Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisntal and I'm Tracy halliway, so, Tracy, this
Speaker 1: is obviously for the two of us in our career,
Speaker 1: as we've discussed numerous times already. I mean, this is
Speaker 1: the second big crisis that both of us have been
Speaker 1: involved in the cover. Yeah, you know, I kind of
Speaker 1: always used to think that nothing would ever top the
Speaker 1: two thousand financial crisis. Uh, And boy was I wrong,
Speaker 1: because I'm pretty sure this is going to be a much,
Speaker 1: much bigger economic crisis. Maybe not as big a financial
Speaker 1: crisis in terms of what's happening to the banking system,
Speaker 1: but definitely bigger from a sort of macro perspective. Yeah,
Speaker 1: definitely bigger from a macro perspective. It's a more global crisis.
Speaker 1: Even the two thou thousand nine was global. It's also
Speaker 1: just like you know, from a societal perspective, like, um,
Speaker 1: obviously the last crisis have huge ramifications for the financial system,
Speaker 1: but for the most part, like it didn't really change
Speaker 1: how people lived. There wasn't really much ambiguity about, you know,
Speaker 1: that much about what the post prisis landscape would look like.
Speaker 1: Whereas in this case, I don't think anyone really has
Speaker 1: any solid prediction. Yeah, for sure. This one is much
Speaker 1: wider in scale, with the potential to affect not just
Speaker 1: the economy but politics and society as a whole. And
Speaker 1: even back in two thousand eight, in the worst of
Speaker 1: the crisis, you know, right after Lehman collapsed, when people
Speaker 1: were really worried about the entire banking system, they were
Speaker 1: still going out to get sandwiches, you know, still going
Speaker 1: out getting hair coats, going about their sort of day
Speaker 1: to day business more or less, and all of that
Speaker 1: is very different, right now. Yeah, that's exactly that's exactly right. Well,
Speaker 1: there's never any good, by and large about crisis, and
Speaker 1: this one is particularly horrific from so many dimensions. Um.
Speaker 1: But one of the things that's interesting to see, and
Speaker 1: having seen the last one and this one, is that
Speaker 1: in any new crisis, sort of new voices are brought
Speaker 1: to the four people with expertise that previously weren't being
Speaker 1: paid as much attention to suddenly become very uh, widely
Speaker 1: read and widely followed. People in this case, of course,
Speaker 1: numerous epidemiology and health experts, but also people who really
Speaker 1: have a detailed understanding the financial system. Who can really
Speaker 1: explain all of these sort of new new monetary interventions
Speaker 1: and innovations that central banks around the world are doing
Speaker 1: are in high demand, right. I remember one of the
Speaker 1: I guess you would say the few good things about
Speaker 1: the two thousand eight financial crisis was that it sort
Speaker 1: of gave birth, or gave a boost to this really
Speaker 1: lively community almost of independent financial bloggers um and I
Speaker 1: still remember some of them, some of them have been
Speaker 1: on odd lots before. And also again I remember this
Speaker 1: because I was blocking at the time over at ft Alphaville,
Speaker 1: and it was my first job basically writing specifically about
Speaker 1: finance and markets. And the great thing about the situation
Speaker 1: was there was a really even playing field because everything
Speaker 1: that was happening was so new. It basically meant that
Speaker 1: even if you'd been following finance for ten years, you
Speaker 1: were sort of in the same position as a newcomer
Speaker 1: who was learning it all at once in real time.
Speaker 1: So it was really great to see that conversation happening. Yeah,
Speaker 1: novel crises have a nice way of, as you say,
Speaker 1: leveling the playing field, and the sort of old incumbent
Speaker 1: pundits don't really have an edge, which is kind of
Speaker 1: nice to see. So today the sad thing is we
Speaker 1: are old incumbent pundits. I know, yeah, I know. At
Speaker 1: least we can we can talk to the new ones.
Speaker 1: So today we are going to be talking to someone
Speaker 1: whose voice has really become extremely influential really just over
Speaker 1: the last several weeks, lots of people reading his writing
Speaker 1: as one of the sort of premier experts on this crisis,
Speaker 1: particularly from the actions of the Central Bank, and particularly
Speaker 1: all of the extraordinary moves that we've seen from the
Speaker 1: Federal Reserve really since late February through uh through now. Yeah,
Speaker 1: So I know who we're about to speak to, and
Speaker 1: I have to say, I I sort of don't know
Speaker 1: anything about his professional background. I just know what he
Speaker 1: does from reading reading his blog or sub stack. And
Speaker 1: also I think we did karaoke ones. So I'm really
Speaker 1: excited for this conversation. I wanna learn more. Alright, me too.
Speaker 1: So I don't know anything really about his background either,
Speaker 1: and I even so let's let's bring him in. He's
Speaker 1: Today we're going to be talking with Nathan tank Is.
Speaker 1: He's the research director of the Modern Money Network and
Speaker 1: he also in the last month has launched a much
Speaker 1: must read newsletter that everyone in the world is subscribing
Speaker 1: to understand the actions of the Federal Reserve. Everyone should
Speaker 1: subscribe to it. Nathan, thank you so much for joining us.
Speaker 1: Thank you so much for half of having me. What
Speaker 1: a generous introduction. Lots of people reading your newsletter on substack.
Speaker 1: But who are you? I'm serious, who are you? Like?
Speaker 1: I've I know Nathan, I know you in real life.
Speaker 1: I've got sandwiches in drinks with you in the past
Speaker 1: before this crisis. But I realized I don't know anything
Speaker 1: about you. Like who are you? Then? Like? How do
Speaker 1: you know so much about how the FED works? I
Speaker 1: like how we booked Nathan to come on all thoughts
Speaker 1: with without actually knowing this crutical information. Yea, Hey, the
Speaker 1: subseex speaks for itself. Where my kind of ordinance, or
Speaker 1: in terms of UH finance is the last financial crisis.
