1 00:00:10,280 --> 00:00:13,520 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast. 2 00:00:13,600 --> 00:00:16,560 Speaker 1: I'm Tracy Alloway and I'm Joe. Isn't all Joe? I 3 00:00:16,600 --> 00:00:21,320 Speaker 1: feel like in our current period of high inflation, bond 4 00:00:21,360 --> 00:00:25,440 Speaker 1: market volatility, tension between you know, central banks, and UH 5 00:00:25,760 --> 00:00:28,920 Speaker 1: fiscal stimulus, all of that, I feel like people tend 6 00:00:28,960 --> 00:00:32,400 Speaker 1: to have their favorite historical analogies that they reach for 7 00:00:32,640 --> 00:00:36,479 Speaker 1: to try to explain what we're experiencing now. Everyone, whatever 8 00:00:36,520 --> 00:00:39,360 Speaker 1: it is, always says this is just like this, and 9 00:00:39,400 --> 00:00:41,720 Speaker 1: like I get it kind of, you know, like naturally 10 00:00:41,720 --> 00:00:43,879 Speaker 1: this say is what we do. But I also think, like, 11 00:00:44,159 --> 00:00:46,400 Speaker 1: you know, there's that danger of like knowing too much history, 12 00:00:46,440 --> 00:00:49,040 Speaker 1: which is if you know your history, you think it's repeating. 13 00:00:49,479 --> 00:00:52,040 Speaker 1: That's right. I mean the one that everyone seems to 14 00:00:52,040 --> 00:00:54,640 Speaker 1: reach for is the seventies, right, like, oh, this is 15 00:00:54,680 --> 00:00:57,280 Speaker 1: just like the seventies, We need a Paul Vulcer to 16 00:00:57,400 --> 00:01:00,600 Speaker 1: come and really tamp down inflation. And then the other 17 00:01:00,640 --> 00:01:03,400 Speaker 1: one that I'm kind of partial to this one the 18 00:01:03,480 --> 00:01:07,080 Speaker 1: nineteen eighteen Spanish flu. Who can forget the period after 19 00:01:07,120 --> 00:01:10,200 Speaker 1: that in World War One ended up with the high 20 00:01:10,280 --> 00:01:13,600 Speaker 1: inflation and then it flipped into deflation. You know, the 21 00:01:13,600 --> 00:01:16,800 Speaker 1: other one that I think about. Two is the Euro 22 00:01:16,880 --> 00:01:19,640 Speaker 1: Area crisis and the tensions. You know what they had 23 00:01:19,680 --> 00:01:21,880 Speaker 1: to do sort of like plumbing wise, what Mario drag 24 00:01:22,200 --> 00:01:24,520 Speaker 1: had to do in terms of like sort of recreating 25 00:01:24,520 --> 00:01:28,400 Speaker 1: the European sovereign bond structure on the fly to improve 26 00:01:28,440 --> 00:01:31,640 Speaker 1: the transmission of monetary policy. I think some of these 27 00:01:31,680 --> 00:01:33,399 Speaker 1: issues are also coming up. We really see it in 28 00:01:33,400 --> 00:01:35,920 Speaker 1: the UK specifically. Yeah, that's a good one. I hadn't 29 00:01:35,959 --> 00:01:38,800 Speaker 1: considered that. But today, on that note, we are going 30 00:01:38,840 --> 00:01:42,080 Speaker 1: to be speaking about a historic parallel that hardly ever 31 00:01:42,200 --> 00:01:46,840 Speaker 1: gets mentioned. It is the year one specific year ninety three. 32 00:01:47,120 --> 00:01:50,280 Speaker 1: I don't know anything that happened in I would never 33 00:01:50,760 --> 00:01:52,760 Speaker 1: you could have guessed, asked me any year in the 34 00:01:52,840 --> 00:01:57,600 Speaker 1: nineteen hundreds and I would not have Yeah, what happened here? 35 00:01:57,640 --> 00:01:59,680 Speaker 1: All right? So it turns out nineteen fifty three was 36 00:01:59,720 --> 00:02:02,560 Speaker 1: actually a seminal year for global finance for reasons that 37 00:02:02,720 --> 00:02:06,600 Speaker 1: I will not get into right now, but specifically because 38 00:02:06,760 --> 00:02:10,560 Speaker 1: it ended up with a policy decision that still has 39 00:02:10,639 --> 00:02:14,680 Speaker 1: relevance today. So not only was the US specifically in 40 00:02:14,680 --> 00:02:19,959 Speaker 1: the nineteen fifties facing high inflation, tension between employment and prices, 41 00:02:19,960 --> 00:02:23,720 Speaker 1: things like that, but we also had an outcome that 42 00:02:23,760 --> 00:02:27,280 Speaker 1: has sort of like echoed across the decades ever since 43 00:02:27,480 --> 00:02:29,640 Speaker 1: I want to learn more. I'm ready. All right, Well, 44 00:02:29,680 --> 00:02:32,680 Speaker 1: we really do have the perfect guests to explain nineteen 45 00:02:32,760 --> 00:02:35,520 Speaker 1: fifty three and it's relevance to today to us. We 46 00:02:35,520 --> 00:02:38,160 Speaker 1: are going to be speaking with Josh Younger. He is 47 00:02:38,200 --> 00:02:41,800 Speaker 1: the global head of Asset and Liability Management, Research and 48 00:02:41,880 --> 00:02:45,200 Speaker 1: Strategy at JP Morgan. He has also a repeat all 49 00:02:45,200 --> 00:02:47,680 Speaker 1: thoughts guests. He's no getting up there like this is. 50 00:02:47,760 --> 00:02:50,440 Speaker 1: He's become not quite in the lead, but getting close alright, 51 00:02:50,440 --> 00:02:52,760 Speaker 1: one of our favorites. So Josh, welcome back to the show. 52 00:02:52,919 --> 00:02:55,440 Speaker 1: That's great to be back in studio, which is more exciting. 53 00:02:55,840 --> 00:03:00,160 Speaker 1: So this is just your hobby now it's researching financial history. 54 00:03:00,280 --> 00:03:02,880 Speaker 1: I needed to know hobby basically, Um, yeah, it's it's 55 00:03:02,919 --> 00:03:05,600 Speaker 1: just for fun. And there's so much you can do online, 56 00:03:05,639 --> 00:03:07,120 Speaker 1: Like it's sin's weird to say that the internet's a 57 00:03:07,120 --> 00:03:09,440 Speaker 1: wonderful thing. Like you can pull up basically anything, and 58 00:03:09,919 --> 00:03:11,720 Speaker 1: the Federals, your bank at St. Louis, has been very 59 00:03:11,800 --> 00:03:14,320 Speaker 1: kind to provide like an enormous quantity of documents and 60 00:03:14,400 --> 00:03:16,799 Speaker 1: data so you don't have to get Dusty and archives. 61 00:03:16,840 --> 00:03:18,480 Speaker 1: You can just search it. This is what I should 62 00:03:18,480 --> 00:03:20,600 Speaker 1: be doing instead of just scrolling Twitter at night and 63 00:03:20,639 --> 00:03:23,600 Speaker 1: playing playing chess online. I need to go on the 64 00:03:23,600 --> 00:03:26,320 Speaker 1: New York Times way back machine and see what bond 65 00:03:26,320 --> 00:03:29,760 Speaker 1: market volatility was like in the early nineteen fifties. Well, okay, 66 00:03:29,800 --> 00:03:34,920 Speaker 1: on this note, Josh why nine specifically, he has a 67 00:03:34,920 --> 00:03:37,320 Speaker 1: lot of relevance in general. So that's the year where 68 00:03:37,360 --> 00:03:40,040 Speaker 1: the European country start opening up their imports to to 69 00:03:40,200 --> 00:03:43,160 Speaker 1: the dollar zone. It's the lended debt deal with the 70 00:03:43,160 --> 00:03:45,800 Speaker 1: Germans after the war around German debt um. But it's 71 00:03:45,800 --> 00:03:48,440 Speaker 1: also one of the years where the Feed is really 72 00:03:48,440 --> 00:03:50,680 Speaker 1: forced to make a really important decision. So it's where 73 00:03:51,240 --> 00:03:53,200 Speaker 1: a lot of their desire to get out of the 74 00:03:53,240 --> 00:03:54,760 Speaker 1: bond market. I'm sure we'll talk about what they did 75 00:03:54,840 --> 00:03:56,880 Speaker 1: during the Second World War. It's a very controlled market. 76 00:03:56,960 --> 00:04:00,400 Speaker 1: It's very heavily um managed by the Fed at an 77 00:04:00,400 --> 00:04:02,840 Speaker 1: active basis. They really pegged yields on the long end, 78 00:04:02,880 --> 00:04:05,960 Speaker 1: and getting out of that is complicated. And in fifty 79 00:04:05,960 --> 00:04:07,560 Speaker 1: three is when the market really tests them. So we 80 00:04:07,560 --> 00:04:10,560 Speaker 1: didn't have to don't fight the Fed mantra quite quite yet. 81 00:04:10,600 --> 00:04:13,160 Speaker 1: At that point But this is like a really interesting 82 00:04:13,200 --> 00:04:17,520 Speaker 1: philosophical question right here, because there's always this question today 83 00:04:17,560 --> 00:04:20,880 Speaker 1: or in any period, to what degree is the rate 84 00:04:20,920 --> 00:04:23,200 Speaker 1: that we see on a ten year, on a thirty year, 85 00:04:23,240 --> 00:04:26,640 Speaker 1: on a two year a policy rate verse a market rate. 86 00:04:26,880 --> 00:04:30,240 Speaker 1: Before we get to fifty three, specifically, can you just 87 00:04:30,279 --> 00:04:32,560 Speaker 1: talk a little bit more about what you're what you 88 00:04:32,680 --> 00:04:36,840 Speaker 1: said about how rates across the curve were essentially policy rates. Yeah, 89 00:04:36,880 --> 00:04:38,560 Speaker 1: there's when we think about a tenure rate, like you 90 00:04:38,600 --> 00:04:40,520 Speaker 1: could do one of two things. You can roll treasury 91 00:04:40,560 --> 00:04:42,600 Speaker 1: bills every three months for ten years, or you can 92 00:04:42,600 --> 00:04:45,920 Speaker 1: buy a tenure bond. So in a perfect world, those 93 00:04:45,920 --> 00:04:48,720 Speaker 1: two things are connected through expectations. Uh. And then there's 94 00:04:48,760 --> 00:04:51,680 Speaker 1: this question of should I involve some a little premium 95 00:04:51,680 --> 00:04:54,080 Speaker 1: on top of them, right, the term premium, which is 96 00:04:54,120 --> 00:04:56,360 Speaker 1: unlocking my up my money up for ten years. I 97 00:04:56,440 --> 00:04:58,720 Speaker 1: might be wrong in my expectations, and so I should 98 00:04:58,760 --> 00:05:01,440 Speaker 1: probably be paid for that at least little excess over 99 00:05:01,440 --> 00:05:05,400 Speaker 1: the expectations. And so they're connected. Most of the tenure 100 00:05:05,440 --> 00:05:08,440 Speaker 1: eight is an expectation. Those expectations are often wrong, but 101 00:05:08,520 --> 00:05:11,160 Speaker 1: you know that's a that's a separate issue, um. But 102 00:05:11,600 --> 00:05:13,839 Speaker 1: there is a policy lever and on the on the 103 00:05:13,839 --> 00:05:15,840 Speaker 1: other hand, there's the market level, which is a term premium, 104 00:05:15,839 --> 00:05:18,120 Speaker 1: their demand to actually buy the bond in the first place. 105 00:05:18,520 --> 00:05:21,200 Speaker 1: So talk to us then about the state of the 106 00:05:21,240 --> 00:05:23,600 Speaker 1: bond market. You know, coming out of World War Two 107 00:05:23,720 --> 00:05:26,520 Speaker 1: into the nineteen fifties, you mentioned that the Fed had 108 00:05:26,600 --> 00:05:31,680 Speaker 1: imposed yield curve control um basically to finance the wartime deficit. 109 00:05:31,720 --> 00:05:34,880 Speaker 1: They were trying to move off of that. Again, these 110 00:05:34,880 --> 00:05:38,200 Speaker 1: are all sort of familiar themes to anyone in two, 111 00:05:38,320 --> 00:05:41,120 Speaker 1: But why was that difficult for them? Well, so let's 112 00:05:41,120 --> 00:05:44,159 Speaker 1: get a sense of scale, right, So in in ninette, 113 00:05:44,480 --> 00:05:48,440 Speaker 1: there's about forty billion dollars with the treasury outstanding. There's 114 00:05:48,480 --> 00:05:51,360 Speaker 1: about two and forty billion dollars where the treasury is outstanding. 