WEBVTT - Josh Younger on the Origin Story of the Shadow Banking System 0:00:10.280 --> 0:00:13.520 Hello, and welcome to another episode of the Odd Thoughts Podcast. 0:00:13.600 --> 0:00:16.560 I'm Tracy Alloway and I'm Joe. Isn't all Joe? I 0:00:16.600 --> 0:00:21.320 feel like in our current period of high inflation, bond 0:00:21.360 --> 0:00:25.440 market volatility, tension between you know, central banks, and UH 0:00:25.760 --> 0:00:28.920 fiscal stimulus, all of that, I feel like people tend 0:00:28.960 --> 0:00:32.400 to have their favorite historical analogies that they reach for 0:00:32.640 --> 0:00:36.479 to try to explain what we're experiencing now. Everyone, whatever 0:00:36.520 --> 0:00:39.360 it is, always says this is just like this, and 0:00:39.400 --> 0:00:41.720 like I get it kind of, you know, like naturally 0:00:41.720 --> 0:00:43.879 this say is what we do. But I also think, like, 0:00:44.159 --> 0:00:46.400 you know, there's that danger of like knowing too much history, 0:00:46.440 --> 0:00:49.040 which is if you know your history, you think it's repeating. 0:00:49.479 --> 0:00:52.040 That's right. I mean the one that everyone seems to 0:00:52.040 --> 0:00:54.640 reach for is the seventies, right, like, oh, this is 0:00:54.680 --> 0:00:57.280 just like the seventies, We need a Paul Vulcer to 0:00:57.400 --> 0:01:00.600 come and really tamp down inflation. And then the other 0:01:00.640 --> 0:01:03.400 one that I'm kind of partial to this one the 0:01:03.480 --> 0:01:07.080 nineteen eighteen Spanish flu. Who can forget the period after 0:01:07.120 --> 0:01:10.200 that in World War One ended up with the high 0:01:10.280 --> 0:01:13.600 inflation and then it flipped into deflation. You know, the 0:01:13.600 --> 0:01:16.800 other one that I think about. Two is the Euro 0:01:16.880 --> 0:01:19.640 Area crisis and the tensions. You know what they had 0:01:19.680 --> 0:01:21.880 to do sort of like plumbing wise, what Mario drag 0:01:22.200 --> 0:01:24.520 had to do in terms of like sort of recreating 0:01:24.520 --> 0:01:28.400 the European sovereign bond structure on the fly to improve 0:01:28.440 --> 0:01:31.640 the transmission of monetary policy. I think some of these 0:01:31.680 --> 0:01:33.399 issues are also coming up. We really see it in 0:01:33.400 --> 0:01:35.920 the UK specifically. Yeah, that's a good one. I hadn't 0:01:35.959 --> 0:01:38.800 considered that. But today, on that note, we are going 0:01:38.840 --> 0:01:42.080 to be speaking about a historic parallel that hardly ever 0:01:42.200 --> 0:01:46.840 gets mentioned. It is the year one specific year ninety three. 0:01:47.120 --> 0:01:50.280 I don't know anything that happened in I would never 0:01:50.760 --> 0:01:52.760 you could have guessed, asked me any year in the 0:01:52.840 --> 0:01:57.600 nineteen hundreds and I would not have Yeah, what happened here? 0:01:57.640 --> 0:01:59.680 All right? So it turns out nineteen fifty three was 0:01:59.720 --> 0:02:02.560 actually a seminal year for global finance for reasons that 0:02:02.720 --> 0:02:06.600 I will not get into right now, but specifically because 0:02:06.760 --> 0:02:10.560 it ended up with a policy decision that still has 0:02:10.639 --> 0:02:14.680 relevance today. So not only was the US specifically in 0:02:14.680 --> 0:02:19.959 the nineteen fifties facing high inflation, tension between employment and prices, 0:02:19.960 --> 0:02:23.720 things like that, but we also had an outcome that 0:02:23.760 --> 0:02:27.280 has sort of like echoed across the decades ever since 0:02:27.480 --> 0:02:29.640 I want to learn more. I'm ready. All right, Well, 0:02:29.680 --> 0:02:32.680 we really do have the perfect guests to explain nineteen 0:02:32.760 --> 0:02:35.520 fifty three and it's relevance to today to us. We 0:02:35.520 --> 0:02:38.160 are going to be speaking with Josh Younger. He is 0:02:38.200 --> 0:02:41.800 the global head of Asset and Liability Management, Research and 0:02:41.880 --> 0:02:45.200 Strategy at JP Morgan. He has also a repeat all 0:02:45.200 --> 0:02:47.680 thoughts guests. He's no getting up there like this is. 0:02:47.760 --> 0:02:50.440 He's become not quite in the lead, but getting close alright, 0:02:50.440 --> 0:02:52.760 one of our favorites. So Josh, welcome back to the show. 0:02:52.919 --> 0:02:55.440 That's great to be back in studio, which is more exciting. 