Speaker 1: Pushkin. I'm Lyddy Egeen Coott and I'm Michael Lewis, and.
Speaker 2: This is our Picture It companion series on Against the Rules. Michael,
Speaker 2: the other day you were telling me, when you were
Speaker 2: talking about this episode, how you were thinking about your
Speaker 2: days in college when you studied art history. Tell me
Speaker 2: about that. Why are you thinking about that?
Speaker 1: One of the things that happens when you're studying our
Speaker 1: history is professors as just a teaching tool. Often they'll
Speaker 1: just throw up two pictures side by side and ask
Speaker 1: you to compare and contrast, and you just look at
Speaker 1: a Rembrandt painting differently if it's next to a Rubens,
Speaker 1: and you start thinking about what are the differences, Like,
Speaker 1: what are the similarities? What are the differences. It's a
Speaker 1: tool for forcing your mind to move, and as a
Speaker 1: tool for forcing our mind to move. About the two
Speaker 1: thousand and eight financial crisis, I can't really think of
Speaker 1: a better event than the nineteen twenty nine crash and
Speaker 1: the slow rolling depression that occurred after it. And it
Speaker 1: just so happens that a really great financial writer, Andrew
Speaker 1: Ross Sorkin, who wrote a really good book about the
Speaker 1: two thousand and eight financial crisis called Too Big to
Speaker 1: Fail has written a history of the nineteen twenty nine
Speaker 1: crash and the subsequent depression, and I just thought, that's
Speaker 1: holl I'm on and put the paintings next to each
Speaker 1: other and just talk about what happened then and how
Speaker 1: it rhymes or doesn't rhyme with what happened in two
Speaker 1: thousand and.
Speaker 2: Eight, right, and we should say that. Andrew Rossworkin also
Speaker 2: has a column for The New York Times, a financial column,
Speaker 2: and he's the co host of The Squalockbox on CNBC.
Speaker 1: He's had basically he has basically four careers going at once.
Speaker 1: I don't know how he does it. I really don't
Speaker 1: know how he does it. But the book is really interesting.
Speaker 1: I've read it quite a bit about the nineteen twenty
Speaker 1: nine crisis. I read all the great things that were
Speaker 1: written back in the fifties and the sixties about it,
Speaker 1: and it's an original contribution.
Speaker 2: And I can say, Michael's not the easiest person to
Speaker 2: get to like your book, so that's high praise it.
Speaker 1: I began my conversation with the journalist Andrew Ross Sorkin
Speaker 1: by asking him to explain what led to the crisis
Speaker 1: of nineteen twenty nine, the one that eventually set off
Speaker 1: the Great Depression.
Speaker 3: Quick summary is the nineteen twenties were probably one of
Speaker 3: the greatest stock booms in history, in large part because
Speaker 3: Americans got access to credit for the first time, and
Speaker 3: not just credit to go buy actual products for their homes,
Speaker 3: but to be able to go buy on margin stock.
Speaker 3: And people thought it was free money. And so you
Speaker 3: got into nineteen twenty seven, nineteen twenty eight, and then
Speaker 3: into ninety twenty nine, and it had become a national
Speaker 3: pastime to trade. You know, they were broken on the
Speaker 3: corners the way there are Starbucks on the corners today.
Speaker 3: It was literally like that, and people go out of
Speaker 3: their minds, they start gambling. I mean, the American dream
Speaker 3: becomes the get rich quick dream, which, by the way,
Speaker 3: we live with to some degree today. But I think
Speaker 3: that emanated in a large way in the nineteen twenties,
Speaker 3: and you had investors piling in at the same time
Speaker 3: as you had folks on Wall Street and financiers taking
Speaker 3: advantage of them. Insofar as they're both manipulating the market
Speaker 3: in a whole bunch of different ways, they're creating all
Speaker 3: sorts of increasingly leveraged instruments that look like Russian dolls
Speaker 3: of leverage piling on top of each other. And we'll
Speaker 3: never know, We'll never know what it exactly was. That
Speaker 3: sort of was tipped the balance, but the balance was tipped,
Speaker 3: and I think it ultimately fundamentally changed the psychology of
Speaker 3: an entire scarred, an entire generation. You know, I don't
Speaker 3: tell the story in the book, Michael, but I'll tell you.
Speaker 3: My grandfather was eleven years old and was a messenger
Speaker 3: down in October nineteen twenty nine. He was down there
Speaker 3: during this. He was on Wall Street, he was on Wastered.
Speaker 3: He had an older brother who actually he had skipped
Speaker 3: school to go down there, and he watched somebody. He's
Speaker 3: to tell the story. He watched somebody jump out of
Speaker 3: a building and kill himself. And my grandfather, who's no
Speaker 3: longer alive, lived till I think ninety two or ninety
Speaker 3: three now, never bought a share of stock his entire life.
Speaker 3: After that, he bought bonds and other things. But he
Speaker 3: would always say, the stock market is not for us.
Speaker 3: The stock market is like this other thing.
Speaker 1: How'd you get interested in the first place of writing
Speaker 1: a history of the crash?
Speaker 4: This is going to sound so silly.