115 00:05:51,440 --> 00:05:55,120 Speaker 1: So that's about double the pre war p GDP. If 116 00:05:55,160 --> 00:05:58,599 Speaker 1: you scale that, say, okay, COVID expenditures on the scale 117 00:05:58,600 --> 00:06:01,359 Speaker 1: of World War two, that's about forty trillion dollars in 118 00:06:01,480 --> 00:06:03,560 Speaker 1: net treasury issuance. So we're talking about a lot of 119 00:06:03,600 --> 00:06:08,279 Speaker 1: debt um and the question is who's gonna buy yeah um, 120 00:06:08,360 --> 00:06:10,160 Speaker 1: And what we're dealing with is kind of nothing we 121 00:06:10,480 --> 00:06:12,240 Speaker 1: got in that context, and so that's where I guess 122 00:06:12,240 --> 00:06:15,039 Speaker 1: the analogy breaks down, not to start there for the episode, 123 00:06:15,080 --> 00:06:17,800 Speaker 1: but like, it's a very difficult problem, which is who's 124 00:06:17,839 --> 00:06:20,400 Speaker 1: going to buy the equivalent of forty trillion dollars today 125 00:06:20,520 --> 00:06:23,520 Speaker 1: in debt um, and one of those participants is the Fed. 126 00:06:23,680 --> 00:06:26,000 Speaker 1: So what the Fed says is in in further into 127 00:06:26,040 --> 00:06:29,520 Speaker 1: the war effort, we're gonna peg gields uh specifically the 128 00:06:29,560 --> 00:06:31,720 Speaker 1: front end, the one year point, and the long end. 129 00:06:31,839 --> 00:06:35,160 Speaker 1: So every tenure bond, for example, yields two an a 130 00:06:35,160 --> 00:06:37,920 Speaker 1: half percent or less because I'm willing to buy it 131 00:06:37,960 --> 00:06:40,360 Speaker 1: to an alf percent um. Every Treasury bill yelds three. 132 00:06:41,320 --> 00:06:43,000 Speaker 1: That's roughly where the curve was at the beginning of 133 00:06:43,000 --> 00:06:45,200 Speaker 1: the war. It was no like particular thought given to 134 00:06:45,279 --> 00:06:48,240 Speaker 1: that in terms of like fair value pricing. It was 135 00:06:48,240 --> 00:06:50,800 Speaker 1: just saying, wherever it is is where it's going to 136 00:06:50,880 --> 00:06:55,200 Speaker 1: stay until until conditions allow real quickly. How much actual 137 00:06:55,279 --> 00:06:58,640 Speaker 1: buying did they have to do versus the declaration of 138 00:06:58,680 --> 00:07:00,800 Speaker 1: the price essentially taking care of most of it. Yeah, 139 00:07:00,839 --> 00:07:02,880 Speaker 1: not that much. I mean they thought about twenty billion 140 00:07:02,880 --> 00:07:05,119 Speaker 1: dollars the Fed did over the course of that period. 141 00:07:05,160 --> 00:07:07,840 Speaker 1: Most of those were in bills actually, because bills at 142 00:07:07,839 --> 00:07:10,240 Speaker 1: three eights are not very appealing. Tenure bonds at two 143 00:07:10,240 --> 00:07:11,680 Speaker 1: and a half or a lot more appealing. So what 144 00:07:11,720 --> 00:07:14,320 Speaker 1: the market did was they extended. And actually the FED 145 00:07:14,400 --> 00:07:17,160 Speaker 1: was a net seller of long and boughts towards the 146 00:07:17,240 --> 00:07:19,320 Speaker 1: end of the war because deals were dipping below their 147 00:07:19,360 --> 00:07:22,000 Speaker 1: target m so, so it wasn't all buying, but they 148 00:07:22,000 --> 00:07:24,600 Speaker 1: owned something like the bill market by the end of 149 00:07:24,640 --> 00:07:27,120 Speaker 1: the war. Um. And they didn't really have a chance 150 00:07:27,160 --> 00:07:29,200 Speaker 1: to get out so easy because when you get out 151 00:07:29,200 --> 00:07:33,360 Speaker 1: of that situation, like, you can't just turn it off. Um. 152 00:07:33,480 --> 00:07:36,119 Speaker 1: And so there was this outstanding question, which is how 153 00:07:36,280 --> 00:07:37,960 Speaker 1: are we going to get out of the market and 154 00:07:38,040 --> 00:07:40,320 Speaker 1: not completely blow up bond markets in the in the 155 00:07:40,360 --> 00:07:42,120 Speaker 1: first instance, Like, how do we do this in the 156 00:07:42,200 --> 00:07:45,200 Speaker 1: right way? Well, so, how how did they try to 157 00:07:45,400 --> 00:07:49,040 Speaker 1: undertake that transition? I mean, nowadays you think about the 158 00:07:49,080 --> 00:07:51,840 Speaker 1: FED trying to wind down its balance sheet embark on 159 00:07:51,920 --> 00:07:55,720 Speaker 1: quantitative tightening. There's a lot of communication that comes ahead 160 00:07:55,720 --> 00:07:58,320 Speaker 1: of that. Was a similar thing, trying to broadcast to 161 00:07:58,360 --> 00:08:00,160 Speaker 1: the market this is how we're going to do it. 162 00:08:00,280 --> 00:08:03,000 Speaker 1: Please don't freak out. It was really fraught um So. 163 00:08:03,080 --> 00:08:04,680 Speaker 1: Ken Garbage has done a ton of work on this 164 00:08:04,840 --> 00:08:07,800 Speaker 1: and they really didn't fits and starts and very slowly, 165 00:08:07,800 --> 00:08:10,120 Speaker 1: so no one ever really imagined they do cold turkey 166 00:08:10,200 --> 00:08:12,760 Speaker 1: like that was never really considered. So what they said is, well, 167 00:08:12,840 --> 00:08:15,320 Speaker 1: let's start with bills um. And then the Treasury said, well, 168 00:08:15,320 --> 00:08:16,920 Speaker 1: we don't want to big bills. We like bills at 169 00:08:16,960 --> 00:08:19,160 Speaker 1: three eights uh. And and there was a back and 170 00:08:19,200 --> 00:08:21,320 Speaker 1: forth over a couple of years, and by I think 171 00:08:21,320 --> 00:08:24,440 Speaker 1: it was forty seven. Essentially the committee went to the 172 00:08:24,480 --> 00:08:26,400 Speaker 1: Treasury and said, we think this makes sense. We'll figure 173 00:08:26,440 --> 00:08:27,840 Speaker 1: it out for you, but we're going to do this 174 00:08:28,400 --> 00:08:30,320 Speaker 1: in two days. And so it was a kind of 175 00:08:30,400 --> 00:08:32,959 Speaker 1: unilateral decision by the committee. There was some sweet nurse 176 00:08:33,000 --> 00:08:36,000 Speaker 1: for the treasury, but the Fed basically told the Treasury 177 00:08:36,040 --> 00:08:38,360 Speaker 1: we're doing this whether you like it or not. Uh. 178 00:08:38,400 --> 00:08:40,839 Speaker 1: And then the debate moved on to the certificates of 179 00:08:41,080 --> 00:08:43,360 Speaker 1: indebtedness was roughly the one year point, so he said, well, 180 00:08:43,480 --> 00:08:47,320 Speaker 1: can that be released? And by around the fifty yearly fifties, 181 00:08:47,640 --> 00:08:48,960 Speaker 1: the front end of the curve out to the one 182 00:08:49,040 --> 00:08:50,880 Speaker 1: year point was free to float, so billy yields came 183 00:08:50,920 --> 00:08:53,840 Speaker 1: up into the one rate one one and a half 184 00:08:53,840 --> 00:08:56,160 Speaker 1: percent range, So it was kind of a market rate, 185 00:08:56,240 --> 00:08:58,200 Speaker 1: but the long end was still a two and a half, 186 00:08:58,559 --> 00:09:00,640 Speaker 1: and they hadn't figured out how to stilt that, and 187 00:09:00,640 --> 00:09:02,800 Speaker 1: that was most of the market um, even though the 188 00:09:03,040 --> 00:09:04,640 Speaker 1: FED to own most of the bill markets, so that 189 00:09:04,679 --> 00:09:07,680 Speaker 1: made it a little more straightforward. But um at the 190 00:09:07,679 --> 00:09:09,600 Speaker 1: long end, you know, that was most of the outstanding 191 00:09:09,600 --> 00:09:24,000 Speaker 1: debt at the time. So I'm just trying to understand 192 00:09:24,360 --> 00:09:27,000 Speaker 1: a little bit more. How much of the challenge of 193 00:09:27,320 --> 00:09:30,120 Speaker 1: for the Fed, of extricating itself to some extent from 194 00:09:30,200 --> 00:09:33,840 Speaker 1: the bond market was about the rates specifically, and what 195 00:09:33,840 --> 00:09:35,920 Speaker 1: that would do to the economy were rates to jump up, 196 00:09:36,480 --> 00:09:40,480 Speaker 1: versus who, um, whose balance sheet these assets would beyond? 197 00:09:40,480 --> 00:09:42,640 Speaker 1: It was both. So the Treasury just doesn't like the 198 00:09:42,679 --> 00:09:44,720 Speaker 1: idea of paying more, which is test of all. I mean, 199 00:09:44,720 --> 00:09:46,720 Speaker 1: they have a deficit to fund, and by the late 200 00:09:46,720 --> 00:09:49,720 Speaker 1: forties early fifties, the deficits standing again, so they paid 201 00:09:49,760 --> 00:09:51,959 Speaker 1: on their debt pretty fast. And then by the by 202 00:09:51,960 --> 00:09:54,080 Speaker 1: the early fifties you've got the Korean War, You've got 203 00:09:54,360 --> 00:09:57,040 Speaker 1: a tax bill that actually Truman vitas and has passed 204 00:09:57,040 --> 00:09:59,880 Speaker 1: over his objection to cut taxes, and so there's a 205 00:10:00,000 --> 00:10:04,280 Speaker 1: fiscal expansion going on. So that that's the treasuries and incentive. Now, 206 00:10:04,440 --> 00:10:06,480 Speaker 1: a lot of their documents suggested were also sensitive to 207 00:10:06,480 --> 00:10:10,360 Speaker 1: the feds concern around inflation um and inflation was under 208 00:10:10,400 --> 00:10:13,400 Speaker 1: control for about a year after the war because the 209 00:10:13,400 --> 00:10:16,079 Speaker 1: Office of Price Administration basically fixed the price of things. 210 00:10:16,559 --> 00:10:19,800 Speaker 1: They tried to renew that that organization to keep price 211 00:10:19,840 --> 00:10:23,480 Speaker 1: fixing in place. Truman decides it's not a strong enough bill. 212 00:10:23,880 --> 00:10:25,800 Speaker 1: He vetos it, but they can't come up with saying 213 00:10:25,800 --> 00:10:28,000 Speaker 1: that can pass the vetos, so it just expires. So 214 00:10:28,400 --> 00:10:32,079 Speaker 1: all prices are released at the same time. So shock therapy. 215 00:10:33,040 --> 00:10:35,920 Speaker 1: But I don't go well, okay on that note, I 216 00:10:35,920 --> 00:10:40,000 Speaker 1: mean the inflation of the late nineteen forties, early nineteen fifties, 217 00:10:40,080 --> 00:10:44,080 Speaker 1: how much of that was sort of supply chain issues, 218 00:10:44,240 --> 00:10:46,800 Speaker 1: you know, the transitioning of the U. S. Economy from 219 00:10:46,920 --> 00:10:49,680 Speaker 1: a wartime footing to one of peace, and then I 220 00:10:49,679 --> 00:10:52,559 Speaker 1: guess they went back to war relatively quickly given the 221 00:10:52,600 --> 00:10:57,960 Speaker 1: Korean situation versus actual debt monetization, because you know, the 222 00:10:57,960 --> 00:11:01,000 Speaker 1: FED was in the market buying back trudge, Yeah, it was. 223 00:11:01,120 --> 00:11:03,320 Speaker 1: It was. It's hard to make an attribution. I haven't 224 00:11:03,320 --> 00:11:05,720 Speaker 1: seen a good attribution. But you know, the other thing. 225 00:11:05,960 --> 00:11:08,319 Speaker 1: The FED bought twenty billion dollars worth of worth the 226 00:11:08,360 --> 00:11:11,760 Speaker 1: treasuries during the war of commercial banks bought se so 227 00:11:11,960 --> 00:11:14,199 Speaker 1: commercial banks are the real price fixtures in the treasury 228 00:11:14,240 --> 00:11:16,640 Speaker 1: market during the Second World War. And when when a 229 00:11:16,760 --> 00:11:19,199 Speaker 1: commercial bank buys the treasury bond, they create deposits on 230 00:11:19,240 --> 00:11:20,959 Speaker 1: the other side of that. So they didn't let loans 231 00:11:21,040 --> 00:11:24,240 Speaker 1: roll off and replace them with treasuries. They had new assets. 232 00:11:24,240 --> 00:11:27,520 Speaker 1: So the leverage in the banking system doubles in three years. 