Speaker 1: I was in high school at the time time, and
Speaker 1: the financial crisis was extremely fascinating immediately and UH. I
Speaker 1: was at a high school that was kind of alternative,
Speaker 1: weird in New York City in Manhattan. That um had
Speaker 1: two teachers who had discretion over the curriculum and basically
Speaker 1: just said in January, let's just do a class on
Speaker 1: the financial crisis um where you read the newspaper each
Speaker 1: week and you'd argue over nationalization, over the A I G. Bonuses,
Speaker 1: over the stimulus, and just sort of like argue out
Speaker 1: what everyone else was arguing out on a week to
Speaker 1: week basis. And from that I was completely hooked um
Speaker 1: and fascinated by crisis, you know, trying to figure what
Speaker 1: was so interesting was it felt like something that no
Speaker 1: one really quite understood, but it was obviously the most
Speaker 1: important thing happening. And so ever since then, was just
Speaker 1: fascinated by crisis, wanted to learn about it, discovered writings
Speaker 1: by Minsky Um and that sort of just set me
Speaker 1: on at your Jet three to be very very interested
Speaker 1: in crisis, financial market design, fiscal policy, and over the
Speaker 1: years have kind of moved into working and writing on policy. So, Nathan,
Speaker 1: if you don't mind me asking what do you do
Speaker 1: now and does it overlap with your your interest in policy?
Speaker 1: As Joe introduced me Um, research director of the Modern
Speaker 1: Money Network. Before all this happened and with with the pandemic,
Speaker 1: which is obviously become the top of everyone's attention that
Speaker 1: I was working on a report on monetary policy for
Speaker 1: Agree to Deal UM kind of been doing similar polish
Speaker 1: policy ish things, uh in the background, kind of pushing
Speaker 1: alternative frameworks to implement these sort of broad policy goals
Speaker 1: that people have been interested in. So we should get
Speaker 1: to the you know, what you've been writing about and
Speaker 1: sort of how we can understand the Fed's extraordinary actions
Speaker 1: in a in a moment, but you mentioned, you know,
Speaker 1: after high school you sort of got interested in finance.
Speaker 1: But one of the things that really stands out in
Speaker 1: your writing it's not just that you're sort of interest
Speaker 1: in this altogether, but the sort of extreme granularity with
Speaker 1: which you understand monetary operations. Because I think a lot
Speaker 1: of people have this idea it's like, Okay, the fat
Speaker 1: is buy junk bonds and the fat is going to uh,
Speaker 1: you know, intervene in some new market. But the way
Speaker 1: you write about it is far more granular and detailed
Speaker 1: than that. So between you know, over the last two years,
Speaker 1: how did you or sorry, over the last say ten years,
Speaker 1: how did you really educate yourself on like the sort
Speaker 1: of finer points of topics that even a lot of
Speaker 1: like so called experts in the field actually don't have
Speaker 1: a ton of understanding. Um. Well, if one of the
Speaker 1: one of the most basic levels is just understanding monetary
Speaker 1: operations and the details of monetary operations, is really just
Speaker 1: about learning a language that there's this language, this language
Speaker 1: of accounting of t accounts, of drawing balance sheets, of
Speaker 1: drawing you know, you know, saying this entity has assets
Speaker 1: and liabilities and what set of transactions balance these balance
Speaker 1: sheets throughout the economy. Um. That is it's it's not
Speaker 1: so much like getting like a very detailed understanding, although
Speaker 1: you also have to know the operations and the names
Speaker 1: of the facilities, um, and the type of financial assets
Speaker 1: and their legal structure. But becoming more conversational in terms
Speaker 1: of monetary operations becomes just like a a rote doing
Speaker 1: examples of monetary operations over and over and over again. UM,
Speaker 1: drawing and drawing the t accounts. I mean, this is
Speaker 1: you know, one of the best things about Perry Merlin's
Speaker 1: passcuts in the shows. Um, of course, stero course is
Speaker 1: that drawing of balance sheets. UM. And I think that
Speaker 1: really is that core of that class. And um, I
Speaker 1: think that's generally applicable that the best money of banking
Speaker 1: and understanding of of monetary operations comes from just doing it.
Speaker 1: It's just the language that you have to learn, like
Speaker 1: any other language. And once you have it, once you
Speaker 1: can speak it, quote unquote, it's very easy to get
Speaker 1: a handle on new situations and new things going on.
Speaker 1: So I have a pre existing framework UM and pre
Speaker 1: existing understanding want before I look at all these different
Speaker 1: UH facilities and just balance sheet it out and figure out, okay,
Speaker 1: what exactly is going is going on behind these facilities.