Speaker 3: I having written Too Big to Fail, I thought, ah,
Speaker 3: I should know something about nineteen twenty nine. I mean,
Speaker 3: I know sort of the contours, the outline. I read
Speaker 3: some of the more famous books, and while there were
Speaker 3: some fascinating books that totally intrigued me about the period,
Speaker 3: I was sort of searching, to be honest with you,
Speaker 3: for the Michael Lewis version of this. I was searching
Speaker 3: for the or the Too Big to Fail version.
Speaker 1: You were looking for your own version of this.
Speaker 3: I wanted to understand the motivations and the personalities, and
Speaker 3: what they were actually thinking in that moment, and why
Speaker 3: they were thinking, what they thinking, and what they did afterwards,
Speaker 3: all those things. I was having to give a speech
Speaker 3: up at Harvard, and I got there early, and I
Speaker 3: went to the Baker Library and I walked in and
Speaker 3: I asked the libraria, the archivist there, if I could
Speaker 3: look at the Thomas Lamont papers from nineteen twenty nine.
Speaker 1: Tell us quickly who Thomas Lamont was.
Speaker 3: Thomas Lamont effectively was the de facto CEO of JP
Speaker 3: Morgan at the time. He wasn't actually the CEO. The
Speaker 3: real CEO was named Jack Morgan. He was the son
Speaker 3: of JP Morgan, but this was the guy who basically
Speaker 3: ran the place and made most of the important decisions.
Speaker 3: And his secretary used to keep transcripts of his phone
Speaker 3: conversations with Hoover. And so I'm sitting there in the
Speaker 3: library reading this stuff, going, oh, my goodness, well maybe
Speaker 3: you could write a book like this. And interestingly I
Speaker 3: went and then talked to that archivist and she said
Speaker 3: that she had read Too Big to Fail, and she said, actually, Andrew,
Speaker 3: you really can't. You can't do what you want to do.
Speaker 3: I know what you're trying to do, and just it's
Speaker 3: not really possible. It's not like one or two or
Speaker 3: three archives either here at Baker or at Columbia or Yale,
Speaker 3: where you can sort of excavate the stuff and then
Speaker 3: you'll be able to write it the way you want
Speaker 3: to write it. And I sort of just didn't want
Speaker 3: to believe her, and then I went on this sort
Speaker 3: of eight year journey to try to figure out and
Speaker 3: she was right in the following way.
Speaker 4: It wasn't all in one place.
Speaker 3: Or two places, or three places or four places had
Speaker 3: to do this sort of like just a different kind
Speaker 3: of excavation.
Speaker 1: There is this line that I wrote you about that
Speaker 1: you must have found in the Lamont archives when you
Speaker 1: were at the Baker Library, and it's and this is
Speaker 1: your description of Thomas Lamont. His attraction to men in
Speaker 1: power reportedly even caused him to ask a senior German official,
Speaker 1: just what sort of fellow is Hitler? Is he the
Speaker 1: sort you'd go fishing with? The reply, my dear Lamont,
Speaker 1: he is the nicest fellow in the world, always making jokes.
Speaker 1: You couldn't ask for a more delightful companion. Where on
Speaker 1: earth does that come from?
Speaker 3: If I recall there was a book written in I
Speaker 3: want to say late thirties or maybe even late forties
Speaker 3: that mentioned Lamont and described this.
Speaker 1: Fly fishing with Hitler is just an image that I
Speaker 1: couldn't get out of my mind I read it. Once
Speaker 1: I read it, I couldn't get it out of my head.
Speaker 3: Once I saw it, I kept thinking, how am I
Speaker 3: going to work the sand?
Speaker 1: So let's run through the characters and let's just describe them,
Speaker 1: and then the analogy. Thomas Lamont, You've given us a
Speaker 1: little sketch. Who do you think the closest to Thomas
Speaker 1: Lamont in two thousand and eight was well.
Speaker 3: I would actually argue maybe he was the Jamie Diamond
Speaker 3: of that period. I think that he's probably the closest
Speaker 3: at that time actually to a Jamie Diamond who was
Speaker 3: trying to work with the government, who was trying to,
Speaker 3: you know, have these relationships.
Speaker 1: It's kind of interesting that in both crises, JP Morgan
Speaker 1: running JP Morgan Morgan plays the analogous role.
Speaker 3: And if you think about it, the government did rely.
Speaker 3: They were relying on Thomas Lamont's advice in nineteen twenty
Speaker 3: nine and after that, and they were relying not only
Speaker 3: on Jamie Diamond's advice in part, but they were also
Speaker 3: relying on his largess and money when he was, you know,
Speaker 3: saving bear Stearns and being used to buy.
Speaker 4: Some of these other banks.
Speaker 1: Yes, tell us about Jesse Livermore.
Speaker 3: Jesse Livermore was a short seller. He was a trader,
Speaker 3: hedge fund manager. He wasn't just a short seller. He
Speaker 3: was the star short seller in the world. He was
Speaker 3: on the cover of magazines, he was a philosopher king.