233 00:11:29,679 --> 00:11:31,920 Speaker 1: This is new money because deposits or money, right and 234 00:11:32,040 --> 00:11:35,160 Speaker 1: and some will talk about money's a spectrum, so deposits 235 00:11:35,160 --> 00:11:38,120 Speaker 1: are very close to the real paper money side of 236 00:11:38,320 --> 00:11:42,440 Speaker 1: that spectrum. Uh. And so there's a view at least 237 00:11:42,440 --> 00:11:44,800 Speaker 1: at the Treasury and the FED that that because banks 238 00:11:44,800 --> 00:11:49,079 Speaker 1: are so heavily supporting the market and market debt, that 239 00:11:49,080 --> 00:11:51,000 Speaker 1: that expansion of their balance sheets, expansion of the money 240 00:11:51,000 --> 00:11:53,360 Speaker 1: supply has generated a lot of inflation. So that's on 241 00:11:53,440 --> 00:11:57,160 Speaker 1: the demand side. Too much money. Um, we can debate monitorism, 242 00:11:57,200 --> 00:11:59,160 Speaker 1: I guess on a different episode, but they said there's 243 00:11:59,200 --> 00:12:00,719 Speaker 1: a big expansion of them to supply it at the 244 00:12:00,760 --> 00:12:02,760 Speaker 1: same time, like you go from guns to butter and 245 00:12:02,800 --> 00:12:05,720 Speaker 1: back and and that that's disruptive. So that's that's where 246 00:12:06,360 --> 00:12:08,880 Speaker 1: analogies come in. You're really moving the economy from a 247 00:12:08,960 --> 00:12:12,400 Speaker 1: very different production model UM in the year, and then 248 00:12:12,400 --> 00:12:14,160 Speaker 1: you're trying to bring it back and these things don't 249 00:12:14,200 --> 00:12:17,800 Speaker 1: start up that quickly. This is all so familiar. So okay, 250 00:12:17,800 --> 00:12:21,600 Speaker 1: so the FED doesn't want to be UM fixing the 251 00:12:21,640 --> 00:12:25,280 Speaker 1: price of all these assets. There's also this concern about 252 00:12:25,360 --> 00:12:29,760 Speaker 1: too much commercial bank leverage and valid or not. So 253 00:12:29,960 --> 00:12:32,520 Speaker 1: who else is there where where? What's the next step 254 00:12:32,559 --> 00:12:34,920 Speaker 1: here in terms of who enters the market. Yeah, so 255 00:12:35,160 --> 00:12:38,960 Speaker 1: the non bank investors are really domestic. So something like 256 00:12:39,040 --> 00:12:41,000 Speaker 1: less than one percent of the market for treasuries at 257 00:12:41,000 --> 00:12:42,800 Speaker 1: the end of the war needs to the late fifties 258 00:12:42,880 --> 00:12:45,480 Speaker 1: is owned by international investors. So you have to find 259 00:12:45,480 --> 00:12:48,760 Speaker 1: insurance companies and you know other there's not a great 260 00:12:48,800 --> 00:12:51,600 Speaker 1: deal of granularity in the old data, so it's basically 261 00:12:51,600 --> 00:12:54,280 Speaker 1: like it's a bank, it's an insurance company, it's the FED, 262 00:12:54,800 --> 00:12:57,680 Speaker 1: it's an international or it's somebody else. And so you 263 00:12:57,720 --> 00:12:59,559 Speaker 1: know that we don't have Pimcoes and black Rocks in 264 00:12:59,600 --> 00:13:03,160 Speaker 1: the world time UM and corporations are very important. Corporation 265 00:13:03,200 --> 00:13:04,880 Speaker 1: is very cash rich. Um, they have a lot of 266 00:13:04,880 --> 00:13:06,400 Speaker 1: money to invest, and so to find a place to 267 00:13:06,400 --> 00:13:08,480 Speaker 1: put it. But ultimately to an a half percent in 268 00:13:08,520 --> 00:13:11,560 Speaker 1: worldward inflations at ten is not particularly appealing. So what 269 00:13:11,679 --> 00:13:14,240 Speaker 1: happens in the bond market? I can imagine that, you know, 270 00:13:14,360 --> 00:13:16,760 Speaker 1: the combination of two and a half percent being not 271 00:13:16,800 --> 00:13:20,040 Speaker 1: that appealing, plus the Fed basically you know, making it 272 00:13:20,080 --> 00:13:22,240 Speaker 1: fairly clear that they would like to step back from 273 00:13:22,240 --> 00:13:25,880 Speaker 1: the market. I imagine that's a recipe for some drama. Yeah, 274 00:13:25,880 --> 00:13:28,520 Speaker 1: there were the what became the Accord of the Fed 275 00:13:28,520 --> 00:13:30,640 Speaker 1: Treasury Accord the Treasury Fed a cord. I'm not sure 276 00:13:30,679 --> 00:13:32,680 Speaker 1: what the order we're supposed to put in, but that's 277 00:13:32,679 --> 00:13:35,480 Speaker 1: in uh. And that's the result of a lot of 278 00:13:35,480 --> 00:13:38,400 Speaker 1: congressional pressure in the early fifties. So in nineteen fifty 279 00:13:38,960 --> 00:13:42,600 Speaker 1: the Banking Committee the Senate condads a hearing and make recommendations. 280 00:13:42,640 --> 00:13:45,559 Speaker 1: You know, that's thanks for being helpful kind of thing. Um. 281 00:13:45,679 --> 00:13:48,719 Speaker 1: And and the President gets involved, and there's just a 282 00:13:48,800 --> 00:13:51,920 Speaker 1: lot of concern that monetary policy is worsening a very 283 00:13:51,920 --> 00:13:56,120 Speaker 1: disruptive inflationary environment. And by early fifty one there's just 284 00:13:56,240 --> 00:13:59,280 Speaker 1: enough pressure on the the Treasury to get along that 285 00:13:59,360 --> 00:14:02,120 Speaker 1: they figure out. And one of the most important characters 286 00:14:02,120 --> 00:14:04,720 Speaker 1: in this debate is Bill Martin. So Bill Martin used 287 00:14:04,720 --> 00:14:06,880 Speaker 1: to run the York Stock Exchange in the thirties, so 288 00:14:06,920 --> 00:14:09,920 Speaker 1: he comes from a dealer background, he comes from the street. Um, 289 00:14:09,960 --> 00:14:13,160 Speaker 1: he goes in and runs the XM bank for for Truman, 290 00:14:13,200 --> 00:14:15,560 Speaker 1: and then he's brought into Treasury by by Snyder, who's 291 00:14:15,559 --> 00:14:18,360 Speaker 1: the Secretary of the Treasury at the time, initially as 292 00:14:18,400 --> 00:14:22,360 Speaker 1: an assistant Secretary for international affairs, but he quickly becomes 293 00:14:22,440 --> 00:14:24,440 Speaker 1: kind of a fixer. So he's kind of doing everything 294 00:14:24,480 --> 00:14:27,640 Speaker 1: and he's tasked by Snyder with liaising with the Federal 295 00:14:27,640 --> 00:14:31,000 Speaker 1: Reserve to figure out a way to get out of 296 00:14:31,000 --> 00:14:33,920 Speaker 1: the market. Um that it's amenable to both parties, Like, 297 00:14:33,960 --> 00:14:35,720 Speaker 1: what's the best way to do this? Because we kind 298 00:14:35,720 --> 00:14:37,560 Speaker 1: of have to do it now? So what did what 299 00:14:37,760 --> 00:14:40,800 Speaker 1: did he do? So he broke here it an arrangement 300 00:14:40,800 --> 00:14:44,320 Speaker 1: that came out as a very vague commitment. So they 301 00:14:44,320 --> 00:14:46,800 Speaker 1: basically just say like we've we've reached a full accord. 302 00:14:47,200 --> 00:14:48,760 Speaker 1: They don't say what that accord is other than to 303 00:14:48,760 --> 00:14:51,440 Speaker 1: say we're gonna stop monetizing the debt. So then us is, 304 00:14:51,440 --> 00:14:52,840 Speaker 1: how are actually gonna do this, but they do put 305 00:14:52,840 --> 00:14:55,440 Speaker 1: that up publicly and make a public commitment to free 306 00:14:55,440 --> 00:14:57,840 Speaker 1: the bond market UM and a couple of days later, 307 00:14:58,640 --> 00:15:00,600 Speaker 1: Martin is actually nominated to Chair of the FED because 308 00:15:00,640 --> 00:15:04,760 Speaker 1: mcape's deaths down, so he switches sides UM and he's 309 00:15:04,800 --> 00:15:07,600 Speaker 1: confirmed pretty quickly, and by by early April he's the 310 00:15:07,680 --> 00:15:10,600 Speaker 1: Chair of the Board of the FED and he's very 311 00:15:10,640 --> 00:15:12,840 Speaker 1: he's very committed to this inflation fighting thing, and in 312 00:15:12,880 --> 00:15:16,600 Speaker 1: his oath of office statement he says inflation is the 313 00:15:16,600 --> 00:15:19,560 Speaker 1: greatest threat, including the enemies beyond our borders or something 314 00:15:19,560 --> 00:15:22,480 Speaker 1: to that effect, which you know in in April one, 315 00:15:22,520 --> 00:15:25,400 Speaker 1: three days earlier, the Rosenbergs have been convicted. H you 316 00:15:25,400 --> 00:15:27,240 Speaker 1: don't get Joe Welsh saying, you know, have you no 317 00:15:27,320 --> 00:15:29,720 Speaker 1: decency sir to McCarthy until fifty four, So this is 318 00:15:29,720 --> 00:15:31,760 Speaker 1: the red Scare, and he's saying inflation is worse than 319 00:15:31,800 --> 00:15:35,560 Speaker 1: communism or implicitly and so like he's he's very much 320 00:15:36,000 --> 00:15:40,320 Speaker 1: committed to the cause, but the commitment is out there. 321 00:15:40,320 --> 00:15:41,720 Speaker 1: It's just the question of like how we're going to 322 00:15:41,760 --> 00:15:44,600 Speaker 1: execute this in practice, and that's where you know, the 323 00:15:44,680 --> 00:15:46,920 Speaker 1: changing of the guard at Treasury, the Eisenhower election, like 324 00:15:47,080 --> 00:15:49,440 Speaker 1: people have to get into the seat for the next 325 00:15:49,480 --> 00:15:52,040 Speaker 1: administration to actually affect the change in policy, because they 326 00:15:52,120 --> 00:15:54,880 Speaker 1: ultimately need to agree. Snider didn't like the idea of 327 00:15:54,920 --> 00:15:57,280 Speaker 1: ission above two and a half percent, So the Treasury 328 00:15:57,320 --> 00:15:59,800 Speaker 1: kept flooding the market with short term death uh and then, 329 00:16:00,040 --> 00:16:03,040 Speaker 1: and that was partially for regular debt management purposes. They 330 00:16:03,080 --> 00:16:04,760 Speaker 1: do some things around non market all to debt, to 331 00:16:04,800 --> 00:16:08,680 Speaker 1: get the bank debt bank holdings down, but ultimately there's 332 00:16:08,680 --> 00:16:11,920 Speaker 1: just a lot of institutional tension. At one point, Truman 333 00:16:12,040 --> 00:16:15,600 Speaker 1: takes Martin's side at some event and says, you're a trader, right, 334 00:16:15,720 --> 00:16:18,680 Speaker 1: gets very much in his face. Um. So it's it's 335 00:16:18,680 --> 00:16:21,960 Speaker 1: a very like fraught situation. I feel like I'm listening 336 00:16:21,960 --> 00:16:24,880 Speaker 1: to a really good, like campfire story. This is good. 337 00:16:24,920 --> 00:16:26,280 Speaker 1: I just wanted to just I don't even want to 338 00:16:26,280 --> 00:16:30,720 Speaker 1: ask any questions. I just want to hear what happens next? Okay, well, 339 00:16:30,920 --> 00:16:33,200 Speaker 1: what happens? What happens next? I mean, on that note, 340 00:16:33,240 --> 00:16:35,280 Speaker 1: you can imagine at some point the Treasury goes back 341 00:16:35,320 --> 00:16:38,800 Speaker 1: to selling longer term, right, and how does the market 342 00:16:39,000 --> 00:16:41,840 Speaker 1: take that? So that's an Eisenhower administration thing that they're 343 00:16:42,080 --> 00:16:45,400 Speaker 1: part of. Eisenhower's election is about inflation. Actually, one of 344 00:16:45,400 --> 00:16:47,680 Speaker 1: the first television commercials ever got sent to a general 345 00:16:47,720 --> 00:16:50,960 Speaker 1: audience is about inflation. Is Eisenharer saying, my grandmother doesn't 346 00:16:50,960 --> 00:16:52,760 Speaker 1: like the inflation. That's why I say it's time for 347 00:16:52,800 --> 00:16:56,720 Speaker 1: a change. There's a central plank of his presidential campaign. 