Speaker 1: And once you do, the operations become clear what they mean,
Speaker 1: especially when you're used to seeing similar operating monetary operations
Speaker 1: in past examples. Mm hmm. I think that language point
Speaker 1: is really important, and I guess cynics would say that
Speaker 1: maybe central bankers sort of make the language as difficult
Speaker 1: as possible in order to sort of keep um the
Speaker 1: riff raff out, I guess, or make it less understandable
Speaker 1: for outsiders. But just to press on the point of
Speaker 1: of how you learned about monetary policy, were there any
Speaker 1: particular resources that you depended on, because I remember back
Speaker 1: in two thousand eight in the financial crisis, then most
Speaker 1: of what I was reading, for instance, to get up
Speaker 1: to speed. It all came from blogs and maybe some
Speaker 1: of the cell side notes. But is there anything in
Speaker 1: particular that you found useful? Um? Yeah, I read you know,
Speaker 1: blogs as well. I mean I still have I have
Speaker 1: an old reader of my Google Reader from the time,
Speaker 1: um and you know, still still technically subscribe to all
Speaker 1: those different sets of blogs, things like Naked Capitalism, um
Speaker 1: uh smith even just the whole ecosystem blogs beyond like
Speaker 1: one specific exception of maybe Naked Capitalism. It was more
Speaker 1: reading the different arguments that would go through different sets
Speaker 1: of blogs, things that would bounce from Krugman too to
Speaker 1: belong to all over the play Um you've seeing people
Speaker 1: in when they're actually arguing with each other is kind
Speaker 1: of what you get the clearer sense of, um, what's unclear,
Speaker 1: what's good to learn about? But um, I wou'd say
Speaker 1: combination of that plus reading in Sky, which definitely was replatory,
Speaker 1: and that just sort of getting obsessed and reading all
Speaker 1: sorts of all sorts of alternative Heternox literature, post kante
Speaker 1: In literature, and so like, you know, I felt like
Speaker 1: I really had a hand on things. Let's talk about
Speaker 1: Minsky because I'm sure I think a lot of our
Speaker 1: listeners maybe have some idea who he is. They have
Speaker 1: some idea that the financial instability hypothishness, that systems tend
Speaker 1: towards instability. Probably some of our guests would find him
Speaker 1: uh inside him as being influential. What was it about
Speaker 1: his work specifically that influenced you and sort of set
Speaker 1: you on the path, Like, what is it? What is
Speaker 1: the sort of main idea that really set you alife?
Speaker 1: Behind of his first that you know that you have
Speaker 1: to be able to speak in balance sheets, that balance
Speaker 1: sheets is how you keep yourself coherent. But then that
Speaker 1: the instability and the innovation in finance is one in
Speaker 1: the same thing, the idea that you're going to expand
Speaker 1: balance sheets but with a unique uh financial uh instrument.
Speaker 1: You know, you know what I would say today, a
Speaker 1: unique uh legal structure to those uh to those financial instruments,
Speaker 1: and that there's this social process by which new legal
Speaker 1: and financial innovations convince people that financial structure that in
Speaker 1: many respects is similar to an unstable one from in
Speaker 1: the past, is gonna be stable uh this time. And
Speaker 1: then you know, watching him discussed it through examples. The
Speaker 1: examples that I think are like obscure now, Like you know,
Speaker 1: he has a whole large sections in Stabilizing unstable economy
Speaker 1: on real estate investment trust in the seventies and these
Speaker 1: sort of more obscure things where you see, um, how
Speaker 1: the financial structure evolves and uh and and its relationship
Speaker 1: to to instability, and then also just things like you
Speaker 1: know Minsky. You know, at the time when securitization seemed
Speaker 1: like this new fingled thing that no one paid attention to.
Speaker 1: Reading Minsky discussed securitization and it's benefits the prophet seeking bands,
Speaker 1: but also it's potential for instability was like rebelatory. You know,
Speaker 1: it felt like at the time, maybe a little less
Speaker 1: so now, but in two thousand nine it felt like
Speaker 1: reading a profit. Um when when you read about when
Speaker 1: you read Minsky discussed securitization in the eighties, Well, let's
Speaker 1: talk about the evolution that is arguably happening now and
Speaker 1: what we're sort of seeing from the Federal Reserve. You
Speaker 1: and I have I think we've tweeted at each other
Speaker 1: a little bit about the sort of mingling of monetary
Speaker 1: policy with fiscal policy or the potential for that to happen,
Speaker 1: and it does kind of feel like, even if it's
Speaker 1: not happening explicit le central banks are certainly talking about
Speaker 1: it more, and there's this idea of monetary financing as well.
Speaker 1: Could you sort of give us a broad outline of
Speaker 1: what you're seeing on that front. UM, I mean, what
Speaker 1: we're seeing is basically like UM, a charged up version
Speaker 1: of quantitative easing, the large scale asset purchases UM over
Speaker 1: two thousand, two thousand nine to two thousand twelve roughly,
Speaker 1: but this time rather than being you know, this indirect
Speaker 1: offense attempt to increase demand by saying, you know, you
Speaker 1: buy a bond off of off of hedge fund and
Speaker 1: they reinvest in somewhere else, and you know, credited availability
Speaker 1: expands or whatever other theory you have for why quantitative
Speaker 1: easing would work. At the most basic level, the big gift,
Speaker 1: the sort of supercharge quantitative easing now has been about
Speaker 1: making sure that the treasury market function, making sure that
Speaker 1: you know, at this time, when you have a huge
Speaker 1: collapse and income across across business sectors, that they're able
Speaker 1: to access liquid assets they need to make payments, and
Speaker 1: the normal financial players who would usually accommodate that demand
Speaker 1: for whatever reason, weren't able to, and thus the FED
Speaker 1: became essentially, you know, a buyer of treasury securities of
Speaker 1: last resort or you know, maybe even a first resort.
Speaker 1: And so in this case, the large scale asset purchases
Speaker 1: have been about um fixing the financial plumbing um and
Speaker 1: making sure people have access to treasury security liquidity, rather
Speaker 1: than the sort of other the other sort of justifications
Speaker 1: for large scale asset purposes that happened a decade ago, right,
Speaker 1: so a decade ago arguably or in retrospect, obviously, the
Speaker 1: FED did a lot of treasury buying, but it was limited.
Speaker 1: It was arguably primarily a signaling vehicle about raids, or
Speaker 1: maybe it was something to do with the portfolio channel
Speaker 1: to encourage people into risky your assets to stimulate the economy.
