WEBVTT - How the Federal Reserve Grew More Powerful Than Anyone Ever Imagined 0:00:10.200 --> 0:00:14.320 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.400 --> 0:00:17.520 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, do you 0:00:17.560 --> 0:00:20.840 remember like after the Great Financial Crisis and the FED 0:00:20.920 --> 0:00:23.680 couldn't get the unemployment rate down even with all the 0:00:23.800 --> 0:00:27.120 raid cuts, and people were talking about like monetary policy 0:00:27.200 --> 0:00:29.240 is pushing on a string in this environment. You remember 0:00:29.240 --> 0:00:32.000 hearing that termola? You know what I remember? I remember 0:00:32.040 --> 0:00:36.600 people complaining about below target inflation for many, many, many 0:00:36.680 --> 0:00:39.000 years and how the FED we couldn't figure out why 0:00:39.400 --> 0:00:42.120 the FED wasn't able to push up prices, and now 0:00:42.200 --> 0:00:44.880 fast forward to you know, twenty twenty three, we can't 0:00:44.920 --> 0:00:48.040 figure out why the FED can't bring inflation under control. 0:00:48.159 --> 0:00:51.680 I don't want to insult like the various like brilliant 0:00:52.240 --> 0:00:55.040 economists and pundits out there. I never would, but I 0:00:55.240 --> 0:00:58.560 always found the complaints about like too low inflation to 0:00:58.640 --> 0:01:01.880 just be like hilarious, as if that is, as if 0:01:01.880 --> 0:01:04.080 there was ever like a real problem that anyone in 0:01:04.080 --> 0:01:06.080 the world faced. But I do think it's interesting, like 0:01:06.240 --> 0:01:09.760 you know, this pushing on a string narrative, everyone's sort 0:01:09.760 --> 0:01:12.920 of assumed that, Okay, maybe it's hard for the FED 0:01:12.959 --> 0:01:16.760 to get unemployment down, but that if inflation were to accelerate, well, 0:01:16.760 --> 0:01:18.840 at least we know how to deal with that. Yeah. 0:01:18.880 --> 0:01:22.080 But at the same time, there was this weird sort 0:01:22.120 --> 0:01:27.080 of discrepancy or tension because the FED couldn't figure out 0:01:27.120 --> 0:01:31.200 how to push down employment or push up prices at 0:01:31.200 --> 0:01:34.760 that time, but it seemed to do a reasonably good 0:01:34.840 --> 0:01:39.000 job of like intervening in markets. Yeah, and this was 0:01:39.400 --> 0:01:42.920 this was the chorus that you heard for so many years, 0:01:42.959 --> 0:01:45.959 the FED is coming in and distorting the markets, which 0:01:46.080 --> 0:01:50.720 you know, tacitly admits that they do have an impact there. Yeah. 0:01:50.800 --> 0:01:53.120 I think that's sort of like one thing that everyone 0:01:53.160 --> 0:01:55.960 agrees on, especially in the wake of you know, the 0:01:56.200 --> 0:01:59.720 the massive spasms in March twenty twenty, and then of 0:01:59.720 --> 0:02:02.120 course also in the wake of the Great Financial Crisis. 0:02:02.160 --> 0:02:04.840 The FED is pretty good at stopping financial crisis when 0:02:04.840 --> 0:02:07.040 there's a run on some sort of bank if it 0:02:07.160 --> 0:02:11.120 so chooses that. Like, maybe the FED can't get inflation 0:02:11.160 --> 0:02:13.680 at target when it plans, maybe it can't get employment 0:02:13.720 --> 0:02:17.639 at maximum employment, but it can definitely stop bank runs. Well, 0:02:17.680 --> 0:02:20.160 the other thing I would say, and we should stop 0:02:20.200 --> 0:02:23.079 talking soon because our guests, Yeah, we could keep going forever. 0:02:23.200 --> 0:02:27.799 But I think people forget how much things have changed 0:02:27.880 --> 0:02:32.000 in the span of let's see, like fourteen or fifteen years, 0:02:32.480 --> 0:02:35.079 because I remember, you know, I remember writing about the 0:02:35.120 --> 0:02:38.000 corporate bond market and it was like, ooh, maybe one 0:02:38.080 --> 0:02:40.280 day the FED will have to come in and bail 0:02:40.320 --> 0:02:42.800 out the corporate bomb market, and that was the worst 0:02:42.840 --> 0:02:45.440 thing that could happen. That was like, I got so 0:02:45.560 --> 0:02:49.080 much pushback on that, and then lo and behold, twenty 0:02:49.160 --> 