
Speaker 1: is that the sheer complexity and size of these financials

515
00:29:59,840 --> 00:30:05,200
Speaker 1: two tions make them totally unaccountable even when the facts

516
00:30:05,280 --> 00:30:10,200
Speaker 1: are breathtaking. Lee damning right. You will never see a

517
00:30:10,280 --> 00:30:15,400
Speaker 1: clearer cut example of abject criminality in consumer banking that

518
00:30:15,480 --> 00:30:19,360
Speaker 1: is as widespread as this. Right, this was absolute fraud.

519
00:30:19,640 --> 00:30:22,200
Speaker 1: I think You're not cynical enough if you think nothing

520
00:30:22,320 --> 00:30:24,640
Speaker 1: is going to be worse than this, Because every time

521
00:30:24,640 --> 00:30:28,240
Speaker 1: I've said that throughout my professional career, what could ever

522
00:30:28,320 --> 00:30:32,240
Speaker 1: be worse than fill in the blank? Where go from

523
00:30:32,360 --> 00:30:36,840
Speaker 1: Enron's world? Calm too? You pick it there, seeing every

524
00:30:36,880 --> 00:30:41,360
Speaker 1: time I I think I'm become too cynical, the rejoinder

525
00:30:41,400 --> 00:30:44,880
Speaker 1: comes back at me. Just wait, that's pretty great, um,

526
00:30:45,280 --> 00:30:47,480
Speaker 1: you know to for me to find another example, it

527
00:30:47,480 --> 00:30:51,080
Speaker 1: would have to be city Groups predecessor National City during

528
00:30:51,120 --> 00:30:55,640
Speaker 1: the run up to the Great Depression, which which motivated

529
00:30:55,680 --> 00:30:58,680
Speaker 1: the original passage of Glass Stiegel, where you would get

530
00:30:58,720 --> 00:31:02,560
Speaker 1: these salesman coming from the banking so or sorry, from

531
00:31:02,600 --> 00:31:07,560
Speaker 1: the capital market side, looking at bank customers. You see, Okay,

532
00:31:07,600 --> 00:31:09,920
Speaker 1: I've got a retired couple and their nest ex ten dollars.

533
00:31:09,920 --> 00:31:12,880
Speaker 1: I've got it in a savings account. Go to their house,

534
00:31:13,600 --> 00:31:16,520
Speaker 1: swindle them out of it, and make them invest in

535
00:31:16,840 --> 00:31:19,680
Speaker 1: Latin American mining operations. That's a that's a really exact

536
00:31:19,720 --> 00:31:23,200
Speaker 1: that's a perfect thing for a young couple's retirement. Yeah

537
00:31:23,280 --> 00:31:25,080
Speaker 1: right there in there, they're they're gonna live another ten years.

538
00:31:25,120 --> 00:31:27,120
Speaker 1: And now you're speculating, and of course that goes bust,

539
00:31:27,200 --> 00:31:30,360
Speaker 1: all their money is gone, right, um. And there's there

540
00:31:30,360 --> 00:31:33,720
Speaker 1: are these letters that you can read in uh, in

541
00:31:33,800 --> 00:31:36,760
Speaker 1: the Library of Congress where people just writing to their

542
00:31:36,760 --> 00:31:40,680
Speaker 1: members of Congress during the Glass Eagle hearings, the Pecora

543
00:31:41,000 --> 00:31:45,520
Speaker 1: hearings that proceeded Glass Seagull saying please ask Charlie Mitchell

544
00:31:46,440 --> 00:31:50,080
Speaker 1: why he would target us my I'm sitting now next

545
00:31:50,120 --> 00:31:55,160
Speaker 1: to my wife's coffin. She died early because of the

546
00:31:55,200 --> 00:31:58,000
Speaker 1: stress of realizing our nest egg was gone. So that

547
00:31:58,080 --> 00:32:00,800
Speaker 1: was a big scandal. I see, wells Fargo is being

548
00:32:01,160 --> 00:32:04,600
Speaker 1: pretty similar in scope. But now compare the difference in

549
00:32:04,600 --> 00:32:07,520
Speaker 1: the reactions to them, right. I think we've become inured

550
00:32:07,560 --> 00:32:09,480
Speaker 1: to these sort of things. That was the takeaway from

551
00:32:09,480 --> 00:32:13,600
Speaker 1: the Great Financial Crisis. My cynicism is whatever you think,

552
00:32:13,760 --> 00:32:18,040
Speaker 1: it's much worse. Let's talk a little bit about the

553
00:32:18,080 --> 00:32:22,240
Speaker 1: Federal Reserve and central bankers. And I'm gonna begin with

554
00:32:22,400 --> 00:32:29,200
Speaker 1: something from Lombard Street, a description of the money market. Uh.

555
00:32:29,320 --> 00:32:32,960
Speaker 1: A very famous quote is lend freely at a penalty

556
00:32:33,080 --> 00:32:38,040
Speaker 1: rate against good collateral. That that comes supposedly been called

557
00:32:38,440 --> 00:32:42,560
Speaker 1: Badget's dictum. The first question is, by the way, the

558
00:32:42,560 --> 00:32:46,120
Speaker 1: whole purpose of that is an articulation of how central

559
00:32:46,160 --> 00:32:49,200
Speaker 1: banks should respond to a panic to avoid a full

560
00:32:49,200 --> 00:32:53,440
Speaker 1: blown crisis. First, who is really the author of that rule?

561
00:32:53,600 --> 00:32:56,960
Speaker 1: You suggest that it wasn't Badget. No, it's it's it's

562
00:32:57,000 --> 00:33:00,719
Speaker 1: not Walter Badget. You can read the entire book, uh,

563
00:33:00,760 --> 00:33:02,400
Speaker 1: you know, because many times you'd like Hill never find

564
00:33:02,400 --> 00:33:05,920
Speaker 1: Badget's Dictum. He hints around it. He talks about lending

565
00:33:06,000 --> 00:33:09,200
Speaker 1: freely in liquefying. Yeah, he's got two chapters that are

566
00:33:09,240 --> 00:33:12,680
Speaker 1: basically about lending freely. Um. He does talk a little

567
00:33:12,680 --> 00:33:16,560
Speaker 1: bit about what was good collateral, but mostly as a

568
00:33:16,600 --> 00:33:20,080
Speaker 1: set of shared assumptions that everyone would have about what

569
00:33:20,120 --> 00:33:23,920
Speaker 1: constituted good collateral, um, which were essentially, you know, uh,

570
00:33:24,080 --> 00:33:28,320
Speaker 1: good collateral was going to be on these commerce bills,

571
00:33:28,360 --> 00:33:31,880
Speaker 1: which is basically, here, we've got a contract already set

572
00:33:31,960 --> 00:33:34,440
Speaker 1: up that refers to real business that's been done. It's

573
00:33:34,440 --> 00:33:38,280
Speaker 1: not speculative. Right, that's good collateral, and that is not

574
00:33:38,360 --> 00:33:41,120
Speaker 1: our definition of good collateral. Good collateral can be securities,

575
00:33:41,200 --> 00:33:44,360
Speaker 1: right good uh today, And that would not have been

576
00:33:44,840 --> 00:33:48,000
Speaker 1: his definition. He mentioned that just in passing penalty rate,

577
00:33:48,080 --> 00:33:50,640
Speaker 1: there's a sentence about the idea that you're like, well,

578
00:33:50,680 --> 00:33:52,440
Speaker 1: you want to you want to make it hurt a

579
00:33:52,440 --> 00:33:55,440
Speaker 1: little Georgia premium above what you could get if there

580
00:33:55,480 --> 00:33:58,440
Speaker 1: wasn't a panic, in order to discourage this behavior in

581
00:33:58,480 --> 00:34:00,840
Speaker 1: the future. But interestingly enough, the rest of the book

582
00:34:00,880 --> 00:34:04,239
Speaker 1: is about not doing that very thing right because if

583
00:34:04,280 --> 00:34:08,160
Speaker 1: you make it, if you stigmatize the lending um by

584
00:34:08,320 --> 00:34:10,960
Speaker 1: a central bank, which a penalty rate would do um,

585
00:34:11,080 --> 00:34:14,080
Speaker 1: then you've created the very scenario that Badget saying you

586
00:34:14,080 --> 00:34:17,000
Speaker 1: shouldn't do. So there's no Badget's didictive. He never said that.

587
00:34:17,120 --> 00:34:19,360
Speaker 1: His book is not about that, and indeed it's ironic

588
00:34:19,440 --> 00:34:21,399
Speaker 1: because you know, one of the things that he writes

589
00:34:21,440 --> 00:34:25,040
Speaker 1: in that book is that there are people are so

590
00:34:25,880 --> 00:34:29,680
Speaker 1: eager for you to say, all right, well, our central

591
00:34:29,680 --> 00:34:31,640
Speaker 1: banks good things are bad things, and if you say,

592
00:34:31,680 --> 00:34:34,279
Speaker 1: well it's complicated, they're like, well, I don't care, right,

593
00:34:34,480 --> 00:34:37,200
Speaker 1: Welcome to the modern world of politics. And he's writing this,

594
00:34:37,280 --> 00:34:39,080
Speaker 1: you know, in the late eighteen sixties. This is published

595
00:34:39,080 --> 00:34:41,520
Speaker 1: in eighteen seventy three. And then he also said, you know,

596
00:34:41,560 --> 00:34:44,440
Speaker 1: people just don't have appetite for long books. They want

597
00:34:44,520 --> 00:34:47,640
Speaker 1: short sentences. And what's hilarious to me about this is

598
00:34:47,680 --> 00:34:50,040
Speaker 1: the thing that Badget's book is remembered for is a

599
00:34:50,080 --> 00:34:53,560
Speaker 1: short sentence that he never wrote. So who did write that?

600
00:34:53,680 --> 00:34:56,200
Speaker 1: You know, it's it's hard that I would be interested

601
00:34:56,239 --> 00:34:58,360
Speaker 1: if our if our listeners can track this down. I

602
00:34:58,360 --> 00:35:00,480
Speaker 1: haven't succeeded. I can tell you to people who have

603
00:35:00,560 --> 00:35:04,560
Speaker 1: popularized it. Um. One is Paul Tucker, who is a

604
00:35:04,600 --> 00:35:07,840
Speaker 1: great scholar and practitioner of central banking. He's got a

605
00:35:07,840 --> 00:35:10,960
Speaker 1: new book, let's just come out. Somebody might consider for

606
00:35:10,960 --> 00:35:13,560
Speaker 1: for your own, for your podcast, and and uh and

607
00:35:13,640 --> 00:35:16,239
Speaker 1: for this radio show. He was the Deputy governor at

608
00:35:16,239 --> 00:35:18,600
Speaker 1: the Bank of England during the crisis, and he has

609
00:35:19,000 --> 00:35:21,000
Speaker 1: has written a lot about this idea. And he's the

610
00:35:21,000 --> 00:35:23,719
Speaker 1: one who quoted most often for Badget's victim. It's never

611
00:35:24,080 --> 00:35:27,440
Speaker 1: Badge being quoted, it's always somebody else quoting Paul Tucker

612
00:35:28,560 --> 00:35:32,440
Speaker 1: creating Badget's sictam. But again he did Paul didn't create this, right,

613
00:35:32,440 --> 00:35:36,080
Speaker 1: He's referring to something that came before. Um. Ben Bernanke

614
00:35:36,200 --> 00:35:38,080
Speaker 1: is the other one who's really popularized that's but only

615
00:35:38,120 --> 00:35:42,040
Speaker 1: two thirds of Badgett's victim rent free when freely uh, well,

616
00:35:42,080 --> 00:35:45,760
Speaker 1: maybe one and a half of it when freely against

617
00:35:46,960 --> 00:35:51,239
Speaker 1: So so so collateral, but don't do a penalty rate. Right. Uh.

