1 00:00:10,119 --> 00:00:13,440 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:13,480 --> 00:00:17,000 Speaker 1: I'm Tracy Allaway and I'm Joe Wisn't so Joe. This 3 00:00:17,160 --> 00:00:20,160 Speaker 1: is a very special episode of All Thoughts. It is 4 00:00:20,280 --> 00:00:24,200 Speaker 1: a live recording. That's right, We did a live recording. 5 00:00:24,200 --> 00:00:26,480 Speaker 1: There was a big I don't want two hundred something 6 00:00:26,560 --> 00:00:30,120 Speaker 1: people came out, really packed house to talk about Finn Red. 7 00:00:30,600 --> 00:00:34,400 Speaker 1: That's right. Everyone got really into Finn Red. No. So 8 00:00:34,560 --> 00:00:37,559 Speaker 1: this is basically a follow up from the episode we 9 00:00:37,680 --> 00:00:40,960 Speaker 1: did with Josh Younger, one of our favorite guests, in 10 00:00:41,040 --> 00:00:44,320 Speaker 1: which he was talking about the origins of the repo market, 11 00:00:44,440 --> 00:00:47,159 Speaker 1: and we decided that we needed to talk more about it, 12 00:00:47,240 --> 00:00:51,200 Speaker 1: and we wanted to bring in Josh's research partner, Love Men, 13 00:00:51,240 --> 00:00:54,040 Speaker 1: and yeah, that's right. And so we have this sort 14 00:00:54,040 --> 00:00:57,560 Speaker 1: of sprawling financial system, you know there, as you mentioned, 15 00:00:57,600 --> 00:01:02,640 Speaker 1: there's a repo, there's euro dollars, there's crypto stable coins, PayPal, Venmo, 16 00:01:02,760 --> 00:01:04,920 Speaker 1: all of these things that have sort of like some 17 00:01:05,000 --> 00:01:08,720 Speaker 1: banking like qualities but aren't really banks. And so the 18 00:01:08,800 --> 00:01:11,480 Speaker 1: frame after that great episode with Josh I guess that 19 00:01:11,560 --> 00:01:14,720 Speaker 1: was in October is basically like, how did we get here? 20 00:01:14,720 --> 00:01:17,800 Speaker 1: How did we get in this position where we have 21 00:01:18,000 --> 00:01:21,560 Speaker 1: all these sort of various bank entities that aren't traditional 22 00:01:21,600 --> 00:01:25,120 Speaker 1: banks that in somewhere or another, the FED is responsible 23 00:01:25,200 --> 00:01:28,319 Speaker 1: for regulating or backstopping, right, And I think there's a 24 00:01:28,360 --> 00:01:31,000 Speaker 1: lot about the financial system that we tend to take 25 00:01:31,160 --> 00:01:34,000 Speaker 1: for granted. But there's a reason that all of these 26 00:01:34,040 --> 00:01:37,360 Speaker 1: different things exist, for better or worse, and they do 27 00:01:37,440 --> 00:01:41,360 Speaker 1: come with, you know, advantages and drawbacks. So that's really 28 00:01:41,640 --> 00:01:45,440 Speaker 1: the theme of this particular episode, talking about how we 29 00:01:45,520 --> 00:01:48,840 Speaker 1: got here and why and what it means now. So 30 00:01:49,280 --> 00:01:52,240 Speaker 1: please enjoy it. Thank you everyone for coming to a 31 00:01:52,440 --> 00:01:55,800 Speaker 1: very special live recording of the All Thoughts podcast. I'm 32 00:01:55,840 --> 00:01:58,760 Speaker 1: Tracy Alloway and I'm Joe Wasn't so I am very 33 00:01:58,800 --> 00:02:01,560 Speaker 1: pleased to say that to day we have Josh Younger, 34 00:02:01,640 --> 00:02:04,520 Speaker 1: one of our favorite Odd Thoughts guests. We also have 35 00:02:04,680 --> 00:02:07,520 Speaker 1: his research partner, Love Men and he is an associate 36 00:02:07,520 --> 00:02:10,600 Speaker 1: professor of law at Columbia also the author of The 37 00:02:10,639 --> 00:02:13,760 Speaker 1: FED Unbound. And one of the reasons we wanted to 38 00:02:13,880 --> 00:02:17,000 Speaker 1: hold this live event is because we recorded an episode 39 00:02:17,000 --> 00:02:20,720 Speaker 1: with Josh Younger earlier this month, I believe, where we 40 00:02:20,760 --> 00:02:24,960 Speaker 1: talked about the origins of the shadow banking system, specifically 41 00:02:25,080 --> 00:02:27,840 Speaker 1: the repo market. And one of the themes that emerged 42 00:02:27,840 --> 00:02:31,080 Speaker 1: from that discussion is that even if you think the 43 00:02:31,080 --> 00:02:34,880 Speaker 1: shadow banking market has a lot of issues and problems today, 44 00:02:35,480 --> 00:02:38,600 Speaker 1: the reason those issues and problems exist sort of stems 45 00:02:38,639 --> 00:02:41,680 Speaker 1: from these decisions that were made many, many decades ago, 46 00:02:41,840 --> 00:02:46,720 Speaker 1: conscious decisions by regulators, notably the FED, that combined to 47 00:02:46,919 --> 00:02:49,880 Speaker 1: create the shadow banking market as we know it today. Right, 48 00:02:49,960 --> 00:02:53,000 Speaker 1: even if you're not interested in shadow shadow banking market, 49 00:02:53,400 --> 00:02:57,600 Speaker 1: shadow banking market is interested in you basically. So yeah, 50 00:02:57,680 --> 00:03:01,160 Speaker 1: I'm really excited about this. Um plenty to learn, plenty 51 00:03:01,280 --> 00:03:04,480 Speaker 1: to sort of look through history to sort of understand 52 00:03:04,800 --> 00:03:08,440 Speaker 1: where we are now, plenty of finnregg and financial stability 53 00:03:08,480 --> 00:03:11,120 Speaker 1: issues always popping up. So let's go for it. It's 54 00:03:11,120 --> 