0:02:51.920 twenty two happens, and the FED comes in and rescues 0:02:52.000 --> 0:02:56.240 not only the corporate bomb market, but treasuries, munies, pretty 0:02:56.320 --> 0:02:59.679 much everything, and it's sort of an accepted state of 0:02:59.680 --> 0:03:02.160 as now right. And of course this is one of 0:03:02.200 --> 0:03:04.480 the things we talked about in a recent episode, our 0:03:04.520 --> 0:03:07.720 live episode with a love Menend and Josh Younger. Anyway, 0:03:08.120 --> 0:03:10.560 let's get right to it. Let's talk more about how 0:03:10.600 --> 0:03:14.480 the FED has taken on these new powers, these new responsibilities, 0:03:14.760 --> 0:03:17.040 what it can do, what it can't do. We're going 0:03:17.080 --> 0:03:19.720 to be speaking with Gina Smilet, fed reporter at the 0:03:19.720 --> 0:03:23.760 New York Times, also a former Bloomberger, a former colleague 0:03:23.760 --> 0:03:26.960 of US, and the author of the new book Limitless. 0:03:26.960 --> 0:03:29.800 The Federal Reserve takes on a new age of crisis, 0:03:29.960 --> 0:03:32.640 which I see is number one and the Amazon money 0:03:32.720 --> 0:03:35.800 and monetary policy. Ken, Gina, thank you so much for 0:03:36.040 --> 0:03:39.160 coming on Oblots. Yeah, thank you for having me. Congratulations 0:03:39.320 --> 0:03:42.440 on the new book. You know, I'm curious about the 0:03:42.480 --> 0:03:46.880 title because limitless and obviously we talked about like, okay, 0:03:46.480 --> 0:03:49.200 these new powers that the FED has taken on both 0:03:49.200 --> 0:03:51.440 in the wake of the Great Financial Crisis and also 0:03:51.520 --> 0:03:54.760 the COVID shock, and yet there there does seem to 0:03:54.760 --> 0:03:57.840 be a limit on its actual dual mandate, as in, 0:03:58.320 --> 0:04:00.400 doesn't even have the tools to do like the two 0:04:00.480 --> 0:04:03.880 things max employment and stable prices that we think of 0:04:03.920 --> 0:04:06.680 as being the Fed's core mission. Yeah, so I think 0:04:06.680 --> 0:04:10.760 they're actually fairly interrelated. So the title itself actually comes 0:04:10.760 --> 0:04:13.560 from something Chair Jerome Powell said during sort of the 0:04:13.640 --> 0:04:16.800 depths of the twenty twenty pandemic upheaval. You know, he 0:04:16.920 --> 0:04:20.159 was doing an interview with David Wessel at the Brookings Institution, 0:04:20.360 --> 0:04:23.640 and David asked him, you know, is there a limit 0:04:23.680 --> 0:04:26.000 to how much the FED can do to sort of 0:04:26.080 --> 0:04:29.560 save all of these markets that are crashing. I'm paraphrasing, 0:04:29.560 --> 0:04:31.839 but that visual gist of it, and he said effectively, 0:04:31.880 --> 0:04:34.400 you know, no, there's no limit we can do, you know, 0:04:34.440 --> 0:04:36.560 as much of this as we need to within the 0:04:36.600 --> 0:04:40.200 confines of the law. And so that's that's where the 0:04:40.279 --> 0:04:42.839 title draws from. And I do think that's relatively accurate, 0:04:42.839 --> 0:04:45.080 you know, in the sense that these emergency powers that 0:04:45.080 --> 0:04:47.240 they used to save markets, like Tracy was just alluding to, 0:04:47.880 --> 0:04:50.720 very broad, very comprehensive, can be stretched in a lot 0:04:50.760 --> 0:04:52.160 of ways, and that's a lot of what I talk 0:04:52.200 --> 0:04:54.360 about in the book. But then at the same time, 0:04:54.440 --> 0:04:56.680 you know, when you're busily stretching those in all the 0:04:56.680 --> 0:05:01.040 ways that you're stretching them, it doesn't necessarily of guarantee 0:05:01.279 --> 0:05:04.720 a smooth on ramp back to solid growth and stable 0:05:04.760 --> 0:05:07.200 inflation when we get to the other side of a crisis. 