348 00:16:56,960 --> 00:17:01,840 Speaker 1: Eisenhower answers, America, you know what things cost today? High 349 00:17:01,880 --> 00:17:06,000 Speaker 1: prices are just driving me crazy. Yes, my Nami gets 350 00:17:06,040 --> 00:17:08,520 Speaker 1: after me about the high cost of living. And he 351 00:17:08,600 --> 00:17:12,359 Speaker 1: nominates not only Humphrey, who's committed to fighting inflation, but 352 00:17:12,400 --> 00:17:14,479 Speaker 1: a bunch of x FED people. So he brings them 353 00:17:14,480 --> 00:17:17,000 Speaker 1: people in from the New York FED and other places 354 00:17:17,080 --> 00:17:20,560 Speaker 1: to be senior advisors under secretaries. And so, you know, 355 00:17:20,600 --> 00:17:23,399 Speaker 1: the news media at the time speculates the FED is 356 00:17:23,440 --> 00:17:26,560 Speaker 1: like one this argument as to the relative benefits of 357 00:17:26,600 --> 00:17:29,240 Speaker 1: low cost of debt service versus inflation. So inflation is 358 00:17:29,280 --> 00:17:33,719 Speaker 1: the priority. So the changing of the administration changes the priorities. Uh, 359 00:17:33,720 --> 00:17:35,040 Speaker 1: And they come and they say, we need to find 360 00:17:35,080 --> 00:17:37,199 Speaker 1: non bank investors. We need to find a way to 361 00:17:37,240 --> 00:17:39,399 Speaker 1: sell long term debt that doesn't inflate the size of 362 00:17:39,400 --> 00:17:42,159 Speaker 1: the banking system. And by extension, the money supply and 363 00:17:42,200 --> 00:17:45,880 Speaker 1: by extension the price um price pressures. And and their 364 00:17:45,920 --> 00:17:48,159 Speaker 1: solution is to reintroduce the bond. They hadn't issued long 365 00:17:48,240 --> 00:17:51,200 Speaker 1: term debt since forty five uh and and they want 366 00:17:51,240 --> 00:17:53,679 Speaker 1: to bring back the bond uh And the question is 367 00:17:53,720 --> 00:17:55,960 Speaker 1: how do you figure out the right way to do 368 00:17:56,000 --> 00:17:58,560 Speaker 1: that because the market is not used to buying I 369 00:17:58,560 --> 00:18:00,399 Speaker 1: think it was supposed to mature in eighties free or 370 00:18:00,440 --> 00:18:02,160 Speaker 1: something like that. So it's like a thirty year bond 371 00:18:02,160 --> 00:18:03,960 Speaker 1: and they haven't done third year bond a really long time. 372 00:18:04,080 --> 00:18:05,879 Speaker 1: So who's gonna buy it? How are you going to 373 00:18:05,960 --> 00:18:08,600 Speaker 1: price it in a way that brings in brings in 374 00:18:08,600 --> 00:18:12,159 Speaker 1: interest from non banks specifically. I mean this point is 375 00:18:12,200 --> 00:18:16,880 Speaker 1: interesting because when politicians talk about fighting inflation today, they're 376 00:18:16,880 --> 00:18:20,000 Speaker 1: talking about fiscal various fiscal policy levers and we need 377 00:18:20,040 --> 00:18:22,919 Speaker 1: to cut spending here, or we need to you know, 378 00:18:22,960 --> 00:18:26,399 Speaker 1: expand oil oil drilling or something like that. But it 379 00:18:26,520 --> 00:18:30,240 Speaker 1: sounds like in the Eisenhower administration it was like they're 380 00:18:30,240 --> 00:18:32,720 Speaker 1: trying to solve it via the financial system or via 381 00:18:32,760 --> 00:18:35,600 Speaker 1: plumbing and something. Everything was basically well, there was a 382 00:18:35,600 --> 00:18:38,480 Speaker 1: fiscal lever as well, I should say, um, but that's 383 00:18:38,480 --> 00:18:41,360 Speaker 1: always a little hard thought to say, oh, higher taxes 384 00:18:41,440 --> 00:18:44,440 Speaker 1: because inflation is higher, and that doesn't feel great for anybody, 385 00:18:44,480 --> 00:18:50,359 Speaker 1: but it's today. Yeah. But the but the debt management 386 00:18:50,359 --> 00:18:52,320 Speaker 1: strategy of the treasury when the when the Feed is 387 00:18:52,320 --> 00:18:55,480 Speaker 1: buying get it fixed price, debt management is money manage 388 00:18:55,720 --> 00:18:57,920 Speaker 1: because they're in the market to buy at any price. 389 00:18:57,960 --> 00:19:00,520 Speaker 1: They buy treasuries. When the Fed buys treasuries, they print 390 00:19:00,520 --> 00:19:03,359 Speaker 1: new money with which to do so. Um. And so 391 00:19:04,160 --> 00:19:07,400 Speaker 1: those two things are connected, and this becomes a technocratic problem. 392 00:19:07,400 --> 00:19:09,480 Speaker 1: There's not there's actually quite a bit of public debate 393 00:19:09,480 --> 00:19:11,640 Speaker 1: about debt management, more so than you would expect given 394 00:19:11,680 --> 00:19:15,239 Speaker 1: the current current climate, or at least focus on, you know, 395 00:19:15,440 --> 00:19:17,520 Speaker 1: how much, how big the twenty years sector is and 396 00:19:17,840 --> 00:19:20,680 Speaker 1: things like that. Um. But you know, it's not like 397 00:19:20,720 --> 00:19:22,840 Speaker 1: a political story all the time. But then it would 398 00:19:22,840 --> 00:19:25,840 Speaker 1: have been. Um. But you know, I think that the 399 00:19:25,920 --> 00:19:29,400 Speaker 1: key here is there's an alignment of interests. And so 400 00:19:29,480 --> 00:19:31,919 Speaker 1: Snyder comes to the market and he said, sorry, Humphrey 401 00:19:31,920 --> 00:19:33,520 Speaker 1: comes to the market and says, we're going to bring 402 00:19:33,520 --> 00:19:36,240 Speaker 1: back the bond and by the way, we're pricing it cheap, 403 00:19:36,800 --> 00:19:39,439 Speaker 1: so get involved. So we're gonna price it about a 404 00:19:39,520 --> 00:19:41,439 Speaker 1: quarter of a point sheet to where you would have 405 00:19:41,520 --> 00:19:44,200 Speaker 1: otherwise expecting given where like the Victory two and a half, 406 00:19:44,280 --> 00:19:47,760 Speaker 1: we're trading and Victory two has we're issuing forty five. 407 00:19:48,440 --> 00:19:51,640 Speaker 1: Uh so everybody's interested, right, so they're saying, we want 408 00:19:51,640 --> 00:19:54,520 Speaker 1: to blow out reception. They get five times the over subscription, 409 00:19:54,600 --> 00:19:56,119 Speaker 1: so they get five and a half billion of orders 410 00:19:56,119 --> 00:19:58,600 Speaker 1: for roughly a billion of paper, and they're feeling really 411 00:19:58,600 --> 00:20:01,520 Speaker 1: good about it. The problem is, it turns out that 412 00:20:01,600 --> 00:20:03,640 Speaker 1: a lot of that five and a billion was speculative. 413 00:20:03,960 --> 00:20:05,720 Speaker 1: So people were trying to buy cheap bonds and flip 414 00:20:05,800 --> 00:20:09,200 Speaker 1: them for half a point um. And so they called 415 00:20:09,200 --> 00:20:11,760 Speaker 1: them free riders back then, which I haven't heard, but 416 00:20:11,880 --> 00:20:16,280 Speaker 1: it's it's kind of a fun, fun analogy. And so um, 417 00:20:16,480 --> 00:20:17,879 Speaker 1: we could I ask you who did they think they 418 00:20:17,880 --> 00:20:21,960 Speaker 1: were going to flip them to? Unclear somebody else? Um. 419 00:20:22,040 --> 00:20:24,840 Speaker 1: And so it's it's just a question of you know, 420 00:20:24,920 --> 00:20:27,200 Speaker 1: if if you think the bond is trading fundamentally cheap, 421 00:20:27,359 --> 00:20:29,560 Speaker 1: then there's probably someone else at what you think the 422 00:20:29,560 --> 00:20:32,560 Speaker 1: par value should be um. And so their bet was 423 00:20:32,680 --> 00:20:35,920 Speaker 1: the expectations of the market were at for a lower yield, 424 00:20:35,920 --> 00:20:37,520 Speaker 1: they could buy it a slightly higher yield, they could 425 00:20:37,520 --> 00:20:39,679 Speaker 1: flip into someone with different expectations, and it's as long 426 00:20:39,720 --> 00:20:42,000 Speaker 1: as you got filled, you'd be happy, as only you've 427 00:20:42,000 --> 00:20:45,280 Speaker 1: got your order insufficient size to make that interesting. The 428 00:20:45,320 --> 00:20:48,440 Speaker 1: Treasury also makes a mistake in in filling orders on 429 00:20:48,440 --> 00:20:51,520 Speaker 1: a proportional basis. So if you put in an outsized order, 430 00:20:51,560 --> 00:20:54,960 Speaker 1: for example, as part of the fixed rate um placement, 431 00:20:55,040 --> 00:20:57,240 Speaker 1: then you've got a big allocation. And the problem is 432 00:20:57,280 --> 00:20:59,720 Speaker 1: if you're a spec account, that's not necessarily what you 433 00:20:59,760 --> 00:21:01,879 Speaker 1: want it to happen. Um, So a lot of the 434 00:21:01,960 --> 00:21:05,000 Speaker 1: bonds get sold almost immediately. Yeah, this sounds familiar. This 435 00:21:05,040 --> 00:21:08,000 Speaker 1: is like big bond funds patting their order books with 436 00:21:08,080 --> 00:21:11,120 Speaker 1: like corporate issues nowadays. Yeah, it was actually so concerning 437 00:21:11,160 --> 00:21:13,639 Speaker 1: that they delayed allocations which had never really been done 438 00:21:13,680 --> 00:21:15,920 Speaker 1: or at least for a long time, so the Fed 439 00:21:15,960 --> 00:21:17,760 Speaker 1: could go through the orders and make sure that they 440 00:21:17,760 --> 00:21:19,440 Speaker 1: all made sense, you know. So they were a little 441 00:21:19,480 --> 00:21:23,000 Speaker 1: nervous from the start. But the von eventually prints in 442 00:21:23,000 --> 00:21:25,760 Speaker 1: in I believe it was late April. Initially it's trading 443 00:21:25,760 --> 00:21:28,679 Speaker 1: okay um, but it starts to weaken pretty quickly, and 444 00:21:28,720 --> 00:21:31,520 Speaker 1: in particular, the market starts to become pretty dysfunctional. And 445 00:21:31,840 --> 00:21:32,960 Speaker 1: you know, one of the fun things about the New 446 00:21:33,040 --> 00:21:35,520 Speaker 1: York Times and the fifties is they published bits spreads 447 00:21:35,520 --> 00:21:38,679 Speaker 1: for every treasury issue on a daily basis. So imagine 448 00:21:38,720 --> 00:21:42,320 Speaker 1: the poor reporter that it was after the sports section, 449 00:21:42,400 --> 00:21:45,440 Speaker 1: so they had their priorities straight. But it was actually 450 00:21:45,440 --> 00:21:47,800 Speaker 1: the whole business section was after the sports section. Any 451 00:21:47,880 --> 00:21:50,480 Speaker 1: papers that even have stocks anymore, probably not, probably not. 452 00:21:50,680 --> 00:21:53,680 Speaker 1: But they had fex forward pricing in Europe they had 453 00:21:53,760 --> 00:21:55,959 Speaker 1: so three month forwards and sterling they had. They had 454 00:21:56,119 --> 00:22:00,159 Speaker 1: on a roughly weekly basis. They had daily bond market priceing. 455 00:22:00,200 --> 00:22:01,720 Speaker 1: So I mean this was the only source, right, you 456 00:22:01,720 --> 00:22:04,400 Speaker 1: have nowhere else to go. Okay, so the bond starts 457 00:22:04,680 --> 00:22:09,119 Speaker 1: treating week then what so they're faced with a choice. 458 00:22:09,160 --> 00:22:11,760 Speaker 1: So inflation is still pretty high. This is gonna sound familiar. 