00:03:13,480 Speaker 1: a good time to talk about financial stability. Good time. 55 00:03:13,880 --> 00:03:16,960 Speaker 1: Just one note before we begin, I think our producer 56 00:03:17,040 --> 00:03:19,960 Speaker 1: already walked you through some of the housekeeping, but we 57 00:03:20,000 --> 00:03:22,720 Speaker 1: are taking questions from the audience. Please write them down 58 00:03:22,760 --> 00:03:25,640 Speaker 1: on your index cards and they will be put into 59 00:03:26,560 --> 00:03:30,360 Speaker 1: the magic box that we have on stage. Alright, So, 60 00:03:30,480 --> 00:03:33,440 Speaker 1: without further ado up, Love, why don't we start with you? 61 00:03:33,520 --> 00:03:39,240 Speaker 1: I mean, researching the evolution of modern banking. How did 62 00:03:39,280 --> 00:03:42,800 Speaker 1: you get into that? And why? So it's really a 63 00:03:42,920 --> 00:03:46,800 Speaker 1: product in my biography in some sense. I graduated from 64 00:03:47,000 --> 00:03:51,680 Speaker 1: college in the midst of the global financial crisis and 65 00:03:51,720 --> 00:03:56,520 Speaker 1: the and it's aftermath, the Great Recession, and I, in 66 00:03:56,560 --> 00:03:59,840 Speaker 1: a in a weird turn of events, got a job 67 00:04:00,600 --> 00:04:03,240 Speaker 1: at the Federal Reserve Bank for New York. So I 68 00:04:03,360 --> 00:04:07,800 Speaker 1: was I was thrown into an economy that was in turmoil, UH, 69 00:04:07,800 --> 00:04:12,920 Speaker 1: financially induced turmoil. And so I was naturally very curious 70 00:04:12,920 --> 00:04:14,440 Speaker 1: about that. And then suddenly I had a job that 71 00:04:14,520 --> 00:04:18,039 Speaker 1: gave me an opportunity to UH to learn about that 72 00:04:18,120 --> 00:04:21,920 Speaker 1: problem and and to confront it UH directly. And so 73 00:04:21,960 --> 00:04:25,120 Speaker 1: I got to work on the first ce CAR, the 74 00:04:25,160 --> 00:04:28,320 Speaker 1: first stress test, and developed that. And I also got 75 00:04:28,360 --> 00:04:32,080 Speaker 1: to UM. I was seconded to the Financial Stability over 76 00:04:32,080 --> 00:04:35,000 Speaker 1: s ACOUNTIL. I got to work on UM preparing the 77 00:04:35,040 --> 00:04:38,680 Speaker 1: first Financial Stability Report for the United States. UH. And 78 00:04:38,720 --> 00:04:41,279 Speaker 1: then you know, once you find a problem that is 79 00:04:41,320 --> 00:04:44,320 Speaker 1: interesting to you, you know, I guess my personality. I've 80 00:04:44,360 --> 00:04:48,080 Speaker 1: just continued sort of chewing at that ever since. UH 81 00:04:48,120 --> 00:04:49,919 Speaker 1: and and and in part because I don't think that 82 00:04:49,960 --> 00:04:53,040 Speaker 1: we've solved the solved the problems from two thousand and eight, 83 00:04:53,120 --> 00:04:55,440 Speaker 1: and I think that the consequences of two thousand and 84 00:04:55,480 --> 00:04:59,800 Speaker 1: eight are are extremely momentous across a number of dimensions 85 00:04:59,800 --> 00:05:04,160 Speaker 1: of society, many problems that we're experiencing today, political, economic, social, 86 00:05:04,800 --> 00:05:07,240 Speaker 1: Two thousand and eight was a was a major shift 87 00:05:07,279 --> 00:05:09,080 Speaker 1: in how we address those problems. In nature of those 88 00:05:09,080 --> 00:05:11,320 Speaker 1: problems made a lot of them worse. And I think 89 00:05:11,320 --> 00:05:14,480 Speaker 1: that monetary and financial stability, what we lost for that 90 00:05:14,560 --> 00:05:17,440 Speaker 1: one moment is a key social good that we need 91 00:05:17,480 --> 00:05:20,479 Speaker 1: to do a better job of preserving and protecting over time. 92 00:05:20,920 --> 00:05:23,680 Speaker 1: So one of the do in um, Josh, you know, 93 00:05:23,720 --> 00:05:26,480 Speaker 1: in terms of like, okay, we had you on recently, 94 00:05:26,640 --> 00:05:30,479 Speaker 1: we talked about the nineteen fifties, What is it about 95 00:05:30,520 --> 00:05:33,680 Speaker 1: the history? Why is it important to take a historical 96 00:05:33,839 --> 00:05:36,800 Speaker 1: lens to think about some of these problems and to 97 00:05:36,800 --> 00:05:40,000 Speaker 1: think about, Okay, what does an optimal financial regulation system 98 00:05:40,080 --> 00:05:42,840 Speaker 1: look like? Why is like the historical lens is sort 99 00:05:42,839 --> 00:05:45,279 Speaker 1: of useful approach for that. Yeah. So I have, in 100 00:05:45,400 --> 00:05:47,560 Speaker 1: many ways the opposite story to live. So I was 101 00:05:47,560 --> 00:05:51,719 Speaker 1: trying as a physicist. I got my PhD two thousand nine, UM, 102 00:05:51,800 --> 00:05:53,760 Speaker 1: and so when the financial crisis was raising, I had 103 00:05:53,760 --> 00:05:55,200 Speaker 1: no idea what was going on. I mean, I was 104 00:05:55,320 --> 00:05:57,880 Speaker 1: entirely focused on I was using a telescope in Hawaii 105 00:05:58,000 --> 00:06:01,000 Speaker 1: like a collecting other physicists or to blame for the 106 00:06:01,040 --> 00:06:03,520 Speaker 1: financial crisis. So at least your blameless, right, I'm not 107 00:06:03,560 --> 00:06:06,960 Speaker 1: going to take a view on that. But um, so 108 00:06:07,560 --> 00:06:09,720 Speaker 1: I think