0:05:08.400 --> 0:05:11.320 Maybe just to go back in time a little bit, 0:05:11.360 --> 0:05:13.480 and this is one of the themes that emerged from 0:05:13.520 --> 0:05:16.640 our conversations with Josh Younger and love Men and but 0:05:16.720 --> 0:05:20.039 this idea that the Fed's mandate and its role has 0:05:20.080 --> 0:05:23.279 really changed over time. Can you talk to us about, 0:05:23.360 --> 0:05:27.480 you know, what was the original conception of the FED 0:05:27.880 --> 0:05:30.800 versus what it is today. Yes, So I spend a 0:05:30.880 --> 0:05:33.080 huge amount of time on this in the book because 0:05:33.080 --> 0:05:36.200 I think it's just so interesting, and I think the 0:05:36.279 --> 0:05:39.360 upshot is basically, the FED as it is today is 0:05:39.480 --> 0:05:42.640 not the FED as it was originally envisaged in nineteen 0:05:42.680 --> 0:05:46.520 thirteen when it was set up in basically anyway, nineteen thirteen, 0:05:46.600 --> 0:05:49.360 FED was set up to be a really limited institution 0:05:49.440 --> 0:05:51.479 that was basically going to come in and prevent runs 0:05:51.480 --> 0:05:55.159 on the bank, which were very frequent characteristic of society. 0:05:55.440 --> 0:05:57.360 In that time. We had just had a bunch of 0:05:57.480 --> 0:06:00.679 big financial crises, including a very painful one in nineteen 0:06:00.680 --> 0:06:03.560 oh seven that cost a very bad recession, and so 0:06:03.720 --> 0:06:05.640 that was sort of the idea is we need some 0:06:05.680 --> 0:06:07.880 sort of institution that can both sort of make money 0:06:07.920 --> 0:06:10.560 more organized and make sure that it's not getting stuck 0:06:10.560 --> 0:06:13.120 in Tallahassee when you need it in somewhere in the 0:06:13.120 --> 0:06:15.760 middle of Kentucky. And we need an institution that can 0:06:15.800 --> 0:06:17.719 make sure there's sort of a lender of last resort, 0:06:17.800 --> 0:06:20.240 somebody who can back up markets in times of crisis. 0:06:20.440 --> 0:06:23.640 So those emergency powers always kind of they're very limited 0:06:23.640 --> 0:06:26.680 at the outset. The monetary policy powers really not there 0:06:26.680 --> 0:06:28.800 at the outset, because we were if you recall back, 0:06:28.800 --> 0:06:31.320 you know, we're on the gold standard that sort of 0:06:31.360 --> 0:06:34.119 had some sort of self breaking mechanism. We regularly drop 0:06:34.240 --> 0:06:36.480 the gold standard. So, I mean it was not some 0:06:36.560 --> 0:06:39.760 cure all solution for inflation, but just the way we 0:06:39.800 --> 0:06:42.400 thought about inflation and society very different at the time, 0:06:42.560 --> 0:06:45.080 and the FED didn't have such a developed role in 0:06:45.160 --> 0:06:47.960 sort of regulating the speed of the economy back then. 0:06:48.400 --> 0:06:51.640 FED independence is a term that you hear a lot, 0:06:52.200 --> 0:06:56.120 and I feel like it has different definitions and different contexts. 0:06:56.240 --> 0:06:59.200 But can you talk about, like where did this term 0:06:59.400 --> 0:07:02.000 come from and what did it mean? Like, what is 0:07:02.080 --> 0:07:04.479 this idea? What was the purpose of it? What do 0:07:04.560 --> 0:07:06.760 people mean? And where did it? Yeah? Where did it 0:07:06.760 --> 0:07:09.279 originate from? Yeah? So we need to do a little 0:07:09.360 --> 0:07:12.000 bit more history right here. So you get up through 0:07:12.480 --> 0:07:14.520 the nineteen thirties and the FED has really kind of 0:07:14.520 --> 0:07:17.880 figured out how to actually do some macroeconomic management. They 0:07:17.920 --> 0:07:19.920 sort of figure out that if you buy and sell bonds, 0:07:20.000 --> 0:07:22.480 it can guide interest rates into place you can either 0:07:22.520 --> 0:07:25.040 speed up the economy and slow times or slow it 0:07:25.080 --> 0:07:28.239 down when you need to. And up into the nineteen fifties, 0:07:28.280 --> 0:07:30.680 the FED really starts to take on sort of this 0:07:30.800 --> 0:07:34.920 inflation management job and what we see in the nineteen 0:07:35.000 --> 0:07:37.880 fifties is the Truman administration is really leaning on the 0:07:37.880 --> 0:07:40.600 Federal Reserve to keep interest rates very low, to try 0:07:40.640 --> 0:07:44.320 and sort of buy bonds, use it its ability to 0:07:44.680 --> 0:07:48.240 print money effectively to help sort of fund war efforts, 0:07:48.320 --> 0:07:51.160 fund you know, the fiscal fiscal policies that they want 0:07:51.200 --> 0:07:53.800 to do. And the FED is very