618
00:35:51,480 --> 00:35:55,360
Speaker 1: But you know Brankie's book, his memoir of the crisis,

619
00:35:55,400 --> 00:35:59,239
Speaker 1: he talks courage to accourage to act. Yeah, right, And

620
00:35:59,400 --> 00:36:02,719
Speaker 1: he notes when he game FED chair in two thousand six,

621
00:36:02,760 --> 00:36:07,080
Speaker 1: and the chair has a personal library and uh in

622
00:36:07,239 --> 00:36:10,120
Speaker 1: his office, and he said, I brought Badget's Lombard Street

623
00:36:10,160 --> 00:36:12,920
Speaker 1: and put it there. Now. Now, ben BURNANKI is a

624
00:36:13,040 --> 00:36:17,520
Speaker 1: very sophisticated financial historian. I assume he's read Lombard Street,

625
00:36:17,680 --> 00:36:19,960
Speaker 1: but I have his book. Would not give you evidence

626
00:36:20,000 --> 00:36:23,120
Speaker 1: that at the end, did you overlap with Bernanke When

627
00:36:23,160 --> 00:36:24,719
Speaker 1: you were a princeton, he was the head of the

628
00:36:24,800 --> 00:36:27,680
Speaker 1: economics department. No, No, I have met him a couple

629
00:36:27,719 --> 00:36:31,560
Speaker 1: of times before. Um, and you know, we've exchanged views

630
00:36:31,719 --> 00:36:33,840
Speaker 1: on a variety of topics. I think that he's a

631
00:36:33,880 --> 00:36:38,120
Speaker 1: remarkable public servant, a terrific scholar. Um. And I always

632
00:36:38,200 --> 00:36:41,800
Speaker 1: leave reading any paper or even blog post. He's written

633
00:36:41,840 --> 00:36:44,960
Speaker 1: feelings smarter Um. But we've also had our differences. We've

634
00:36:44,960 --> 00:36:47,719
Speaker 1: got into an argument about an assertion that he makes

635
00:36:47,719 --> 00:36:50,800
Speaker 1: that I think is false, which is that the reason

636
00:36:50,840 --> 00:36:53,200
Speaker 1: that FED didn't bail out Lehman Brothers. Is that it

637
00:36:53,280 --> 00:36:55,840
Speaker 1: lacked the legal authority to do so. That's been the claim.

638
00:36:56,120 --> 00:36:58,120
Speaker 1: I have a pet theory on that. I'm curious as

639
00:36:58,120 --> 00:37:00,200
Speaker 1: to what yours is. Well, it's legally it's false. That's

640
00:37:00,200 --> 00:37:02,040
Speaker 1: not correct. They did have a legal authority to do it,

641
00:37:02,200 --> 00:37:05,319
Speaker 1: to bail out a dealer. Oh absolutely. I mean the

642
00:37:05,400 --> 00:37:09,880
Speaker 1: statute is unusual and exigent circumstances, a term which is

643
00:37:10,080 --> 00:37:12,400
Speaker 1: sounds very heavy, but it is not defined. Unusual and

644
00:37:12,480 --> 00:37:15,279
Speaker 1: exigent is Tuesday? Okay, yeah, it could. It could be

645
00:37:15,800 --> 00:37:17,880
Speaker 1: so long as five members of the Board of Governor's

646
00:37:17,960 --> 00:37:21,760
Speaker 1: vote in favor, which he had, and the Federal Reserve

647
00:37:21,840 --> 00:37:27,480
Speaker 1: Bank who's in whose district? Uh? The institution exists in

648
00:37:27,480 --> 00:37:31,000
Speaker 1: New York is that the loan is secured to the

649
00:37:31,040 --> 00:37:34,920
Speaker 1: satisfaction of the Federal Reserve Bank. Secured to the satisfaction

650
00:37:34,960 --> 00:37:39,200
Speaker 1: Does that mean, well, it's not defined. Although quite bluntly,

651
00:37:39,280 --> 00:37:43,359
Speaker 1: we know there was a ton of fraudulent uh shenanigans

652
00:37:43,360 --> 00:37:45,440
Speaker 1: going on at Leman Brothers with the famous REPO one

653
00:37:45,440 --> 00:37:47,560
Speaker 1: oh five and all of that. So you might say, well,

654
00:37:47,560 --> 00:37:50,320
Speaker 1: then we're not satisfied by that. But that's a discretionary determination.

655
00:37:50,400 --> 00:37:52,640
Speaker 1: Say we lack legal authority to do so as false.

656
00:37:52,719 --> 00:37:55,120
Speaker 1: It says we were not satisfied by the collateral presented

657
00:37:55,160 --> 00:37:57,880
Speaker 1: a different, different, serferent thing, which of course raised the question,

658
00:37:58,280 --> 00:38:00,960
Speaker 1: then why did they really let it hit the pavement? Well,

659
00:38:00,960 --> 00:38:03,360
Speaker 1: then why is a I G. Different? Their answer is, well,

660
00:38:03,360 --> 00:38:06,839
Speaker 1: because they had a good insurance business going, had all

661
00:38:06,920 --> 00:38:11,640
Speaker 1: kinds of profitable businesses within their twenty thousand corporations under

662
00:38:11,680 --> 00:38:15,640
Speaker 1: their uh their parent company. So again, was that the

663
00:38:15,719 --> 00:38:17,839
Speaker 1: right decision or the wrong decision? As a separate set

664
00:38:17,840 --> 00:38:20,560
Speaker 1: of questions, was it politically motivated or not? Should it

665
00:38:20,640 --> 00:38:22,600
Speaker 1: have been? Step set of questions. Did they have a

666
00:38:22,640 --> 00:38:25,279
Speaker 1: legal authority to do so? Well, yes, of course they did.

667
00:38:25,320 --> 00:38:27,480
Speaker 1: And this isn't just me being an obnoxious lawyer saying,

668
00:38:27,520 --> 00:38:31,319
Speaker 1: well look at this. The idea that they lacked the

669
00:38:31,400 --> 00:38:35,240
Speaker 1: legal authority to do so was the single defining idea

670
00:38:35,280 --> 00:38:38,640
Speaker 1: that motivated the passage of Dodd Frank. That's fascinated And

671
00:38:38,680 --> 00:38:41,360
Speaker 1: so I think that that ends up mattering a huge amount.

672
00:38:41,760 --> 00:38:44,319
Speaker 1: It just isn't isn't correct. So I wish I was

673
00:38:44,360 --> 00:38:46,200
Speaker 1: a fly in the wall when they were having this

674
00:38:46,280 --> 00:38:51,560
Speaker 1: internal debate. But my pet thesis is simply um at

675
00:38:51,600 --> 00:38:56,200
Speaker 1: one point. Early in the spiral of Lehman Brothers, Warren

676
00:38:56,239 --> 00:38:59,720
Speaker 1: Buffett of Berkshire Hathaway had the conversation with Dick Fuld

677
00:39:00,360 --> 00:39:03,160
Speaker 1: made a low ball offer because he's a value investor,

678
00:39:03,680 --> 00:39:07,440
Speaker 1: and to everybody who was an employee of Lahman Brothers

679
00:39:08,480 --> 00:39:11,880
Speaker 1: lasting regret, Dick Folds said, this guy's trying to steal

680
00:39:12,000 --> 00:39:14,600
Speaker 1: the company for three billion dollars. It was only a

681
00:39:14,680 --> 00:39:19,400
Speaker 1: small percentage ownership, and he rejected Buffett. And I can't

682
00:39:19,400 --> 00:39:23,320
Speaker 1: help but think from a moral hazard perspective the debate

683
00:39:23,400 --> 00:39:26,719
Speaker 1: going on with Bernankee and Guthner, and hey, how could

684
00:39:26,719 --> 00:39:30,879
Speaker 1: we bail out this guy when he turns down Warren Buffett, who,

685
00:39:30,920 --> 00:39:35,600
Speaker 1: by the way, later made a much more advantageous um

686
00:39:35,800 --> 00:39:40,120
Speaker 1: loan to a much better bank, Golden So Folds folly

687
00:39:40,320 --> 00:39:43,799
Speaker 1: turned out to uh benefit Goldman and and Buffett. Here's

688
00:39:43,800 --> 00:39:46,120
Speaker 1: my friendly amendment to your your theory. I would call

689
00:39:46,160 --> 00:39:49,520
Speaker 1: it Folds follies because Buffett was one in a series

690
00:39:50,120 --> 00:39:53,399
Speaker 1: of suitors who came knocking, and Dick Fold was trying

691
00:39:53,400 --> 00:39:55,600
Speaker 1: to value the company as though it were two thousand five,

692
00:39:55,680 --> 00:39:58,919
Speaker 1: not two thousand seven or eight, And so I think

693
00:39:58,920 --> 00:40:03,279
Speaker 1: it was just spectacle ular Hubris that I think the regulators,

694
00:40:03,400 --> 00:40:08,520
Speaker 1: including Tim Geitner and Hank Paulson couldn't fathom. So one

695
00:40:08,520 --> 00:40:10,040
Speaker 1: of the one of the conspiracy theories that a lot

696
00:40:10,080 --> 00:40:12,960
Speaker 1: of people I think are pretty sophisticated people, and back

697
00:40:13,040 --> 00:40:15,399
Speaker 1: it was paid payback. It's the Goldman versus Lehman thing.

698
00:40:15,640 --> 00:40:17,440
Speaker 1: I just don't buy it. I think to the extent

699
00:40:17,560 --> 00:40:20,640
Speaker 1: that that mattered at all. And by the way, remember

700
00:40:21,040 --> 00:40:24,560
Speaker 1: that if anybody was payback, there was Bear Stearns go

701
00:40:24,640 --> 00:40:27,520
Speaker 1: back to long Term Capital Management. They didn't want to.

702
00:40:27,600 --> 00:40:29,759
Speaker 1: They didn't want to be part of the consortium that

703
00:40:29,840 --> 00:40:33,600
Speaker 1: rescued who they were the prime broker for. So when

704
00:40:33,920 --> 00:40:37,920
Speaker 1: when Bear hit the deck earlier than Lehman, the deal

705
00:40:38,200 --> 00:40:42,120
Speaker 1: that was actually Jamie Diamond stole it right out from under.

706
00:40:42,800 --> 00:40:44,759
Speaker 1: I think it was with Covia was looking at it,

707
00:40:44,840 --> 00:40:47,719
Speaker 1: then Um and then to get the Fed to say

708
00:40:47,760 --> 00:40:51,760
Speaker 1: we'll commit to backstop if this goes over billion dollars

709
00:40:51,760 --> 00:40:55,239
Speaker 1: worth of junk. You saw some great dealmakers in the

710
00:40:55,280 --> 00:41:00,000
Speaker 1: crisis and some terrible. Dick was spectacularly not one of UM,

711
00:41:00,000 --> 00:41:01,440
Speaker 1: and so I think that that ends up having a

712
00:41:01,440 --> 00:41:02,640
Speaker 1: lot to do with it. But I think the biggest

713
00:41:02,680 --> 00:41:06,680
Speaker 1: explanation of all does come from Hank Paulson. He's the

714
00:41:06,719 --> 00:41:10,320
Speaker 1: source for a Wall Street Journal editorial. This is after conservatorships,

715
00:41:10,440 --> 00:41:14,440
Speaker 1: is after the first weekend September for Fanily Freddie, Senior

716
00:41:14,480 --> 00:41:20,120
Speaker 1: administration officials assures us, huh, and it's finding quote, there

717
00:41:20,160 --> 00:41:23,960
Speaker 1: will be no political solution for Lehman, meaning there's going

718
00:41:24,000 --> 00:41:26,680
Speaker 1: to be no public money for Lehman, all right. And

719
00:41:26,719 --> 00:41:30,759
Speaker 1: I think at that point, given the bipartisan furor over

720
00:41:31,040 --> 00:41:35,000
Speaker 1: bear Sterns and Fannie and Freddie, that they had to

721
00:41:35,000 --> 00:41:37,439
Speaker 1: find someone to say no to and they just didn't

722
00:41:37,440 --> 00:41:40,040
Speaker 1: recognize that this was going to be the financial cataclysm

723
00:41:40,360 --> 00:41:44,200
Speaker 1: uh that that ended up happening. See uh, let me

724
00:41:44,360 --> 00:41:46,920
Speaker 1: let me push back a little bit from fail Out Nation,

725
00:41:47,080 --> 00:41:50,320
Speaker 1: and I look at Lehman Brothers as merely the first

726
00:41:50,320 --> 00:41:53,720
Speaker 1: trailer in the trailer park when the tornado came through.