459 00:22:11,800 --> 00:22:14,159 Speaker 1: So you have market functioning issues, right. So the solution 460 00:22:14,160 --> 00:22:17,199 Speaker 1: of market functioning issues is to buy bonds. Uh. And 461 00:22:17,200 --> 00:22:20,159 Speaker 1: there's two problems. The first is the fet is committed 462 00:22:20,200 --> 00:22:21,960 Speaker 1: to buy only bonds in the short end. That was 463 00:22:22,000 --> 00:22:23,920 Speaker 1: part of the agreement. When they came to the accord, 464 00:22:23,960 --> 00:22:25,600 Speaker 1: they said, we're only an interview in the market in 465 00:22:25,680 --> 00:22:29,080 Speaker 1: the short end. And that's specifically to provide reserves, So 466 00:22:29,119 --> 00:22:32,240 Speaker 1: it's not about target prices for long term bonds um. 467 00:22:32,280 --> 00:22:34,240 Speaker 1: So we're gonna let the market fund the price. So 468 00:22:34,280 --> 00:22:35,639 Speaker 1: I have to decide if they're going to buy long 469 00:22:35,680 --> 00:22:37,720 Speaker 1: bonds because that's where the pressure is. Bit that spreads 470 00:22:37,720 --> 00:22:41,280 Speaker 1: are widening, volatilities picking up um. And then they've decided 471 00:22:41,280 --> 00:22:42,920 Speaker 1: if they want to increase the size of the money 472 00:22:42,960 --> 00:22:45,879 Speaker 1: supply at a time when inflation is running hot. So 473 00:22:45,960 --> 00:22:50,280 Speaker 1: you have you have a you have a discrepancy in 474 00:22:50,320 --> 00:22:53,320 Speaker 1: the policy goals, which is fighting inflation, you should be tightening, 475 00:22:53,680 --> 00:22:56,000 Speaker 1: but to fix market functioning, you you have to ease. 476 00:22:56,119 --> 00:22:59,200 Speaker 1: And so that they're faced with this like really existential choice, 477 00:22:59,240 --> 00:23:03,560 Speaker 1: and ultimately the world kind of bails them out in 478 00:23:03,560 --> 00:23:05,760 Speaker 1: the sense that these the business cycle turns made a 479 00:23:05,840 --> 00:23:08,840 Speaker 1: year right around when this is happening. So they buy 480 00:23:08,880 --> 00:23:10,600 Speaker 1: a bunch of bills, They do a bunch of repo, 481 00:23:10,680 --> 00:23:13,440 Speaker 1: which we'll talk about I'm short shortly, but did a 482 00:23:13,480 --> 00:23:16,239 Speaker 1: bunch of financing, offer financing to dealers, UH, and they 483 00:23:16,280 --> 00:23:18,360 Speaker 1: lower the reserve requirement and banks they grow the size 484 00:23:18,359 --> 00:23:20,439 Speaker 1: the banking system, and they buy a bunch of treasury 485 00:23:20,440 --> 00:23:23,000 Speaker 1: bonds in the second half of the year, banks increase 486 00:23:23,040 --> 00:23:25,040 Speaker 1: their holdings by two billion dollars. So they buy the 487 00:23:25,040 --> 00:23:27,159 Speaker 1: long end though, or just they bought the long end 488 00:23:27,160 --> 00:23:29,240 Speaker 1: as well. Yeah, so they they banks were sort of 489 00:23:29,320 --> 00:23:31,600 Speaker 1: interested in not the long end long end, but like 490 00:23:32,200 --> 00:23:34,399 Speaker 1: intermediate type paper, you know, three to five years, and 491 00:23:34,440 --> 00:23:37,000 Speaker 1: they also buy bills um. And ultimately the question is 492 00:23:37,160 --> 00:23:39,439 Speaker 1: can we take the excess paper out of the market, 493 00:23:39,720 --> 00:23:41,560 Speaker 1: which doesn't have a home and dealers can't wear a 494 00:23:41,600 --> 00:23:46,120 Speaker 1: house um and resolve the functioning issues and kind of 495 00:23:46,200 --> 00:23:50,600 Speaker 1: come at the problem again another day, extremely boe in 496 00:23:50,720 --> 00:23:53,720 Speaker 1: terms of what's going on right now of this dual 497 00:23:53,840 --> 00:23:57,560 Speaker 1: tension of like, we need to maintain financial market stability, 498 00:23:57,880 --> 00:24:00,960 Speaker 1: but also we're in an anti inflation dans until any 499 00:24:01,040 --> 00:24:04,399 Speaker 1: perception of balance sheet expansion is seen as working cross 500 00:24:04,440 --> 00:24:08,119 Speaker 1: purposes totally. And also, I mean just the idea of 501 00:24:08,240 --> 00:24:11,560 Speaker 1: we need to expand the buyer base for US bonds 502 00:24:11,600 --> 00:24:13,600 Speaker 1: as well, that's kind of familiar. There's been a lot 503 00:24:13,600 --> 00:24:15,919 Speaker 1: of chat recently about who is going to buy bonds 504 00:24:16,000 --> 00:24:19,440 Speaker 1: giving given interest rate volatility and you know, a backdrop 505 00:24:19,480 --> 00:24:22,600 Speaker 1: of higher inflation and all of that. Okay, back to 506 00:24:22,640 --> 00:24:26,800 Speaker 1: the story, So the market tests the accord, the FED 507 00:24:26,960 --> 00:24:30,880 Speaker 1: kind of backs down, and then then what does it do? 508 00:24:30,880 --> 00:24:33,399 Speaker 1: Does it try to like go back to the period 509 00:24:33,400 --> 00:24:35,520 Speaker 1: of the accord or does it try out some new 510 00:24:35,600 --> 00:24:38,680 Speaker 1: solutions to this problem? So they have two problems, what 511 00:24:38,880 --> 00:24:40,960 Speaker 1: is it going to buy the bonds? Uh and the others? 512 00:24:41,000 --> 00:24:43,760 Speaker 1: The dealers are clearly not capable of interweting a market 513 00:24:43,800 --> 00:24:46,600 Speaker 1: that large, right, So they clearly are not able to 514 00:24:46,680 --> 00:24:50,800 Speaker 1: wear house securities enough shot size to really damp and volatility, 515 00:24:50,800 --> 00:24:52,320 Speaker 1: which is what dealers is supposed to do, right. They're 516 00:24:52,320 --> 00:24:54,040 Speaker 1: supposed to find a buyer and a seller and if 517 00:24:54,080 --> 00:24:55,680 Speaker 1: they can't find each other the same day, they hold 518 00:24:55,680 --> 00:24:59,160 Speaker 1: that thing in their inventory. A big problem the dealer's 519 00:24:59,160 --> 00:25:02,560 Speaker 1: had was financing. So most for most of the prior 520 00:25:02,760 --> 00:25:06,040 Speaker 1: seventy years, UM dealers have been funded most about what 521 00:25:06,080 --> 00:25:08,000 Speaker 1: we're called call loans. Call loans are kind of this 522 00:25:08,040 --> 00:25:10,719 Speaker 1: intuitive concept, which is, if I'm a dealer, I need 523 00:25:10,720 --> 00:25:12,600 Speaker 1: a certain amount of money barred every day, I'll post 524 00:25:12,600 --> 00:25:14,440 Speaker 1: collateral against it, but I'll probably borrow it from a 525 00:25:14,480 --> 00:25:17,000 Speaker 1: bank and I'll just change the balance on a daily basis, 526 00:25:17,000 --> 00:25:19,720 Speaker 1: and I'll pledge whatever bonds I have as collateral to 527 00:25:19,800 --> 00:25:23,920 Speaker 1: back that loan. So uh, that was the call loan market. Um. 528 00:25:23,960 --> 00:25:25,640 Speaker 1: The problem with the call loan market is was kind 529 00:25:25,640 --> 00:25:28,600 Speaker 1: of expensive, and when bill yields and treasure yields were 530 00:25:28,640 --> 00:25:31,640 Speaker 1: below the call market rates, it meant the inventory was negative. 531 00:25:31,680 --> 00:25:34,720 Speaker 1: Carry carry means it costs you money to hold inventory. 532 00:25:34,760 --> 00:25:37,440 Speaker 1: You don't make interesting comb at least to hold the inventory. 533 00:25:37,480 --> 00:25:39,920 Speaker 1: So it becomes very expensive to run a dealer when 534 00:25:39,960 --> 00:25:42,960 Speaker 1: you have interest rate and expense on top of the 535 00:25:43,240 --> 00:25:46,720 Speaker 1: salaries and infrastructure and things like that. Uh. And so 536 00:25:46,920 --> 00:25:49,080 Speaker 1: this has been a problem to forties as well, and 537 00:25:49,080 --> 00:25:53,200 Speaker 1: that's when they brought back the repurchase facility. Repurchase facility 538 00:25:53,520 --> 00:25:57,679 Speaker 1: dates back to v when they used its support the 539 00:25:57,760 --> 00:26:00,960 Speaker 1: First World War effort, and they were concerned that there 540 00:26:01,040 --> 00:26:02,960 Speaker 1: wasn't a market for treasuries back then, and so they 541 00:26:03,040 --> 00:26:06,000 Speaker 1: used repurchase agreements, which are the buying and selling of 542 00:26:06,000 --> 00:26:08,880 Speaker 1: a bond at different prices. That kind of mimics alone, 543 00:26:08,920 --> 00:26:13,479 Speaker 1: but in two transactions. Um. And so that allowed the 544 00:26:13,480 --> 00:26:15,720 Speaker 1: Fed to do two things. One is allowed them to 545 00:26:15,960 --> 00:26:19,840 Speaker 1: lend money to non banks, which is critical uh. And 546 00:26:19,880 --> 00:26:21,639 Speaker 1: the second thing is allowed them to do that below 547 00:26:21,640 --> 00:26:23,720 Speaker 1: the discount rate in principle, so they could do it 548 00:26:23,760 --> 00:26:25,439 Speaker 1: at a rate that was consistent with where bills were 549 00:26:25,440 --> 00:26:28,920 Speaker 1: trading if they were below the policy rate. So this 550 00:26:29,000 --> 00:26:31,919 Speaker 1: is kind of a legal workaround, right, because I imagine 551 00:26:31,960 --> 00:26:35,119 Speaker 1: the FED isn't really supposed to be lending money directly 552 00:26:35,320 --> 00:26:37,520 Speaker 1: to non banks. I mean, the whole reason that banks 553 00:26:37,520 --> 00:26:39,840 Speaker 1: have regulations and things like that is so that they 554 00:26:39,840 --> 00:26:42,240 Speaker 1: can interact directly with the FED and they have that 555 00:26:42,280 --> 00:26:45,760 Speaker 1: sort of safety backstop. Is that right? Yeah? Carter Glass 556 00:26:45,800 --> 00:26:48,720 Speaker 1: of Glass de Eagle was instrumental in the original Federal 557 00:26:48,760 --> 00:26:50,960 Speaker 1: Reserve Act, and he said this is not intended for 558 00:26:51,040 --> 00:26:53,520 Speaker 1: non banks, but in the depression they find out that, 559 00:26:53,640 --> 00:26:56,520 Speaker 1: like sometimes you need to write. So the thirteen three, 560 00:26:56,560 --> 00:26:59,080 Speaker 1: which becomes Section three, which becomes very famous in two 561 00:26:59,080 --> 00:27:01,320 Speaker 1: thousand and eight, that's the authorization that allows them to 562 00:27:01,320 --> 00:27:05,080 Speaker 1: do all kinds of interventions. It specifically allows for the 563 00:27:05,160 --> 00:27:09,080 Speaker 1: lending or extensions of credit to non banks, um so 564 00:27:09,200 --> 00:27:11,600 Speaker 1: to thousan eight that includes you know, primary dealers, that 565 00:27:11,680 --> 00:27:16,520 Speaker 1: includes a variety of real economy participants. In two twenty 566 00:27:16,520 --> 00:27:18,120 Speaker 1: they do the same thing. So like the main street 567 00:27:18,200 --> 00:27:21,280 Speaker 1: lending facilities in principal thirteen three facility. The problem with 568 00:27:21,280 --> 00:27:24,600 Speaker 1: thirteen three is it's only allowable under exigent circumstances. So 569 00:27:24,640 --> 00:27:26,919 Speaker 1: this is not a business as usual facility. This is, 570 00:27:27,000 --> 00:27:29,679 Speaker 1: if it really comes to it, you can do pretty 571 00:27:29,760 --> 00:27:31,520 Speaker 1: much whatever you want, but you need to be at 572 00:27:31,560 --> 00:27:35,120 Speaker 1: least a of the opinion that the world's about to collapse, 573 00:27:35,119 --> 00:27:36,680 Speaker 1: and b you have to be able to demonstrate that 574 00:27:36,720 --> 00:27:39,800 Speaker 1: credit was not otherwise available. So it's clearly not the 575 00:27:39,840 --> 00:27:42,560 Speaker 1: case where dealers in the fifties. The workaround is, well, 576 00:27:42,600 --> 00:27:44,600 Speaker 1: this is a repo, it's a purchase and a sale. 577 00:27:44,640 --> 00:27:47,760 Speaker 1: This is an open market operation. This isn't Section three 578 00:27:47,760 --> 00:27:50,240 Speaker 1: at all. Is this section fourteen which allows me to 579 00:27:50,280 --> 00:27:53,159 Speaker 1: transact with primary dealers, and so yes, this at the 580 00:27:53,160 --> 00:27:55,919 Speaker 1: economic features of a loan, but it is fundamentally a 581 00:27:56,000 --> 00:27:58,520 Speaker 1: purchase and sale. Um, they had to do a little 582 00:27:58,520 --> 00:28:00,520 Speaker 1: bit of jimmying with it, and it's money is to 583 00:28:00,560 --> 00:28:03,400 Speaker 1: make it consistent with legal opinions, like I think it's 584 00:28:03,440 --> 00:28:06,760 Speaker 1: it's putable as opposed to like specific maturities, and they 585 00:28:06,760 --> 00:28:10,120 Speaker 1: try to work around some legal interpretations. But fundamentally it's 586 00:28:10,160 --> 00:28:12,159 Speaker 1: just a way to lend money to non dealers in 587 00:28:12,160 --> 00:28:15,120 Speaker 1: a format that gives the committee a lot more flexibility. 