when you're a physicist, like you're turning to 109 00:06:09,720 --> 00:06:11,960 Speaker 1: figure out what the rules are that the input um 110 00:06:12,000 --> 00:06:13,560 Speaker 1: in a sense, and so they're taking you know, I 111 00:06:13,680 --> 00:06:15,559 Speaker 1: just try to post to figure out how the world works, 112 00:06:15,680 --> 00:06:17,640 Speaker 1: because it works a certain way and that's not up 113 00:06:17,680 --> 00:06:19,479 Speaker 1: to me, but it's interesting to figure out what like 114 00:06:19,560 --> 00:06:22,320 Speaker 1: what that is. Um. Financial markets are opposite of that, 115 00:06:22,360 --> 00:06:23,839 Speaker 1: which is we get to set the rules to achieve 116 00:06:23,839 --> 00:06:26,599 Speaker 1: an outcome. And so you know, as I went into 117 00:06:26,600 --> 00:06:29,920 Speaker 1: the industry and and uh sort of got deeper into 118 00:06:30,600 --> 00:06:32,640 Speaker 1: the really fundamental questions of market structure. First you have 119 00:06:32,640 --> 00:06:34,000 Speaker 1: to get your sea legs because I didn't know like 120 00:06:34,040 --> 00:06:36,040 Speaker 1: what bond math was, for example, and then these things 121 00:06:36,080 --> 00:06:37,960 Speaker 1: so you figure out like yields up, prices down. I 122 00:06:38,279 --> 00:06:41,279 Speaker 1: got that right, um. But after you do that, you 123 00:06:41,279 --> 00:06:43,200 Speaker 1: start to think about why the system operates the way 124 00:06:43,200 --> 00:06:46,000 Speaker 1: that it does. And and because it's a construct because 125 00:06:46,000 --> 00:06:49,880 Speaker 1: it's a set of choices that we don't necessarily like 126 00:06:49,920 --> 00:06:52,160 Speaker 1: all the aspects of where it ended up. Raises the 127 00:06:52,200 --> 00:06:53,880 Speaker 1: question as to why we made those choices in the 128 00:06:53,880 --> 00:06:57,160 Speaker 1: first place. Is this just a function of markets, um, 129 00:06:57,200 --> 00:06:59,240 Speaker 1: you know, having their own mind um and going their 130 00:06:59,240 --> 00:07:01,480 Speaker 1: own way, or is this really a set of conscious 131 00:07:01,480 --> 00:07:06,040 Speaker 1: decisions where maybe we don't love some aspects of the system, um, 132 00:07:06,080 --> 00:07:08,240 Speaker 1: but it was set up to solve other problems, right, 133 00:07:08,279 --> 00:07:09,800 Speaker 1: And so the history tells you that, it tells you 134 00:07:09,800 --> 00:07:12,800 Speaker 1: what the intent was, and that's important. One to just 135 00:07:12,880 --> 00:07:15,600 Speaker 1: understand why things are the way they are because to 136 00:07:15,720 --> 00:07:18,400 Speaker 1: a to a new observer, they seem a little odd sometimes, 137 00:07:18,520 --> 00:07:20,720 Speaker 1: but but also to think about the limits of what 138 00:07:20,760 --> 00:07:23,080 Speaker 1: you can do to fix it, because because the the 139 00:07:23,240 --> 00:07:26,600 Speaker 1: entrenched interests that are created by that process are really important. 140 00:07:27,200 --> 00:07:29,720 Speaker 1: So why don't we talk about one of the rule 141 00:07:29,800 --> 00:07:33,600 Speaker 1: making episodes or one of the like conscious decisions that 142 00:07:33,800 --> 00:07:37,640 Speaker 1: was made that reverberates to today. And Josh, this is 143 00:07:37,640 --> 00:07:39,840 Speaker 1: something we spoke about with you on the episode the 144 00:07:39,960 --> 00:07:43,400 Speaker 1: nineteen fifties and one of the outcomes of that particular 145 00:07:43,480 --> 00:07:47,160 Speaker 1: era was the repo market as we know it today. 146 00:07:47,200 --> 00:07:51,280 Speaker 1: But love you have also talked about how the FED 147 00:07:51,360 --> 00:07:54,760 Speaker 1: chair at the time, William Martin, made a big decision 148 00:07:54,760 --> 00:07:59,480 Speaker 1: about breaking with traditional banking and shifting the system into 149 00:07:59,600 --> 00:08:01,960 Speaker 1: something and part of that involved the role of primary 150 00:08:01,960 --> 00:08:04,360 Speaker 1: dealers in the repo market. But talked to us about 151 00:08:04,400 --> 00:08:08,440 Speaker 1: that that break and why it matters today. William Martin 152 00:08:08,520 --> 00:08:12,280 Speaker 1: is one of the most consequential twentieth century figures and 153 00:08:12,440 --> 00:08:14,560 Speaker 1: played a huge role in creating the world as we 154 00:08:14,600 --> 00:08:16,880 Speaker 1: know today. Things that we take for granted, like the 155 00:08:16,920 --> 00:08:19,680 Speaker 1: repo market, the eurodollar market and their centrality and how 156 00:08:19,720 --> 00:08:22,560 Speaker 1: our financial system works, how our economy works. These were 157 00:08:22,640 --> 00:08:25,520 Speaker 1: projects of William Martin, and they were things that he 158 00:08:25,600 --> 00:08:28,840 Speaker 1: tried to construct and bring about. UH. And he was 159 00:08:29,200 --> 00:08:33,520 Speaker 1: not painting on a blank canvas. UH. He was UM. 160 00:08:33,520 --> 00:08:38,120 Speaker 1: He was actively trying to re engineer a system that 161 00:08:38,200 --> 00:08:40,320 Speaker 1: had been set up in the wake of the Great Depression, 162 00:08:41,200 --> 00:08:45,920 Speaker 1: the New Deal