0:02:55.840 --> 0:03:00.160 So this is just your hobby now it's researching financial history. 0:03:00.280 --> 0:03:02.880 I needed to know hobby basically, Um, yeah, it's it's 0:03:02.919 --> 0:03:05.600 just for fun. And there's so much you can do online, 0:03:05.639 --> 0:03:07.120 Like it's sin's weird to say that the internet's a 0:03:07.120 --> 0:03:09.440 wonderful thing. Like you can pull up basically anything, and 0:03:09.919 --> 0:03:11.720 the Federals, your bank at St. Louis, has been very 0:03:11.800 --> 0:03:14.320 kind to provide like an enormous quantity of documents and 0:03:14.400 --> 0:03:16.799 data so you don't have to get Dusty and archives. 0:03:16.840 --> 0:03:18.480 You can just search it. This is what I should 0:03:18.480 --> 0:03:20.600 be doing instead of just scrolling Twitter at night and 0:03:20.639 --> 0:03:23.600 playing playing chess online. I need to go on the 0:03:23.600 --> 0:03:26.320 New York Times way back machine and see what bond 0:03:26.320 --> 0:03:29.760 market volatility was like in the early nineteen fifties. Well, okay, 0:03:29.800 --> 0:03:34.920 on this note, Josh why nine specifically, he has a 0:03:34.920 --> 0:03:37.320 lot of relevance in general. So that's the year where 0:03:37.360 --> 0:03:40.040 the European country start opening up their imports to to 0:03:40.200 --> 0:03:43.160 the dollar zone. It's the lended debt deal with the 0:03:43.160 --> 0:03:45.800 Germans after the war around German debt um. But it's 0:03:45.800 --> 0:03:48.440 also one of the years where the Feed is really 0:03:48.440 --> 0:03:50.680 forced to make a really important decision. So it's where 0:03:51.240 --> 0:03:53.200 a lot of their desire to get out of the 0:03:53.240 --> 0:03:54.760 bond market. I'm sure we'll talk about what they did 0:03:54.840 --> 0:03:56.880 during the Second World War. It's a very controlled market. 0:03:56.960 --> 0:04:00.400 It's very heavily um managed by the Fed at an 0:04:00.400 --> 0:04:02.840 active basis. They really pegged yields on the long end, 0:04:02.880 --> 0:04:05.960 and getting out of that is complicated. And in fifty 0:04:05.960 --> 0:04:07.560 three is when the market really tests them. So we 0:04:07.560 --> 0:04:10.560 didn't have to don't fight the Fed mantra quite quite yet. 0:04:10.600 --> 0:04:13.160 At that point But this is like a really interesting 0:04:13.200 --> 0:04:17.520 philosophical question right here, because there's always this question today 0:04:17.560 --> 0:04:20.880 or in any period, to what degree is the rate 0:04:20.920 --> 0:04:23.200 that we see on a ten year, on a thirty year, 0:04:23.240 --> 0:04:26.640 on a two year a policy rate verse a market rate. 0:04:26.880 --> 0:04:30.240 Before we get to fifty three, specifically, can you just 0:04:30.279 --> 0:04:32.560 talk a little bit more about what you're what you 0:04:32.680 --> 0:04:36.840 said about how rates across the curve were essentially policy rates. Yeah, 0:04:36.880 --> 0:04:38.560 there's when we think about a tenure rate, like you 0:04:38.600 --> 0:04:40.520 could do one of two things. You can roll treasury 0:04:40.560 --> 0:04:42.600 bills every three months for ten years, or you can 0:04:42.600 --> 0:04:45.920 buy a tenure bond. So in a perfect world, those 0:04:45.920 --> 0:04:48.720 two things are connected through expectations. Uh. And then there's 0:04:48.760 --> 0:04:51.680 this question of should I involve some a little premium 0:04:51.680 --> 0:04:54.080 on top of them, right, the term premium, which is 0:04:54.120 --> 0:04:56.360 unlocking my up my money up for ten years. I 0:04:56.440 --> 0:04:58.720 might be wrong in my expectations, and so I should 0:04:58.760 --> 0:05:01.440 probably be paid for that at least little excess over 0:05:01.440 --> 0:05:05.400 the expectations. And so they're connected. Most of the tenure 0:05:05.440 --> 0:05:08.440 eight is an expectation. Those expectations are often wrong, but 0:05:08.520 --> 0:05:11.160 you know that's a that's a separate issue, um. But 0:05:11.600 --> 0:05:13.839 there is a policy lever and on the on the 0:05:13.839 --> 0:05:15.840 other hand, there's the market level, which is a term premium, 0:05:15.839 --> 0:05:18.120 their demand to actually buy the bond in the first place. 