Speaker 1: But in this case it was literally about making sure
Speaker 1: people could get liquidity for treasuries. The one thing that
Speaker 1: seems like very different or sort of like a innovation
Speaker 1: beyond what we saw in the last crisis is the
Speaker 1: degree to which the FED is intervening in the market
Speaker 1: for risky assets on the credit side, having clearly stepped
Speaker 1: into the market for investment grade bonds, but even high
Speaker 1: yield bonds, entities which carry credit risk and UM put
Speaker 1: in theory default. Talk to us about what they've done
Speaker 1: and how innovative it is in terms of a break
Speaker 1: from its previous actions it represents for the FED to
Speaker 1: get involved in these markets. I think it's hugely innovative.
Speaker 1: I think we can't underestimate. You know, of course, there's
Speaker 1: been UH in Europe and the e CP Japan, there
Speaker 1: have been purchases of corporate of corporate debt, so it's
Speaker 1: not a completely brand new innovation in terms of such
Speaker 1: a banking, even recent central banking globally. But for UM,
Speaker 1: the feeder was or of it's very unique because the
Speaker 1: Federal Reserve has has UH has had more than any
Speaker 1: other central bank has had. This commitment to our policy
Speaker 1: is neutral. UM. We don't pick winners and losers. We're
Speaker 1: just here to, you know, provide general credit support to
Speaker 1: manage general economic conditions. Were not about these specific entities
Speaker 1: and UM. The innovation today is that that is I'm
Speaker 1: clearly not the case. They by by circumstances they feel
Speaker 1: forced to make sure that corporate America as a whole
Speaker 1: has access to liquidity, but that you know, the mechanism
Speaker 1: for doing that, launching these primary corporate credit UH facility
Speaker 1: and the secondary market corporate credit facility that launching these facilities,
Speaker 1: they are intervening. They're making specific choices. They're choosing UM
Speaker 1: investment grade bonds and investment grade bonds that were investment
Speaker 1: grade H before a certain point. I think the current
Speaker 1: one is the current caught office March and there and
Speaker 1: then as well, they're buying extrage traded funds UM. And
Speaker 1: this is specifically, you know, this is them saying, you know,
Speaker 1: this set of corporate America, we we need to prevent
Speaker 1: the spread between their borrowing rates and the risk free
Speaker 1: borrowing right from exploding. They need to be able to
Speaker 1: access credit at this difficult time when there's this you know,
Speaker 1: big drop and revenue across the board. They they're they're
Speaker 1: putting this out there, and I think it's gonna it's
Speaker 1: gonna change the Federals are from now on, there's always
Speaker 1: gonna be bought corporate UH credit corporate securities before you
Speaker 1: can you know, first of all, shouldn't we give you
Speaker 1: normal give this to you as a normal tool of
Speaker 1: monetary policy. There's gonna be talk about UM specific sectors
Speaker 1: that they should be supporting, especially around energy. I think
Speaker 1: it's gonna be a huge one um in terms of
Speaker 1: the future of monetary policy debates, and and that combined
Speaker 1: with the municipal liquidity facility, which is state and local,
Speaker 1: just now there's I think there's gonna be this like
Speaker 1: debate between Okay, if you're at the zero lower band
Speaker 1: and you can't really have anywhere else to go, what
Speaker 1: should you be doing to trying to uh support the economy?
Speaker 1: Should you be loostening financial constraints of non financial corporations
Speaker 1: or should you be loosening the financial constraints of municipalities,
Speaker 1: especially the most disadvantaged municipalities who experience a lot of musterity,
Speaker 1: especially over the last decade. And so I think that
Speaker 1: I think that is the future of of debates over
Speaker 1: monetary policy. And it's a very different world, and it's
Speaker 1: a world that the Federal Reserve is uncomfortable with above
Speaker 1: everything else. Post two thousand eight, I remember we saw
Speaker 1: people up in arms over you know, well, people are
Speaker 1: up in arms over quantitative easing and talking about moral
Speaker 1: hazard and stuff like that. And of course now we
Speaker 1: see the FED taking on credit risk on an entirely
Speaker 1: different scale from your perspective. And this is kind of
Speaker 1: a tough question, but do you think they should be
Speaker 1: assuming that credit risk and what kind of moral hazard
Speaker 1: debates would you expect this to open up? I think
Speaker 1: the corporate credit facilities aren't necessary. I do think that
Speaker 1: you can't, like you can let specific companies go down,
Speaker 1: but you can't let UM they're to basically be a
Speaker 1: run on corporate America as a whole. What I would
Speaker 1: say is, I think the fact that you know that
Speaker 1: the safety net is revealed that you know not just
Speaker 1: that specific banks are too big to fail, but corporate
Speaker 1: America as a whole is too big to fail, and
Speaker 1: we'll always get some sort of generalized support UM. And now,
Speaker 1: especially in the finance side through the Federal Reserve, opens
Speaker 1: up questions about what responsibilities do they have as uh
Speaker 1: to the public, as we're essentially treating them as part
Speaker 1: of public infrastructure. You know, there are central workers, but
Speaker 1: now there are also essential corporations, and I think that
Speaker 1: opens up a question to you know, how firms operate
Speaker 1: and to the extent to which that they're going to
Speaker 1: be truly especially multig multinational corporations are going to operate
Speaker 1: truly as these like purely private entities, or whether there's
Speaker 1: going to be a transition to seeing them as sites
Speaker 1: of governance that involve a series of stakeholder who all
Speaker 1: have rights, um and I think that that is gonna
Speaker 1: be a v piece, And of course I think it's
Speaker 1: going to be. I think the municipality stuff is uh,
Speaker 1: very is very critical as as well, and in fact,
Speaker 1: it should be expanded a lot. I think, you know,
Speaker 1: it hasn't been anywhere near uh near enough what they've
Speaker 1: been doing. I want to get a little bit, you know,
Speaker 1: soon into what more the FEN could be doing. But
Speaker 1: before we do, I mean Tracy asked about this sort
Speaker 1: of moral hazard entanglement questions governance. What about the pure
Speaker 1: legality question of what they we've done. There are people say, oh,
Speaker 1: this is blatantly illegal, and then they cite some line
Speaker 1: of the law regarding the Federal Reserve Act and they
Speaker 1: say they can't be taken on credit risk like that
Speaker 1: just from a sort of purely within the bounds of
Speaker 1: what they're allowed to do. In your view, are they
Speaker 1: sort of still unambiguously within uh the letter of the law.