banking system UM. And that system was 163 00:08:46,280 --> 00:08:51,160 Speaker 1: constructed around a separation between banking and other financial and 164 00:08:51,160 --> 00:08:55,880 Speaker 1: commercial activity. And banking was a franchise business UH. And 165 00:08:55,960 --> 00:08:59,960 Speaker 1: the point of the business was monetary to issue deposit 166 00:09:00,040 --> 00:09:02,840 Speaker 1: it's deposits with the primary form of money still are 167 00:09:02,880 --> 00:09:04,720 Speaker 1: the primary form of money in the economy. When there's 168 00:09:04,720 --> 00:09:07,280 Speaker 1: more deposits, you get inflationary pressures. When they're seward deposits, 169 00:09:07,320 --> 00:09:11,440 Speaker 1: you get disinflationary pressures. This was the banking franchise banks. 170 00:09:11,480 --> 00:09:13,960 Speaker 1: We're going to do this subject to a bunch of regulations. 171 00:09:14,280 --> 00:09:18,200 Speaker 1: Other things we're gonna happen outside of banks. UM. William 172 00:09:18,240 --> 00:09:21,960 Speaker 1: Martin in an effort to solve a series of problems, 173 00:09:22,240 --> 00:09:25,320 Speaker 1: one of which you talked about with Josh previously, UH 174 00:09:25,600 --> 00:09:29,920 Speaker 1: is keen to UH break down some of these borders. 175 00:09:29,920 --> 00:09:32,560 Speaker 1: So the birth of the repo market is a way 176 00:09:32,600 --> 00:09:36,240 Speaker 1: to allow broker dealer firms who had been pushed out 177 00:09:36,240 --> 00:09:39,840 Speaker 1: of the banking business to UH find a way to 178 00:09:39,920 --> 00:09:44,360 Speaker 1: fund themselves like banks UM by copying the business model 179 00:09:44,400 --> 00:09:47,480 Speaker 1: of banks. UH. And so they're legally barred by the 180 00:09:47,520 --> 00:09:50,920 Speaker 1: New Deal banking laws from maintaining deposits because there's a 181 00:09:50,920 --> 00:09:54,800 Speaker 1: provision in the Banking Act of three that says that 182 00:09:55,320 --> 00:09:58,280 Speaker 1: only a bank can take deposits. UH. So they create 183 00:09:58,600 --> 00:10:03,360 Speaker 1: a structure that mimics UH deposit UH and Martin is 184 00:10:03,480 --> 00:10:07,040 Speaker 1: instrumental in facilitating this, allowing this to happen, providing a 185 00:10:07,080 --> 00:10:10,280 Speaker 1: backstop for it. UM in the fifties. And this is 186 00:10:10,320 --> 00:10:14,240 Speaker 1: really the birth moment of the shadow banking system, UH, 187 00:10:14,280 --> 00:10:16,880 Speaker 1: the idea that we're not going to have a money 188 00:10:16,880 --> 00:10:21,280 Speaker 1: supply that's entirely provided by either the government in the 189 00:10:21,320 --> 00:10:23,439 Speaker 1: form of cash or the banking system in the form 190 00:10:23,440 --> 00:10:25,640 Speaker 1: of deposits, where the deposits are the sort of the 191 00:10:25,640 --> 00:10:28,360 Speaker 1: big the big event, and the cash is a small side. 192 00:10:28,400 --> 00:10:32,400 Speaker 1: So there's actually room in this system for non bank money, 193 00:10:32,520 --> 00:10:36,199 Speaker 1: other forms of private money, UH, namely repo. And this 194 00:10:36,240 --> 00:10:39,960 Speaker 1: starts UH in earnest in the fifties, and and everything 195 00:10:40,000 --> 00:10:41,880 Speaker 1: else that sort of comes along, and I think we'll 196 00:10:41,880 --> 00:10:45,600 Speaker 1: get to it. The eurodollar markets, UH, money market, mutual funds, 197 00:10:45,600 --> 00:10:51,240 Speaker 1: commercial paper of very short duration UH. Stable coins are 198 00:10:51,440 --> 00:10:54,760 Speaker 1: a sort of variation on this same theme. And all 199 00:10:54,840 --> 00:10:59,000 Speaker 1: of these UM are more or less viable based on 200 00:10:59,240 --> 00:11:02,960 Speaker 1: a sort of in more relationship that they can develop 201 00:11:03,000 --> 00:11:04,880 Speaker 1: with with the central bank. You know, if you have 202 00:11:04,920 --> 00:11:06,920 Speaker 1: a central bank back stop, you can you can make 203 00:11:07,080 --> 00:11:10,079 Speaker 1: a viable money alternative. If you don't have access to 204 00:11:10,160 --> 00:11:12,160 Speaker 1: the central bank, you really you can't get very big. 205 00:11:12,200 --> 00:11:15,840 Speaker 1: You can't you can't do that UM. And so Martin's 206 00:11:15,960 --> 00:11:20,360 Speaker 1: key role was to UH was to re arctact the 207 00:11:20,400 --> 00:11:22,960 Speaker 1: system and make it clear that the FED would provide 208 00:11:22,960 --> 00:11:26,280 Speaker 1: backstops for various time types of non bank money UM too. 209 00:11:26,320 --> 00:11:29,000 Speaker 1: In particular that become the dominant the repo market and 210 00:11:29,040 --> 00:11:32,800 Speaker 1: then the euroinour market. So use this word border, which 211 00:11:32,840 --> 00:11:35,480 Speaker 1: I think is interesting, and you describe, okay, the expanding border. 