727
00:41:54,320 --> 00:41:56,960
Speaker 1: Everybody who was leveraged up with bad paper that was

728
00:41:57,000 --> 00:42:00,359
Speaker 1: relying on either sub prime or alt A mortgages and drivetives.

729
00:42:01,000 --> 00:42:03,120
Speaker 1: Now they were one of the worst. Bear Stearns was

730
00:42:03,160 --> 00:42:05,440
Speaker 1: pretty bad, ai g was terrible. Lehman was one of

731
00:42:05,520 --> 00:42:07,920
Speaker 1: the worst. But whether Lehman was rescued or not that

732
00:42:08,000 --> 00:42:11,160
Speaker 1: tornado was going through. You had home prices run up

733
00:42:11,200 --> 00:42:15,120
Speaker 1: so much and now we're collapsing. That that whole derivative

734
00:42:15,520 --> 00:42:19,759
Speaker 1: unwined was going to take place. Even if, now, if

735
00:42:19,800 --> 00:42:25,680
Speaker 1: you want to argue Lehman Brothers precipitated the conflagration spreading faster,

736
00:42:26,400 --> 00:42:28,480
Speaker 1: well you know who knows. It's hard to argue against that.

737
00:42:28,520 --> 00:42:30,200
Speaker 1: So let me ask you to put you put you

738
00:42:30,239 --> 00:42:31,879
Speaker 1: on the hot seat. Then, even though I'm the guests

739
00:42:31,880 --> 00:42:35,360
Speaker 1: and you're the host. Good decision, bad decision on Lehman Brothers,

740
00:42:35,400 --> 00:42:37,279
Speaker 1: assume they had authority to do so, which I'm telling

741
00:42:37,280 --> 00:42:39,319
Speaker 1: you they did. I'm the wrong person to ask that.

742
00:42:39,360 --> 00:42:41,120
Speaker 1: I'll give you the answer. But the reason I'm the

743
00:42:41,120 --> 00:42:45,000
Speaker 1: wrong person is I believe that see that sort of

744
00:42:45,440 --> 00:42:48,560
Speaker 1: doric building with the columns over there, called the bankruptcy Court,

745
00:42:49,120 --> 00:42:51,919
Speaker 1: that's there for a reason. Now, if you want to say,

746
00:42:52,000 --> 00:42:55,440
Speaker 1: we're gonna take all these banks and have Uncle Sam

747
00:42:55,520 --> 00:42:58,920
Speaker 1: be dead or in possession. So my favorite example was

748
00:42:58,960 --> 00:43:03,719
Speaker 1: Bank America, all lynch that whole countrywide. Let's go over there,

749
00:43:04,160 --> 00:43:07,520
Speaker 1: we take all the debts sticking in to sell it. Um.

750
00:43:07,640 --> 00:43:10,920
Speaker 1: There's no such thing as toxic assets. There's only toxic prices.

751
00:43:11,360 --> 00:43:14,239
Speaker 1: So this at a dollar a hundred cents on the

752
00:43:14,239 --> 00:43:16,880
Speaker 1: dollar as a disaster, but twenty cents on the dollar

753
00:43:16,920 --> 00:43:19,279
Speaker 1: for something worth thirty seven is is a winner. So

754
00:43:19,320 --> 00:43:21,600
Speaker 1: you sell that stuff off, you clean up Marylanch, you

755
00:43:21,680 --> 00:43:23,960
Speaker 1: spin them out, you clean up Bank American, spin it out,

756
00:43:24,120 --> 00:43:26,239
Speaker 1: you clean up country wide, just spin. You go through

757
00:43:26,239 --> 00:43:28,720
Speaker 1: this whole process. You do it one after another. Now,

758
00:43:29,200 --> 00:43:32,279
Speaker 1: maybe the doubt doesn't stop at six thousand, maybe it

759
00:43:32,280 --> 00:43:36,160
Speaker 1: goes to four thousand, Maybe unemployment gets worse, but you

760
00:43:36,320 --> 00:43:38,800
Speaker 1: end up on the other end with a much healthier

761
00:43:38,920 --> 00:43:43,280
Speaker 1: financial system. So I'm in favor of following the law

762
00:43:43,800 --> 00:43:47,479
Speaker 1: having people suffer the consequences of their actions. By the way,

763
00:43:47,560 --> 00:43:49,759
Speaker 1: I would claw back all the stock options that all

764
00:43:49,800 --> 00:43:53,560
Speaker 1: these executives would get, but tear the band aid off.

765
00:43:54,560 --> 00:43:58,360
Speaker 1: It's really painful in oh seven, oh eight, oh nine,

766
00:43:58,760 --> 00:44:03,120
Speaker 1: but in you have a healthy economy. Even though what

767
00:44:03,200 --> 00:44:07,160
Speaker 1: we did ended up saving the system, we're still dealing

768
00:44:07,160 --> 00:44:11,160
Speaker 1: with ramifications of that. And so my answer is you

769
00:44:12,120 --> 00:44:14,840
Speaker 1: the reason nobody would come in and buy Lehman Brothers

770
00:44:14,960 --> 00:44:20,000
Speaker 1: is I think their liabilities vastly out outweighed um their death.

771
00:44:20,080 --> 00:44:21,799
Speaker 1: The fact that I'm drawing a blank on his name.

772
00:44:21,840 --> 00:44:23,279
Speaker 1: The guy came in and took over A I G.

773
00:44:24,080 --> 00:44:27,080
Speaker 1: He did a wonderful job, passed away from cancer. Not

774
00:44:28,320 --> 00:44:30,440
Speaker 1: A I G had a real business. It had a

775
00:44:30,440 --> 00:44:33,960
Speaker 1: real cash flow. The four people on the A I G.

776
00:44:34,160 --> 00:44:37,080
Speaker 1: Financial Product Group were a debacle, but you could have

777
00:44:37,160 --> 00:44:40,040
Speaker 1: carved that out, and they ultimately did, and that's why

778
00:44:40,120 --> 00:44:44,000
Speaker 1: I G is now a functional business. Yeah, I mean

779
00:44:44,000 --> 00:44:46,719
Speaker 1: that's interesting. I mean, the the counterfactual you're you're at

780
00:44:46,800 --> 00:44:50,520
Speaker 1: you're telling us about, I think is pretty persuasive on

781
00:44:50,640 --> 00:44:54,360
Speaker 1: the following assumption, and that is that the depths that

782
00:44:54,400 --> 00:44:56,360
Speaker 1: we would have reached in two thousands of any and

783
00:44:56,520 --> 00:45:02,000
Speaker 1: nine cleansing would have been cleansing, yes, ra than fatal, right,

784
00:45:02,040 --> 00:45:05,520
Speaker 1: because we've seen national systems that collapse not to stand

785
00:45:05,560 --> 00:45:08,400
Speaker 1: up again. Right. Argentina is a great example. If you

786
00:45:08,440 --> 00:45:10,960
Speaker 1: and I were having this conversation in eighteen ninety, we

787
00:45:10,960 --> 00:45:13,440
Speaker 1: were in Buenos Aires, right, and we said, hey, let's

788
00:45:13,440 --> 00:45:16,640
Speaker 1: make a bet America or Argentina hundred years from now,

789
00:45:16,960 --> 00:45:18,799
Speaker 1: I think both of us would have said, we can't

790
00:45:18,800 --> 00:45:21,080
Speaker 1: find a counterparty, right, We would have both bet on

791
00:45:21,360 --> 00:45:26,960
Speaker 1: Argentina as just on much more secure some republic go

792
00:45:27,040 --> 00:45:30,160
Speaker 1: down the list of whenever there's a crisis, and that

793
00:45:30,320 --> 00:45:33,280
Speaker 1: was if you like the book The Lords of Finance,

794
00:45:33,719 --> 00:45:36,560
Speaker 1: that was imposed from the outside, but still it's a great,

795
00:45:36,680 --> 00:45:39,719
Speaker 1: great example. So my the question really for us in

796
00:45:39,920 --> 00:45:44,799
Speaker 1: evaluating these counterfactuals is where is that threshold where under

797
00:45:44,800 --> 00:45:47,800
Speaker 1: which the US doesn't recover ever right where it recovers

798
00:45:47,840 --> 00:45:50,719
Speaker 1: in something that we don't recognize. That is the four

799
00:45:50,800 --> 00:45:52,960
Speaker 1: trillion dollar question? Can you stick around a bit? I

800
00:45:52,960 --> 00:45:55,239
Speaker 1: have a bunch of more questions. We've been speaking with

801
00:45:55,239 --> 00:45:59,319
Speaker 1: Professor Peter Brown of Wharton. If you enjoy this conversation,

802
00:45:59,360 --> 00:46:02,160
Speaker 1: we'll be sure come back for the podcast extras. Will

803
00:46:02,200 --> 00:46:04,759
Speaker 1: we keep the tape rolling and continue to walk out

804
00:46:04,840 --> 00:46:09,200
Speaker 1: over all things Central Banks. We love your comments, feedback

805
00:46:09,239 --> 00:46:13,080
Speaker 1: and suggestions right to us at m IB podcast at

806
00:46:13,080 --> 00:46:16,320
Speaker 1: Bloomberg dot net. You can check out my daily column

807
00:46:16,320 --> 00:46:19,360
Speaker 1: on Bloomberg dot com. Follow me on Twitter at rid Holts.

808
00:46:19,800 --> 00:46:22,840
Speaker 1: I'm Barry Ridholts. You're listening to Masters in Business on

809
00:46:22,960 --> 00:46:38,680
Speaker 1: Bloomberg Radio. Welcome to the podcast, Peter, Thank you so

810
00:46:38,760 --> 00:46:42,200
Speaker 1: much for doing this. I'm I'm really enjoying walking out

811
00:46:42,239 --> 00:46:45,040
Speaker 1: on FED stuff and I have a ton of a

812
00:46:45,080 --> 00:46:47,520
Speaker 1: ton of questions for you that we didn't get to.

813
00:46:48,120 --> 00:46:51,319
Speaker 1: The Wells Fargo stuff is just fascinating, I mean, and

814
00:46:51,360 --> 00:46:54,600
Speaker 1: we barely scratching the service. I mean, that's just astonishing

815
00:46:54,640 --> 00:46:56,200
Speaker 1: to here's here's the thing. The one thing I'll say

816
00:46:56,200 --> 00:46:58,200
Speaker 1: about What's Fargo, I think that our listeners might want

817
00:46:58,239 --> 00:47:01,000
Speaker 1: to know is that they made a choice in hiring

818
00:47:01,000 --> 00:47:03,320
Speaker 1: a new chairman of the board, a chairwoman of the board,

819
00:47:03,320 --> 00:47:07,400
Speaker 1: Betsy Duke, former governor of the Federal Reserve Board. And

820
00:47:07,920 --> 00:47:11,200
Speaker 1: this news was the first thing out of Wells Fargo,

821
00:47:11,600 --> 00:47:15,719
Speaker 1: including their independent directors report about what had happened that

822
00:47:15,840 --> 00:47:20,840
Speaker 1: made me think this entire thing isn't just a smoldering pile.

823
00:47:21,160 --> 00:47:23,759
Speaker 1: They finally on top of it. They finally done something.