Speaker 1: I don't think it's unambiguous. I think it's definitely stretching
Speaker 1: the law sum um, but it's stretching the law in
Speaker 1: the way that the exact way that that happened in
Speaker 1: two thousand eight. And what's so, I mean, to back up,
Speaker 1: the key legal innovation that was employed in two tho
Speaker 1: and employed today was Okay, we don't have the legal
Speaker 1: authority to do sets of purchases that directly, so we'll
Speaker 1: launder these purchases through some leave the straw purchaser that
Speaker 1: will create which is a special purpose vehicle. At the time,
Speaker 1: they were named Maiden Lane one, Maiden Lane two, Maiden
Speaker 1: Lane three, UM. As far as I know, there isn't
Speaker 1: any really names today um for them, or if they're
Speaker 1: just like named after the facility or whatever. But they're
Speaker 1: setting up the set of special purpose vehicles where there
Speaker 1: is um a injection of equity from the treasury where
Speaker 1: they'll they'll buy you know, ten billion dollar equity state
Speaker 1: or thirty billion dollar equity state, whatever it is, um
Speaker 1: into the special purpose vehicle, and then that special purchase
Speaker 1: vehicle will conduct all the purchases that we're talking about.
Speaker 1: So the corporate credit facilities, these are special technically special
Speaker 1: purpose vehicles UM. And I think the idea behind that
Speaker 1: is that the equity stake from the Treasury IS makes
Speaker 1: this sort of like a partnership between the Treasury and
Speaker 1: the Federal Reserve rather than the Reserve purely acting on
Speaker 1: its own authority. And thus, you know, it's it's legal.
Speaker 1: I think it's I think the case for these special
Speaker 1: purpose vehicles being legal is pretty strong, you know, and
Speaker 1: also who would have standing in the court to challenge them?
Speaker 1: But I think that they open up big questions like
Speaker 1: why if we think that this is an appropriate emergency tool,
Speaker 1: then the use of the IS facilities should be legislated, Like,
Speaker 1: there's no reason why we can't legislate that there a
Speaker 1: facility exists, that is, you know, a special emergency Treasury
Speaker 1: that are reserved facility, which by the way, could have
Speaker 1: a permanent staff that is UH studying crises and you know,
Speaker 1: tail risks on all the time. UM, that could get
Speaker 1: up and running when it needs to and it's running
Speaker 1: scenarios and so on and so forth. UM, and then
Speaker 1: specifically specify what sort of powers that that UH, that
Speaker 1: that Joint Treasury FT reserved facility has UH in extraordinary times.
Speaker 1: So I think in broke strits, I think these facilities
Speaker 1: are legal, that the defense of them being lehical is
Speaker 1: very strong. But I think it's a huge policy fail
Speaker 1: here that we are leaning in special purpose vehicles. And
Speaker 1: I don't think it was at all clear to anyone um,
Speaker 1: including experts and the public at large, that recourse to
Speaker 1: special purpose vehicles to do whatever you want was still
Speaker 1: on the board, after on the table, after dot Frank
Speaker 1: and I think you know, there's there's a big question
Speaker 1: of democratic accountability in terms of having this sort of
Speaker 1: state of exception where you can set up a special
Speaker 1: purpose vehicle and do whatever you want. Right, the FED
Speaker 1: is sort of, I guess, cobbling together these various facilities
Speaker 1: under immense time pressure, or maybe they're sort of mcgivering
Speaker 1: it right, like putting it together in any way they
Speaker 1: can um But as you say, if they had the
Speaker 1: explicit ability to do that, then we would save a
Speaker 1: little bit of time, and maybe we shouldn't be coming
Speaker 1: up with new policies or new ways of doing things
Speaker 1: in the middle of an emergency. In this way, you've
Speaker 1: written thousands and thousands of words at this point about
Speaker 1: what the FED has been doing, what else could they
Speaker 1: do at this point, what's sort of top of the
Speaker 1: list or number one if you had a wish list
Speaker 1: from the bad Number one is definitely just expanding the
Speaker 1: municipal liquidity facility. UM. I mean, I think it should
Speaker 1: just be like an unlimited swap line to state and
Speaker 1: local governments for the duration of the crisis. You know,
Speaker 1: we we provide unlimited swap lines to foreign governments. I
Speaker 1: don't see any reason why we can't provide unlimited swap
Speaker 1: lines now, especially you know, a pandemic is an especially
Speaker 1: unique circumstance where you need a public spending on the
Speaker 1: grounds and that spending literally saves lives, you know, in
Speaker 1: a very immediate direct way when you provide that that
Speaker 1: that those financial support. So I think, UM massive expansion
Speaker 1: at the state and local level is He's kind of
Speaker 1: the biggest thing for me. I think. Second is UM
Speaker 1: I think not only is like it's weird that we're
Speaker 1: doing special purpose vehicles, but the way that they have
Speaker 1: structured it legally with the Cares Act where and and
Speaker 1: they're they're essentially their legal argument where the beds proposed
Speaker 1: purchases and taking on of credit risk. UM is somehow
Speaker 1: in proportion to the equity stakes that the Treasury is
Speaker 1: putting up through the Exchange Stabilization Fund. I think that
Speaker 1: is a limited structure that hits the problem with quantitative easing,
Speaker 1: where you can't simply set rates. You just have to
Speaker 1: announce specific quantities and hope that they have the the
Speaker 1: interest rate and credit availability effects that you want. I think,
Speaker 1: you know, an alternative, you know, accounting gemmick essentially um
Speaker 1: to that accounting gimmick would have given them the ability
Speaker 1: to set interest rates across the board, and it's unfortunately
Speaker 1: set up a special account of crisis facility account where
Speaker 1: losses are booked too, that gets booked as a negative equity,
Speaker 1: the negative liability of the Treasury and isolated from all
Speaker 1: the other remittance a negative negative liability of the Federal
Speaker 1: Reserve that gets booked as a that that gets you know,
Speaker 1: separated from remittances. Would have, you know, given them much
Speaker 1: broader scopes. You would have let congressional preparations actually go
Speaker 1: to grants and spending um and you know, would would
Speaker 1: make their their emergency monitory policy much more effective. So
Speaker 1: I think, you know, those those two big things really
Speaker 1: expanding on the municipal front and then an alternative accounting
Speaker 1: gimmick so they could really expand purchases lending. I think
Speaker 1: really the way to go. One of the weird things
Speaker 1: about the recovery effort, and uh, you know the payroll
Speaker 1: protection component of the CARES Act is that it's all
Speaker 1: run through the banking system, So even though it's a
Speaker 1: it's treasury backstopping all of these dischargeable loans to companies.