Speaker 3: People listened to his every word. I'm trying to think
Speaker 3: in my head now though about two thousand and eight,
Speaker 3: and given that The Big Short has a lot, has
Speaker 3: a number of short sellers, but none of those short
Speaker 3: sellers had the sort of fame at the time.
Speaker 1: There has a little Jesse Livermore and all my characters
Speaker 1: in The Big Short, I mean Livermore. I've told you this.
Speaker 1: I sold Showtime a TV pilot, a pilot based on
Speaker 1: the life of the Jesse Livermore, and it opens during
Speaker 1: the crash. One of the many things that appealed to
Speaker 1: me about him as a character was that he was
Speaker 1: so sure of his ability to make judgments under an uncertainty,
Speaker 1: and yet and made so many mistakes along the way.
Speaker 1: And he was so kind of seemingly in control of
Speaker 1: his professional life. His personal life was absolute chaos.
Speaker 3: He would call reporters and they would come to his office,
Speaker 3: and meanwhile, he, by the way, was you know, he
Speaker 3: was drinking. He had alcohol problems, he had personal problems.
Speaker 3: He was being sued constantly by everybody for everything.
Speaker 1: And he's short the end of the crash.
Speaker 3: He's short into the crash. He had actually prior to
Speaker 3: that almost got an out of the shorting business. Because
Speaker 3: the truth was being a short seller on Wall Street
Speaker 3: in nineteen twenty eight and in nineteen twenty nine seemed
Speaker 3: like terrible, terrible businesses. And then this guy comes back
Speaker 3: in at the last minute and wins.
Speaker 1: So any other characters that you would like to highlight.
Speaker 3: So to me, the other major character that drives the
Speaker 3: entire story is Carter Glass.
Speaker 2: Oh.
Speaker 3: Yes, Carter Glass is a senator from Virginia. He had
Speaker 3: been the Treasury Secretary. He later gets asked to be
Speaker 3: the Treasure Secretary again by Roosevelt, and he helped create
Speaker 3: the law that established the Federal Reserve. He was the
Speaker 3: Elizabeth Warren of his time.
Speaker 1: That's right.
Speaker 3: He creates what is now known as Glass Stegel, the
Speaker 3: Glass Steagle Act, which ultimately broke up the banks between
Speaker 3: the sort of casino gambling side of the bank and
Speaker 3: traditional commercial lending side of the bank. And of course
Speaker 3: this becomes a feature of what ultimately happened in two
Speaker 3: thousand and eight, a lot of the calls for by
Speaker 3: Elizabeth Warren in fact, after two thousand and eight to
Speaker 3: break up the banks all over again, in large part
Speaker 3: because the rules that had been put in place by
Speaker 3: the Glass Steagle Act in nineteen thirty three got watered
Speaker 3: down in the nineties, and some people argue ultimately led
Speaker 3: to some of the things that took place in two
Speaker 3: thousan eight.
Speaker 1: When we return, I asked Andrew to compare these reformers
Speaker 1: who arose after each disaster on Wall Street.
Speaker 5: How did the Volkswagen Beetle go from being Hitler's dream
Speaker 5: car to a hippie icon. How did a disgruntled center
Speaker 5: fielder change the business of sports. I'm Jacob Goldstein and
Speaker 5: on Business History. My co host Robert Smith and I
Speaker 5: dig into the people and companies who created the modern world.
Speaker 5: Business History is full of innovations and failures and insights
Speaker 5: into how.
Speaker 1: Business works today.
Speaker 5: At the end of today's episode of Against the Rules,
Speaker 5: We're going to play a clip from our episode about
Speaker 5: Jim Simon's decades ago. Simon's basically invented modern algorithmic trading,
Speaker 5: and after a few early hiccups, including buying up all
Speaker 5: the potatoes in Maine, Simon's built a machine that generated
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Speaker 5: and the previous coming up. At the end of today's
Speaker 5: episode of Against the.
Speaker 1: Rules, I'm back with Andrew ross Orkin. When you compare
Speaker 1: and contrast these two characters and what they wanted to do.
Speaker 1: Carter Glass and Elizabeth Warren, what differences do you see?
Speaker 1: Like they're they're policing a different event, the coming in
Speaker 1: after a different The first event is it's a stock
Speaker 1: market bubble, or it's a it's a debt fueled stock
Speaker 1: market boom. The second event is a debt fueled housing boom.
Speaker 1: The role of the bank's slightly different in each case,
Speaker 1: and the institutions that get created a different The SEC
Speaker 1: gets created out of the twenty nine crisis they CFPB.
Speaker 1: He gets created out of the out of the two
Speaker 1: thousand and eight crisis. So like, what differences do you
Speaker 1: see between kind of what they are thinking about what
Speaker 1: bothers them?
Speaker 3: Well, so the similarities are they are vocal, they are allowed,
Speaker 3: they lots of press, and they are the Cassandra's. They
Speaker 3: are the Cassandras in the room. From the beginning. The
Speaker 3: biggest distinction between the two of them is that card Glass,
Speaker 3: I think, actually was genuinely a capitalist and somebody who
Speaker 3: believed in the banking system, in large part because he
Speaker 3: had helped develop the Federal Reserve and he believed in
Speaker 3: these systems. He wasn't so quick to completely and utterly
Speaker 3: break them up and without giving away too much of
Speaker 3: the story, the actual creation of that law, while it
Speaker 3: has his name on it, is so much more complicated
Speaker 3: and dramatic and wild, I think actually too in my estimation.