concerned about inflation, 0:07:53.920 --> 0:07:56.800 and so we see this real rebellion at the FED 0:07:56.840 --> 0:07:59.600 where they work very hard to wrestle their wrestle control 0:07:59.640 --> 0:08:03.160 over their policies. Back. Mariner Eccles, who's one of the 0:08:02.840 --> 0:08:07.960 sort of important pivotal figures in early FED history, actually 0:08:08.040 --> 0:08:10.880 ends up releasing an account of a very sort of 0:08:11.360 --> 0:08:14.560 thans meeting between the Truman administration and the FOMC to 0:08:14.640 --> 0:08:17.960 the press. It embarrasses the administration. The administration decides to 0:08:17.960 --> 0:08:19.520 come to some sort of agreement with the Fed, and 0:08:19.520 --> 0:08:22.520 we get this nineteen fifty one Fed Treasury Accord, which 0:08:22.560 --> 0:08:25.560 really hands the FED a lot of independence over monetary policy, 0:08:25.560 --> 0:08:29.320 a lot of ability to not necessarily set the targets itself. 0:08:29.360 --> 0:08:31.840 You know, it still has to aim for maximum employment 0:08:31.880 --> 0:08:35.280 and stable inflation, as Congress eventually defines, but it does 0:08:35.480 --> 0:08:37.880 get to decide how it's going to go about those jobs, 0:08:38.080 --> 0:08:42.280 completely independent of the partisan process. So it's funny you're 0:08:42.280 --> 0:08:44.920 talking about this because I wrote about it and we 0:08:45.000 --> 0:08:47.640 talked a lot about it with Josh Younger on that 0:08:47.720 --> 0:08:51.360 episode about the origins of the shadow banking system and 0:08:51.480 --> 0:08:54.679 sort of the modern financial system as well. But just 0:08:54.720 --> 0:08:57.440 to back up slightly, when we talk about central bank 0:08:57.480 --> 0:09:01.240 independence nowadays, we generally talk about it as a good thing, 0:09:01.360 --> 0:09:05.439 and it's often considered a hallmark of a developed economy 0:09:05.559 --> 0:09:10.440 versus say, in an emerging market with perhaps more institutional weakness, 0:09:10.480 --> 0:09:13.360 where the central bank might be pressured to do whatever 0:09:13.400 --> 0:09:17.040 the government wants. Why is it desirable to have an 0:09:17.080 --> 0:09:20.560 independent FED that is perhaps a little bit more free 0:09:20.760 --> 0:09:24.280 from the types of political considerations that you would see 0:09:24.400 --> 0:09:28.200 in electric politicians. Yeah, I think a huge part of 0:09:28.200 --> 0:09:31.280 the reason we treat it as sort of the gospel 0:09:31.520 --> 0:09:34.960 that it is that FED independence should be protected at 0:09:35.000 --> 0:09:38.280 all costs traces back to the nineteen seventies. So in 0:09:38.320 --> 0:09:42.040 the nineteen seventies we had an inflation situation not hugely 0:09:42.080 --> 0:09:45.200 unlike the one today, originally caused by some supply issues, 0:09:45.280 --> 0:09:49.200 some excess demand issues tied to war efforts, and it 0:09:49.320 --> 0:09:52.440 just lasted for years and years, and the FED would 0:09:52.440 --> 0:09:54.760 occasionally raise rates to try and bring it back under control, 0:09:54.800 --> 0:09:57.400 but then when unemployment went up, they would quickly lower 0:09:57.400 --> 0:09:59.600 the rates again, and they just never got a handle 0:09:59.640 --> 0:10:03.600 on it. Historians economic historians think that part of the 0:10:03.640 --> 0:10:07.280 reason for that is Burned then the FED chair was 0:10:07.320 --> 0:10:10.640 really caving to the Nixon administration. Nixon was very nervous 0:10:10.640 --> 0:10:13.680 about reelection. He wanted rates to stay low. Low rates 0:10:13.760 --> 0:10:16.560 translates to low unemployment, and so that was sort of 0:10:16.559 --> 0:10:19.600 the conceit. And it's pretty clear from tapes that were 0:10:19.640 --> 0:10:23.280 released after the fact that Burns, a huge Nixon loyalist, 0:10:23.400 --> 0:10:26.160 did in fact take that into consideration when setting monetary policy. 