Speaker 1: Companies that want to keep workers on their payroll have
Speaker 1: to go to their bank and fill out paperwork and
Speaker 1: their different issues. Every bank has their different issues. Um,
Speaker 1: what in your view, we've been talking a lot about
Speaker 1: asset purchases and so forth. What could the FED do
Speaker 1: on the regulatory side so that the banks are in
Speaker 1: a better position themselves to provide money or provide credit
Speaker 1: to keep the economy going or yeah, just generally speaking,
Speaker 1: is there something that they could be doing to the
Speaker 1: banks directly that would help the help the economy overall? Um,
Speaker 1: I don't think that there is anything. You know, one
Speaker 1: thing we forgot to talk about was the main Street
Speaker 1: or I forgot to mention was the main Street learning
Speaker 1: program that they're doing direct lending to small or launching
Speaker 1: a program to do direct lending small and medium sized
Speaker 1: businesses again through banks in a similar way to the
Speaker 1: um P P P UH and I think that banks
Speaker 1: are you know, as there's a mccronics is running about
Speaker 1: it recently. I'm thinking on her name UM and someone
Speaker 1: who comes from the money view was writing about recently
Speaker 1: about how banks are actually very unused to being credit intermediaries.
Speaker 1: Their payment energy comediaries. They make payments all the times,
Speaker 1: but they're not used to being credit intermaters, despite you know,
Speaker 1: they could sort of textbook UM examples saying that that's
Speaker 1: how things work, and so they're they're very uncomfortable in
Speaker 1: meaning these pass through mechanisms for the Federal Reserve or
Speaker 1: the Small Business Association from operating. And so I think
Speaker 1: one thing is to sort of kind of be tighter
Speaker 1: on regulatory pressure to make sure that loans are going
Speaker 1: out the door as fast as possible. UM. But also
Speaker 1: UH that that consolidating these programs into one program makes
Speaker 1: a lot of sense. Like they've launched the Federal Reserve
Speaker 1: has actually wants the facility to provide liquidity UM two
Speaker 1: PPP loans where they're providing term financing and the loans
Speaker 1: get pledged as collateral UM on a no recourse basis,
Speaker 1: which means that the bank could just walk away and
Speaker 1: the FED takes the collateral UM and nothing else is said,
Speaker 1: you know, just kind of like a effectively a purchase
Speaker 1: with an upside to uh to the seller UM. And
Speaker 1: you know, if we're gonna do that, if essentially, you know,
Speaker 1: the Federal reserves balance sheet is going to be backstopping
Speaker 1: things loans UM, just like the main street lending program,
Speaker 1: and all the quote unquote government guarantee does is improve
Speaker 1: the Federal reserves net worth after the fact, then it seems,
Speaker 1: you know, in retrospect, it feels like these facilities could
Speaker 1: have been consolidated. You could have booked losses, like I
Speaker 1: was saying to UM, a special crisis facility account UM,
Speaker 1: and you know, segregated that from the rest of the
Speaker 1: Federal reserves balance sheet UM, and these programs would have
Speaker 1: run on a uh a much simpler, smoother basis with
Speaker 1: one bureaucracy and you know, dealing with the FED, which
Speaker 1: them we're used to dealing with on on these banking sides.
Speaker 1: But uh, it's a it's a it's a tough problem.
Speaker 1: Regulators can can loosen things that can lower capital requirements,
Speaker 1: they can lower liquidity requirements, they can they can incurred banks,
Speaker 1: they can threatened banks, um. But at the end of
Speaker 1: the day, banks are in the business of lending, and
Speaker 1: the problem right now is income. You know, they're doing
Speaker 1: a small bit through the mainstream lending program of deferring
Speaker 1: principle and interest paints for a year, and that's nice,
Speaker 1: and that's better than what they would have been doing otherwise.
Speaker 1: But you know, the FED is very under unused and
Speaker 1: does not like being a fiscal authority with a good reason,
Speaker 1: and we really need to be doing this through UH glance.
Speaker 1: And you know, of course the small the p p
Speaker 1: P program is an attempt to do that, uh through
Speaker 1: a kind of a kind of sort of grant structure.