Speaker 3: It was actually one of the great surprises to me
Speaker 3: as I was reporting on this, because there are so
Speaker 3: many other players who get involved in the creation of
Speaker 3: that law, including people in banking itself, which I think.
Speaker 4: Would shock.
Speaker 3: Which shock Elizabeth Warren given her love for citing that
Speaker 3: bill today. I think Elizabeth Warren was much more about protectingary.
Speaker 1: Americans from the financial predators.
Speaker 4: From the predators.
Speaker 3: I think she was much more focused on that that,
Speaker 3: you know, the ordinary American, the quote unquote little guy.
Speaker 3: She really wanted to make sure that the system quote
Speaker 3: unquote worked for them, that it was equal for them.
Speaker 3: Whereas I'm not sure those were the instincts or at
Speaker 3: least what was the motivation for carter Glass.
Speaker 1: No, there is in the aftermath. It seems to be
Speaker 1: there's a really different tone to the aftermath of eight
Speaker 1: than there was from the aftermath of twenty nine. The
Speaker 1: aftermath of twenty nine, it doesn't in your story as
Speaker 1: you tell the story Anyway, I don't really get the
Speaker 1: feeling that ordinary Americans are thought to have been exploited,
Speaker 1: that these financial predators came in and got them to
Speaker 1: do things that they wouldn't have done wise, and we
Speaker 1: should all feel sorry for them. Whereas in the aftermath
Speaker 1: of Oh wait, that was very much the story. It's like,
Speaker 1: we got the strippers in Las Vegas to buy six
Speaker 1: houses with subprime loans, and we should be ashamed of
Speaker 1: ourselves for having done that. There was much more emphasis
Speaker 1: on bashing the financial elites, well thankful for their predatory behavior,
Speaker 1: because you could very easily say at the back end
Speaker 1: of eight, one natural sort of interpretation is like, once again,
Speaker 1: ordinary Americans got carried away and they borrowed money they
Speaker 1: shouldn't have borred to make to speculate whiys they shouldn't
Speaker 1: and they should be held responsible for that kind of thing.
Speaker 3: So I think there's two distinctions here. One is that
Speaker 3: the sort of turn on Wall Street, the Occupy Wall
Speaker 3: Street sort of movement that happened in the aftermath of
Speaker 3: two thousand and eight, did happen to some degree after
Speaker 3: twenty nine. It just took a lot longer for it
Speaker 3: to happen, and it oddly happened for slightly different reasons,
Speaker 3: which is to say, it was like a very slow collapse.
Speaker 3: People think that nineteen twenty nine the market collapse. You
Speaker 3: hear about this, you know, the one day collapse, and
Speaker 3: that's it. It was really not just that. It was
Speaker 3: the psychological break of that, and then into thirty and
Speaker 3: a whole bunch of other things that happened, including by
Speaker 3: the way, Smooth Hawlly, which was a terrifact somewhat similar
Speaker 3: to what was happening today, but it had a hugely
Speaker 3: deleterious effect on the economy, and you had unemployment then
Speaker 3: spike at one point to twenty five percent. Once we
Speaker 3: got to that, which by the way, didn't really happen
Speaker 3: until nineteen thirty two, then you had people pointing fingers
Speaker 3: and doing lots of things in terms of how they
Speaker 3: thought about Wall Street and the bankers. But I don't
Speaker 3: think people were putting that all together immediately in the
Speaker 3: aftermath of ninet twenty nine, also in part because people
Speaker 3: did have to blame themselves in the following way. They
Speaker 3: knew they were gambling to some degree. It was a gambler,
Speaker 3: weren't trying to in two thousand and eight. At least
Speaker 3: it was framed up in the idea of this American
Speaker 3: dream that we would all own a home, and it
Speaker 3: wasn't you actually got something ostensibly for it. Yep, this
Speaker 3: was truly about trading paper back in nineteen twenty nine.
Speaker 1: Yeah, that's a big distinction. The other difference, And I
Speaker 1: didn't know this. I just assumed that the leftward turn
Speaker 1: in American politics and the rise of Roosevelt was a
Speaker 1: direct response to the hostility towards financial elites and the crash.
Speaker 1: And you make the point that like that wasn't even
Speaker 1: the most salient issue. No, Roosevelt's first campaign.
Speaker 3: Prohibition prohibition, was we need to do away with prohibition.
Speaker 3: People wanted to drink. I really wanted to drink.
Speaker 1: Can you imagine after the SEC is created in.
Speaker 3: What nineteen thirty three, nineteen thirty four, thirty four.
Speaker 1: Yep, that ten years later, or even eight years later,
Speaker 1: people are calling for it's dismantling it because it's getting
Speaker 1: in the way of Wall Street doing what it needs
Speaker 1: to do. I mean, the CFPP is created on the
Speaker 1: back end of the financial crisis, and it's a historical
Speaker 1: terms of kind of nanosecond before there's already attacks on it,
Speaker 1: attempt to kind of neuter it, don't.