0:10:26.280 --> 0:10:27.599 And so the idea is, you just don't want to 0:10:27.640 --> 0:10:30.439 have these short term political considerations in place when you're 0:10:30.480 --> 0:10:34.280 doing something as important and potentially painful as fighting inflation, 0:10:34.440 --> 0:10:37.439 because it puts away your decision making in a way 0:10:37.440 --> 0:10:40.080 that allows inflation to become sort of entrenched in the economy. 0:10:40.120 --> 0:10:42.200 And we really saw in that episode that it was 0:10:42.559 --> 0:10:45.880 very difficult to get inflation out once it had been 0:10:45.960 --> 0:10:48.840 so ingrained in economy. There was what people now refer 0:10:48.960 --> 0:10:51.880 to as this inflationary psychology that got just sort of 0:10:51.960 --> 0:10:55.280 really dug in and took a big recession to wipe out. 0:11:12.520 --> 0:11:15.000 Let me sort of like zoom up a bit towards 0:11:15.120 --> 0:11:17.560 the present day, and I'm we're happy to go back 0:11:17.720 --> 0:11:20.680 into the history because I think that's interesting. But one 0:11:21.200 --> 0:11:23.920 dynamic that feels real, and tell me if I'm wrong, 0:11:24.160 --> 0:11:28.120 is that one nice thing about the FED is that 0:11:28.200 --> 0:11:30.760 it can sort of just move, and that there is like, 0:11:31.000 --> 0:11:33.679 I think people have very low expectations for what Congress 0:11:33.800 --> 0:11:35.840 can do on anything these days. It's sort of like 0:11:36.160 --> 0:11:38.120 every once in a while you get a window where 0:11:38.160 --> 0:11:42.160 one party controls the White House and both Houses of Congress, 0:11:42.160 --> 0:11:44.640 and then they have a limited political capital to spend, 0:11:45.200 --> 0:11:48.520 whereas in theory, the FED can just move very fast, 0:11:48.559 --> 0:11:51.080 and we saw that in the middle of March twenty twenty, 0:11:51.080 --> 0:11:54.520 for example. How much of the sort of accumulation of 0:11:54.679 --> 0:11:57.600 powers that the FED has, particularly over the last fifteen 0:11:57.679 --> 0:12:00.920 years during a period of like deep partisan division, is 0:12:00.960 --> 0:12:05.880 simply a function of well, it's one institution in DC 0:12:06.480 --> 0:12:09.480 that is not riven by partisan gridlock. Yeah, So I 0:12:09.520 --> 0:12:11.200 think this is sort of the central conceit of my 0:12:11.240 --> 0:12:13.680 book is we've built up all these powers over a 0:12:13.720 --> 0:12:16.640 time basically because they always made sense in the moment, 0:12:16.679 --> 0:12:19.560 and now we're using them all simultaneously because of the 0:12:19.600 --> 0:12:22.560 situation in Washington, and so I think, you know, everything 0:12:22.559 --> 0:12:24.920 we've talked about so far, so nineteen thirteen we're set 0:12:25.000 --> 0:12:28.319 up to guard against banking crises. Nineteen thirties, we really 0:12:28.520 --> 0:12:31.240 deepen those powers to guard against banking crises because that's 0:12:31.280 --> 0:12:33.599 the problem of the day. Nineteen fifties, the problem of 0:12:33.600 --> 0:12:36.240 the day is increasingly inflation. Nineteen seventies, that is the 0:12:36.280 --> 0:12:38.360 big problem. And so you have sort of these like 0:12:38.480 --> 0:12:40.840 ebbs and flows where everybody's focused, everyone at the fedest 0:12:40.840 --> 0:12:43.079 focused on banking crises, then everyone at the fetist focused 0:12:43.120 --> 0:12:45.760 on inflation. Suddenly we get to the modern era and 0:12:46.080 --> 0:12:48.439 everything is suddenly the FEDE job. You know, we're very 0:12:48.440 --> 0:12:51.400 concerned with sort of the monetary policy management portion here, 0:12:51.559 --> 0:12:54.160 but we're also using them pretty aggressively to fend off 0:12:54.200 --> 0:12:56.840 financial crises and moments of financial crises. And I think 0:12:56.880 --> 0:12:59.679 a lot of the reason for that is because some 0:12:59.720 --> 0:13:01.120 of the things that they can do in moments of 0:13:01.160 --> 0:13:03.920 financial crisis are a lot easier than coming to some 0:13:03.960 --> 0:13:07.000 sort of agreement on Capitol Hill on either a bank 0:13:07.040 --> 0:13:10.120 regulation that might preempt some of those financial problems, or 0:13:10.240 --> 0:13:14.079 be some sort of bailout for the institutions that are 