824
00:47:23,800 --> 00:47:26,319
Speaker 1: They finally done something real. And so I have high

825
00:47:26,320 --> 00:47:29,719
Speaker 1: hopes for for Duke. And I think that she's a

826
00:47:29,960 --> 00:47:35,040
Speaker 1: really first rate banker intellect She understands the government, so

827
00:47:35,280 --> 00:47:38,000
Speaker 1: I act, she understands crisis. So i'm i'm I think

828
00:47:38,040 --> 00:47:40,280
Speaker 1: that they might have turned a corner. But again, grab

829
00:47:40,280 --> 00:47:43,080
Speaker 1: your popcorn. The story is not ever So we we

830
00:47:43,120 --> 00:47:46,360
Speaker 1: really didn't talk about any of your books. The book

831
00:47:46,400 --> 00:47:49,879
Speaker 1: that's out, um that came out last year, the power

832
00:47:49,920 --> 00:47:53,520
Speaker 1: and independence of the Federal Reserve. What motivated you to

833
00:47:53,600 --> 00:47:55,920
Speaker 1: write that? How much of that is you pushing back

834
00:47:55,960 --> 00:47:59,280
Speaker 1: at all the crazy conspiracy stuff that we see about

835
00:47:59,320 --> 00:48:02,000
Speaker 1: the Federals. You know, it's it's me trying to stand

836
00:48:02,040 --> 00:48:05,480
Speaker 1: in the middle of the conspiracists and the FED apologists

837
00:48:05,480 --> 00:48:08,560
Speaker 1: who see the FEDS this great temple of reason. Right,

838
00:48:08,680 --> 00:48:11,359
Speaker 1: that is just doing the same thing NASA does when

839
00:48:11,360 --> 00:48:14,160
Speaker 1: it sends, you know, the voyager out to Mars. By

840
00:48:14,160 --> 00:48:17,840
Speaker 1: the way, I call that um economists all have physics

841
00:48:17,840 --> 00:48:21,560
Speaker 1: penis envy. Yeah, that's this, It's exactly that. And and

842
00:48:21,719 --> 00:48:25,920
Speaker 1: the problem is that we're talking about an uncertain present

843
00:48:26,800 --> 00:48:30,480
Speaker 1: with a past that we've not fully understood, making projections

844
00:48:30,520 --> 00:48:35,239
Speaker 1: about an unknowable future. Right. We're not talking about physics, right,

845
00:48:35,280 --> 00:48:37,480
Speaker 1: We're talking about something else. And it's not that there's

846
00:48:37,520 --> 00:48:39,799
Speaker 1: no technical content in what the FED does. And that's

847
00:48:39,800 --> 00:48:42,880
Speaker 1: where the conspiracists are wrong, right, It's not being taken

848
00:48:42,920 --> 00:48:46,759
Speaker 1: over by different ideologues. There is technical There is a

849
00:48:46,760 --> 00:48:51,400
Speaker 1: technical apparatus. It's just that inside the FED that technical

850
00:48:51,440 --> 00:48:55,360
Speaker 1: apparatus isn't enough and can never be enough to answer

851
00:48:55,400 --> 00:48:58,200
Speaker 1: some of these big questions, should Lehman live or die?

852
00:48:58,760 --> 00:49:03,239
Speaker 1: Should we take into straits into negative territory? Right? And

853
00:49:03,280 --> 00:49:06,400
Speaker 1: all these other kinds of questions, the unknown unknowns nobody

854
00:49:06,440 --> 00:49:09,040
Speaker 1: can answer because humans are involved, and who knows what

855
00:49:09,120 --> 00:49:11,680
Speaker 1: we're gonna do. So I saw my role, you know,

856
00:49:11,760 --> 00:49:14,560
Speaker 1: as a lawyer and as a financial historian, not an economist,

857
00:49:14,800 --> 00:49:19,319
Speaker 1: although conversant in in monetary economics and finance, to be

858
00:49:19,560 --> 00:49:22,560
Speaker 1: the guy who says it's I'm going to draw the

859
00:49:22,600 --> 00:49:24,799
Speaker 1: curtain back. Right, We're gonna look at the man, not

860
00:49:24,880 --> 00:49:28,719
Speaker 1: the wizard, and it's gonna be okay, Alright, we're gonna

861
00:49:28,719 --> 00:49:33,160
Speaker 1: do and we're gonna see that this extremely interesting, fascinating, important,

862
00:49:33,239 --> 00:49:39,160
Speaker 1: powerful central bank is not held hostage by a bunch

863
00:49:39,200 --> 00:49:43,279
Speaker 1: of greedy bankers. Right, But it's not the wizard. So

864
00:49:43,400 --> 00:49:47,800
Speaker 1: let's talk about the wizard. Um. I think some people

865
00:49:48,320 --> 00:49:52,839
Speaker 1: um blame Bernanke for the financial crisis, which I think

866
00:49:52,960 --> 00:49:58,160
Speaker 1: is sort of um really misunderstanding the timeline. But the

867
00:49:58,239 --> 00:50:02,400
Speaker 1: question I'll ask you is how responsible do you think

868
00:50:02,440 --> 00:50:07,279
Speaker 1: Alan Greenspan is for the great financial crisis? That's great, Um,

869
00:50:07,320 --> 00:50:12,480
Speaker 1: there's a there's Alan Greenspan has the unfortunate status of

870
00:50:12,560 --> 00:50:14,680
Speaker 1: being pilloried on the left and the right for totally

871
00:50:14,719 --> 00:50:18,040
Speaker 1: different things. So left sees him as giving away the

872
00:50:18,120 --> 00:50:21,880
Speaker 1: store from a regulatory and supervisory perspective. Right, well, he

873
00:50:21,960 --> 00:50:24,839
Speaker 1: said a couple of things where, um, hey, you know,

874
00:50:25,080 --> 00:50:26,880
Speaker 1: the banks will take care of themselves. They have their

875
00:50:26,880 --> 00:50:32,240
Speaker 1: reputation to worry about. Or um. In California, where the

876
00:50:32,320 --> 00:50:38,760
Speaker 1: Democratic Congress Democratic State Assembly purposefully did not regulate any

877
00:50:38,800 --> 00:50:43,239
Speaker 1: of the private lenders, Greenspan said, hey, these are the innovators.

878
00:50:43,280 --> 00:50:45,040
Speaker 1: Why do we want to get in their way? So

879
00:50:45,239 --> 00:50:48,879
Speaker 1: it absolutely is consistent with his ideology. Greenspan also had

880
00:50:48,920 --> 00:50:53,560
Speaker 1: the misfortune of publishing an extremely candid memoir where he

881
00:50:53,600 --> 00:50:56,920
Speaker 1: admits completely that yeah, I had no appetite for regulation,

882
00:50:57,480 --> 00:50:59,560
Speaker 1: and he said that he took care of it by saying, well,

883
00:50:59,600 --> 00:51:02,520
Speaker 1: I'm as and recuse myself because I ideologically I'm opposed

884
00:51:02,560 --> 00:51:06,440
Speaker 1: to this. What happens in any organization where the boss says, look,

885
00:51:06,520 --> 00:51:09,279
Speaker 1: you can do what you want. Here's my vision, but

886
00:51:09,440 --> 00:51:11,880
Speaker 1: you make your decision. Do people say, okay, great, well

887
00:51:11,920 --> 00:51:13,399
Speaker 1: I disagree with your vision, so I'm gonna do mine.

888
00:51:13,480 --> 00:51:15,319
Speaker 1: Or do they say, oh, well, let's guess what his

889
00:51:15,400 --> 00:51:18,240
Speaker 1: vision isn't implement it? And of course it's the latter,

890
00:51:18,239 --> 00:51:20,080
Speaker 1: and that's what happens at the FED. So the left

891
00:51:20,520 --> 00:51:25,479
Speaker 1: sees the FED as the only governmental institution with both

892
00:51:25,480 --> 00:51:29,319
Speaker 1: the credibility and the perspective on the economy to do

893
00:51:29,360 --> 00:51:34,839
Speaker 1: anything about the underwriting crisis fair enough, and then does

894
00:51:34,880 --> 00:51:37,440
Speaker 1: nothing about it. And the right what's the rights criticism?

895
00:51:37,520 --> 00:51:41,320
Speaker 1: The rights criticism is that he played God and he

896
00:51:41,560 --> 00:51:44,880
Speaker 1: rather than having a monetary policy rule that would have

897
00:51:44,920 --> 00:51:48,640
Speaker 1: increased interest rates much more rapidly after nine eleven and

898
00:51:48,680 --> 00:51:53,200
Speaker 1: the tech bubble implosion, he didn't. He felt like that

899
00:51:53,239 --> 00:51:58,440
Speaker 1: he knew what was better than uh than monetary policy rules,

900
00:51:58,560 --> 00:52:02,319
Speaker 1: and as results, he started blowing bubbles. So the thing

901
00:52:02,400 --> 00:52:05,400
Speaker 1: I love about that, I totally agree with your observation.

902
00:52:05,800 --> 00:52:11,400
Speaker 1: But there's something deliciously ironic about an iron rand libertarian

903
00:52:11,840 --> 00:52:15,240
Speaker 1: who says we should not have government intervention in anything

904
00:52:15,680 --> 00:52:18,520
Speaker 1: unless I have my hands on the wheel, and then hey,

905
00:52:18,719 --> 00:52:23,359
Speaker 1: watch the whole my beer. Watch this. It's an amazing contradiction,

906
00:52:23,560 --> 00:52:26,680
Speaker 1: and in real time very few people pointed it out.

907
00:52:26,800 --> 00:52:29,040
Speaker 1: Milton Friedman was one who did right. So he was

908
00:52:29,080 --> 00:52:33,200
Speaker 1: as consistent libertarian as you ever find um, with only

909
00:52:33,239 --> 00:52:36,200
Speaker 1: a couple of exceptions. In his youth wing he helped

910
00:52:36,360 --> 00:52:39,520
Speaker 1: create the payroll deduction system, for example. It was something

911
00:52:39,520 --> 00:52:41,800
Speaker 1: that he regretted the rest of his life. Thought taxes

912
00:52:41,800 --> 00:52:45,879
Speaker 1: should be voluntarily given. Um. That's adorable. Yeah, right, that's

913
00:52:45,920 --> 00:52:48,839
Speaker 1: that's the libertarian fervor right there. But but Milton Freed

914
00:52:48,920 --> 00:52:50,279
Speaker 1: was a very smart guy, and he was asked in

915
00:52:50,320 --> 00:52:53,480
Speaker 1: the ninety nineties, I mean, Greenspan made a decision that

916
00:52:53,600 --> 00:52:57,400
Speaker 1: is credited um, that is credited with adding you know,

917
00:52:57,680 --> 00:53:02,360
Speaker 1: a trillion dollars of wealth and countless jobs to the economy.

918
00:53:02,400 --> 00:53:05,600
Speaker 1: And that is by saying in the nineteen nineties, we

919
00:53:05,600 --> 00:53:08,800
Speaker 1: should not raise interest rates too early because what we're seeing,

920
00:53:08,880 --> 00:53:11,840
Speaker 1: in part because the technology, uh, in part because of

921
00:53:11,880 --> 00:53:18,520
Speaker 1: other factors in the economy, dramatic expansion in productivity, rather

922
00:53:18,640 --> 00:53:21,920
Speaker 1: than an overheating inflationary economy. And so he convinced the

923
00:53:21,960 --> 00:53:24,040
Speaker 1: other members of the Federal Open Market Committee in nineteen

924
00:53:24,120 --> 00:53:27,600
Speaker 1: nineties to hold tight. And one of the hawks on

925
00:53:27,640 --> 00:53:30,040
Speaker 1: the other side of that was Janet Yellen, right, not

926
00:53:30,239 --> 00:53:32,360
Speaker 1: the dove on the other side of his funnishness, but

927
00:53:32,400 --> 00:53:35,480
Speaker 1: the opposite and uh. And he was right in the

928
00:53:35,600 --> 00:53:39,239
Speaker 1: sense that the economy continued to expand even after him,

929
00:53:39,760 --> 00:53:44,760
Speaker 1: you know, the stock as stock, the tech stocks fell apart.

930
00:53:45,480 --> 00:53:48,719
Speaker 1: Where they bottomed out was substantially higher, and of course

931
00:53:48,719 --> 00:53:51,560
Speaker 1: they went right up again than where others were calling

932
00:53:51,719 --> 00:53:54,400
Speaker 1: the Um the top of the market. And so that

933
00:53:54,560 --> 00:53:57,879
Speaker 1: idea was that he's the wizard, right, he's the maestro um.

934
00:53:58,360 --> 00:54:01,800
Speaker 1: And I think that that ends up be feeding this idea.