588 00:28:15,320 --> 00:28:18,800 Speaker 1: Just a brief like sort of theoretical question, is there 589 00:28:18,840 --> 00:28:20,800 Speaker 1: ever really a limit to what the FED can do 590 00:28:20,960 --> 00:28:25,320 Speaker 1: beyond the creativity of lawyers. Well, that's anything, basically, that's 591 00:28:25,320 --> 00:28:27,960 Speaker 1: what I mean. And you know, we look at these documents. 592 00:28:27,960 --> 00:28:29,480 Speaker 1: It's true, you know we look at these documents and 593 00:28:29,480 --> 00:28:31,280 Speaker 1: their debates about what they didn't. Right, It's like, don't 594 00:28:31,359 --> 00:28:34,159 Speaker 1: lend the banks. But actually, I'm sorry, don't learn to 595 00:28:34,240 --> 00:28:38,560 Speaker 1: non banks. But you totally count the constraint. Yeah, creativity 596 00:28:38,560 --> 00:28:41,040 Speaker 1: in Congress. So Congress can give you very specific constraints 597 00:28:41,080 --> 00:28:43,440 Speaker 1: and and the courts can, in principle stop you. I 598 00:28:43,480 --> 00:28:45,560 Speaker 1: think it's tough with the FED because the question is 599 00:28:45,560 --> 00:28:47,400 Speaker 1: what's the cause of action, Like who's going to soothe 600 00:28:47,440 --> 00:28:50,160 Speaker 1: them and say you shouldn't have lent this dealer money. Um. 601 00:28:50,200 --> 00:28:51,680 Speaker 1: So I'm not sure how much this has been tested 602 00:28:51,680 --> 00:28:53,120 Speaker 1: in court. This is where my lack of a law 603 00:28:53,160 --> 00:28:57,080 Speaker 1: degree is probably worth noting. Um. But but ultimately, the 604 00:28:57,080 --> 00:29:01,239 Speaker 1: interpretation of these rules is ultimately is an interpretation. FET 605 00:29:01,360 --> 00:29:03,280 Speaker 1: has a general council, they write opinions, and there's an 606 00:29:03,320 --> 00:29:06,440 Speaker 1: internal process, but they can do whatever they think to 607 00:29:06,520 --> 00:29:11,320 Speaker 1: be ultimately legal. So the fence Repot facility is created 608 00:29:11,320 --> 00:29:14,320 Speaker 1: in nineteen seventeen, but then in the nineteen fifties, as 609 00:29:14,320 --> 00:29:18,120 Speaker 1: you just described, it presumably gets a big boost because 610 00:29:18,160 --> 00:29:20,560 Speaker 1: they've settled on it as a way to solve this 611 00:29:20,640 --> 00:29:23,480 Speaker 1: problem of how do we sort of settle the debt 612 00:29:23,480 --> 00:29:28,040 Speaker 1: market without sparking debt monetization and another bout of inflation. 613 00:29:28,440 --> 00:29:30,000 Speaker 1: So what's interesting here is the FT doesn't do a 614 00:29:30,040 --> 00:29:32,040 Speaker 1: ton of repo, But what they do is they demonstrate 615 00:29:32,040 --> 00:29:34,360 Speaker 1: their willingness to use it. They have a big internal debate, 616 00:29:34,400 --> 00:29:36,080 Speaker 1: they write a bunch of memos and they say this 617 00:29:36,120 --> 00:29:38,960 Speaker 1: is something we're committed to doing at the bill Raider 618 00:29:39,040 --> 00:29:41,600 Speaker 1: higher so basically saying we are here for the market 619 00:29:41,640 --> 00:29:45,600 Speaker 1: to provide repo to primary dealers at this specific administered 620 00:29:45,680 --> 00:29:47,440 Speaker 1: rate and industry meeting. We're just gonna say what it is. 621 00:29:47,440 --> 00:29:49,200 Speaker 1: It's not an auction. We're just gonna tell you where 622 00:29:49,200 --> 00:29:52,080 Speaker 1: we'll lend to you. Um And so that's important as 623 00:29:52,080 --> 00:29:54,040 Speaker 1: a backstop. So it's not so much that the FETE 624 00:29:54,080 --> 00:29:57,360 Speaker 1: is financing dealers, it's they're providing a liquidity backstop at 625 00:29:57,400 --> 00:30:02,320 Speaker 1: a specified rate that gives other market participants willing willingness 626 00:30:02,360 --> 00:30:04,880 Speaker 1: to participate in the repo market. So most funding and 627 00:30:04,920 --> 00:30:07,200 Speaker 1: repo by the end of the fifties comes from corporations, 628 00:30:07,760 --> 00:30:11,160 Speaker 1: and those corporations had bank deposits. Bank deposits were limited 629 00:30:11,160 --> 00:30:13,480 Speaker 1: by red Q as a depression year regulation saying we 630 00:30:13,480 --> 00:30:15,440 Speaker 1: don't want banks competing with each other for funding. That 631 00:30:15,520 --> 00:30:18,240 Speaker 1: leads to bad outcomes. And so they don't like their 632 00:30:18,280 --> 00:30:20,200 Speaker 1: bank deposit yields. They go the repo market. They get 633 00:30:20,200 --> 00:30:22,520 Speaker 1: wholesale funding rates, they get much more attractive yields, and 634 00:30:22,600 --> 00:30:26,320 Speaker 1: so the FED gives the market confidence that they can 635 00:30:26,440 --> 00:30:28,880 Speaker 1: participate in this in this sort of money like or 636 00:30:28,920 --> 00:30:31,440 Speaker 1: deposits substitute. Actually, the New York Clearinghouse is really worried 637 00:30:31,440 --> 00:30:34,200 Speaker 1: about this in the late fifties. So consortation of banks say, 638 00:30:34,440 --> 00:30:37,280 Speaker 1: you're cannibalizing our funding, Like, we don't want people doing repo, 639 00:30:37,360 --> 00:30:51,200 Speaker 1: we want people keeping deposits with us, So sorry, can 640 00:30:51,240 --> 00:30:54,400 Speaker 1: you just walk through or make a little marked clearer. 641 00:30:54,480 --> 00:30:57,360 Speaker 1: So this is sort of what plays the call loan market. 642 00:30:57,880 --> 00:31:00,800 Speaker 1: What what does the gap in terms of like financing 643 00:31:01,000 --> 00:31:03,320 Speaker 1: costs between these two things, and what did that open 644 00:31:03,400 --> 00:31:05,440 Speaker 1: up in terms of you know, how much balance sheet 645 00:31:05,560 --> 00:31:08,320 Speaker 1: or how much capacity the dealer community had. It wasn't 646 00:31:08,400 --> 00:31:11,360 Speaker 1: always a lot, but it was predictable, and the FIGHT 647 00:31:11,440 --> 00:31:14,560 Speaker 1: could control it, and and the call in market was 648 00:31:14,600 --> 00:31:17,400 Speaker 1: prone to they call them call in panics, so like 649 00:31:17,480 --> 00:31:19,480 Speaker 1: you'd call your New York bank and the wouldn't have 650 00:31:19,560 --> 00:31:21,960 Speaker 1: money on hand, and and so you'd call it someone 651 00:31:22,000 --> 00:31:25,000 Speaker 1: in Midwest or something like not non New York, other 652 00:31:25,080 --> 00:31:26,960 Speaker 1: city bank or you know. I don't think the rural 653 00:31:26,960 --> 00:31:29,120 Speaker 1: banks were participating in this, but it was. It was 654 00:31:29,160 --> 00:31:32,000 Speaker 1: just hokey in a lot of ways and somewhat unpredictable, 655 00:31:32,000 --> 00:31:34,040 Speaker 1: and they ultimately ended up going to FED funds markets 656 00:31:34,080 --> 00:31:36,800 Speaker 1: often to a plug intraday liquidity gaps and and repo 657 00:31:36,920 --> 00:31:40,560 Speaker 1: was better than that for that purpose. Um, but the 658 00:31:40,600 --> 00:31:43,080 Speaker 1: price could just be maintained by the FED specifically, and 659 00:31:43,120 --> 00:31:46,200 Speaker 1: that was key. So UM, if the FED can control 660 00:31:46,200 --> 00:31:47,960 Speaker 1: the price, and they can make sure it's profitable to 661 00:31:48,040 --> 00:31:50,560 Speaker 1: run a dealer, and they can expand their balance sheets, 662 00:31:50,560 --> 00:31:53,880 Speaker 1: so we don't have there's some data on dealer balance sheets. 663 00:31:53,880 --> 00:31:56,240 Speaker 1: I think turnover is a better measure. So turnover as 664 00:31:56,280 --> 00:31:58,120 Speaker 1: a fracture of the overall market, which you got to 665 00:31:58,160 --> 00:32:02,600 Speaker 1: scale it to the whole market. Between nineteen fifty, I 666 00:32:02,600 --> 00:32:04,520 Speaker 1: guess fifty five might be the earliest day we have 667 00:32:04,600 --> 00:32:07,040 Speaker 1: to the late sixties goes up by multiples um, so 668 00:32:07,080 --> 00:32:09,440 Speaker 1: the dealers are able to move move the debt around 669 00:32:10,160 --> 00:32:13,440 Speaker 1: much more easily. That's important because they're a distribution mechanisms. 670 00:32:13,480 --> 00:32:15,960 Speaker 1: You want non banks buying treasuries, you have to find them, 671 00:32:16,000 --> 00:32:18,040 Speaker 1: and dealers of the mechanism by which to get them 672 00:32:18,040 --> 00:32:22,160 Speaker 1: the paper. Uh. And so that's when non bank ownership 673 00:32:22,200 --> 00:32:24,800 Speaker 1: starts going up a lot. Banks or go from half 674 00:32:24,840 --> 00:32:28,920 Speaker 1: the market to thirty percent. By two thousand and five, 675 00:32:28,920 --> 00:32:30,640 Speaker 1: two thousand and six, they're like three or four percent 676 00:32:30,640 --> 00:32:32,720 Speaker 1: of the market. So it's a very successful policy. Like 677 00:32:32,800 --> 00:32:34,920 Speaker 1: dealers are able to do a lot more volume, a 678 00:32:34,960 --> 00:32:39,040 Speaker 1: lot more turnover bits, spreads stay relatively tight until relatively 679 00:32:39,080 --> 00:32:42,880 Speaker 1: recently and and by the two financial crisis. Like not 680 00:32:43,560 --> 00:32:46,680 Speaker 1: US banks are not a huge fraction or even a 681 00:32:46,800 --> 00:32:50,040 Speaker 1: dominant fraction of of the of the treasury market. They 682 00:32:50,080 --> 00:32:52,760 Speaker 1: have a lot of non bank participation. So this is 683 00:32:52,800 --> 00:32:55,520 Speaker 1: the amazing thing because I think nowadays we're accustomed to 684 00:32:55,600 --> 00:32:59,080 Speaker 1: thinking about the repo market as like a source of 685 00:32:59,160 --> 00:33:03,680 Speaker 1: potential instability and a big component of the shadow banking system. 686 00:33:03,760 --> 00:33:05,760 Speaker 1: So you think back to two thousand and eight, the 687 00:33:05,800 --> 00:33:07,960 Speaker 1: repo market was kind of ground zero for a lot 688 00:33:08,000 --> 00:33:12,400 Speaker 1: of the problems that that occurred in a mortgage backed securities. 