212 00:11:35,520 --> 00:11:38,360 Speaker 1: And there's all these sort of like non bank shadow 213 00:11:38,400 --> 00:11:42,320 Speaker 1: bank type entities that issue deposit like instruments even if 214 00:11:42,320 --> 00:11:46,480 Speaker 1: they're not technically bank deposits, uh nearly defined. What is 215 00:11:46,520 --> 00:11:49,120 Speaker 1: accomplished by this? What is sort of for either of you? 216 00:11:49,720 --> 00:11:52,080 Speaker 1: What is it? What do we get from having the 217 00:11:52,120 --> 00:11:55,600 Speaker 1: benefits from having more of these entities that can issue 218 00:11:56,040 --> 00:11:59,160 Speaker 1: deposit like money. Isn't having this relationship with the Federal 219 00:11:59,240 --> 00:12:03,040 Speaker 1: Reserve outside of like the sort of normal banking system. Well, 220 00:12:03,120 --> 00:12:05,880 Speaker 1: so I'll let Josh sort of get into the details 221 00:12:06,040 --> 00:12:10,280 Speaker 1: on on RIPO and the treasury markets in particular, but 222 00:12:10,440 --> 00:12:12,720 Speaker 1: just sort of at a high level. The banking system 223 00:12:12,760 --> 00:12:16,240 Speaker 1: is heavily regulated under the New Deal banking law framework, 224 00:12:16,520 --> 00:12:20,440 Speaker 1: and so there are lots of requirements on banks and 225 00:12:20,880 --> 00:12:24,720 Speaker 1: UM there's an effort to direct the sorts of assets 226 00:12:24,760 --> 00:12:27,199 Speaker 1: that banks invest in, so they are expanding the money supply. 227 00:12:27,400 --> 00:12:30,160 Speaker 1: Where is the privilege of that going Who gets access 228 00:12:30,200 --> 00:12:34,240 Speaker 1: to that UM money issued based credit that monetary financing, 229 00:12:34,480 --> 00:12:36,160 Speaker 1: And there's lots of rules the government has put in 230 00:12:36,200 --> 00:12:39,359 Speaker 1: place on who who benefits, and there's lots of restrictions 231 00:12:39,440 --> 00:12:41,320 Speaker 1: on the design of the banking system. So at this 232 00:12:41,360 --> 00:12:43,240 Speaker 1: time we have something that looks a lot more like 233 00:12:43,240 --> 00:12:47,400 Speaker 1: a unit banking system. It's very uh decentralized. There's thousands 234 00:12:47,440 --> 00:12:50,240 Speaker 1: and thousands of banks UM. There's limits on how big 235 00:12:50,360 --> 00:12:53,200 Speaker 1: banks can be. There's limits on how much banks can 236 00:12:53,240 --> 00:12:57,200 Speaker 1: pay their depositors. This is rg Q, which exists from 237 00:12:57,240 --> 00:13:01,160 Speaker 1: the thirties until the early a these. And so the 238 00:13:01,320 --> 00:13:05,480 Speaker 1: incentive to create non bank money is an incentive to 239 00:13:06,040 --> 00:13:10,680 Speaker 1: have some UM to direct the benefits of monetary financing 240 00:13:10,720 --> 00:13:14,319 Speaker 1: in some other way not subject to all of these constraints. Uh. 241 00:13:14,360 --> 00:13:19,320 Speaker 1: And so there's just large rents or surplus to extract 242 00:13:19,760 --> 00:13:22,960 Speaker 1: from being able to expand the money supply outside of 243 00:13:22,960 --> 00:13:25,200 Speaker 1: all these constraints. And so that's the impetus that everybody 244 00:13:25,200 --> 00:13:28,160 Speaker 1: that's always leading people to try to create private forms 245 00:13:28,160 --> 00:13:31,440 Speaker 1: of money is to do it without the without all 246 00:13:31,480 --> 00:13:33,360 Speaker 1: the costs. And this is exactly what goes on with 247 00:13:33,360 --> 00:13:36,400 Speaker 1: stable coins as well. So I think the treasure mark 248 00:13:36,480 --> 00:13:37,880 Speaker 1: is a great example. So, like, what do we want 249 00:13:37,920 --> 00:13:41,400 Speaker 1: from the treasury market, Well, the investors want liquidity. Um. 250 00:13:41,440 --> 00:13:43,720 Speaker 1: That means dealers that can expand and contract their balance 251 00:13:43,760 --> 00:13:46,080 Speaker 1: sheets and take on a lot of leverage, because a 252 00:13:46,160 --> 00:13:48,480 Speaker 1: low margin business means lots of liquid it means low 253 00:13:48,520 --> 00:13:50,559 Speaker 1: transaction costs. But like you still have to pay the 254 00:13:50,600 --> 00:13:53,160 Speaker 1: rent um and and so you need to take on 255 00:13:53,240 --> 00:13:55,440 Speaker 1: more leverage to make than a profitable business. And so 256 00:13:55,480 --> 00:13:57,959 Speaker 1: that that doesn't work in a traditional banking framework, in 257 00:13:58,000 --> 00:14:00,320 Speaker 1: part because it shouldn't work in a traditional banking favorite 258 00:14:00,320 --> 00:14:03,319 Speaker 1: in certain ways, like banks are providing this incredibly central 259 00:14:03,760 --> 00:14:07,640 Speaker 1: social service of making money, uh, and so like they're 260 00:14:07,640 --> 00:14:10,400 Speaker 1: held to a higher standard in a sense, and so um, 261 00:14:10,440 --> 00:14:13,640 Speaker 1: you know, dealers get access to money like financing, even 262 00:14:13,679 --> 00:14:16,120 Speaker 1: if it's not strictly money in the classic sense, and 263 00:14:16,160 --> 00:14:19,560 Speaker 1: that gives the market liquidity depth and in particular low 264 00:14:19,560 --> 00:14:21,600 Speaker 1: transaction costs. That's what we're really talking about, right, I 265 00:14:21,640 --> 00:14:23,120 Speaker 1: don't want to pay a lot to trade by treasuries, 266 00:14:23,240 --> 00:14:26,120 Speaker 1: and I want to do it in arbitrary size. Um, 267 00:14:26,160 --> 00:14:29,920 Speaker 1: So for the treasury that beans lower yields liquidity premium. Right, 