Speaker 1: But I think there probably was an alternative way to
Speaker 1: do it UM that was simpler, especially one that wasn't
Speaker 1: rely on that specific appropriations. You just had you qualify
Speaker 1: if you're this type of small business and you get
Speaker 1: this amount of forgivable load of forgivable loads or grants
Speaker 1: or whatever it is, UM And I think that would
Speaker 1: have been a smoother process, that would have been easier
Speaker 1: to administer you know more just like you know, a
Speaker 1: basic income, but for businesses that UM the sort of
Speaker 1: almost means tested, almost loane, almost clan um structure that
Speaker 1: they've been going lest right, UM, I want to get
Speaker 1: back to something you said earlier or you touched on it,
Speaker 1: the idea of UM. I guess how expanded powers for
Speaker 1: the Federal Reserve would interact with democracy? So the FED
Speaker 1: is an unelected body, and whenever we start talking about
Speaker 1: the FED actually doing stuff and maybe having expanded responsibilities
Speaker 1: or expanded powers, this inevitably comes up. But how do
Speaker 1: you view that debate? Should the FED be basically enacting UM,
Speaker 1: well almost fiscal policy in some senses of the word,
Speaker 1: with without having been um voted into office from a
Speaker 1: from a legal perspective, which you know, a lot of
Speaker 1: my organizations filled with lawyers, having some sort of administrative
Speaker 1: agency which at a reserve board is conducts some have
Speaker 1: some discretion over fiscal policy. UH isn't totally out there
Speaker 1: from our point of view. You can have you can
Speaker 1: have you know, administrative agencies conducting fiscal policy. The issue
Speaker 1: is is designing a legal structure which defines the bounds
Speaker 1: of UM that conductive fiscal policy and integrates it into
Speaker 1: a larger macroeconomic framework that the government is operating it.
Speaker 1: And you know, the problem you know with our government,
Speaker 1: probably most governments, is there isn't really a macroeconomic framework
Speaker 1: that's being operated in. There's you know, a congressional budgeting process,
Speaker 1: and then there is the Central Bank and its powers,
Speaker 1: and you know, there's you know, some fiscal automatic stabilizers,
Speaker 1: some programs like so security, but basically, you know, the
Speaker 1: FED is the macroeconomic policymaker of the of the federal
Speaker 1: government and as a result, it gets leaned on more
Speaker 1: and more as as we encounter macroeconomic instability, whether it's
Speaker 1: pandemic call or financial crisis caused. And so I think
Speaker 1: that does strain uh democratic norms in the sense that
Speaker 1: we have this administrative amasis that's very difficult to understand
Speaker 1: for the public to understand and understand what's going It's
Speaker 1: not clear what their emergency powers are, like you know,
Speaker 1: I I think if you've taken a hundred answers to
Speaker 1: a layman of what the Fed's emergency powers are for
Speaker 1: Dodd Frank before this latest crisis, you know, probably an
Speaker 1: idea of the answers would have been wrong, not one UM,
Speaker 1: given what we what we what? What has happened now?
Speaker 1: And I think you know that is extremely corrosive. You know,
Speaker 1: I think that you know, our macro economic policy framework
Speaker 1: is an essential component of civics. It's what you know
Speaker 1: defines what whether you're going to have a job, what
Speaker 1: the quality of your job is, what the quality of
Speaker 1: your retirement security is, what the quality of your health
Speaker 1: care is um And it needs to be an understandable
Speaker 1: part of being a resident of of of of a
Speaker 1: country and centering so much more things in the FED.
Speaker 1: Where the Fed by nature has to come up with
Speaker 1: complicated innovations to do what it's being asked is very
Speaker 1: corrosive and you know, erodes people's ability to understand, um,
Speaker 1: what's going on and what our policy intervention is. And
Speaker 1: Congress is essentially asked Federal Reserve to take on that
Speaker 1: role when it devoted four n four billion dollars of
Speaker 1: the Cares Act to capitalize these Federal Reserve facilities. And
Speaker 1: I think that that is extremely corrosive and we need
Speaker 1: we need a math. It's it's not the Fed's fault,
Speaker 1: um for the most part, and we need uh, Congress
Speaker 1: and the rest of the federal government to take on
Speaker 1: much more of the burden of macro economic policy making
Speaker 1: and become competent in acarreconotic policy making. And that expertise
Speaker 1: is far too concentrated in the Federal Reserve, but not
Speaker 1: what you would decide ex anti to, you know, to
Speaker 1: in terms of your relative decision making. I think, you know,
Speaker 1: we they think we could have a whole another episode
Speaker 1: on just what Congress should be doing now, But like
Speaker 1: I said, that would be a whole different episode. But
Speaker 1: this was really great to chat with you and hopefully
Speaker 1: you enjoyed it, And thanks for coming on AVEL. Thank
Speaker 1: you very much for happening. Thanks Nathan, that was great
Speaker 1: and now we know who you are well obviously, Tracy,
Speaker 1: I really liked that episode and I thought his last
Speaker 1: point actually at the end was sort of the key
Speaker 1: to understanding the whole thing, which is, you know, people
Speaker 1: get angry about the Federal Reserve, or they feel like
Speaker 1: the Federal Reserve is overstepping against mandate or engaging in
Speaker 1: activities that really shouldn't be engaged ding in. Like the
Speaker 1: fact of the matter is, our entire system is basically
Speaker 1: designed so that only the Federal Reserve is in a
Speaker 1: position to conduct robust and timely macrocon on politics. Yeah,
Speaker 1: and there have been a few people who have said
Speaker 1: in the current crisis that the Central Bank has basically
Speaker 1: acted in the role of I guess the grown up
Speaker 1: in the room, Like they have been probably the most
Speaker 1: responsive not only domestically for the United States, but we
Speaker 1: have also seen them taking on this growing international role
Speaker 1: when it comes to providing dollar liquidity through the swap lines.