935
00:54:02,080 --> 00:54:05,919
Speaker 1: When it's good, it's great, right, But when it's bad,

936
00:54:06,080 --> 00:54:09,600
Speaker 1: you have a villain. And again it's a bipartisan villainy there.

937
00:54:09,880 --> 00:54:13,600
Speaker 1: I think that's a fair assessment, right, he when as

938
00:54:13,640 --> 00:54:16,279
Speaker 1: long as everything's going well, hey listen, when the party

939
00:54:16,360 --> 00:54:19,279
Speaker 1: is in full swing, everybody loves an easy bartender. But

940
00:54:19,480 --> 00:54:22,280
Speaker 1: the next morning, when you hungover in sick to your stomach,

941
00:54:22,320 --> 00:54:24,759
Speaker 1: it's can't believe what sort of jumped this guy was

942
00:54:24,840 --> 00:54:27,760
Speaker 1: pouring into my glasses. And I think from the perspective,

943
00:54:27,760 --> 00:54:30,120
Speaker 1: I mean, there's a lot to say in favor and

944
00:54:30,239 --> 00:54:32,680
Speaker 1: against both of those narratives on the left and the right.

945
00:54:33,040 --> 00:54:35,600
Speaker 1: So some of those who critique the critique on the

946
00:54:35,719 --> 00:54:40,799
Speaker 1: left say, um, there's there was no appetite in America

947
00:54:41,160 --> 00:54:44,280
Speaker 1: for taking a hard line on bankers. And if Greenspan

948
00:54:44,360 --> 00:54:47,160
Speaker 1: had done it, he would have been pilloried just as

949
00:54:47,200 --> 00:54:50,040
Speaker 1: anyone else was. What what about either the tale of

950
00:54:50,160 --> 00:54:53,719
Speaker 1: rule or any other assessment that, when you play it

951
00:54:53,800 --> 00:54:56,800
Speaker 1: out to the last steps, says, hey, we should have

952
00:54:57,400 --> 00:55:00,759
Speaker 1: rates a little higher than these. You know, that's where

953
00:55:00,800 --> 00:55:04,080
Speaker 1: the Greenspan put more or less can exactly right. And

954
00:55:04,320 --> 00:55:07,399
Speaker 1: and Taylor himself, although not at the time very much.

955
00:55:07,680 --> 00:55:11,280
Speaker 1: You know, John has made a big career since the crisis,

956
00:55:11,440 --> 00:55:15,080
Speaker 1: and uh and really raking the Fed over the coals,

957
00:55:15,280 --> 00:55:16,680
Speaker 1: but he wasn't doing it at the time. And even

958
00:55:16,680 --> 00:55:19,960
Speaker 1: the original papers that created the Tailor rule were much

959
00:55:20,040 --> 00:55:23,359
Speaker 1: more tentative than his certainty today, which makes me uh

960
00:55:23,600 --> 00:55:26,040
Speaker 1: much less sure about the Taylor rule. I'm opposed to

961
00:55:26,160 --> 00:55:29,600
Speaker 1: writing the Tailor rule into into legislation. Um. But that

962
00:55:29,800 --> 00:55:31,560
Speaker 1: is the critique the Taylor rule would have said in

963
00:55:31,600 --> 00:55:34,359
Speaker 1: two thousand four interest rate should have been higher by

964
00:55:36,400 --> 00:55:39,440
Speaker 1: same same situation, right, they should have been higher by

965
00:55:39,520 --> 00:55:41,880
Speaker 1: not just twenty five basins points, but by two hundred

966
00:55:41,920 --> 00:55:45,800
Speaker 1: basis points, right, um or more. And so the problem

967
00:55:45,880 --> 00:55:49,279
Speaker 1: with that narrative, though Ben murnike um has pointed this out,

968
00:55:49,800 --> 00:55:53,520
Speaker 1: is that the real estate bubble started. It predated you know,

969
00:55:53,640 --> 00:55:58,040
Speaker 1: the initial departure. It predated the monetary policy phenomenon. I

970
00:55:58,239 --> 00:56:02,960
Speaker 1: disagree with um Bernankee on this. Years ago, when he

971
00:56:03,080 --> 00:56:06,520
Speaker 1: was leaving the FED, there was a lunch a luncheon

972
00:56:06,600 --> 00:56:09,400
Speaker 1: that I got to intend, and the conference table was,

973
00:56:09,640 --> 00:56:11,800
Speaker 1: you know, three miles long. He's in the middle of it.

974
00:56:12,160 --> 00:56:14,320
Speaker 1: I'm in the opposite corner. So I had to scream

975
00:56:14,360 --> 00:56:18,440
Speaker 1: my question too, and that came up. And the pushback

976
00:56:18,560 --> 00:56:21,439
Speaker 1: I gave, and I'll repeat it now, was go back

977
00:56:21,520 --> 00:56:26,160
Speaker 1: to right. You have the crash, Greenspan comes in like

978
00:56:26,320 --> 00:56:31,160
Speaker 1: many new bankers, they're tested immediately, and you pretty much

979
00:56:31,239 --> 00:56:34,839
Speaker 1: had the peak in real estate, at least in New

980
00:56:34,960 --> 00:56:40,240
Speaker 1: York and other metropolitan areas in that seven to eighty

981
00:56:40,360 --> 00:56:42,399
Speaker 1: nine air If you bought a condo in eighty nine

982
00:56:43,000 --> 00:56:45,520
Speaker 1: in Manhattan or a co op, you didn't get back

983
00:56:45,600 --> 00:56:50,040
Speaker 1: to break even until like the whole concept that real

984
00:56:50,120 --> 00:56:53,479
Speaker 1: estate never goes down. That's before we're not even talking

985
00:56:53,480 --> 00:56:56,239
Speaker 1: about the Great Depression. But if you look at a chart,

986
00:56:56,320 --> 00:56:59,799
Speaker 1: you'll see we peaked, took a while to get back over,

987
00:57:00,200 --> 00:57:04,120
Speaker 1: and my personal experience has been that in the mid

988
00:57:04,200 --> 00:57:07,959
Speaker 1: to late nineties. Remember the bullmarket really began in eighty

989
00:57:08,040 --> 00:57:10,560
Speaker 1: two in the mid to late nineties, a lot of

990
00:57:10,840 --> 00:57:14,120
Speaker 1: people and this is an anecdote, it's not data, but

991
00:57:14,280 --> 00:57:16,640
Speaker 1: I saw so much of it that I can't believe

992
00:57:16,760 --> 00:57:19,240
Speaker 1: there isn't a good data source on this. A lot

993
00:57:19,320 --> 00:57:22,080
Speaker 1: of people said, Hey, I'm gonna roll out a little

994
00:57:22,120 --> 00:57:24,600
Speaker 1: bit of my equities and trade up in real estate.

995
00:57:25,000 --> 00:57:26,560
Speaker 1: I'm in a three bedroom, I want to be a

996
00:57:26,600 --> 00:57:28,520
Speaker 1: four bedroom on an acre. I'm I'm on an acre.

997
00:57:28,600 --> 00:57:31,040
Speaker 1: I want to be waterfront, I'm waterfront. I want to

998
00:57:31,080 --> 00:57:34,520
Speaker 1: be at a bigger house. Whatever it was, And that's

999
00:57:34,640 --> 00:57:37,320
Speaker 1: what it was, a combination of all this wealth that

1000
00:57:37,400 --> 00:57:40,400
Speaker 1: was created in the eighties and nineties, rates were still

1001
00:57:40,560 --> 00:57:45,360
Speaker 1: relatively attractive, and it it just was the demographic cycle

1002
00:57:45,520 --> 00:57:49,400
Speaker 1: that people started to to roll up and out and

1003
00:57:49,640 --> 00:57:56,040
Speaker 1: then what could have sort of faded in most most cycles,

1004
00:57:56,680 --> 00:58:00,680
Speaker 1: the economy drives real estate. Following the nomination of the

1005
00:58:00,760 --> 00:58:03,960
Speaker 1: dot com crash and nine eleven, when rates dropped, I

1006
00:58:04,000 --> 00:58:06,680
Speaker 1: want to say they were below two percent for about

1007
00:58:06,760 --> 00:58:09,240
Speaker 1: three years, and they were about one percent for a year.

1008
00:58:09,840 --> 00:58:14,080
Speaker 1: That's what started that giant spiral. And following there was

1009
00:58:14,200 --> 00:58:19,120
Speaker 1: no refractory period post uh dot com collapse. You had

1010
00:58:19,200 --> 00:58:23,120
Speaker 1: real estate then driving the economy for the next well

1011
00:58:23,240 --> 00:58:26,200
Speaker 1: five six seven years, and that's when everything kind of

1012
00:58:26,240 --> 00:58:30,480
Speaker 1: went vertical. And then add to that, you start running

1013
00:58:30,480 --> 00:58:33,280
Speaker 1: out of people to buy houses, and you moved to

1014
00:58:33,360 --> 00:58:36,000
Speaker 1: sub prime and all day and you bring in another

1015
00:58:36,120 --> 00:58:40,120
Speaker 1: ten or twenty million potential homebuyers. You know, A buddy

1016
00:58:40,120 --> 00:58:42,960
Speaker 1: of mine used to call that um renters with an

1017
00:58:43,000 --> 00:58:46,560
Speaker 1: option to default, people who really My favorite scene in

1018
00:58:46,640 --> 00:58:48,960
Speaker 1: The Big Short is Steve Correll is talking to the

1019
00:58:49,000 --> 00:58:52,720
Speaker 1: stripper who owns a rental property she's renting out. He goes,

1020
00:58:52,840 --> 00:58:54,880
Speaker 1: you own a house that you rent out? She goes, no,

1021
00:58:54,960 --> 00:58:58,040
Speaker 1: I owned six. And the light goes off. Oh this

1022
00:58:58,240 --> 00:59:01,040
Speaker 1: is a disaster. This is going to collapse. So when

1023
00:59:01,080 --> 00:59:04,320
Speaker 1: I look at when bernanke says that, you know, yeah,

1024
00:59:04,480 --> 00:59:07,720
Speaker 1: you were cut. You had a huge booming economy for

1025
00:59:08,360 --> 00:59:11,320
Speaker 1: a decade plus and you still a good chunk of

1026
00:59:11,400 --> 00:59:14,919
Speaker 1: that real estate was upside down for a while. Once

1027
00:59:14,960 --> 00:59:18,320
Speaker 1: you crossed I want to say nine seven, Yeah, real

1028
00:59:18,440 --> 00:59:20,520
Speaker 1: estate started to move. But you look at O two

1029
00:59:20,560 --> 00:59:22,560
Speaker 1: oh three or four or five or six oh seven,

1030
00:59:22,920 --> 00:59:26,080
Speaker 1: it's exclusion. It went vertical. So it's kind of I

1031
00:59:26,240 --> 00:59:29,800
Speaker 1: find he's the same thing with the excess cash looking

1032
00:59:29,920 --> 00:59:32,600
Speaker 1: for a home. I always thought that argument was a

1033
00:59:32,720 --> 00:59:37,600
Speaker 1: little You tell me how disingenuous is is the there's

1034
00:59:37,640 --> 00:59:41,200
Speaker 1: too much savings, that's our problem around the world gets

1035
00:59:41,280 --> 00:59:44,840
Speaker 1: to um my own ideology, which is that I am

1036
00:59:44,920 --> 00:59:52,320
Speaker 1: a radical uncertain tist. So I love that I don't

1037
00:59:52,400 --> 00:59:55,000
Speaker 1: have a strong view on these questions, but I love

1038
00:59:55,080 --> 00:59:58,600
Speaker 1: doing and structuring those arguments and understanding what would I

1039
00:59:58,720 --> 01:00:00,800
Speaker 1: have to know in order to horse one or another?