Speaker 3: I look at the two thousand and eight financial crisis
Speaker 3: and almost draw a straight line to the election of
Speaker 3: President Trump in twenty sixteen, and arguably again in twenty
Speaker 3: four this idea that the institutions, the experts let us
Speaker 3: all down.
Speaker 4: They failed us. They told us it was all going
Speaker 4: to be fine.
Speaker 3: They you know those quotes from even Ben Bernaki and
Speaker 3: others in two thousand and seven, you know, suggesting that
Speaker 3: we weren't on the precipice, and then we were in
Speaker 3: twenty nine.
Speaker 1: We were. The experts weren't similarly defenestrated. They were were
Speaker 1: like empowered in a way at the back end of it.
Speaker 3: They were empowered until they weren't. Hoover immediately empowered them
Speaker 3: because he was a Republican and he he was having
Speaker 3: meetings with CEOs the way Trump is having meetings with CEOs.
Speaker 3: He was calling them all to the White House. They
Speaker 3: were doing photo ops left and right.
Speaker 4: Now.
Speaker 3: He was desperately trying to press them to do certain things,
Speaker 3: less successfully than Trump was in certain cases, in that
Speaker 3: he would tell them, for example, that he wanted them
Speaker 3: to hire more people, and then the question is would
Speaker 3: they and of course they did the opposite. So the
Speaker 3: other character that I fell in love with, to be
Speaker 3: honest with you, is John Rascob. John Rascob to me,
Speaker 3: actually is very much the Elon Musk of that moment.
Speaker 3: John Rascob helped develop General Motors, So there was.
Speaker 1: No Elon Musk in two thousand and eight.
Speaker 3: There was no Elon Musk in two thousand and eight.
Speaker 3: But back in the nineteen twenties, John Rascob had become
Speaker 3: a hugely successful executive in the automobile business. He helped
Speaker 3: effectively create the idea of credit like truly because he
Speaker 3: created the credit unit at General Motors to help them
Speaker 3: sell cars. Prior to that, actually most people thought it
Speaker 3: was a sin to take on debt, and he really
Speaker 3: fundamentally reshaped that. He then took his winnings from his
Speaker 3: General Motors' days and became a hugely successful investor and
Speaker 3: was making more money investing than he had ever been
Speaker 3: made at General Motors. He then, like Elon, decides that
Speaker 3: he has all this money, has all this power, He's
Speaker 3: going to get into politics. And now he doesn't choose
Speaker 3: the winner in this case, he doesn't choose Hoover. He
Speaker 3: chooses al Smith, who was running against Hoover, and he
Speaker 3: becomes the head of the Democratic Committee. I mean, that's
Speaker 3: what he becomes. And once he loses, and it was
Speaker 3: really hit, the first loss in his whole life, almost
Speaker 3: he then makes it his mission to undo Hoover's reputation,
Speaker 3: to hurt Hoover reputationally by effectively paying people to write
Speaker 3: articles and give speeches undermining his reputation. And by the way,
Speaker 3: Hoover has a very bad reputation even to this day.
Speaker 3: I believe to some degree you can look back at
Speaker 3: John Rascob and say he was responsible for that. Of course,
Speaker 3: Elon musk and did a buying Twitter and uses it
Speaker 3: in all sorts of interesting ways to bolster and undermine
Speaker 3: political reputations. And then he goes off and does the
Speaker 3: equivalent of building a spaceship back in nineteen twenty nine
Speaker 3: called the Empire State building right, and.
Speaker 1: It really does. It maps pretty neatly onto Elon's life.
Speaker 3: And he was also a philosopher, king in that the
Speaker 3: media paid at ten to everything this man said.
Speaker 4: He had all sorts of other ideas.
Speaker 3: At one point he was trying to create the equivalent
Speaker 3: of probably what would have been one of the first
Speaker 3: mutual funds in the world. And he also it becomes
Speaker 3: an advocate for what ultimately turns out to be the
Speaker 3: five day work week. I didn't know this back then,
Speaker 3: most people worked six days a week, including by the
Speaker 3: way people in the stock market. The stock market was
Speaker 3: open on Saturdays in the morning. But he writes a
Speaker 3: paper in November of nineteen twenty nine that actually got
Speaker 3: overlooked until nineteen until the nineteen thirties, where he basically
Speaker 3: made the argument that would be better for the economy
Speaker 3: if there was a five day work week because that
Speaker 3: people would have more leisure time. They would have to
Speaker 3: go out and buy more cars. He owned stock in
Speaker 3: general motors. They would you know, buy camping equipment, they
Speaker 3: would do home home decorps and other things, and it
Speaker 3: would spur the economy. And that was his argument, and
Speaker 3: ultimately he was proved right. So I found him to
Speaker 3: be just a fascinating human at the intersection of all
Speaker 3: of these different component parts.
Speaker 1: We're going to take a quick break. When we come back.