0:05:18.520 --> 0:05:21.200 So talk to us then about the state of the 0:05:21.240 --> 0:05:23.600 bond market. You know, coming out of World War Two 0:05:23.720 --> 0:05:26.520 into the nineteen fifties, you mentioned that the Fed had 0:05:26.600 --> 0:05:31.680 imposed yield curve control um basically to finance the wartime deficit. 0:05:31.720 --> 0:05:34.880 They were trying to move off of that. Again, these 0:05:34.880 --> 0:05:38.200 are all sort of familiar themes to anyone in two, 0:05:38.320 --> 0:05:41.120 But why was that difficult for them? Well, so let's 0:05:41.120 --> 0:05:44.159 get a sense of scale, right, So in in ninette, 0:05:44.480 --> 0:05:48.440 there's about forty billion dollars with the treasury outstanding. There's 0:05:48.480 --> 0:05:51.360 about two and forty billion dollars where the treasury is outstanding. 0:05:51.440 --> 0:05:55.120 So that's about double the pre war p GDP. If 0:05:55.160 --> 0:05:58.599 you scale that, say, okay, COVID expenditures on the scale 0:05:58.600 --> 0:06:01.359 of World War two, that's about forty trillion dollars in 0:06:01.480 --> 0:06:03.560 net treasury issuance. So we're talking about a lot of 0:06:03.600 --> 0:06:08.279 debt um and the question is who's gonna buy yeah um, 0:06:08.360 --> 0:06:10.160 And what we're dealing with is kind of nothing we 0:06:10.480 --> 0:06:12.240 got in that context, and so that's where I guess 0:06:12.240 --> 0:06:15.039 the analogy breaks down, not to start there for the episode, 0:06:15.080 --> 0:06:17.800 but like, it's a very difficult problem, which is who's 0:06:17.839 --> 0:06:20.400 going to buy the equivalent of forty trillion dollars today 0:06:20.520 --> 0:06:23.520 in debt um, and one of those participants is the Fed. 0:06:23.680 --> 0:06:26.000 So what the Fed says is in in further into 0:06:26.040 --> 0:06:29.520 the war effort, we're gonna peg gields uh specifically the 0:06:29.560 --> 0:06:31.720 front end, the one year point, and the long end. 0:06:31.839 --> 0:06:35.160 So every tenure bond, for example, yields two an a 0:06:35.160 --> 0:06:37.920 half percent or less because I'm willing to buy it 0:06:37.960 --> 0:06:40.360 to an alf percent um. Every Treasury bill yelds three. 0:06:41.320 --> 0:06:43.000 That's roughly where the curve was at the beginning of 0:06:43.000 --> 0:06:45.200 the war. It was no like particular thought given to 0:06:45.279 --> 0:06:48.240 that in terms of like fair value pricing. It was 0:06:48.240 --> 0:06:50.800 just saying, wherever it is is where it's going to 0:06:50.880 --> 0:06:55.200 stay until until conditions allow real quickly. How much actual 0:06:55.279 --> 0:06:58.640 buying did they have to do versus the declaration of 0:06:58.680 --> 0:07:00.800 the price essentially taking care of most of it. Yeah, 0:07:00.839 --> 0:07:02.880 not that much. I mean they thought about twenty billion 0:07:02.880 --> 0:07:05.119 dollars the Fed did over the course of that period. 0:07:05.160 --> 0:07:07.840 Most of those were in bills actually, because bills at 0:07:07.839 --> 0:07:10.240 three eights are not very appealing. Tenure bonds at two 0:07:10.240 --> 0:07:11.680 and a half or a lot more appealing. So what 0:07:11.720 --> 0:07:14.320 the market did was they extended. And actually the FED 0:07:14.400 --> 0:07:17.160 was a net seller of long and boughts towards the 0:07:17.240 --> 0:07:19.320 end of the war because deals were dipping below their 0:07:19.360 --> 0:07:22.000 target m so, so it wasn't all buying, but they 0:07:22.000 --> 0:07:24.600 owned something like the bill market by the end of 0:07:24.640 --> 0:07:27.120 the war. Um. And they didn't really have a chance 0:07:27.160 --> 0:07:29.200 to get out so easy because when you get out 