689 00:33:12,760 --> 00:33:15,000 Speaker 1: And then in the decade since two thousand and eight, 690 00:33:15,000 --> 00:33:17,280 Speaker 1: all we've heard from the FED and the Financial Stability 691 00:33:17,320 --> 00:33:19,360 Speaker 1: Board is, Oh, we need to get a handle on 692 00:33:19,400 --> 00:33:22,280 Speaker 1: shadow banks, we need to reform the repo market, we 693 00:33:22,320 --> 00:33:25,640 Speaker 1: need to make everything better. But as you're describing it, 694 00:33:26,200 --> 00:33:30,360 Speaker 1: this was a direct policy decision made in the nineteen 695 00:33:30,400 --> 00:33:34,040 Speaker 1: fifties to solve a specific problem. Yeah, it becomes saying 696 00:33:34,080 --> 00:33:36,920 Speaker 1: it's really entrenched. So the repo market is are the 697 00:33:36,960 --> 00:33:39,080 Speaker 1: solution to their problem in lots of ways. But by 698 00:33:39,080 --> 00:33:41,760 Speaker 1: the time the solution becomes very effective, now they're committed 699 00:33:41,800 --> 00:33:44,960 Speaker 1: to the repot market. So you know. Great example of 700 00:33:44,960 --> 00:33:47,800 Speaker 1: that is an eighty two when a bankruptcy court finds 701 00:33:47,840 --> 00:33:49,920 Speaker 1: that the collateral associate with repo is subject to an 702 00:33:49,840 --> 00:33:51,600 Speaker 1: automatic state. What does that mean. It means if a 703 00:33:51,600 --> 00:33:54,920 Speaker 1: dealer goes bankrupt, this court will seize their collateral and 704 00:33:54,960 --> 00:33:57,200 Speaker 1: hold it until the bankruptcy is resolved. And that doesn't 705 00:33:57,200 --> 00:33:59,800 Speaker 1: take a day or two. That takes a long time. 706 00:34:00,120 --> 00:34:02,760 Speaker 1: People have just sort of assumed that that wasn't the case, 707 00:34:02,760 --> 00:34:04,640 Speaker 1: because like, oh, this is a purchase in a sale, 708 00:34:04,680 --> 00:34:07,280 Speaker 1: like why would this be subject to a day I 709 00:34:07,320 --> 00:34:09,040 Speaker 1: just have like a bond that I sold you, and 710 00:34:09,040 --> 00:34:10,839 Speaker 1: you're gonna sell it back to me. We'll just do that. 711 00:34:11,440 --> 00:34:14,680 Speaker 1: Uh And And the FED panics basically in eighty two 712 00:34:15,000 --> 00:34:18,520 Speaker 1: they lobby Congress aggressively to get specific protections for REPO 713 00:34:18,600 --> 00:34:23,200 Speaker 1: and other similar instruments and basically legislated. So there's a 714 00:34:23,239 --> 00:34:26,640 Speaker 1: bill in eighty four that's meant to reform the judicial 715 00:34:26,840 --> 00:34:30,759 Speaker 1: nomination process that actually has within it a protection for 716 00:34:30,960 --> 00:34:33,480 Speaker 1: REPO that exempts it from the automatic stay. So the 717 00:34:33,560 --> 00:34:37,400 Speaker 1: preferential treatment for REPO specifically in bankruptcy um and and 718 00:34:37,440 --> 00:34:40,600 Speaker 1: that is necessary. Vulcar argues directly, it's Bob doll at 719 00:34:40,600 --> 00:34:43,359 Speaker 1: the time, like to stabilize the whole financial market, you 720 00:34:43,400 --> 00:34:46,080 Speaker 1: need to do this. Um. So it's just an example 721 00:34:46,080 --> 00:34:48,839 Speaker 1: of where you sort of find a good solution. Now 722 00:34:48,880 --> 00:34:52,560 Speaker 1: you're now it's entrenched, and the more it presents issues, 723 00:34:53,120 --> 00:34:56,480 Speaker 1: the more you have to like step in to provide 724 00:34:56,640 --> 00:35:00,160 Speaker 1: other protections or specifically that market. So it is a 725 00:35:00,200 --> 00:35:02,480 Speaker 1: shadow banking system in the sense that is treated like 726 00:35:02,480 --> 00:35:05,200 Speaker 1: a money alternative, like a deposit alternative, and it's sort 727 00:35:05,239 --> 00:35:08,200 Speaker 1: of wrapped with successive layers of protection. First, as the 728 00:35:08,239 --> 00:35:11,160 Speaker 1: FED liquity back stopped in, there's bankruptcy protection. You know 729 00:35:11,239 --> 00:35:13,520 Speaker 1: banks for example of different treatment under bankruptcy. Now REPO 730 00:35:13,560 --> 00:35:16,040 Speaker 1: has different treatment under bankruptcy. And by the time you 731 00:35:16,040 --> 00:35:18,960 Speaker 1: get to two thousand eight, and especially in the FED 732 00:35:19,040 --> 00:35:20,719 Speaker 1: is doing both sides of the real market, right, So 733 00:35:20,760 --> 00:35:22,759 Speaker 1: the FED is doing the standing REPO facility and the 734 00:35:22,760 --> 00:35:25,640 Speaker 1: reverse REYBU facility. And so now it's very much a 735 00:35:25,719 --> 00:35:29,040 Speaker 1: policy lever in lots of ways. Um whether or not 736 00:35:29,120 --> 00:35:32,120 Speaker 1: that's desirable as a separate question, but but ultimately REPO 737 00:35:32,239 --> 00:35:37,400 Speaker 1: becomes the plumbing because it's so effective in facilitating the 738 00:35:37,440 --> 00:35:40,160 Speaker 1: initial policy goals of the Martin Fat. So this is 739 00:35:40,239 --> 00:35:42,920 Speaker 1: really interesting, and I guess just to sort of piggyback 740 00:35:43,080 --> 00:35:45,520 Speaker 1: on Tracy's last question, I mean, we do seem to 741 00:35:45,560 --> 00:35:50,000 Speaker 1: have these recurring bouts of instability today in this part 742 00:35:50,040 --> 00:35:53,760 Speaker 1: of the market. The market that exists solved a certain 743 00:35:53,800 --> 00:35:57,879 Speaker 1: problem at the time, Like what is the trade off 744 00:35:58,040 --> 00:36:00,960 Speaker 1: is that we're still living with today because it seems 745 00:36:00,960 --> 00:36:03,000 Speaker 1: like the sort of like old regime, while maybe it 746 00:36:03,080 --> 00:36:07,120 Speaker 1: had issues with sort of like inflation, etcetera. Um, the 747 00:36:07,239 --> 00:36:09,800 Speaker 1: sort of the less market based regime, so to speak, 748 00:36:10,360 --> 00:36:12,480 Speaker 1: at least it was more stable. Yeah. I think that 749 00:36:12,560 --> 00:36:15,440 Speaker 1: there's different phases of cognitive dissonance here. So you know, 750 00:36:15,480 --> 00:36:17,439 Speaker 1: if you can pull dealers in and say you're gonna 751 00:36:17,440 --> 00:36:20,400 Speaker 1: in your the critical intermediation mechanism for the treasure market, 752 00:36:20,440 --> 00:36:22,839 Speaker 1: and not only critical to intermediating it, but getting things 753 00:36:22,880 --> 00:36:24,680 Speaker 1: out of the out of banks and into non banks 754 00:36:24,800 --> 00:36:27,560 Speaker 1: is like critical to financial stability and and and more 755 00:36:27,600 --> 00:36:29,680 Speaker 1: important than the enemies beyond our shores, right, And that's 756 00:36:29,719 --> 00:36:32,120 Speaker 1: what they're saying. Um So to fight the Soviets, we 757 00:36:32,160 --> 00:36:37,879 Speaker 1: need REPO basically and again relevant to today. Yeah. Uh 758 00:36:37,960 --> 00:36:42,480 Speaker 1: so the problem with that is you need a regulatorriticism 759 00:36:42,520 --> 00:36:46,120 Speaker 1: that recognizes the relative importance you're placing on dealers. And 760 00:36:46,160 --> 00:36:49,560 Speaker 1: that took a long time. So dealers are regulated by 761 00:36:49,600 --> 00:36:53,680 Speaker 1: the SEC. It's a it's an investor protection mandate. So basically, 762 00:36:53,760 --> 00:36:55,440 Speaker 1: if and when a dealer goes bankrupt, we wanna have 763 00:36:55,440 --> 00:36:58,759 Speaker 1: funds on hand to resolve all outstanding trades. Banks are 764 00:36:58,840 --> 00:37:00,799 Speaker 1: safety and sound is mandate, which is like, you can't 765 00:37:00,840 --> 00:37:02,799 Speaker 1: go bankrupt, so let's make sure you don't because you're 766 00:37:02,800 --> 00:37:06,040 Speaker 1: critical to the functioning of the economy. And so those 767 00:37:06,120 --> 00:37:09,640 Speaker 1: two things don't entirely mesh. And by two thousand and 768 00:37:09,680 --> 00:37:12,440 Speaker 1: six seven there's a series of changes to how dealers 769 00:37:12,480 --> 00:37:13,880 Speaker 1: are regulated, and all of a sudden they have a 770 00:37:13,920 --> 00:37:17,360 Speaker 1: ton of leverage UM forty times leverage is one that 771 00:37:17,440 --> 00:37:19,520 Speaker 1: everyone always quotes. But like turn over, the treasury market 772 00:37:19,560 --> 00:37:23,080 Speaker 1: skyrockets because not only is it uh not as only 773 00:37:23,080 --> 00:37:25,920 Speaker 1: our dealers allowed to take more leverage, but also treasury 774 00:37:25,960 --> 00:37:28,360 Speaker 1: specifically in treasury rebo like don't really count torture the 775 00:37:28,400 --> 00:37:32,120 Speaker 1: space capital requirements, and so there's just a lot of 776 00:37:32,280 --> 00:37:36,400 Speaker 1: capacity to intermediate treasury bond trading and repo trading. In 777 00:37:36,400 --> 00:37:38,760 Speaker 1: two thousand eight, everything gets stuck back into the banking system. 778 00:37:39,080 --> 00:37:42,400 Speaker 1: So all these independent dealers, with the exception of the 779 00:37:42,440 --> 00:37:44,800 Speaker 1: smaller ones, but like you're rather out of business or 780 00:37:44,800 --> 00:37:46,799 Speaker 1: you're part of a bank holding company. So Leaving goes 781 00:37:46,840 --> 00:37:50,719 Speaker 1: out of business, bears absorbed by JP Morgan, um, you know, 782 00:37:50,840 --> 00:37:52,600 Speaker 1: Mary all goes to Bank of America, and all of 783 00:37:52,600 --> 00:37:54,960 Speaker 1: a sudden, they're all subject to that bank safety and 784 00:37:55,000 --> 00:37:58,160 Speaker 1: soundness requirement or at least within the context of the 785 00:37:58,200 --> 00:38:01,080 Speaker 1: holding company as a as a whole, uh, And so 786 00:38:01,480 --> 00:38:06,200 Speaker 1: the market gets consolidated behind the bank regulatory perimeter, it 787 00:38:06,200 --> 00:38:09,920 Speaker 1: becomes like formally associated with banks. Um, that's fine as 788 00:38:09,960 --> 00:38:12,560 Speaker 1: long as treasuries don't consume a lot of you know 789 00:38:12,560 --> 00:38:15,080 Speaker 1: what we often call the industry like resources, meaning capital 790 00:38:15,080 --> 00:38:18,600 Speaker 1: and liquidity. Treasuries are risk free, treasurys risk free or 791 00:38:18,600 --> 00:38:21,200 Speaker 1: at least nearly risk free, and so depending on how 792 00:38:21,200 --> 00:38:23,279 Speaker 1: it's haircutted and so forth and so like, if it 793 00:38:23,320 --> 00:38:25,759 Speaker 1: doesn't add to your risk weighted assets, which was the 794 00:38:25,760 --> 00:38:28,239 Speaker 1: binding constrainting banks for a long time, you've got a 795 00:38:28,239 --> 00:38:30,560 Speaker 1: lot of elasticity. You can grow and shrink and treasury 796 00:38:30,600 --> 00:38:34,759 Speaker 1: bounty pretty straightforwardly. Leverage constraints come later and they are 797 00:38:34,800 --> 00:38:37,760 Speaker 1: inconsistent with that, or at least into some circumstances. Well, 798 00:38:38,040 --> 00:38:40,040 Speaker 1: this is exactly what I wanted to ask about. So 799 00:38:40,120 --> 00:38:43,200 Speaker 1: today there is this big question mark over the treasury 800 00:38:43,239 --> 00:38:46,640 Speaker 1: market about who is going to buy and also intermediate 801 00:38:46,680 --> 00:38:49,320 Speaker 1: the bonds. So we have a lot of interest rate volatility. 802 00:38:49,480 --> 00:38:53,239 Speaker 1: Dealer inventories are lower um than they have been historically. 