268 00:14:29,920 --> 00:14:32,440 Speaker 1: liquidity premium means I'm going to pay more because this 269 00:14:32,480 --> 00:14:35,080 Speaker 1: thing has liquidity value, and that's just a lower overall 270 00:14:35,120 --> 00:14:38,440 Speaker 1: cost of debt service um. So all of these things 271 00:14:38,520 --> 00:14:41,400 Speaker 1: are are valuable. And then you rewrap all of that 272 00:14:41,440 --> 00:14:43,800 Speaker 1: in the context of having a lot of elasticity, meaning 273 00:14:44,120 --> 00:14:46,840 Speaker 1: if there's a shock like in for example, people need 274 00:14:46,880 --> 00:14:49,760 Speaker 1: to monetize their treasures, if everyone needs to sell at 275 00:14:49,800 --> 00:14:52,600 Speaker 1: the same time, there has to be new money to 276 00:14:52,680 --> 00:14:55,800 Speaker 1: provide the proceeds of those sales um. Because those bonds 277 00:14:55,840 --> 00:14:58,000 Speaker 1: are held outside of the banking system. When they come 278 00:14:58,040 --> 00:14:59,880 Speaker 1: into the banking system, that gets turned into bank as 279 00:15:00,040 --> 00:15:02,160 Speaker 1: sets and that means they're funded with new money. And 280 00:15:02,160 --> 00:15:05,160 Speaker 1: so then the holders of those bonds now hold money 281 00:15:05,200 --> 00:15:08,720 Speaker 1: in the classic sense, and so that elasticity is not 282 00:15:08,840 --> 00:15:12,640 Speaker 1: easy to provide um within the context of traditional banking. 283 00:15:12,680 --> 00:15:15,280 Speaker 1: And so you know, the shadow banks in a sense 284 00:15:15,360 --> 00:15:19,200 Speaker 1: like augment the money supply as needed under stress in 285 00:15:19,240 --> 00:15:22,160 Speaker 1: a very desirable way. But it comes to costs and 286 00:15:22,200 --> 00:15:24,040 Speaker 1: that that's that's the issue. It's it's a means to 287 00:15:24,080 --> 00:15:26,960 Speaker 1: an end. It's not a generic good. Just to put 288 00:15:27,000 --> 00:15:30,880 Speaker 1: a finer point on what happened in the fifties. Uh, 289 00:15:30,960 --> 00:15:34,640 Speaker 1: the Federal Reserve is providing the elasticity for the treasury 290 00:15:34,640 --> 00:15:37,240 Speaker 1: market coming out of the forties. And so if there 291 00:15:37,440 --> 00:15:39,800 Speaker 1: is the need for balancing capacity, if you want liquidity 292 00:15:39,800 --> 00:15:42,400 Speaker 1: in the market, where's that Where's that elasticity coming to 293 00:15:42,800 --> 00:15:46,160 Speaker 1: the Federal reserves balance sheet? Can the banking system take 294 00:15:46,200 --> 00:15:49,480 Speaker 1: that roll over? Given the regulations in the banking system, 295 00:15:49,680 --> 00:15:53,040 Speaker 1: the liquidity that the amount that of elasticity that they 296 00:15:53,080 --> 00:15:56,120 Speaker 1: can provide is going to be much less. What if 297 00:15:56,120 --> 00:15:58,120 Speaker 1: we turn to broker dealers and provide them with a 298 00:15:58,200 --> 00:16:02,200 Speaker 1: similar ability. Oh, they're not sust all of these restrictions 299 00:16:02,280 --> 00:16:04,080 Speaker 1: on their bountary capacity. They're going to be able to 300 00:16:04,160 --> 00:16:06,640 Speaker 1: mimic the elasticity at the Federal reserve balance sheet was 301 00:16:06,720 --> 00:16:09,160 Speaker 1: able to provide um. But now we don't have the 302 00:16:09,160 --> 00:16:11,560 Speaker 1: Federal Reserve directly in the market anymore. And that's that's 303 00:16:11,560 --> 00:16:14,800 Speaker 1: how this all gets going in the mid fifties, Josh, 304 00:16:14,840 --> 00:16:17,360 Speaker 1: could you maybe talk a little bit about the birth 305 00:16:17,480 --> 00:16:20,120 Speaker 1: of the euro dollar market, because this is also something 306 00:16:20,160 --> 00:16:24,000 Speaker 1: that happens by deliberate policy choice. And I feel like 307 00:16:24,040 --> 00:16:26,160 Speaker 1: nowadays a lot of people talk about the euro dollar 308 00:16:26,200 --> 00:16:31,119 Speaker 1: market like it's some mysterious like shadow pot of synthetic 309 00:16:31,160 --> 00:16:34,880 Speaker 1: dollar deposits just floating around. But why did it happen? 310 00:16:34,920 --> 00:16:37,560 Speaker 1: Why does it exist? There's kind of two euro dollar 311 00:16:37,600 --> 00:16:40,720 Speaker 1: markets in the beginning. Um, there's the original euro dollar market, 312 00:16:40,720 --> 00:16:43,680 Speaker 1: which is a communist creation. So uh in the in 313 00:16:43,720 --> 00:16:46,600 Speaker 1: the late forties. Yet it wasn't expecting to hear that. Yeah, 314 00:16:46,640 --> 00:16:48,400 Speaker 1: and so that one of the most important capital markets 315 00:16:48,400 --> 00:16:50,560 Speaker 1: is a communist invention, which is in the late forties. 