1040
01:00:01,080 --> 01:00:03,200
Speaker 1: And so here's what I would have to know. I

1041
01:00:03,240 --> 01:00:08,320
Speaker 1: would have to know more about the relative availability of credit,

1042
01:00:08,880 --> 01:00:14,640
Speaker 1: right that securitization, the explosion of securitization, and then demand

1043
01:00:14,760 --> 01:00:17,640
Speaker 1: that securitization I'm talking about second third generated into c

1044
01:00:17,760 --> 01:00:20,960
Speaker 1: d O s and beyond that downward interest rate pressure

1045
01:00:21,080 --> 01:00:24,640
Speaker 1: was putting on the system. Uh, And how we would

1046
01:00:24,680 --> 01:00:27,680
Speaker 1: look at that if the federal funds rate was higher,

1047
01:00:28,480 --> 01:00:33,400
Speaker 1: because one view, uh that Taylor and others assert is

1048
01:00:33,480 --> 01:00:37,760
Speaker 1: that these move an absolute lockstep. Right, So federal funds

1049
01:00:37,840 --> 01:00:40,280
Speaker 1: in two thousand and one to two thousand four, if

1050
01:00:40,320 --> 01:00:42,720
Speaker 1: it had been raised two d basis points or three

1051
01:00:42,760 --> 01:00:46,080
Speaker 1: hundred basis points, and then we would have seen such

1052
01:00:46,120 --> 01:00:48,720
Speaker 1: a dramatic break on the expansion of the housing system.

1053
01:00:49,360 --> 01:00:51,000
Speaker 1: I think there's some truth to that, and I want

1054
01:00:51,000 --> 01:00:53,840
Speaker 1: to know why, how did you reach that conclusion. I

1055
01:00:53,880 --> 01:00:55,400
Speaker 1: don't have a view on that, So I'll give you

1056
01:00:55,520 --> 01:00:59,360
Speaker 1: short against the counter factual that interstates were higher and

1057
01:00:59,440 --> 01:01:03,360
Speaker 1: we still had that breathtaking enthusiasm that you can make

1058
01:01:03,480 --> 01:01:06,640
Speaker 1: this back on capital gains alone, and it will be

1059
01:01:06,880 --> 01:01:11,360
Speaker 1: swift and swifter than stock markets right under other equities

1060
01:01:11,440 --> 01:01:14,240
Speaker 1: or other asset classes. So so here's the mechanism for

1061
01:01:14,320 --> 01:01:17,040
Speaker 1: that specific thing. And I'm literally talking my book again.

1062
01:01:17,680 --> 01:01:21,000
Speaker 1: So if you're running a pension fund and foundation, anything

1063
01:01:21,160 --> 01:01:25,240
Speaker 1: that a charitable trust, um, anything that has a five

1064
01:01:25,320 --> 01:01:27,480
Speaker 1: percent bogu, We're gonna give away five percent of our

1065
01:01:27,520 --> 01:01:31,200
Speaker 1: corpus each year in order to maintain our tax exempt status.

1066
01:01:31,400 --> 01:01:33,400
Speaker 1: I think if you're a public pension fund, that's not

1067
01:01:33,920 --> 01:01:37,720
Speaker 1: a technical issue. But any of the giant foundations and

1068
01:01:37,920 --> 01:01:41,000
Speaker 1: charities and what have you have to do that when

1069
01:01:41,120 --> 01:01:43,320
Speaker 1: when rates go to and it's easy to do that.

1070
01:01:43,520 --> 01:01:47,280
Speaker 1: You expected returns for equities or six percent you're expect

1071
01:01:47,320 --> 01:01:50,760
Speaker 1: to return for bonds a three five percent a blended portfolio, Hey,

1072
01:01:50,880 --> 01:01:53,400
Speaker 1: five percent is a no brainer. How hard is that? Now?

1073
01:01:53,480 --> 01:01:55,800
Speaker 1: You take rates down you have a dot com crash,

1074
01:01:55,920 --> 01:01:58,600
Speaker 1: so oops, there's that. Then you take rates down to

1075
01:01:58,680 --> 01:02:01,880
Speaker 1: one percent. Now my bond aren't giving me anything. I

1076
01:02:02,040 --> 01:02:04,680
Speaker 1: think a lot of bond a lot of fund managers

1077
01:02:04,760 --> 01:02:10,120
Speaker 1: went to their bonds, either traders or salespeople whatever, say listen,

1078
01:02:10,560 --> 01:02:14,120
Speaker 1: I can't live on two percent. I have to get

1079
01:02:14,200 --> 01:02:18,160
Speaker 1: me something that will generate a better return, or I

1080
01:02:18,280 --> 01:02:21,920
Speaker 1: have to find somebody who will and so out. At

1081
01:02:22,000 --> 01:02:26,880
Speaker 1: the same time, we have a small bit of securitized

1082
01:02:27,160 --> 01:02:31,840
Speaker 1: sub prime and suddenly, hey, just as safe as treasuries.

1083
01:02:32,240 --> 01:02:35,440
Speaker 1: I remember being pitched in oh three, but look at

1084
01:02:35,520 --> 01:02:39,000
Speaker 1: yields a hundred fifty two fifty basis points. Mare, there's

1085
01:02:39,000 --> 01:02:42,440
Speaker 1: your five percent but bogey. And then all of a sudden,

1086
01:02:43,320 --> 01:02:47,840
Speaker 1: these mushrooms start to pop sprout after rain that the

1087
01:02:47,960 --> 01:02:53,800
Speaker 1: business model was not lends in order to get a

1088
01:02:53,920 --> 01:02:57,160
Speaker 1: yield on a mortgage, but lend in order to sell

1089
01:02:57,240 --> 01:03:02,080
Speaker 1: the papers to securitizers. And now that's what's feeding the

1090
01:03:02,160 --> 01:03:06,040
Speaker 1: beast and that process. Now I'm taking some liberties with

1091
01:03:06,120 --> 01:03:08,840
Speaker 1: the timelines, and I'm sure skipping some steps, but I

1092
01:03:08,960 --> 01:03:11,440
Speaker 1: think that is what led to that massive upswing in

1093
01:03:11,520 --> 01:03:13,520
Speaker 1: the I think, and again, I think it's a coherent view.

1094
01:03:13,600 --> 01:03:16,360
Speaker 1: This isn't This isn't something i'd call incoherent or or,

1095
01:03:16,600 --> 01:03:19,120
Speaker 1: and it's not a place where I've resolved these uncertainties

1096
01:03:19,160 --> 01:03:20,760
Speaker 1: for myself. And here's one of the reasons why I'm

1097
01:03:20,800 --> 01:03:23,760
Speaker 1: not walking out saying Barry, You're right, bernanke is wrong.

1098
01:03:23,840 --> 01:03:25,920
Speaker 1: I buy in the to the Taylor critique. I think

1099
01:03:25,920 --> 01:03:28,080
Speaker 1: it's exactly right, and part of it is all right.

1100
01:03:28,120 --> 01:03:30,880
Speaker 1: So we've got the soup of factors that contribute the

1101
01:03:30,880 --> 01:03:36,400
Speaker 1: financial crisis. Easy money is certainly one, right, and now

1102
01:03:36,520 --> 01:03:39,520
Speaker 1: let's talk about the five or six others that are

1103
01:03:39,600 --> 01:03:43,880
Speaker 1: contributing to and explain to me why the FEDS easy

1104
01:03:44,000 --> 01:03:47,840
Speaker 1: money is the factor that we call causal as opposed

1105
01:03:47,880 --> 01:03:51,160
Speaker 1: to just simply part of the soup. Is I agree,

1106
01:03:51,160 --> 01:03:53,520
Speaker 1: it is part of the soup. It's that take the

1107
01:03:53,560 --> 01:03:57,080
Speaker 1: Commodity Futures Modernization Act that said derivatives don't have to

1108
01:03:57,120 --> 01:04:00,480
Speaker 1: be regulated like other insurance products. Absolutely, that's a big

1109
01:04:00,560 --> 01:04:03,400
Speaker 1: part of the global The global savings glut is a

1110
01:04:03,480 --> 01:04:06,520
Speaker 1: massive factor. Right, So we've got things that unless convinced

1111
01:04:06,520 --> 01:04:08,120
Speaker 1: to that, you're like, you don't, you're not convinced that

1112
01:04:08,120 --> 01:04:10,720
Speaker 1: there's a massive amount of money flowing unless convinced that

1113
01:04:11,000 --> 01:04:14,600
Speaker 1: that is a factor causing a great financial crisis. It

1114
01:04:14,760 --> 01:04:18,120
Speaker 1: might have money yield. Yeah, well money seeking return not

1115
01:04:18,280 --> 01:04:21,720
Speaker 1: necessarily yield. So in in coming up so with the

1116
01:04:21,800 --> 01:04:25,080
Speaker 1: structure of collateralized that obligations. Right, the financial innovation, which

1117
01:04:25,080 --> 01:04:26,960
Speaker 1: I still think is a pretty breath taking piece of

1118
01:04:27,000 --> 01:04:29,960
Speaker 1: financial engineering in the sense right, being able And it's

1119
01:04:30,000 --> 01:04:34,520
Speaker 1: not financial alchemy to say we can actually traditional mortgage

1120
01:04:34,560 --> 01:04:37,000
Speaker 1: backed securities are already tranched, but they're trenched in a

1121
01:04:37,080 --> 01:04:39,840
Speaker 1: way that isn't about diversification risk, right, it's just about

1122
01:04:39,880 --> 01:04:42,560
Speaker 1: pooling rice on geography. How much risk do you want

1123
01:04:42,560 --> 01:04:44,520
Speaker 1: to take for how much reward? Yeah, and now cd

1124
01:04:44,600 --> 01:04:47,080
Speaker 1: as are saying, well, we're gonna make this in first in, uh,

1125
01:04:47,360 --> 01:04:49,640
Speaker 1: first out, and we're just going to If you had

1126
01:04:49,720 --> 01:04:52,880
Speaker 1: drawn the lines of c d O S differently, right,

1127
01:04:52,960 --> 01:04:55,040
Speaker 1: so that the equity tranch was much larger and the

1128
01:04:55,080 --> 01:04:58,360
Speaker 1: trip lay transferable smaller, right, that's one option. The other

1129
01:04:58,400 --> 01:05:01,280
Speaker 1: option is is garbage and garbage out? If what was

1130
01:05:01,360 --> 01:05:04,440
Speaker 1: going so when again I'm talking to my book, One

1131
01:05:04,480 --> 01:05:08,560
Speaker 1: of my most stunning things I discovered on the standardized

1132
01:05:08,600 --> 01:05:12,440
Speaker 1: documents for purchases of mortgages to be securitized. There is

1133
01:05:12,480 --> 01:05:16,040
Speaker 1: a nine day warranty a toaster. By a toast, you

1134
01:05:16,080 --> 01:05:21,080
Speaker 1: get warranty if the thirty day mortgages that go into

1135
01:05:21,120 --> 01:05:23,880
Speaker 1: these c d O s, if they default within ninety day,

1136
01:05:23,960 --> 01:05:25,920
Speaker 1: you can put it back to it. Now, stop and

1137
01:05:25,960 --> 01:05:30,640
Speaker 1: think about that. This is a thirty year obligation, right,

1138
01:05:31,120 --> 01:05:35,080
Speaker 1: how many months is that that's that's sixty months. If

1139
01:05:35,120 --> 01:05:37,920
Speaker 1: it defaults in the first three months, you can put

1140
01:05:37,960 --> 01:05:39,480
Speaker 1: it back now. If that would have been a twenty

1141
01:05:39,560 --> 01:05:42,520
Speaker 1: four month put which is hey, after two years, we've

1142
01:05:42,560 --> 01:05:45,960
Speaker 1: done our due diligence, it's on you, that would have

1143
01:05:46,000 --> 01:05:49,440
Speaker 1: been a big difference. But because of this was so

1144
01:05:49,680 --> 01:05:54,880
Speaker 1: complicated in real time, nobody understood the details. You could

1145
01:05:54,920 --> 01:05:58,120
Speaker 1: say night by the way, even that put. I think

1146
01:05:58,240 --> 01:06:01,800
Speaker 1: there was a great website called mortgage implode dot com

1147
01:06:02,360 --> 01:06:05,920
Speaker 1: that tracked all of the mortgage ender waters who went

1148
01:06:05,960 --> 01:06:09,360
Speaker 1: belly up, and it was four hundred of them. Because

1149
01:06:09,480 --> 01:06:12,400
Speaker 1: even with that short ninety day there were people who

1150
01:06:12,560 --> 01:06:16,200
Speaker 1: who they were doing the piggyback loans, they were doing

1151
01:06:16,240 --> 01:06:19,360
Speaker 1: the underlying mortgage and the whole equity at the same time.