0:07:29.200 --> 0:07:33.360 of that situation, like, you can't just turn it off. Um. 0:07:33.480 --> 0:07:36.119 And so there was this outstanding question, which is how 0:07:36.280 --> 0:07:37.960 are we going to get out of the market and 0:07:38.040 --> 0:07:40.320 not completely blow up bond markets in the in the 0:07:40.360 --> 0:07:42.120 first instance, Like, how do we do this in the 0:07:42.200 --> 0:07:45.200 right way? Well, so, how how did they try to 0:07:45.400 --> 0:07:49.040 undertake that transition? I mean, nowadays you think about the 0:07:49.080 --> 0:07:51.840 FED trying to wind down its balance sheet embark on 0:07:51.920 --> 0:07:55.720 quantitative tightening. There's a lot of communication that comes ahead 0:07:55.720 --> 0:07:58.320 of that. Was a similar thing, trying to broadcast to 0:07:58.360 --> 0:08:00.160 the market this is how we're going to do it. 0:08:00.280 --> 0:08:03.000 Please don't freak out. It was really fraught um So. 0:08:03.080 --> 0:08:04.680 Ken Garbage has done a ton of work on this 0:08:04.840 --> 0:08:07.800 and they really didn't fits and starts and very slowly, 0:08:07.800 --> 0:08:10.120 so no one ever really imagined they do cold turkey 0:08:10.200 --> 0:08:12.760 like that was never really considered. So what they said is, well, 0:08:12.840 --> 0:08:15.320 let's start with bills um. And then the Treasury said, well, 0:08:15.320 --> 0:08:16.920 we don't want to big bills. We like bills at 0:08:16.960 --> 0:08:19.160 three eights uh. And and there was a back and 0:08:19.200 --> 0:08:21.320 forth over a couple of years, and by I think 0:08:21.320 --> 0:08:24.440 it was forty seven. Essentially the committee went to the 0:08:24.480 --> 0:08:26.400 Treasury and said, we think this makes sense. We'll figure 0:08:26.440 --> 0:08:27.840 it out for you, but we're going to do this 0:08:28.400 --> 0:08:30.320 in two days. And so it was a kind of 0:08:30.400 --> 0:08:32.959 unilateral decision by the committee. There was some sweet nurse 0:08:33.000 --> 0:08:36.000 for the treasury, but the Fed basically told the Treasury 0:08:36.040 --> 0:08:38.360 we're doing this whether you like it or not. Uh. 0:08:38.400 --> 0:08:40.839 And then the debate moved on to the certificates of 0:08:41.080 --> 0:08:43.360 indebtedness was roughly the one year point, so he said, well, 0:08:43.480 --> 0:08:47.320 can that be released? And by around the fifty yearly fifties, 0:08:47.640 --> 0:08:48.960 the front end of the curve out to the one 0:08:49.040 --> 0:08:50.880 year point was free to float, so billy yields came 0:08:50.920 --> 0:08:53.840 up into the one rate one one and a half 0:08:53.840 --> 0:08:56.160 percent range, So it was kind of a market rate, 0:08:56.240 --> 0:08:58.200 but the long end was still a two and a half, 0:08:58.559 --> 0:09:00.640 and they hadn't figured out how to stilt that, and 0:09:00.640 --> 0:09:02.800 that was most of the market um, even though the 0:09:03.040 --> 0:09:04.640 FED to own most of the bill markets, so that 0:09:04.679 --> 0:09:07.680 made it a little more straightforward. But um at the 0:09:07.679 --> 0:09:09.600 long end, you know, that was most of the outstanding 0:09:09.600 --> 0:09:24.000 debt at the time. So I'm just trying to understand 0:09:24.360 --> 0:09:27.000 a little bit more. How much of the challenge of 0:09:27.320 --> 0:09:30.120 for the Fed, of extricating itself to some extent from 0:09:30.200 --> 0:09:33.840 the bond market was about the rates specifically, and what 0:09:33.840 --> 0:09:35.920 that would do to the economy were rates to jump up, 0:09:36.480 --> 0:09:40.480 versus who, um, whose balance sheet these assets would beyond? 