0:13:14.080 --> 0:13:18.080 a problem. So it's a small miracle whenever Congress manages 0:13:18.320 --> 0:13:20.960 to pass a law and yet the Fed can announce 0:13:21.080 --> 0:13:25.480 like a trillion dollar program. It seems almost overnight. Why 0:13:25.640 --> 0:13:27.840 is that. Talk to us a little bit more about 0:13:27.880 --> 0:13:32.040 the process and what limitations, if any, there actually are. 0:13:32.240 --> 0:13:34.559 I guess the clue is in the name of your 0:13:34.559 --> 0:13:38.000 book limitless. But if there are limitations or constraints in 0:13:38.080 --> 0:13:40.959 what the FED can do, Yeah, so there are some limitations, 0:13:41.000 --> 0:13:43.400 but I think that they're actually often exaggerated, even by 0:13:43.440 --> 0:13:46.240 the experts who know a lot about this. So in 0:13:46.320 --> 0:13:49.439 moments of extreme crisis, the FED basically has to get 0:13:49.440 --> 0:13:53.679 a declaration that we are in an unusual and exigent circumstance, 0:13:54.200 --> 0:13:56.040 and it then has to get sign off from the 0:13:56.040 --> 0:13:58.840 Treasury Secretary in order to set up an emergency lending 0:13:58.880 --> 0:14:02.840 facility to help in organization or entity. The facility has 0:14:02.880 --> 0:14:05.840 to be broad based, which lawyers generally mean think means 0:14:05.880 --> 0:14:08.120 about five institutions would have to be able to tap 0:14:08.160 --> 0:14:10.959 it and the FED has to be secured to its satisfaction, 0:14:11.200 --> 0:14:15.000 which means that it can't expect to lose money depending 0:14:15.000 --> 0:14:18.719 on whatever it's defining as its satisfaction. Most lawyers at 0:14:18.720 --> 0:14:20.560 the FED will tell you that this means they can't 0:14:20.600 --> 0:14:23.520 lose money. Lawyers outside the FED will say, that's kind 0:14:23.560 --> 0:14:25.720 of dicey. We're not actually sure that that's true. I 0:14:25.720 --> 0:14:28.200 mean that has always seemed to be really fluid, because 0:14:28.240 --> 0:14:31.200 I remember post two thousand and eight, when the FED 0:14:31.400 --> 0:14:34.360 was doing one of its bond buying programs. Oh, it 0:14:34.400 --> 0:14:37.520 was buying mortgage backed securities mbs, and it said it 0:14:37.600 --> 0:14:41.000 was only buying investment grade mbs. And I remember looking 0:14:41.080 --> 0:14:45.360 up each individual q set for like a week and 0:14:45.560 --> 0:14:48.120 seeing that some of it wasn't investment grade when the 0:14:48.120 --> 0:14:51.720 FED bought it. But it didn't seem that concerned with 0:14:51.880 --> 0:14:54.360 that aspect of the program. Yeah, that's and that was 0:14:54.360 --> 0:14:57.000 actually technically quey. But I think the same basic rules 0:14:56.960 --> 0:15:01.000 supply with these emergency lending facilities. They really are pretty broad, though. 0:15:01.080 --> 0:15:03.480 There's so I think I'm really interesting. The example here 0:15:03.560 --> 0:15:05.360 that comes up a lot is there is this one 0:15:05.400 --> 0:15:07.880 program within the nerdiest name of all time. I think 0:15:07.880 --> 0:15:10.280 because nobody wants to talk about it, but it's the 0:15:10.400 --> 0:15:12.600 term asset loan facility, and basically what it does is 0:15:12.600 --> 0:15:16.240 it buys like it takes honest collateral bundle towns. I 0:15:16.280 --> 0:15:19.920 remember TAP, yeah, yeah, And so we used it twice. 0:15:19.920 --> 0:15:21.280 We used it in two thousand and eight. We used 0:15:21.280 --> 0:15:23.320 it again in twenty twenty. The two thousand and eight 0:15:23.440 --> 0:15:26.320 version was collateralized by the private sector. The FED didn't 0:15:26.360 --> 0:15:28.840 have any government money backing that up. And that's always 0:15:28.880 --> 0:15:30.880 sort of the idea is that, oh, well, there's some 0:15:30.920 --> 0:15:33.560 constraints in here because Congress has to appropriate some money 0:15:33.600 --> 0:15:37.200 to back up these facilities. That's clearly not technically true 0:15:37.200 --> 0:15:39.360 based on the way we've actually done this in the past, 0:15:39.880 --> 0:15:42.160 And so I think there are fewer limits then