Speaker 1: There seems to be some recognition recognition that the Fed is, um, well,
Speaker 1: it's a needed entity, isn't it. Could you imagine like
Speaker 1: Congress of voting on things like swap lines dollar swaps. Yeah,
Speaker 1: like I just imagined of that or something that they
Speaker 1: are system were premised on Congress of voting each time
Speaker 1: to open up doll or swap line before or to
Speaker 1: raise or lower interest rates. I can only imagine, um,
Speaker 1: hellish that would be. But I also think like it
Speaker 1: it sort of speaks to and you know, he talked
Speaker 1: about like essentially it's all of these things are on
Speaker 1: some level accounting gimmicks, whether it's the fact that the
Speaker 1: Treasury has to invest in a special purpose vehicle which
Speaker 1: is then levered up by the FED, which then remits
Speaker 1: its profits back to the treasury. They're all accounting gimmicks,
Speaker 1: but they're accounting gimmicks because on some level, that's the
Speaker 1: only way that you shoehorn these actions into our existing
Speaker 1: legal and institutional structure, right, And I think the point
Speaker 1: is that you don't want the FED to be spending
Speaker 1: its time thinking of accounting gimmicks or trying to structure
Speaker 1: these things in an emergency. You want them to be
Speaker 1: thinking about the actual policy um and what makes the
Speaker 1: most sense for the current situation, instead of pouring over,
Speaker 1: you know, reams and realms of legal documents to figure
Speaker 1: out how they can kind of create a thing in
Speaker 1: order to enable them to do something similar to what
Speaker 1: they would like to do. It's sort of a waste
Speaker 1: of resources. As Nathan pointed out, I do think it's
Speaker 1: interesting also. It's like after the last crisis, like the
Speaker 1: sort of smoke cleared a little bit, then we got
Speaker 1: DoD Frank because there was the sort of realization that's like,
Speaker 1: all right, well, if the infrastructure of government is going
Speaker 1: to sort of or the infrastructure of the FED is
Speaker 1: going to backstop all these central banks or backstop all
Speaker 1: these banks, then we need to apply some new rules
Speaker 1: so this doesn't happen again. And Nathan sort of alluded
Speaker 1: to this, but it's like, Okay, well, in this crisis,
Speaker 1: we've decided that the entire public, the entire corporate sector
Speaker 1: is a de facto public infrastructure that's worried, that's deserving
Speaker 1: of a FED back stuff. And maybe that's true, But
Speaker 1: are we really going to let the corporate sector then
Speaker 1: return to normal after this or will there be some
Speaker 1: version of DoD frank for all co operations or should
Speaker 1: there be once that we've sort of crossed this rubicon
Speaker 1: where we decided that they're all kind of banks to
Speaker 1: with access to FS, right, Like imagine if corporations had
Speaker 1: to start holding onto liquid assets for instance, or I
Speaker 1: guess the most political thing out there at the moment
Speaker 1: is the notion of curving dividends or buy backs or
Speaker 1: something like that. Yeah, And in fact that it's funny
Speaker 1: because Nathan actually had one of the post he's written
Speaker 1: in his newsletter is about should we have arguing for
Speaker 1: a liquidity coverage ratio for non bank public entities, which
Speaker 1: basically this idea is like, Okay, if you're an airline
Speaker 1: or if your restaurant chain or whatever it is, how
Speaker 1: much cash on hand should you have to be able
Speaker 1: to cover expenses? I mean, we do it for banks
Speaker 1: so plausibly in this case where we've seen now that
Speaker 1: all business for some normally operating companies can come to
Speaker 1: de facto hall overnight. Is it that crazy to start
Speaker 1: thinking about similar legs for non bank entities. All these
Speaker 1: things are now sort of open the question. Yeah, it's
Speaker 1: sort of overwhelming to think just how much this crisis
Speaker 1: has the potential to change. I mean, after the two
Speaker 1: thousand eight financial crisis, we did see all these new
Speaker 1: banking rules put in place, new basil rules, Dodd Frank,
Speaker 1: as you pointed out already. But this time around, we
Speaker 1: could get WHOA, we could get new financial rules, We
Speaker 1: could get new rules for the way the FED operates,
Speaker 1: new rules for the way the government potentially operates, and
Speaker 1: of course new rules for the way companies operate as well.
Speaker 1: Everything and people to society. Yeah, yeah, no, it feels
Speaker 1: like that's what really separates this is just that everything
Speaker 1: is on some level, it's on the table. Okay, well, uh,
Speaker 1: instead of talking about everything, shall we shall we call
Speaker 1: it a night or day for you. Sounds good? This
Speaker 1: is this. This is the point where, by the way,
Speaker 1: we're recorded this on April twenty, so if you're depending
Speaker 1: on when you're listening to this and depending on what
Speaker 1: has happened since then, just for a point of reference,
Speaker 1: it's April. Yeah. If the Federal Reserve started issuing its
Speaker 1: own securities already, h it's April. Okay. This has been
Speaker 1: another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't All? You could follow me on
Speaker 1: Twitter at the Stalwarts, and you should follow our guests
Speaker 1: on Twitter. Nathan Tankus He's at Nathan Tanks. Be sure
Speaker 1: to subscribe to his newsletter Nathan tank Is dot substat
Speaker 1: dot com. Also, you should be sure to follow our
Speaker 1: producer on Twitter, Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of Podcasts on Twitter, Francesca Leavie.
Speaker 1: She's at Francesca Today, and check out all of our
Speaker 1: podcasts at Bloomberg under the handle at podcasts. Thanks for listening.
Speaker 1: Se