0:09:40.480 --> 0:09:42.640 It was both. So the Treasury just doesn't like the 0:09:42.679 --> 0:09:44.720 idea of paying more, which is test of all. I mean, 0:09:44.720 --> 0:09:46.720 they have a deficit to fund, and by the late 0:09:46.720 --> 0:09:49.720 forties early fifties, the deficits standing again, so they paid 0:09:49.760 --> 0:09:51.959 on their debt pretty fast. And then by the by 0:09:51.960 --> 0:09:54.080 the early fifties you've got the Korean War, You've got 0:09:54.360 --> 0:09:57.040 a tax bill that actually Truman vitas and has passed 0:09:57.040 --> 0:09:59.880 over his objection to cut taxes, and so there's a 0:10:00.000 --> 0:10:04.280 fiscal expansion going on. So that that's the treasuries and incentive. Now, 0:10:04.440 --> 0:10:06.480 a lot of their documents suggested were also sensitive to 0:10:06.480 --> 0:10:10.360 the feds concern around inflation um and inflation was under 0:10:10.400 --> 0:10:13.400 control for about a year after the war because the 0:10:13.400 --> 0:10:16.079 Office of Price Administration basically fixed the price of things. 0:10:16.559 --> 0:10:19.800 They tried to renew that that organization to keep price 0:10:19.840 --> 0:10:23.480 fixing in place. Truman decides it's not a strong enough bill. 0:10:23.880 --> 0:10:25.800 He vetos it, but they can't come up with saying 0:10:25.800 --> 0:10:28.000 that can pass the vetos, so it just expires. So 0:10:28.400 --> 0:10:32.079 all prices are released at the same time. So shock therapy. 0:10:33.040 --> 0:10:35.920 But I don't go well, okay on that note, I 0:10:35.920 --> 0:10:40.000 mean the inflation of the late nineteen forties, early nineteen fifties, 0:10:40.080 --> 0:10:44.080 how much of that was sort of supply chain issues, 0:10:44.240 --> 0:10:46.800 you know, the transitioning of the U. S. Economy from 0:10:46.920 --> 0:10:49.680 a wartime footing to one of peace, and then I 0:10:49.679 --> 0:10:52.559 guess they went back to war relatively quickly given the 0:10:52.600 --> 0:10:57.960 Korean situation versus actual debt monetization, because you know, the 0:10:57.960 --> 0:11:01.000 FED was in the market buying back trudge, Yeah, it was. 0:11:01.120 --> 0:11:03.320 It was. It's hard to make an attribution. I haven't 0:11:03.320 --> 0:11:05.720 seen a good attribution. But you know, the other thing. 0:11:05.960 --> 0:11:08.319 The FED bought twenty billion dollars worth of worth the 0:11:08.360 --> 0:11:11.760 treasuries during the war of commercial banks bought se so 0:11:11.960 --> 0:11:14.199 commercial banks are the real price fixtures in the treasury 0:11:14.240 --> 0:11:16.640 market during the Second World War. And when when a 0:11:16.760 --> 0:11:19.199 commercial bank buys the treasury bond, they create deposits on 0:11:19.240 --> 0:11:20.959 the other side of that. So they didn't let loans 0:11:21.040 --> 0:11:24.240 roll off and replace them with treasuries. They had new assets. 0:11:24.240 --> 0:11:27.520 So the leverage in the banking system doubles in three years. 0:11:29.679 --> 0:11:31.920 This is new money because deposits or money, right and 0:11:32.040 --> 0:11:35.160 and some will talk about money's a spectrum, so deposits 0:11:35.160 --> 0:11:38.120 are very close to the real paper money side of 0:11:38.320 --> 0:11:42.440 that spectrum. Uh. And so there's a view at least 0:11:42.440 --> 0:11:44.800 at the Treasury and the FED that that because banks 0:11:44.800 --> 0:11:49.079 are so heavily supporting the market and market debt, that 0:11:49.080 --> 0:11:51.000 that expansion of their balance sheets, expansion of the money 0:11:51.000 --> 0:11:53.360 supply has generated a lot of inflation. So that's on 0:11:53.440 --> 0:11:57.160 the demand side. Too much money. Um, we can debate monitorism, 0:11:57.200 --> 0:11:59.160 I guess on a different episode, but they said there's 0:11:59.200 --> 0:12:00.719 a big expansion of them to supply it at the 0:12:00.760 --> 0:12:02.760 same time, like you go from guns to butter and 0:12:02.800 --> 0:12:05.720 back and and that that's disruptive. So that's that's where 0:12:06.360 --> 0:12:08.880 analogies come in. You're really moving the economy from a 0:12:08.960 --> 0:12:12.400 very different production model UM in the year, and then 0:12:12.400 --> 0:12:14.160 you're trying to bring it back and these things don't 0:12:14.200 --> 0:12:17.800 start up that quickly. This is all so familiar. So okay, 0:12:17.800 --> 0:12:21.600 so the FED doesn't want to be UM fixing the 0:12:21.640 --> 0:12:25.280 price of all these assets. There's also this concern about 0:12:25.360 --> 0:12:29.760 too much commercial bank leverage and valid or not. So 0:12:29.960 --> 0:12:32.520 who else is there where where? What's the next step 0:12:32.559 --> 0:12:34.920 here in terms of who enters the market. Yeah, so 0:12:35.160 --> 0:12:38.960 the non bank investors are really domestic. So something like 0:12:39.040 --> 0:12:41.000 less than one percent of the market for treasuries at 0:12:41.000 --> 0:12:42.800 the end of the war needs to the late fifties 0:12:42.880 --> 0:12:45.480 is owned by international investors. So you have to find 0:12:45.480 --> 0:12:48.760 insurance companies and you know other there's not a great 0:12:48.800 --> 0:12:51.600 deal of granularity in the old data, so it's basically 0:12:51.600 --> 0:12:54.280 like it's a bank, it's an insurance company, it's the FED, 0:12:54.800 --> 0:12:57.680 it's an international or it's somebody else. And so you 0:12:57.720 --> 0:12:59.559 know that we don't have Pimcoes and black Rocks in 0:12:59.600 --> 0:13:03.160 the world time UM and corporations are very important. Corporation 0:13:03.200 --> 0:13:04.880 is very cash rich. Um, they have a lot of 0:13:04.880 --> 0:13:06.400 money to invest, and so to find a place to 0:13:06.400 --> 0:13:08.480 put it. But ultimately to an a half percent in 0:13:08.520 --> 0:13:11.560 worldward inflations at ten is not particularly appealing. So what 0:13:11.679 --> 0:13:14.240 happens in the bond market? I can imagine that, you know, 0:13:14.360 --> 0:13:16.760 the combination of two and a half percent being not 0:13:16.800 --> 0:13:20.040 that appealing, plus the Fed basically you know, making it 0:13:20.080 --> 0:13:22.240 fairly clear that they would like to step back from 0:13:22.240 --> 0:13:25.880 the market. I imagine that's a recipe for some drama. Yeah, 0:13:25.880 --> 0:13:28.520 there were the what became the Accord of the Fed 0:13:28.520 --> 0:13:30.640 Treasury Accord the Treasury Fed a cord. I'm not sure 0:13:30.679 --> 0:13:32.680 what the order we're supposed to put in, but that's 0:13:32.679 --> 0:13:35.480 in uh. And that's the result of a lot of 0:13:35.480 --> 0:13:38.400 congressional pressure in the early fifties. So in nineteen fifty 0:13:38.960 --> 0:13:42.600 the Banking Committee the Senate condads a hearing and make recommendations. 0:13:42.640 --> 0:13:45.559 You know, that's thanks for being helpful kind of thing. Um. 0:13:45.679 --> 0:13:48.719 And and the President gets involved, and there's just a 0:13:48.800 --> 0:13:51.920 lot of concern that monetary policy is worsening a very 0:13:51.920 --> 0:13:56.120 disruptive inflationary environment. And by early fifty one there's just 0:13:56.240 --> 0:13:59.280 enough pressure on the the Treasury to get along that 0:13:59.360 --> 0:14:02.120 they figure out. And one of the most important characters 0:14:02.120 --> 0:14:04.720 in this debate is Bill Martin. So Bill Martin used 0:14:04.720 --> 0:14:06.880 to run the York Stock Exchange in the thirties, so 0:14:06.920 --> 0:14:09.920 he comes from a dealer background, he comes from the street. Um, 0:14:09.960 --> 0:14:13.160 he goes in and runs the XM bank for for Truman, 0:14:13.200 --> 0:14:15.560 and then he's brought into Treasury by by Snyder, who's 0:14:15.559 --> 0:14:18.360 the Secretary of the Treasury at the time, initially as 0:14:18.400 --> 0:14:22.360 an assistant Secretary for international affairs, but he quickly becomes 0:14:22.440 --> 0:14:24.440 kind of a fixer. So he's kind of doing everything 0:14:24.480 --> 0:14:27.640 and he's tasked by Snyder with liaising with the Federal 0:14:27.640 --> 0:14:31.000 Reserve to figure out a way to get out of 0:14:31.000 --> 0:14:33.920 the market. Um that it's amenable to both parties, Like, 0:14:33.960 --> 0:14:35.720 what's the best way to do this? Because we kind 0:14:35.720 --> 0:14:37.560 of have to do it now? So what did what 0:14:37.760 --> 0:14:40.800 did he do? So he broke here it an arrangement 0:14:40.800 --> 0:14:44.320 that came out as a very vague commitment. So they 0:14:44.320 --> 0:14:46.800 basically just say like we've we've reached a full accord. 