Speaker 1: Andrew and I talk about how the Federal Reserve failed
Speaker 1: to save the day back in nineteen twenty nine, I'm
Speaker 1: back with Andrew Ross Sorkin so to push this poem
Speaker 1: a little further and talk more about how these two
Speaker 1: events nineteen twenty nine rhyme. The people at the Federal
Speaker 1: Reserve in two thousand and eight were scholars of what
Speaker 1: had happened in nineteen twenty nine, and how the Federal Reserve,
Speaker 1: which really faced its first test in nineteen twenty nine,
Speaker 1: responded to it. Talk a little bit about that response
Speaker 1: and how was similar or different from the response in
Speaker 1: two thousand and eight.
Speaker 3: So the response to the crisis in nineteen twenty nine
Speaker 3: was mostly for the Federal Reserve to on its hands.
Speaker 3: And there's a major distinction to understand the almost insecurity
Speaker 3: that people on the Federal Reserve felt in nineteen twenty nine,
Speaker 3: because it was still a new institution. He'd only been
Speaker 3: born in nineteen thirteen. There were genuine concerns, and I
Speaker 3: have diary memos and notes about this that the board
Speaker 3: members really felt that Congress could decide to shut them down.
Speaker 3: I mean, you know, we have debates today about the
Speaker 3: independence of the Federal Reserve. Back then, they were scared
Speaker 3: that they weren't going to be. They weren't going to
Speaker 3: exist if they made, you know, the wrong move, they
Speaker 3: were going to be, you know, completely hung out to dry.
Speaker 3: And so, for the most part, you know, nineteen twenty eight,
Speaker 3: nineteen twenty nine, as the market was getting frothier and frothier,
Speaker 3: as much as they wanted to tamp it down, even
Speaker 3: by raising interest rates, by raising interest rates, they were
Speaker 3: very worried about doing that, and they were very worried
Speaker 3: about harming the economy because they thought if they harmed
Speaker 3: the economy politically, that would not be a palatable situation
Speaker 3: vis a vis their own independence. And so they did
Speaker 3: not take the kinds of steps that you would have
Speaker 3: wanted them to, and they were debating them, they were
Speaker 3: having conversations constantly about raising interest rates, and yet they
Speaker 3: for the most part didn't want to. What they did instead,
Speaker 3: which is they would send out memos to banks and say,
Speaker 3: you know, stop speculative lending. But they wouldn't explain what
Speaker 3: that even meant. They would just tell them to do this,
Speaker 3: and then some banks would just stop lending completely. By
Speaker 3: the way, as they function of this, they would take
Speaker 3: the memo as gospel and they would stop lending, which
Speaker 3: is a real problem for the economy as well. Two
Speaker 3: thousand and eight. Obviously, Ben Bernanke, who was the FED
Speaker 3: chair at that point, his thesis in college at Princeton
Speaker 3: was on the financial crisis of nineteen twenty nine. That's
Speaker 3: what he studied, the Great depres and I think one
Speaker 3: of the lessons was that the Federal Reserve needed to
Speaker 3: flood the system with money.
Speaker 4: That that is the.
Speaker 3: Way you keep the arteries of the system moving. And
Speaker 3: of course that's what they did. Now in the context
Speaker 3: of doing that, that was also remarkably unpopular. I mean,
Speaker 3: bailouts were unpopular. All of it was quite unpopular. Yet,
Speaker 3: and I don't know where you stand on this. I
Speaker 3: think in the end, as we look back, I think
Speaker 3: a lot of those were probably the right decisions, as
Speaker 3: politically unpopular as they were.
Speaker 1: People who get upset about that decision don't really fully
Speaker 1: imagine the counterfactual and who's going to pay the price
Speaker 1: in the counterfactual. The counterfactual so ugly. The counterfactual is
Speaker 1: the depression. It's twenty five percent unemployment rate. I mean.
Speaker 1: One of the striking things about some of the numbers
Speaker 1: in your narrative is one point you describe the cost
Speaker 1: of the economy by the thirties, like GDP or GNP
Speaker 1: or whatever they were measuring time is down by fifty percent. Right,
Speaker 1: Nothing like that happened after two thousand and eight, And
Speaker 1: there's a reason it didn't happen, because they flooded the
Speaker 1: economy with.
Speaker 4: Dollars in the nineteen thirties.
Speaker 3: Everything moved almost into an austerity period, not just at
Speaker 3: the Phoederal reserve, but even politically. There wasn't an ability
Speaker 3: or a view that they should be, you know, completely
Speaker 3: propping up the economy until, of course Roosevelt shows up
Speaker 3: on the scene, and you know, some people thought he
Speaker 3: was going to spend money like, you know, like a
Speaker 3: wild drunken sailor. But ultimately that was the New Deal
Speaker 3: did provide for a lot of employment that ultimately helped
Speaker 3: the economy out. On top of that, of course, there
Speaker 3: was a war and a whole bunch of other things
Speaker 3: that were going on.