316 00:16:50,880 --> 00:16:53,040 Speaker 1: People usually when they tell this history, they point to 317 00:16:53,040 --> 00:16:56,000 Speaker 1: the Suis incident where the US froze Soviet assets and 318 00:16:56,040 --> 00:16:58,560 Speaker 1: they said, oh, I don't want to take that risk 319 00:16:58,680 --> 00:17:00,920 Speaker 1: of the U s sezing my my assets. But actually 320 00:17:00,920 --> 00:17:03,800 Speaker 1: goes back a lot further, even before the Korean War. Um, 321 00:17:03,800 --> 00:17:07,320 Speaker 1: there's declassified CIA documents that track the flow of dollars 322 00:17:07,320 --> 00:17:10,399 Speaker 1: from Soviet accunts in New York into Europe. Uh, and 323 00:17:10,840 --> 00:17:13,600 Speaker 1: y Europe. It's because in Europe you could have the 324 00:17:13,640 --> 00:17:16,600 Speaker 1: deposits denominating currencies other than the local currency. That wasn't 325 00:17:16,600 --> 00:17:17,920 Speaker 1: true in the US. So you can get a dollar 326 00:17:17,960 --> 00:17:21,359 Speaker 1: depositent Paris, get a dollar depositent Belgium, and so in 327 00:17:21,359 --> 00:17:23,600 Speaker 1: the late forties, the CIA is reporting a list of 328 00:17:23,640 --> 00:17:26,679 Speaker 1: six or seven banks have taken communist dollars um. The 329 00:17:26,720 --> 00:17:28,960 Speaker 1: problem with that is it's not scalable. But there's a 330 00:17:28,960 --> 00:17:32,080 Speaker 1: lot of problems with that, But like they're it's not 331 00:17:32,200 --> 00:17:34,080 Speaker 1: scalable in the sense that what are you gonna do 332 00:17:34,119 --> 00:17:37,240 Speaker 1: with these dollar liabilities? You need assets to match the liabilities. 333 00:17:37,280 --> 00:17:40,680 Speaker 1: And so they were used primarily for East West trade finance, 334 00:17:40,760 --> 00:17:43,840 Speaker 1: so trade in dollars from from the Communist block to 335 00:17:43,880 --> 00:17:46,920 Speaker 1: the West UM. For a lot of reasons, the Soviet 336 00:17:47,000 --> 00:17:48,960 Speaker 1: Union didn't want a lot of that because they wanted 337 00:17:48,960 --> 00:17:51,800 Speaker 1: to be independent UM, and so they restricted it. And 338 00:17:51,800 --> 00:17:54,400 Speaker 1: so like there was a very small market in the beginning. 339 00:17:54,800 --> 00:17:57,840 Speaker 1: The key development is in ninety four when the UK 340 00:17:58,160 --> 00:18:02,280 Speaker 1: liberalizes convertibility and I can exchange my sterling for dollars 341 00:18:02,320 --> 00:18:05,520 Speaker 1: on shore among banks and specifically in the forward market. 342 00:18:06,240 --> 00:18:08,840 Speaker 1: And the key there is now I can hedge it, right, 343 00:18:08,880 --> 00:18:10,840 Speaker 1: so now I can take a dollar deposit, I can 344 00:18:10,880 --> 00:18:13,159 Speaker 1: hedge it back to sterling, put those sterling into the 345 00:18:13,200 --> 00:18:15,879 Speaker 1: local market, and maybe there's an arbitrage and it turns 346 00:18:15,880 --> 00:18:17,880 Speaker 1: out much like today, people didn't know how to price 347 00:18:17,920 --> 00:18:21,080 Speaker 1: effex forwards, and an arbitrage free framework. And so like 348 00:18:21,160 --> 00:18:23,359 Speaker 1: the the the FX forward market of the of the 349 00:18:23,359 --> 00:18:27,040 Speaker 1: mid fifties had a large cross currency basis, meaning it 350 00:18:27,080 --> 00:18:30,560 Speaker 1: wasn't priced it precisely the interest rate differential, wasn't price 351 00:18:30,640 --> 00:18:34,680 Speaker 1: perfectly fair to take free money borrowing dollars in your 352 00:18:34,720 --> 00:18:37,159 Speaker 1: dollar market going to the f X forward market, swapped 353 00:18:37,200 --> 00:18:39,320 Speaker 1: them for sterling on a forward basis and just buy 354 00:18:39,400 --> 00:18:42,800 Speaker 1: local bills in the UK. And and so then the 355 00:18:42,840 --> 00:18:45,240 Speaker 1: market starts to grow because now there's something I can 356 00:18:45,240 --> 00:18:47,600 Speaker 1: actually do. It's still narrow. There's a lot of like 357 00:18:47,680 --> 00:18:50,720 Speaker 1: echoes of stable coins in this right, it's a specific application. 358 00:18:50,840 --> 00:18:53,800 Speaker 1: We said stable coins three times, so I'm just gonna say, okay, 359 00:18:53,960 --> 00:18:58,040 Speaker 1: it's like nineteen minutes in stable coins have mentioned three times. 360 00:18:58,080 --> 00:19:00,400 Speaker 1: What are we talking so much about stable coin? And 361 00:19:00,440 --> 00:19:03,560 Speaker 1: what is it specifically in the context here? You know, 362 00:19:03,560 --> 00:19:06,240 Speaker 1: you're talking about, Okay, this whole like all these non 363 00:19:06,359 --> 00:19:10,440 Speaker 1: deposit deposits that exist sort of an arbitrage purpose is capables, 364 00:19:10,480 --> 00:19:12,760 Speaker 1: Like how does stable coins fit into this? In your 365 00:19:12,960 --> 00:19:15,159 Speaker 1: your dollars are a great example where you create a 366 00:19:15,200 --> 00:19:18,480 Speaker 1: product for very narrow purpose. So initially it's like sanctions 367 00:19:18,480 --> 00:19:20,959 Speaker 1: of Asian by communist block countries, and like, that's obviously 368 00:19:21,000 --> 00:19:22,800 Speaker 1: not gonna grow. We try that. It's not a great 369 00:19:22,800 --> 00:19:24,959 Speaker 1: business model again for a lot of reasons. So like 370 00:19:25,000 --> 00:19:28,560 Speaker 1: that stays relatively small UM. But but once you find 371 00:19:28,600 --> 00:19:32,320 Speaker 1: a use case, in this case cross border interest rate arbitrage, 372 00:19:33,040 --> 00:19:36,240 Speaker 1: which is still narrow but bigger, the market starts to 373 00:19:36,240 --> 00:19:39,600 Speaker 1: grow