0:14:47.200 --> 0:14:48.760 They don't say what that accord is other than to 0:14:48.760 --> 0:14:51.440 say we're gonna stop monetizing the debt. So then us is, 0:14:51.440 --> 0:14:52.840 how are actually gonna do this, but they do put 0:14:52.840 --> 0:14:55.440 that up publicly and make a public commitment to free 0:14:55.440 --> 0:14:57.840 the bond market UM and a couple of days later, 0:14:58.640 --> 0:15:00.600 Martin is actually nominated to Chair of the FED because 0:15:00.640 --> 0:15:04.760 mcape's deaths down, so he switches sides UM and he's 0:15:04.800 --> 0:15:07.600 confirmed pretty quickly, and by by early April he's the 0:15:07.680 --> 0:15:10.600 Chair of the Board of the FED and he's very 0:15:10.640 --> 0:15:12.840 he's very committed to this inflation fighting thing, and in 0:15:12.880 --> 0:15:16.600 his oath of office statement he says inflation is the 0:15:16.600 --> 0:15:19.560 greatest threat, including the enemies beyond our borders or something 0:15:19.560 --> 0:15:22.480 to that effect, which you know in in April one, 0:15:22.520 --> 0:15:25.400 three days earlier, the Rosenbergs have been convicted. H you 0:15:25.400 --> 0:15:27.240 don't get Joe Welsh saying, you know, have you no 0:15:27.320 --> 0:15:29.720 decency sir to McCarthy until fifty four, So this is 0:15:29.720 --> 0:15:31.760 the red Scare, and he's saying inflation is worse than 0:15:31.800 --> 0:15:35.560 communism or implicitly and so like he's he's very much 0:15:36.000 --> 0:15:40.320 committed to the cause, but the commitment is out there. 0:15:40.320 --> 0:15:41.720 It's just the question of like how we're going to 0:15:41.760 --> 0:15:44.600 execute this in practice, and that's where you know, the 0:15:44.680 --> 0:15:46.920 changing of the guard at Treasury, the Eisenhower election, like 0:15:47.080 --> 0:15:49.440 people have to get into the seat for the next 0:15:49.480 --> 0:15:52.040 administration to actually affect the change in policy, because they 0:15:52.120 --> 0:15:54.880 ultimately need to agree. Snider didn't like the idea of 0:15:54.920 --> 0:15:57.280 ission above two and a half percent, So the Treasury 0:15:57.320 --> 0:15:59.800 kept flooding the market with short term death uh and then, 0:16:00.040 --> 0:16:03.040 and that was partially for regular debt management purposes. They 0:16:03.080 --> 0:16:04.760 do some things around non market all to debt, to 0:16:04.800 --> 0:16:08.680 get the bank debt bank holdings down, but ultimately there's 0:16:08.680 --> 0:16:11.920 just a lot of institutional tension. At one point, Truman 0:16:12.040 --> 0:16:15.600 takes Martin's side at some event and says, you're a trader, right, 0:16:15.720 --> 0:16:18.680 gets very much in his face. Um. So it's it's 0:16:18.680 --> 0:16:21.960 a very like fraught situation. I feel like I'm listening 0:16:21.960 --> 0:16:24.880 to a really good, like campfire story. This is good. 0:16:24.920 --> 0:16:26.280 I just wanted to just I don't even want to 0:16:26.280 --> 0:16:30.720 ask any questions. I just want to hear what happens next? Okay, well, 0:16:30.920 --> 0:16:33.200 what happens? What happens next? I mean, on that note, 0:16:33.240 --> 0:16:35.280 you can imagine at some point the Treasury goes back 0:16:35.320 --> 0:16:38.800 to selling longer term, right, and how does the market 0:16:39.000 --> 0:16:41.840 take that? So that's an Eisenhower administration thing that they're 0:16:42.080 --> 0:16:45.400 part of. Eisenhower's election is about inflation. Actually, one of 0:16:45.400 --> 0:16:47.680 the first television commercials ever got sent to a general 0:16:47.720 --> 0:16:50.960 audience is about inflation. Is Eisenharer saying, my grandmother doesn't 0:16:50.960 --> 0:16:52.760 like the inflation. That's why I say it's time for 0:16:52.800 --> 0:16:56.720 a change. There's a central plank of his presidential campaign. 