Speaker 1: Yes, when I first got in touch with you, the
Speaker 1: first question I asked you, and what I wasteing on
Speaker 1: is the different narratives that emerge at the back end
Speaker 1: of one of these events and how they can be
Speaker 1: competing narratives like it takes a while for the society
Speaker 1: to agree upon a truth if it ever does, about
Speaker 1: what just happened, And their competing narrative is about two
Speaker 1: thousand and eight. Now, was there a similar thing in
Speaker 1: the back end of the nineteen twenty nine crash? Were
Speaker 1: there people trying to tell different stories than the one
Speaker 1: that emerges as the consensus.
Speaker 3: Yes, in that there were some folks who were blaming
Speaker 3: the banks for being reckless in terms of lending. And
Speaker 3: the other competing narrative was the idea that somehow short
Speaker 3: sellers were responsible for all of this. For a period
Speaker 3: of time, Congress was looking at short sellers. They were
Speaker 3: trying to name names. They thought some of the short sellers,
Speaker 3: by the way, were in cahoots with certain politicians about
Speaker 3: how all of this was going on. Then there was
Speaker 3: another version of this that blamed this on stock manipulators.
Speaker 4: The idea of what.
Speaker 3: Was back then, and it was a real thing called
Speaker 3: investment pools, where you'd have a financier who who would
Speaker 3: get a whole bunch of his friends together and say
Speaker 3: we're literally going to pump this stock.
Speaker 4: And it was, by the way, it was legal. It
Speaker 4: was not illegal to do this.
Speaker 1: No, it was amazing what they could do. They could
Speaker 1: do the equivalent of I buy some Pfizer stock and
Speaker 1: I call you Andrews say, could you go on television
Speaker 1: and say everybody should buy Pfizer buy some Pfizer too.
Speaker 3: Even crazier than that, because they would have the specialist
Speaker 3: at the stock exchange and RCA, by the way, back
Speaker 3: then was the meme stock of the moment. It was
Speaker 3: the glamour stock of that period, and the specialist who
Speaker 3: was in charge of that stock would literally run almost
Speaker 3: a theatrical routine on the floor of the exchange, where
Speaker 3: he would have people placed almost like actors, saying, Okay,
Speaker 3: I'm gonna buy for this, you're gonna buy for this,
Speaker 3: You're gonna buy for this, You're gonna buy, and literally
Speaker 3: they would ladder up the prices and then they would
Speaker 3: quote unquote pull the rug, and everybody almost knew this
Speaker 3: was happening. In fact, some investors were trying to get
Speaker 3: on the back of these pools. They knew was happening,
Speaker 3: and they thought, if I can get in and out
Speaker 3: before they get out, I can win too. So there
Speaker 3: was a whole sort of game that was being played
Speaker 3: by the way that game is being played today in
Speaker 3: the world of crypto. In the world of crypto, I
Speaker 3: don't know if I ever told you this wild story
Speaker 3: that happened to me earlier this year. I was on
Speaker 3: TV with Larry Fink and he makes a joke, says,
Speaker 3: there should be a Sorkin coin.
Speaker 4: Okay.
Speaker 3: Two hours later, somebody has created the Sorkin coin, no joke,
Speaker 3: and this sorcing coin is now going up by millions
Speaker 3: of dollars, millions of dollars. And I get a text
Speaker 3: message on x formerly Twitter inviting me into a DM group,
Speaker 3: one of these direct message groups, and there are people
Speaker 3: saying to each other, you know, I'm going to put
Speaker 3: in a million dollars here, then you're going to put
Speaker 3: in three million dollars. It was just happening digitally. In
Speaker 3: my hand, I was watching this happen. It was the
Speaker 3: wildest thing. At one point, they were reaching out to
Speaker 3: my sons. I have two twin boys who are fourteen,
Speaker 3: and they were trying to get them. They thought if
Speaker 3: they could show that the Sorkins owned this coin, which
Speaker 3: we never did, that that would help them pump the stock.
Speaker 3: And so I had to call my son and they're
Speaker 3: offering my son fifty thousand dollars worth of Sorking coin.
Speaker 3: And I'm calling up Henry and I'm saying, Henry, you
Speaker 3: cannot talk to these people. Do not respond to these people.
Speaker 3: We're going to be in jail. We're going to go
Speaker 3: to court. This is horrible. Please don't do this. And
Speaker 3: of course Henry says, you know, Dad, I'm leaving a
Speaker 3: lot of money on the table. But so, yes, the
Speaker 3: investment pools of nineteen twenty nine are very much alive
Speaker 3: and well today, and.
Speaker 1: It does seem like we're living through a period of
Speaker 1: you know, increased distrust of the institutions and erosion of
Speaker 1: the authority of central authority. But maybe I'm wrong. Do
Speaker 1: you disagree with that?
Speaker 3: I wish I could disagree with you, just to make
Speaker 3: the conversation more fun, But I violently agree with you.
Speaker 3: I violently agree with you. And my real worry is
Speaker 3: that when you look at all of the rules that
Speaker 3: are being undone today, it's not just do we need
Speaker 3: new rules that haven't been implemented, it's we have rules
Speaker 3: that are coming off and a disinterest in looking at
Speaker 3: some of these things. I'm shocked, for example, that you know,
Speaker 3: investors are now buying these things called tokens in private
Speaker 3: companies and that's not technically allowed. If you ask the
Speaker 3: new head of the SEC, who's part of the Trump administration,
Speaker 3: you know what he wants to do about what seemed
Speaker 3: like clear violations of the rule.