1152
01:06:19,720 --> 01:06:23,440
Speaker 1: So you're lending a d and they never made a payment,

1153
01:06:23,560 --> 01:06:25,720
Speaker 1: They lived rent free for five years before they were

1154
01:06:26,080 --> 01:06:30,600
Speaker 1: eventually evicted. How could that ever go this? Let me

1155
01:06:30,600 --> 01:06:33,280
Speaker 1: take a giant step back and tell you why our

1156
01:06:33,400 --> 01:06:38,280
Speaker 1: conversation right now, oh will prove out this truth about

1157
01:06:38,320 --> 01:06:41,640
Speaker 1: which I don't have uncertainty. The two thousand eight crisis

1158
01:06:41,920 --> 01:06:44,040
Speaker 1: is going to continue to be a master class in

1159
01:06:44,120 --> 01:06:46,919
Speaker 1: financial history for decades to come, just as the Great

1160
01:06:46,960 --> 01:06:50,360
Speaker 1: Depression has. You and I could have an identically structured

1161
01:06:50,400 --> 01:06:53,080
Speaker 1: conversation about what caused the Great Depression, and we'd have

1162
01:06:53,160 --> 01:06:55,200
Speaker 1: so many factors to discuss, and you would say, well,

1163
01:06:55,240 --> 01:06:57,000
Speaker 1: this thing mattered more than that thing, And I said, well,

1164
01:06:57,040 --> 01:06:59,240
Speaker 1: I think that thing is Lewis. It's more complicated than that.

1165
01:06:59,680 --> 01:07:03,360
Speaker 1: And the reason why for some people that's just massively frustrating.

1166
01:07:03,720 --> 01:07:07,120
Speaker 1: Give me an answer, give me the to identify the problem,

1167
01:07:07,560 --> 01:07:09,680
Speaker 1: give me an answer that identifize the solution. Let's move on.

1168
01:07:09,920 --> 01:07:12,120
Speaker 1: So I will admit I'm ignorantous to what was the

1169
01:07:12,160 --> 01:07:15,520
Speaker 1: Great Depression? Was it was it tariffs and trade? Was

1170
01:07:15,600 --> 01:07:19,280
Speaker 1: it was it Herbert Hoover? Was it income in equality?

1171
01:07:19,360 --> 01:07:22,840
Speaker 1: I have no idea, and I think that those conversations

1172
01:07:22,880 --> 01:07:27,200
Speaker 1: which we can have if you'd like tell us a

1173
01:07:27,360 --> 01:07:29,520
Speaker 1: huge amount. And why they call that a master classes

1174
01:07:29,640 --> 01:07:32,920
Speaker 1: rather than you know, uh, just a circular track where

1175
01:07:32,960 --> 01:07:37,080
Speaker 1: we just chase each other endlessly, is because by really

1176
01:07:37,320 --> 01:07:41,320
Speaker 1: digging deep, isolating the mechanisms, ask yourself what you don't know,

1177
01:07:41,440 --> 01:07:43,400
Speaker 1: what you'd need to know in order to answer that question.

1178
01:07:44,040 --> 01:07:48,240
Speaker 1: That's how we learn about the mechanics of finance. And

1179
01:07:48,320 --> 01:07:51,120
Speaker 1: I think that's much. It's not not to dismiss my

1180
01:07:51,280 --> 01:07:55,480
Speaker 1: finance colleagues, but I would take that approach to things.

1181
01:07:55,520 --> 01:07:57,520
Speaker 1: I have taken that approach to things as a financial historian,

1182
01:07:57,520 --> 01:07:59,920
Speaker 1: as a lawyer. Then you know, learning the basics of

1183
01:08:00,000 --> 01:08:02,000
Speaker 1: black shouls or a cap emma or whatever else. Well,

1184
01:08:02,040 --> 01:08:04,720
Speaker 1: that works. So let's jump into our speed round our

1185
01:08:04,800 --> 01:08:08,560
Speaker 1: favorite questions. Let's uh, let's let's run right through these.

1186
01:08:08,840 --> 01:08:11,480
Speaker 1: Tell us the most important thing that people don't know

1187
01:08:11,560 --> 01:08:15,840
Speaker 1: about you. I'm I'm a poor, scrappy kid from More, Oklahoma,

1188
01:08:16,160 --> 01:08:18,120
Speaker 1: and I'm the I'm the sixth of seven kids to

1189
01:08:18,200 --> 01:08:21,360
Speaker 1: a single mom. My dad died when I was nine,

1190
01:08:21,600 --> 01:08:24,559
Speaker 1: but most of my life, most of his life, uh,

1191
01:08:24,680 --> 01:08:28,120
Speaker 1: he just wasn't good at life, wasn't good at being

1192
01:08:28,160 --> 01:08:30,360
Speaker 1: a human. Um, So, how do you go from a

1193
01:08:30,439 --> 01:08:35,720
Speaker 1: poor kid in Oklahoma to Harvard, Stanford Princeton, and so Um.

1194
01:08:35,920 --> 01:08:38,920
Speaker 1: The first was my brother, who is nine years older

1195
01:08:39,000 --> 01:08:42,479
Speaker 1: than me. Um was approached. He did well on the

1196
01:08:42,600 --> 01:08:44,840
Speaker 1: s A t S. And he was approached by an

1197
01:08:44,880 --> 01:08:48,040
Speaker 1: alum of Harvard saying, hey, kid like you shouldn't go

1198
01:08:48,120 --> 01:08:50,360
Speaker 1: to the local state school, should go to Harvard, which

1199
01:08:50,400 --> 01:08:53,160
Speaker 1: just didn't compute for anyone in my family. And so

1200
01:08:53,240 --> 01:08:56,120
Speaker 1: he applied, he got in, he went, and then nine

1201
01:08:56,200 --> 01:08:58,439
Speaker 1: years later, none of my other siblings did right well.

1202
01:08:58,520 --> 01:09:02,760
Speaker 1: Everybody else went to UH, to the state schools UM.

1203
01:09:03,640 --> 01:09:05,800
Speaker 1: And then night years later, I was just like, you

1204
01:09:05,840 --> 01:09:08,280
Speaker 1: know what I'm gonna I'm gonna be like my big brother.

1205
01:09:08,960 --> 01:09:10,280
Speaker 1: And so I did well in the s A t S.

1206
01:09:10,320 --> 01:09:11,640
Speaker 1: And I just from the time I was a kid,

1207
01:09:11,720 --> 01:09:15,439
Speaker 1: I was like, I saw what happened to Sam right

1208
01:09:15,560 --> 01:09:18,639
Speaker 1: the way that people reacted to him. Whatever Harvard meant,

1209
01:09:19,040 --> 01:09:21,880
Speaker 1: it meant something big. And so I applied, I got in,

1210
01:09:22,040 --> 01:09:24,639
Speaker 1: and I went, And then I would love to say

1211
01:09:24,680 --> 01:09:27,640
Speaker 1: that from there it was just all UH sunshine and buttercups,

1212
01:09:28,000 --> 01:09:30,800
Speaker 1: but the but it wasn't the cultural misfit between more

1213
01:09:30,800 --> 01:09:34,320
Speaker 1: Oklahomagetitus is so massive. It was harder for me than

1214
01:09:34,560 --> 01:09:38,080
Speaker 1: some my friends were from you know, gone to lead

1215
01:09:38,120 --> 01:09:43,720
Speaker 1: pipe private schools in Singapore or London, or or Johannesburger,

1216
01:09:43,800 --> 01:09:47,000
Speaker 1: Jennie or whatever else. So let me your brother is

1217
01:09:47,040 --> 01:09:49,679
Speaker 1: clearly a mentor. Who were some of your other early mentors.

1218
01:09:50,360 --> 01:09:53,640
Speaker 1: One of my very favorite mentors is a professor sociology

1219
01:09:53,680 --> 01:09:57,040
Speaker 1: professor named Mary Waters. I ended up not studying really

1220
01:09:57,080 --> 01:09:59,280
Speaker 1: anything close to what she does. She does studies immigration,

1221
01:09:59,439 --> 01:10:03,800
Speaker 1: natural asters, things like that, but she at Harvard University

1222
01:10:04,800 --> 01:10:07,000
Speaker 1: was the only professor I ever had that just took

1223
01:10:07,080 --> 01:10:11,439
Speaker 1: a keen personal interest in me. And as a as

1224
01:10:11,520 --> 01:10:13,759
Speaker 1: a teacher, so not you know, as as a scholar,

1225
01:10:13,760 --> 01:10:15,960
Speaker 1: I've gone in a different direction, but as a as

1226
01:10:16,000 --> 01:10:18,320
Speaker 1: a teacher, Mary has had a huge influence on me.

1227
01:10:18,320 --> 01:10:20,280
Speaker 1: Another one is and not ed Maddi. If you know

1228
01:10:22,080 --> 01:10:25,479
Speaker 1: the banker's new clothes, that's her. Um. She had a

1229
01:10:25,520 --> 01:10:28,439
Speaker 1: big has and still has a huge impact on me

1230
01:10:28,520 --> 01:10:31,760
Speaker 1: as a scholar, because how fearless she is? All right, son,

1231
01:10:31,920 --> 01:10:33,840
Speaker 1: this poor kid from Oklahoma, What business do I have

1232
01:10:33,920 --> 01:10:36,240
Speaker 1: talking about trillions of dollars? When you say fearless? In

1233
01:10:36,360 --> 01:10:38,600
Speaker 1: what way she'll say something? Whether it's popular or not

1234
01:10:38,800 --> 01:10:41,960
Speaker 1: well man, she just goes to war against people whose

1235
01:10:42,000 --> 01:10:46,320
Speaker 1: resources vastly outstripped her own on something that seems as

1236
01:10:46,360 --> 01:10:48,679
Speaker 1: our kane as bank balance sheets. Right, but banks should

1237
01:10:48,680 --> 01:10:51,240
Speaker 1: have much more equity, much less debt and uh and

1238
01:10:51,320 --> 01:10:54,639
Speaker 1: she's just tireless. We don't agree on everything. Sometimes we'll

1239
01:10:54,760 --> 01:10:58,720
Speaker 1: bicker and argue, but she has been just a profound

1240
01:10:59,120 --> 01:11:02,759
Speaker 1: Mentor's let's talk about books, because we we just mentioned

1241
01:11:03,160 --> 01:11:05,439
Speaker 1: the Banker's New Clothes. What are some of your favorite books.

1242
01:11:05,920 --> 01:11:07,680
Speaker 1: When I was a kid, the only book that ever

1243
01:11:07,800 --> 01:11:11,920
Speaker 1: made me physically weep was Victor Hugo's Lay miserab Um,

1244
01:11:12,240 --> 01:11:14,479
Speaker 1: and I remember reading the unabridged version and just feeling

1245
01:11:14,560 --> 01:11:17,200
Speaker 1: like I had been. It was the first time I

1246
01:11:17,240 --> 01:11:19,720
Speaker 1: thought I don't have to actually have these experiences to

1247
01:11:19,800 --> 01:11:22,880
Speaker 1: experience them. So that was that had a big impact.

1248
01:11:23,000 --> 01:11:26,840
Speaker 1: More more recently and perhaps less uh less Sacraine than that.