0:16:56.960 --> 0:17:01.840 Eisenhower answers, America, you know what things cost today? High 0:17:01.880 --> 0:17:06.000 prices are just driving me crazy. Yes, my Nami gets 0:17:06.040 --> 0:17:08.520 after me about the high cost of living. And he 0:17:08.600 --> 0:17:12.359 nominates not only Humphrey, who's committed to fighting inflation, but 0:17:12.400 --> 0:17:14.479 a bunch of x FED people. So he brings them 0:17:14.480 --> 0:17:17.000 people in from the New York FED and other places 0:17:17.080 --> 0:17:20.560 to be senior advisors under secretaries. And so, you know, 0:17:20.600 --> 0:17:23.399 the news media at the time speculates the FED is 0:17:23.440 --> 0:17:26.560 like one this argument as to the relative benefits of 0:17:26.600 --> 0:17:29.240 low cost of debt service versus inflation. So inflation is 0:17:29.280 --> 0:17:33.719 the priority. So the changing of the administration changes the priorities. Uh, 0:17:33.720 --> 0:17:35.040 And they come and they say, we need to find 0:17:35.080 --> 0:17:37.199 non bank investors. We need to find a way to 0:17:37.240 --> 0:17:39.399 sell long term debt that doesn't inflate the size of 0:17:39.400 --> 0:17:42.159 the banking system. And by extension, the money supply and 0:17:42.200 --> 0:17:45.880 by extension the price um price pressures. And and their 0:17:45.920 --> 0:17:48.159 solution is to reintroduce the bond. They hadn't issued long 0:17:48.240 --> 0:17:51.200 term debt since forty five uh and and they want 0:17:51.240 --> 0:17:53.679 to bring back the bond uh And the question is 0:17:53.720 --> 0:17:55.960 how do you figure out the right way to do 0:17:56.000 --> 0:17:58.560 that because the market is not used to buying I 0:17:58.560 --> 0:18:00.399 think it was supposed to mature in eighties free or 0:18:00.440 --> 0:18:02.160 something like that. So it's like a thirty year bond 0:18:02.160 --> 0:18:03.960 and they haven't done third year bond a really long time. 0:18:04.080 --> 0:18:05.879 So who's gonna buy it? How are you going to 0:18:05.960 --> 0:18:08.600 price it in a way that brings in brings in 0:18:08.600 --> 0:18:12.159 interest from non banks specifically. I mean this point is 0:18:12.200 --> 0:18:16.880 interesting because when politicians talk about fighting inflation today, they're 0:18:16.880 --> 0:18:20.000 talking about fiscal various fiscal policy levers and we need 0:18:20.040 --> 0:18:22.919 to cut spending here, or we need to you know, 0:18:22.960 --> 0:18:26.399 expand oil oil drilling or something like that. But it 0:18:26.520 --> 0:18:30.240 sounds like in the Eisenhower administration it was like they're 0:18:30.240 --> 0:18:32.720 trying to solve it via the financial system or via 0:18:32.760 --> 0:18:35.600 plumbing and something. Everything was basically well, there was a 0:18:35.600 --> 0:18:38.480 fiscal lever as well, I should say, um, but that's 0:18:38.480 --> 0:18:41.360 always a little hard thought to say, oh, higher taxes 0:18:41.440 --> 0:18:44.440 because inflation is higher, and that doesn't feel great for anybody, 0:18:44.480 --> 0:18:50.359 but it's today. Yeah. But the but the debt management 0:18:50.359 --> 0:18:52.320 strategy of the treasury when the when the Feed is 0:18:52.320 --> 0:18:55.480 buying get it fixed price, debt management is money manage 0:18:55.720 --> 0:18:57.920 because they're in the market to buy at any price. 0:18:57.960 --> 0:19:00.520 They buy treasuries. When the Fed buys treasuries, they print 0:19:00.520 --> 0:19:03.359 new money with which to do so. Um. And so 0:19:04.160 --> 0:19:07.400 those two things are connected, and this becomes a technocratic problem. 0:19:07.400 --> 0:19:09.480 There's not there's actually quite a bit of public debate 0:19:09.480 --> 0:19:11.640 about debt management, more so than you would expect given 0:19:11.680 --> 0:19:15.239 the current current climate, or at least focus on, you know, 0:19:15.440 --> 0:19:17.520 how much, how big the twenty years sector is and 0:19:17.840 --> 0:19:20.680 things like that. Um. But you know, it's not like 0:19:20.720 --> 0:19:22.840 a political story all the time. But then it would 0:19:22.840 --> 0:19:25.840 have been. Um. But you know, I think that the 0:19:25.920 --> 0:19:29.400 key here is there's an alignment of interests. And so 0:19:29.480 --> 0:19:31.919 Snyder comes to the market and he said, sorry, Humphrey 0:19:31.920 --> 0:19:33.520