Speaker 4: He looks at tokenization says.
Speaker 3: That's a form of innovation, and he doesn't want to
Speaker 3: slow down innovation. And so I'm not sure where the
Speaker 3: police on the beat really are going to be when
Speaker 3: and if there's a problem. There's a lot less people
Speaker 3: minding the store. And when people are minding the store
Speaker 3: and you add in the leverage, and you add a
Speaker 3: little speculation, you get problems.
Speaker 1: On that cheery note we're going to end, I really
Speaker 1: love the book. It was terrific, and I do think
Speaker 1: it's curious that your two big master works are studies
Speaker 1: of financial crises. You yourself are such a calm and
Speaker 1: reasonable person, you seem to be attracted to the other.
Speaker 3: I am attracted to whatever is the most interesting thing
Speaker 3: in crises and failure, not because I love failure.
Speaker 4: I root for people's success, but.
Speaker 3: I think that there's so many lessons in failure and
Speaker 3: failure onto itself is interesting because there's oftentimes so much
Speaker 3: we could learn from it.
Speaker 1: Thanks for taking the time to talk to me.
Speaker 4: Thanks for taking the time to read the book and
Speaker 4: to talk to me.
Speaker 1: Andrew ross Orkin writes Deal Book for The New York
Speaker 1: Times and is the author of the new book nineteen
Speaker 1: twenty nine Inside the Greatest Crash in Wall Street History
Speaker 1: and How It Shattered In.
Speaker 2: A Against the Rules, The Big Short Companion is hosted
Speaker 2: by Michael Lewis. It's produced by Me, Ludy, Jean Kott,
Speaker 2: and Catherine Girardeau. Our editor is Julia Barton. Our theme
Speaker 2: was composed by Nick Burtel, and our engineer is Hans Dale.
Speaker 2: She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela
Speaker 2: Lawrence and the rest of the Pushkin Audiobooks team. Against
Speaker 2: the Rules is the production of Pushkin Industries. To find
Speaker 2: more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts,
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Speaker 5: It's Jacob Goldstein. I'm the co host of a new
Speaker 5: show called Business History, and we're bringing you a clip
Speaker 5: right now from an episode we did about a mathematician
Speaker 5: named Jim Simon's. Simons wanted to take human emotions out
Speaker 5: of investing, and after a few early hiccups, including buying
Speaker 5: up all the potatoes in Maine, he created one of
Speaker 5: the greatest money machines in history. I really hope you
Speaker 5: like the clip, and if you want to hear more,
Speaker 5: please check out the show. It's called Business History and
Speaker 5: it's available wherever you're listening right now.
Speaker 6: They were doing what we would call today machine learning.
Speaker 7: A machine learning is like, essentially, you build a system
Speaker 7: in a computer, You feeded a bunch of data, and
Speaker 7: the system sort of builds a map of the relationships
Speaker 7: in that data, and then with new data it can
Speaker 7: kind of enter or extrapolate and make guesses about.
Speaker 1: What should come next.
Speaker 7: And of course today we have an exciting, maybe misleading,
Speaker 7: confounding term for machine learning.
Speaker 5: We call it AI.
Speaker 6: Exactly right, right, this is still very basic machine learning,
Speaker 6: and the computer at the time keeps making mistakes that
Speaker 6: they didn't really understand. So, for instance, once the computer
Speaker 6: developed a taste for potatoes, main potatoes, the system kept
Speaker 6: buying main potato futures in the state of Maine, potato.
Speaker 1: Potatoes, big harvest next year or whatever.
Speaker 6: Yes, okay, until two thirds of the company's money was
Speaker 6: in potatoes. They were all in potatoes.
Speaker 1: And they got a call from the regulators.
Speaker 7: The cft A CFPP Commodity Futures Trading Commission.
Speaker 6: Right, yeah, saying whoa who are you guys, Like, what
Speaker 6: are you doing over there? You have almost cornered the
Speaker 6: market on potatoes. You have to sell. And they ended
Speaker 6: up losing money on the trade because blown out on potatoes,
Speaker 6: they had stopped the computer or whatever the computer's plan was.
Speaker 6: But you know, this was just one small weird thing.
Speaker 6: Simon and Baum were really kind of nervous about this
Speaker 6: whole thing. They had taken investors' money, they didn't really
Speaker 6: know if their system worked. And as the story gets told,
Speaker 6: they start to like second guess the computer and themselves,
Speaker 6: and they start to think, well, I have this intuition
Speaker 6: that gold's gonna go up because of the geopolitical situation,
Speaker 6: and they'd make some money on that, and then they'd
Speaker 6: lose some money on that, and so by doubting their
Speaker 6: own system, it just wasn't really working. And at that point,
Speaker 6: they're just Wall Street investors right with a big computer,
Speaker 6: trying to buy more potatoes, and the man won't let
Speaker 6: them buy potatoes.