maybe 0:15:42.160 --> 0:15:45.440 we appreciate. But the one thing that does seem to 0:15:45.480 --> 0:15:48.280 be a real limit is the FED doesn't really have 0:15:48.400 --> 0:15:51.600 a way of just like giving household buying power, which 0:15:51.640 --> 0:15:54.440 of course was a really powerful aspect. It would seem 0:15:54.920 --> 0:15:57.560 of the V shaped recovery we saw it coming out 0:15:57.560 --> 0:16:01.160 of twenty twenty. It was a probable a big aspect 0:16:01.160 --> 0:16:03.160 of the very slow recovery we saw out of two 0:16:03.200 --> 0:16:06.920 thousand and nine, the very modest fiscal stimulas, especially in retrospect, 0:16:07.240 --> 0:16:10.360 not even a trillion from the Obama administration. And it 0:16:10.400 --> 0:16:12.960 feels like a lot of the frustration that people have 0:16:13.000 --> 0:16:16.200 towards the FIT is that it does, on some sense 0:16:16.200 --> 0:16:19.880 seem to be limitless designing these new programs, but actually 0:16:19.920 --> 0:16:22.520 the one thing that might actually move the dial big 0:16:22.560 --> 0:16:26.120 time or meaningfully from a macro perspective, give people money. 0:16:26.320 --> 0:16:27.720 That's still like the one thing they don't really have 0:16:27.720 --> 0:16:30.280 any way of doing right, lending not spending. It is 0:16:30.360 --> 0:16:33.760 sort of the phrase Jo repeats at nauseam. They can lend, 0:16:33.840 --> 0:16:36.760 they cannot spend. You can do lending in ways that 0:16:36.840 --> 0:16:39.240 look a little bit like spending, you know. I think 0:16:39.240 --> 0:16:42.160 we saw some push to do that during the depths 0:16:42.200 --> 0:16:44.880 of twenty twenty, like there were some ideas about making 0:16:45.080 --> 0:16:49.360 loans to municipalities really long termed and really low rate, 0:16:49.760 --> 0:16:52.320 and we didn't actually see them take up that up 0:16:52.360 --> 0:16:55.080 too much. I think they still very much see themselves 0:16:55.080 --> 0:16:57.400 as backstop entities who shouldn't be used in that way 0:16:57.400 --> 0:17:00.600 because it's just too close to fiscal policy. But again, 0:17:00.640 --> 0:17:03.120 I think that's more of a personnel choice that's being 0:17:03.160 --> 0:17:07.240 made versus something that is necessarily legally extremely required, which 0:17:07.240 --> 0:17:09.000 I think is an interesting thing to talk about. And 0:17:09.280 --> 0:17:13.160 I think that, you know, the interesting thing to watch 0:17:13.480 --> 0:17:15.879 is how are these programs used in the future. You know, 0:17:16.000 --> 0:17:18.080 will they continue to see them as this backstop? Do 0:17:18.119 --> 0:17:21.640 they think this fiscal separation is very important? So just 0:17:21.720 --> 0:17:23.560 on that topic, I mean, one of the things that 0:17:23.600 --> 0:17:26.280 you will sometimes hear people in markets talk about is 0:17:26.280 --> 0:17:29.639 this idea of the FED getting bang for its book. 0:17:30.160 --> 0:17:32.920 And I guess it was most salient maybe with the 0:17:33.000 --> 0:17:36.560 corporate bond buying program, where they announced, you know, we 0:17:36.800 --> 0:17:40.399 could spend this much buying up corporate bonds to stabilize 0:17:40.480 --> 0:17:43.440 the market. But in practice, I think I can't even 0:17:43.440 --> 0:17:46.240 remember the exact number. You might know it, but it 0:17:46.640 --> 0:17:49.399 was a fraction of the announced amount that they could do. 0:17:49.560 --> 0:17:52.479 And just by virtue of saying that they were going 0:17:52.520 --> 0:17:56.600 to backstop the market, they brought in credit spreads very, 0:17:56.720 --> 0:18:01.119 very dramatically. Is that always going to be the case 0:18:01.520 --> 0:18:04.560 or is there a possibility that as the FED takes 0:18:04.560 --> 0:18:07.520 on more and more responsibilities and if it maybe has 0:18:07.560 --> 0:18:10.880 to use these things over and over again, that sort 0:18:10.920 --> 0:18:14.320 of firepowers starts to dissipate. I think This is such 0:18:14.359 --> 0:18:16.560 an interesting question, and I do not pretend to be 0:18:16.680 --> 0:18:18.399 enough of an