1249
01:11:27,439 --> 01:11:31,120
Speaker 1: Sebastian Malaby is probably my favorite financial journalists. I've read

1250
01:11:31,160 --> 01:11:36,519
Speaker 1: everything he's written, so more Money than God and what

1251
01:11:36,680 --> 01:11:39,840
Speaker 1: was the one on central banks? He wrote? The Man

1252
01:11:40,040 --> 01:11:43,640
Speaker 1: Who Knew, which is the biography of Alan Greenspan. I

1253
01:11:43,800 --> 01:11:46,040
Speaker 1: disagree with a lot of it in terms of the

1254
01:11:46,280 --> 01:11:51,360
Speaker 1: overall framing. Um, but it's it's just a superb product

1255
01:11:51,400 --> 01:11:54,760
Speaker 1: of exposition and research and you know the framing he puts,

1256
01:11:54,840 --> 01:11:58,400
Speaker 1: the policy questions where he intervenes. Uh, you can agree

1257
01:11:58,520 --> 01:12:00,559
Speaker 1: or disagree, but that's not the main country from the book.

1258
01:12:00,560 --> 01:12:04,400
Speaker 1: It's just terrific history. So if you like biography, Alan

1259
01:12:04,439 --> 01:12:06,360
Speaker 1: Green's fans biot it should have won a Pulitzer Prize

1260
01:12:06,360 --> 01:12:10,519
Speaker 1: in my view. Really, Oh it's so good. Wow, that's impressive. UM,

1261
01:12:11,320 --> 01:12:14,560
Speaker 1: tell us about a time you failed and what you

1262
01:12:14,720 --> 01:12:21,960
Speaker 1: learned from the experience. So UM, I when I started

1263
01:12:22,640 --> 01:12:25,880
Speaker 1: as an undergraduate at Harvard, UM, I was the president

1264
01:12:25,880 --> 01:12:29,400
Speaker 1: of the math club in my little Oklahoma high school

1265
01:12:29,840 --> 01:12:32,680
Speaker 1: and I just could not do the math in economics.

1266
01:12:32,720 --> 01:12:35,840
Speaker 1: And that's so funny you say that because in high

1267
01:12:35,840 --> 01:12:38,720
Speaker 1: school I was a mathlete and I then I go

1268
01:12:38,800 --> 01:12:42,000
Speaker 1: to Stony Brook for applied mathematics and physics, thinking that

1269
01:12:42,280 --> 01:12:44,920
Speaker 1: I'm the sh isnt and I know the stuff, like

1270
01:12:45,080 --> 01:12:47,000
Speaker 1: I didn't have to study for cow classes and I

1271
01:12:47,080 --> 01:12:49,840
Speaker 1: would get a's. And then you show up with people

1272
01:12:49,880 --> 01:12:53,439
Speaker 1: who are really serious and suddenly it's like, oh, I'm

1273
01:12:53,479 --> 01:12:55,400
Speaker 1: not as good at this as I thought. These guys

1274
01:12:55,760 --> 01:12:57,920
Speaker 1: who actually put in the heavy lefting do the work.

1275
01:12:58,240 --> 01:13:00,519
Speaker 1: They're running circles, and that was the barry. You and

1276
01:13:00,560 --> 01:13:02,760
Speaker 1: I had exactly the same circumstance. And so what I

1277
01:13:02,880 --> 01:13:05,559
Speaker 1: did in the face of that difficulty is I sprinted

1278
01:13:05,760 --> 01:13:09,639
Speaker 1: in the other direction and way from economics, away from

1279
01:13:10,000 --> 01:13:12,000
Speaker 1: things that were challenging. At least initially, I was like,

1280
01:13:12,040 --> 01:13:14,799
Speaker 1: I have to do something that immediately validates my natural strengths.

1281
01:13:15,120 --> 01:13:16,840
Speaker 1: I tell my students, I tell my children that that

1282
01:13:16,960 --> 01:13:19,760
Speaker 1: is just one of the worst sins that you can

1283
01:13:19,800 --> 01:13:23,160
Speaker 1: commit against yourself. Um And so it took me. I

1284
01:13:23,240 --> 01:13:26,240
Speaker 1: was in graduate school for ten years, during which I

1285
01:13:26,640 --> 01:13:29,439
Speaker 1: I paid for all of my sins and neglect. I

1286
01:13:29,520 --> 01:13:33,520
Speaker 1: took a lot of economics classes. Now I'm no brilliant mathematician,

1287
01:13:33,600 --> 01:13:36,880
Speaker 1: but there's nothing in in basic economics that's outside of

1288
01:13:36,920 --> 01:13:39,600
Speaker 1: my Again, I'm not an economist. I paid for that.

1289
01:13:39,880 --> 01:13:42,960
Speaker 1: I'm glad I did. But that failure, that failure was

1290
01:13:43,080 --> 01:13:46,600
Speaker 1: so signal, and that is I ran away from what

1291
01:13:46,800 --> 01:13:49,280
Speaker 1: was hard, and I wish I'd run in the other direction.

1292
01:13:49,320 --> 01:13:51,240
Speaker 1: And I eventually did run in that other direction, but

1293
01:13:51,360 --> 01:13:53,360
Speaker 1: took a long time for me to make up for

1294
01:13:53,439 --> 01:13:56,360
Speaker 1: that tell us what you do for fun. I love

1295
01:13:56,720 --> 01:14:00,800
Speaker 1: racquetball and squash. Um. I love my children. I have

1296
01:14:00,960 --> 01:14:04,040
Speaker 1: three children and have a wonderful marriage with their with

1297
01:14:04,160 --> 01:14:07,800
Speaker 1: my wife, their mother, Nikki Um. I think he was

1298
01:14:07,840 --> 01:14:11,400
Speaker 1: just traveling this week, and so it was daddy owns

1299
01:14:11,600 --> 01:14:14,519
Speaker 1: the owns, the solo parenting thing and we had a

1300
01:14:14,800 --> 01:14:18,599
Speaker 1: terrific time. But my two year old is h he's

1301
01:14:18,640 --> 01:14:21,160
Speaker 1: an angel ninety at the time a terrorist the other time. Percent.

1302
01:14:21,560 --> 01:14:23,479
Speaker 1: I was very happy to see Nicky come home last night.

1303
01:14:23,720 --> 01:14:26,680
Speaker 1: That was the nine. That's a good So you deal

1304
01:14:26,720 --> 01:14:29,679
Speaker 1: with a lot of millennials and kids in college. Any

1305
01:14:29,720 --> 01:14:31,719
Speaker 1: of them come up to you and say, I'm interested

1306
01:14:31,760 --> 01:14:34,479
Speaker 1: in a career in finance. What sort of advice would

1307
01:14:34,479 --> 01:14:36,080
Speaker 1: you give that? Yeah? They I do that all the time.

1308
01:14:36,120 --> 01:14:38,800
Speaker 1: I teach a financial regulation financial history course, and I

1309
01:14:38,840 --> 01:14:41,879
Speaker 1: always as I say, the same thing. Right, So fintech

1310
01:14:42,040 --> 01:14:44,479
Speaker 1: is not a creature of post two thousand eight. Fintech

1311
01:14:44,600 --> 01:14:47,800
Speaker 1: is as old as finance. Look for ways in which

1312
01:14:48,160 --> 01:14:53,240
Speaker 1: rules have clumped when that should have been more evenly distributed. Right,

1313
01:14:53,640 --> 01:14:57,960
Speaker 1: So that's that treats like things unlike. So maybe it's

1314
01:14:58,040 --> 01:15:01,799
Speaker 1: that there's a phyco At score that treats people very differently,

1315
01:15:01,800 --> 01:15:04,880
Speaker 1: and you see a big difference in interest rates and

1316
01:15:05,000 --> 01:15:09,040
Speaker 1: do an arbitrage. So that would be things like so

1317
01:15:09,240 --> 01:15:12,320
Speaker 1: far right, that would be things like, um, you know,

1318
01:15:12,880 --> 01:15:16,320
Speaker 1: looking at underwriting standards that might be different. Um. So

1319
01:15:16,479 --> 01:15:19,920
Speaker 1: that's one thing. So it's where law has clumped people,

1320
01:15:20,800 --> 01:15:23,720
Speaker 1: where the margins are basically identical. Build a bridge, right.

1321
01:15:23,800 --> 01:15:26,800
Speaker 1: I think that's a really effective business strategy. Second is

1322
01:15:27,479 --> 01:15:30,240
Speaker 1: we're all going to be terrible at at calling uh

1323
01:15:31,040 --> 01:15:33,639
Speaker 1: bubbles at their at their peak and at their trough.

1324
01:15:34,240 --> 01:15:38,360
Speaker 1: But take the Wells Fargo model, nineteenth century version, which is, yeah,

1325
01:15:38,439 --> 01:15:40,200
Speaker 1: we're not going to be in the gold mining business.

1326
01:15:40,479 --> 01:15:42,000
Speaker 1: We're going to sell stuff to people or in the

1327
01:15:42,040 --> 01:15:44,799
Speaker 1: gold mining business. So whether whatever your view a bitcoin

1328
01:15:44,880 --> 01:15:50,080
Speaker 1: or cryptocurrency, if you can design system that provides services

1329
01:15:50,120 --> 01:15:52,519
Speaker 1: that are portable but that could cater to that, that's

1330
01:15:52,520 --> 01:15:53,920
Speaker 1: a good business to be in, just so long as

1331
01:15:53,960 --> 01:15:56,080
Speaker 1: it's not so catered that you can't that it's not

1332
01:15:56,320 --> 01:15:59,560
Speaker 1: not portable. And our final question, what is it that

1333
01:15:59,680 --> 01:16:02,439
Speaker 1: you know about the world of central banks and Federal

1334
01:16:02,520 --> 01:16:06,080
Speaker 1: Reserve today that you wish you knew twenty years ago?

1335
01:16:06,400 --> 01:16:09,640
Speaker 1: That that's there's no wizard that there are women and

1336
01:16:09,720 --> 01:16:15,920
Speaker 1: men behind that curtain of substantial and intellect, talent, technique, ideology,

1337
01:16:16,200 --> 01:16:19,759
Speaker 1: judgment values to their people and the humanized Central Banks

1338
01:16:19,840 --> 01:16:22,880
Speaker 1: is not to disparage them. Has to say the people,

1339
01:16:23,040 --> 01:16:24,920
Speaker 1: and I am too, and I can engage in that debate,

1340
01:16:24,960 --> 01:16:26,760
Speaker 1: and I can do it intelligently or I can do

1341
01:16:26,840 --> 01:16:30,120
Speaker 1: it stupidly. Um, so let's do it intelligently, and let's

1342
01:16:30,160 --> 01:16:32,320
Speaker 1: not just say all right, I'll just trust the wizards

1343
01:16:32,400 --> 01:16:35,720
Speaker 1: know what they're doing. Fascinating. We have been speaking with

1344
01:16:35,920 --> 01:16:39,360
Speaker 1: Peter Conti Brown. He is an assistant professor at Wharton

1345
01:16:39,479 --> 01:16:42,799
Speaker 1: School of Business, both grad and undergrad at the University

1346
01:16:42,840 --> 01:16:46,200
Speaker 1: of Pennsylvania. If you enjoy this conversation, then be sure

1347
01:16:46,240 --> 01:16:52,280
Speaker 1: and look up an Inch or down an inch on Apple, iTunes, Bloomberg, Stitcher, Overcast,

1348
01:16:52,680 --> 01:16:55,200
Speaker 1: wherever finer podcasts are sold, and you can see any

1349
01:16:55,280 --> 01:16:58,200
Speaker 1: of the other two hundred or so such podcasts that

1350
01:16:58,320 --> 01:17:01,920
Speaker 1: we've had. We love your ammens, feedback and suggestions right

1351
01:17:02,000 --> 01:17:05,519
Speaker 1: to us at m IB podcast at Bloomberg dot net.

1352
01:17:06,040 --> 01:17:08,040
Speaker 1: I would be remiss if I did not thank the

1353
01:17:08,120 --> 01:17:12,800
Speaker 1: crack staff that helps us put together these conversations each week. Uh,

1354
01:17:13,240 --> 01:17:17,439
Speaker 1: Medina Parwana is my audio engineer. Producer Taylor Riggs is

1355
01:17:17,479 --> 01:17:20,960
Speaker 1: our booker. Michael Batnick is our head of research. I'm

1356
01:17:21,040 --> 01:17:24,360
Speaker 1: Barry Retults. You've been listening to Masters in Business on

1357
01:17:24,479 --> 01:17:25,400
Speaker 1: Bloomberg Radio.