803 00:38:53,800 --> 00:38:56,600 Speaker 1: Like what exactly is going on there? Like the repo 804 00:38:56,719 --> 00:39:00,200 Speaker 1: market exists, it experiences spasms from time to time, but 805 00:39:00,239 --> 00:39:02,520 Speaker 1: the FED comes in and for the most part, seems 806 00:39:02,560 --> 00:39:04,840 Speaker 1: to fix them or at least set up new programs 807 00:39:04,840 --> 00:39:07,560 Speaker 1: aimed at fixing them. Why is this still happening? Why 808 00:39:07,560 --> 00:39:09,919 Speaker 1: do we have that concern? So it's it's a little 809 00:39:09,920 --> 00:39:15,799 Speaker 1: different every time, which is unfortunate, but but ultimately that's why. Yeah, yeah, 810 00:39:16,360 --> 00:39:18,560 Speaker 1: but you're seeing banks to buy more treasuries now, right, 811 00:39:18,600 --> 00:39:20,640 Speaker 1: So like there's a there's a certain amount of increased 812 00:39:20,640 --> 00:39:23,759 Speaker 1: monetization of the debt through the commercial banking system, not 813 00:39:23,800 --> 00:39:27,240 Speaker 1: necessarily through the Federal Reserve um and and so that's 814 00:39:27,320 --> 00:39:29,840 Speaker 1: helping where it was helping for a while, it's not 815 00:39:29,920 --> 00:39:33,680 Speaker 1: so much helping anymore. UM. But I think the issue 816 00:39:33,800 --> 00:39:37,920 Speaker 1: is repo is a form of money substitute that has 817 00:39:37,960 --> 00:39:40,360 Speaker 1: the implicit backing of the Fed, but is not really 818 00:39:40,400 --> 00:39:43,000 Speaker 1: wrapped in the same kind of cloak as deposits. And 819 00:39:43,080 --> 00:39:46,400 Speaker 1: so deposit funding is stable and sticky funding at low cost. 820 00:39:46,840 --> 00:39:49,319 Speaker 1: Repo funding is fine until there's an issue, and then 821 00:39:49,360 --> 00:39:52,799 Speaker 1: it's sort of more prone to instability than than more 822 00:39:52,840 --> 00:39:55,280 Speaker 1: traditional forms of bank funding. And as you go further 823 00:39:55,320 --> 00:39:57,719 Speaker 1: out the spectrum, you know, we're talking about treasury, but 824 00:39:57,840 --> 00:39:59,680 Speaker 1: then you can talk about mortgage repot in two thousand 825 00:39:59,680 --> 00:40:02,120 Speaker 1: and seven could have talked about non agency mortgage repo, 826 00:40:02,239 --> 00:40:04,680 Speaker 1: and then there's a question of the collateral credit quality 827 00:40:04,719 --> 00:40:08,840 Speaker 1: as well as access to liquidity and so like repo 828 00:40:09,000 --> 00:40:13,080 Speaker 1: is is just not money in the sense that deposits are. 829 00:40:13,520 --> 00:40:16,480 Speaker 1: And so if banks are being called upon to interveeding 830 00:40:16,480 --> 00:40:19,879 Speaker 1: at treasuries as a core banking activity and effect, um, 831 00:40:19,920 --> 00:40:21,959 Speaker 1: they're still funding it with with a form of funding 832 00:40:22,000 --> 00:40:24,800 Speaker 1: that's reserved for dealers, and that's the investor protection world. 833 00:40:24,880 --> 00:40:28,439 Speaker 1: So there's a little bit of cognitive dissonance there. Um, 834 00:40:28,480 --> 00:40:30,439 Speaker 1: But what the FED is doing is their backstopping both 835 00:40:30,440 --> 00:40:33,160 Speaker 1: sides of the market. So so repo's perceiving those kind 836 00:40:33,160 --> 00:40:35,840 Speaker 1: of controls. And there are other central banks where repos 837 00:40:35,920 --> 00:40:37,600 Speaker 1: the primary policy. Right, So this is not you know, 838 00:40:37,640 --> 00:40:41,160 Speaker 1: particularly unusual. Um, whether or not it's desirable as a 839 00:40:41,200 --> 00:40:44,400 Speaker 1: separate question, and whether or not those facilities are effective. 840 00:40:44,440 --> 00:40:47,080 Speaker 1: There is another one. You're talking about dealer inventories. Now 841 00:40:47,120 --> 00:40:48,560 Speaker 1: I think there's I think I was on to talk 842 00:40:48,600 --> 00:40:53,000 Speaker 1: about this pretty recently. Um, I remain relatively sanguine, I guess, 843 00:40:53,000 --> 00:40:55,400 Speaker 1: and you know, prices are moving around, but the world 844 00:40:55,440 --> 00:40:57,440 Speaker 1: is moving around like the world is as volatile as 845 00:40:57,440 --> 00:41:00,759 Speaker 1: the treasure market is. Volatile and so like that's necessarily 846 00:41:01,200 --> 00:41:02,640 Speaker 1: I wouldn't say it's a good or bad thing, but 847 00:41:02,640 --> 00:41:06,520 Speaker 1: it's certainly not unexpected. Um dealer inventories being low off 848 00:41:06,560 --> 00:41:08,800 Speaker 1: the run, trading not being particularly high as a fraction 849 00:41:08,840 --> 00:41:10,919 Speaker 1: of total, Like, you don't see a lot of the 850 00:41:10,960 --> 00:41:14,320 Speaker 1: monetization of treasuries in the form of sales to source 851 00:41:14,400 --> 00:41:19,160 Speaker 1: cash in the way that you saw. So could that happen? Sure? Um, 852 00:41:19,200 --> 00:41:21,360 Speaker 1: if the in inventories were going to rise rapidly and 853 00:41:21,360 --> 00:41:23,560 Speaker 1: we had the same kind of dash for cash dynamic like, 854 00:41:23,600 --> 00:41:27,040 Speaker 1: I think we've run into similar problems. Ultimately those issues 855 00:41:27,080 --> 00:41:29,720 Speaker 1: have not been fixed, um, at least on a fundamental basis. 856 00:41:30,400 --> 00:41:34,839 Speaker 1: But um, you know, the market is functioning even if 857 00:41:34,840 --> 00:41:36,960 Speaker 1: it is a liquid I might have said precisely that 858 00:41:37,520 --> 00:41:39,680 Speaker 1: a few months ago, but I still believe it's the case. 859 00:41:39,880 --> 00:41:42,440 Speaker 1: We've come full circle then, and I gotta say the 860 00:41:42,840 --> 00:41:45,160 Speaker 1: idea that the treasury market is as volatile as the 861 00:41:45,200 --> 00:41:48,680 Speaker 1: world itself. That's a good quote. Yeah, all right, well, Josh, 862 00:41:48,719 --> 00:41:52,239 Speaker 1: that was amazing so much. Yeah, I can't believe this 863 00:41:52,280 --> 00:41:54,719 Speaker 1: is what you do you know for fun um in 864 00:41:55,040 --> 00:41:59,600 Speaker 1: your evenings, But absolutely fantastic, super educational and I think 865 00:41:59,640 --> 00:42:01,239 Speaker 1: you're one of the few people who can draw a 866 00:42:01,320 --> 00:42:04,560 Speaker 1: direct line between you know, something that happened in ninety 867 00:42:04,640 --> 00:42:07,759 Speaker 1: three and a lot of what we're experiencing today. Yeah, yeah, 868 00:42:07,800 --> 00:42:09,960 Speaker 1: and I should. I should thank Levin and as Wealth 869 00:42:10,000 --> 00:42:11,799 Speaker 1: has been really helpful with this, and he he does 870 00:42:11,800 --> 00:42:15,520 Speaker 1: this for a living, so you know, I'm yeah, I've 871 00:42:15,560 --> 00:42:18,000 Speaker 1: watched some of his like lectures on YouTube and stuff 872 00:42:18,000 --> 00:42:20,080 Speaker 1: really interesting. You want to understand the banking system and 873 00:42:20,120 --> 00:42:21,839 Speaker 1: there it comes from, and like why we have certain 874 00:42:21,960 --> 00:42:24,400 Speaker 1: roles in the way they are. Okay, we'll make that happen, 875 00:42:24,600 --> 00:42:40,200 Speaker 1: all right, thanks so much, Thank you very much, so Joe, 876 00:42:40,280 --> 00:42:42,279 Speaker 1: that was fantastic. I mean I actually feel like I 877 00:42:42,320 --> 00:42:44,680 Speaker 1: kind of sat down and listened to like a narrative story. 878 00:42:45,239 --> 00:42:48,359 Speaker 1: I love that, you know what this although it confirms 879 00:42:48,560 --> 00:42:51,520 Speaker 1: this like long view that I've had about all these 880 00:42:51,600 --> 00:42:55,120 Speaker 1: questions about how many of the solutions to problems are 881 00:42:55,160 --> 00:42:58,880 Speaker 1: about recreating the exact same thing under a new language 882 00:42:59,080 --> 00:43:01,799 Speaker 1: or when it's like it's still the same thing, you know, 883 00:43:01,840 --> 00:43:04,120 Speaker 1: and so like it always like sort of driving me 884 00:43:04,160 --> 00:43:06,879 Speaker 1: crazy where it's like okay, well we want the FED 885 00:43:06,920 --> 00:43:09,000 Speaker 1: to backstop it, but we don't want it to increase 886 00:43:09,040 --> 00:43:11,799 Speaker 1: the money supply measured this way, so it's on someone 887 00:43:11,840 --> 00:43:14,560 Speaker 1: else's balance, but it's still like economically the same thing. 888 00:43:14,560 --> 00:43:16,279 Speaker 1: Like all these conversations, like they kind of drive me 889 00:43:16,360 --> 00:43:18,520 Speaker 1: crazy just because it's like I don't just have to 890 00:43:18,520 --> 00:43:22,279 Speaker 1: fed by it all it solves a problem. Okay, Um, 891 00:43:22,440 --> 00:43:24,800 Speaker 1: well that's a little extreme, but you get I agree 892 00:43:24,800 --> 00:43:27,960 Speaker 1: with you on the branding, Like, never underestimate the power 893 00:43:27,960 --> 00:43:30,480 Speaker 1: of branding and giving something a different name. Right, So 894 00:43:30,560 --> 00:43:34,239 Speaker 1: this is now a money like deposits really, but that's 895 00:43:34,280 --> 00:43:36,440 Speaker 1: the point, Like so many different things in the end, 896 00:43:36,480 --> 00:43:38,359 Speaker 1: when you like work it back, are still just some 897 00:43:38,440 --> 00:43:42,880 Speaker 1: sort of like either fed back implicitly or explicitly like 898 00:43:42,960 --> 00:43:45,840 Speaker 1: fed determined instrument. It's just like how many layers of 899 00:43:45,920 --> 00:43:47,680 Speaker 1: pretend do we want to have so that it looks 900 00:43:47,680 --> 00:43:49,799 Speaker 1: like it's just some like thing out in the market. Okay, 901 00:43:49,840 --> 00:43:53,759 Speaker 1: so we've discovered that Joe doesn't want free markets. There's 902 00:43:53,760 --> 00:43:55,719 Speaker 1: no there's just there's no such thing. There's no such thing. 903 00:43:55,760 --> 00:43:57,920 Speaker 1: It's all creating the illusion that there's like these like 904 00:43:57,960 --> 00:44:00,640 Speaker 1: real markets, when in the end, it's like that's my 905 00:44:00,760 --> 00:44:03,000 Speaker 1: it's it's always my ticure. I mean, the central bank 906 00:44:03,040 --> 00:44:05,680 Speaker 1: at a very basic level is setting interest rates? Right, 907 00:44:05,760 --> 00:44:09,840 Speaker 1: So like, okay, alright, well on that very high level 908 00:44:09,920 --> 00:44:12,040 Speaker 1: of philosophical note, shall we leave it there? Let's leave 909 00:44:12,040 --> 00:44:15,160 Speaker 1: it there. This has been another episode of the Addoughts podcast. 910 00:44:15,239 --> 00:44:17,440 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 911 00:44:17,480 --> 00:44:19,759 Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can 912 00:44:19,800 --> 00:44:23,360 Speaker 1: follow me on Twitter at the Stalwart, follow our producer 913 00:44:23,440 --> 00:44:27,759 Speaker 1: Carmen Rodriguez at Carmen armand follow all the podcasts at 914 00:44:27,760 --> 00:44:31,439 Speaker 1: Bloomberg under the handle at podcasts. And for more odd 915 00:44:31,480 --> 00:44:34,800 Speaker 1: Locks content, go to Bloomberg dot com slash odd Lots. 916 00:44:35,239 --> 00:44:37,440 Speaker 1: Tracy and I blog there. We also have a newsletter, 917 00:44:37,440 --> 00:44:39,160 Speaker 1: a weekly newsletter when we talked about some of our 918 00:44:39,200 --> 00:44:41,480 Speaker 1: guests and episodes and other things that we're interested. You 919 00:44:41,480 --> 00:44:44,920 Speaker 1: can subscribe there goes out every Friday. Thanks for listening. 920 00:45:00,200 --> 00:45:06,759 Speaker 1: T T T thing to me to