expert at market it's to have a 0:18:18.440 --> 0:18:20.760 great answer to it. But I've talked to a lot 0:18:20.760 --> 0:18:22.720 of people about this, and I think you actually get 0:18:22.760 --> 0:18:25.320 a range of opinions. There are some people who say, 0:18:25.400 --> 0:18:27.720 you know, they're such a credible lender of last resort 0:18:27.760 --> 0:18:30.520 that this is basically going to stay this way, that 0:18:30.640 --> 0:18:34.520 you know, we people it'll work forever. Yeah, people believe them. 0:18:34.840 --> 0:18:37.199 I think other people will sometimes point you towards some 0:18:37.280 --> 0:18:39.480 of the treasury market dysfunction that we saw really early 0:18:39.520 --> 0:18:42.400 in the crisis, where it didn't seem like people were 0:18:42.760 --> 0:18:46.359 being completely reassured. And I actually think that's an interesting 0:18:46.560 --> 0:18:51.320 distinction because I think that speaks to sort of market fragmentation, 0:18:51.840 --> 0:18:54.240 you know, it just to sort of rewind the tape here, 0:18:54.240 --> 0:18:57.399 back in twenty twenty, people were dumping treasuries. It wasn't 0:18:57.400 --> 0:19:00.000 like one or two entities, and they weren't necessarily all 0:19:00.160 --> 0:19:03.320 US based dumping treasuries. It was everybody. It was hedge 0:19:03.320 --> 0:19:05.720 funds who had basis trades on, it was a lot 0:19:05.720 --> 0:19:07.760 of international holders. A lot of the selling was coming 0:19:07.760 --> 0:19:10.280 out of like the Cayman islands, and so I think 0:19:10.280 --> 0:19:12.480 there was this real sort of signal problem where the 0:19:12.480 --> 0:19:14.439 FED might be stepping up. You might be pretty familiar 0:19:14.480 --> 0:19:16.560 with what the Fed's doing, but there was this idea like, 0:19:16.840 --> 0:19:18.840 you know, how aggressively are they going to do this? 0:19:18.960 --> 0:19:21.280 Can we trust them? You know, there's so many entities 0:19:21.359 --> 0:19:23.439 having trouble coordinating at the same time. And so I 0:19:23.480 --> 0:19:25.880 do think those market structure issues kind of do matter, 0:19:25.920 --> 0:19:29.800 because FED efficacy could be different if market structure changes 0:19:29.840 --> 0:19:33.160 and becomes more fragmented. I want to get back actually 0:19:33.280 --> 0:19:35.520 to the munique backstop that we saw in twenty twenty, 0:19:35.560 --> 0:19:38.840 which was like a pretty novel, you know, further extending 0:19:38.840 --> 0:19:42.679 of the power, kind of a novel policy intervention. And 0:19:42.800 --> 0:19:44.879 one of these areas that did seem to like is 0:19:44.960 --> 0:19:47.919 this fiscal policy is a monetary policy. It's kind of 0:19:47.920 --> 0:19:51.119 fiscal if you're allowing fiscal authorities to spend money, you know, 0:19:51.640 --> 0:19:54.320 for obvious ways. But the question I have is like, 0:19:54.560 --> 0:19:57.240 when they're thinking about, well, where is the boundary, where's 0:19:57.280 --> 0:20:01.359 the border between what monetary versus lending? Do they like? 0:20:01.760 --> 0:20:03.920 And I've asked this question to others and I'm still 0:20:03.960 --> 0:20:05.919 trying to wrap my head around it. Do they think 0:20:05.960 --> 0:20:08.439 about where they want to go and then backfill the 0:20:08.520 --> 0:20:11.880 legal justification, or do they look at the law and 0:20:11.920 --> 0:20:15.120 then determine how far the law allows them to go? Yeah, 0:20:15.160 --> 0:20:17.760 so I think we've seen that very somewhat by crisis. 0:20:18.600 --> 0:20:20.800 I think in two thousand and eight, I would say 0:20:20.800 --> 0:20:23.600 it was definitely the latter, And I actually think that's 0:20:23.640 --> 0:20:26.119 pretty well documented at this point. Like I think if 0:20:26.160 --> 0:20:29.320 you read like the more recent Burnet keybook for example, 0:20:29.440 --> 0:20:32.800 I think that pretty clearly they took very seriously, very 0:20:32.840 --> 0:20:35.119 seriously this idea that there were things they might have 0:20:35.160 --> 0:20:37.439 wanted to do that well, they knew, they knew what 0:20:37.520 --> 0:20:40.080