and then and then you eventually get to the big, 374 00:19:39,880 --> 00:19:41,720 Speaker 1: big event. Right, so after twenty years you get to 375 00:19:41,760 --> 00:19:44,959 Speaker 1: something really massive, But over time that product starts as 376 00:19:44,960 --> 00:19:47,240 Speaker 1: a seed. In the case of stable coins, it's the 377 00:19:47,320 --> 00:19:50,760 Speaker 1: lack of access to traditional banking among large cryptocurrency exchanges, 378 00:19:50,800 --> 00:19:53,920 Speaker 1: and so stable coins are a way to transfer dollar 379 00:19:53,960 --> 00:19:57,719 Speaker 1: equivalents into a new ecosystem. UM, you're you're a dollars 380 00:19:57,720 --> 00:20:01,080 Speaker 1: were way to transfer or create dollars. In case UM, 381 00:20:01,080 --> 00:20:02,800 Speaker 1: which you could say of algo stable coins as well, 382 00:20:02,800 --> 00:20:05,600 Speaker 1: it's way to create new money UM in the new 383 00:20:05,640 --> 00:20:08,480 Speaker 1: ecosystem that is native to the new ecosystem. In this 384 00:20:08,520 --> 00:20:13,400 Speaker 1: case it's European trade finance UM. And as global trade increases, 385 00:20:13,400 --> 00:20:16,760 Speaker 1: and specifically intra European trade increases, there is demand for 386 00:20:16,840 --> 00:20:19,679 Speaker 1: dollars is the currency of trade UM, and now you 387 00:20:19,680 --> 00:20:21,280 Speaker 1: have a new market, and so that I think the 388 00:20:21,320 --> 00:20:23,439 Speaker 1: interest here for stable coins is we're kind of at 389 00:20:23,480 --> 00:20:27,240 Speaker 1: the beginning of that narrative that we're in where there's 390 00:20:27,280 --> 00:20:30,760 Speaker 1: one bank taking major ear dollar deposits for the purposes 391 00:20:30,760 --> 00:20:34,040 Speaker 1: of cross border arbitrage. And the question is what's the 392 00:20:34,040 --> 00:20:37,000 Speaker 1: next phase in that, and what are the what is 393 00:20:37,080 --> 00:20:40,440 Speaker 1: required of the market and regulators to get to those 394 00:20:40,480 --> 00:20:43,119 Speaker 1: next phases where there's real exponential growth, and will we 395 00:20:43,200 --> 00:21:02,240 Speaker 1: do that and do we want so leve One of 396 00:21:02,280 --> 00:21:05,440 Speaker 1: the things we've been discussing is how how the FED 397 00:21:05,520 --> 00:21:09,399 Speaker 1: basically seded some money creation powers. And I feel like 398 00:21:09,560 --> 00:21:13,040 Speaker 1: nowadays one of the criticisms that you hear about central banks. 399 00:21:13,080 --> 00:21:14,960 Speaker 1: And maybe this is because I spent too much time 400 00:21:14,960 --> 00:21:18,520 Speaker 1: on Twitter, as we all do, but you know, there's 401 00:21:18,520 --> 00:21:21,919 Speaker 1: a perception on Twitter that the FED controls everything, and 402 00:21:22,000 --> 00:21:25,120 Speaker 1: you know, all markets are artificially manipulated by the central bank. 403 00:21:25,200 --> 00:21:28,000 Speaker 1: And so I guess my question is does the FED 404 00:21:28,640 --> 00:21:32,320 Speaker 1: control too little or too much or the wrong things? 405 00:21:32,359 --> 00:21:36,879 Speaker 1: Like how would you view that? It's a it's a 406 00:21:36,920 --> 00:21:40,560 Speaker 1: hard question to answer at the sort of level of abstraction. 407 00:21:41,240 --> 00:21:44,760 Speaker 1: Um I would say that in some senses the FED 408 00:21:44,800 --> 00:21:51,600 Speaker 1: controls too little UM. The FED was designed two UM 409 00:21:51,880 --> 00:21:56,439 Speaker 1: manage the money supply, the bank issued money supply. We 410 00:21:56,480 --> 00:21:59,560 Speaker 1: have an outsourcing system. We don't have a money supply 411 00:21:59,600 --> 00:22:04,720 Speaker 1: that's issue directly in bulk by the government. UM. But 412 00:22:05,240 --> 00:22:09,040 Speaker 1: we have a central authority, the Federal Reserve, whose job 413 00:22:09,119 --> 00:22:12,080 Speaker 1: it is to manage the size and composition of bank 414 00:22:12,119 --> 00:22:13,840 Speaker 1: balance sheets and the rate of expansion. And there's a 415 00:22:13,840 --> 00:22:17,600 Speaker 1: specific mandate they want to UH ensure that that expansion 416 00:22:17,600 --> 00:22:21,320 Speaker 1: continues sufficient with the economy operating at its full capacity 417 00:22:21,359 --> 00:22:23,760 Speaker 1: over the long term, which is what Section two A 418 00:22:23,880 --> 00:22:28,400 Speaker 1: is about. And the FED has a much harder time 419 00:22:28,760 --> 00:22:32,080 Speaker 1: doing its job keeping the money supply expanding at a 420 00:22:32,160 --> 00:22:36,199 Speaker 1: rate consistent with the economy's full capacity potential over the 421 00:22:36,240 --> 00:22:40,399 Speaker 1: long term. UM. When a lot of the money UH 422 00:22:40,400 --> 00:22:43,879 Speaker 1: in the system, that's critical to the system's functioning. UM. 423 00:22:43,960 --> 00:22:47,399 Speaker 1: If it disapplines, you get huge disinflationary deflationary pressures. Is 424 00:22:47,400 --> 00:22:50,200 Speaker 1: exactly what happened in two thou and eight UM. If 425 00:22:50,240 --> 00:22:53,359 Speaker 1: that's being issued outside of the banking system. Because the 426 00:22:53,400 --> 00:22:56,800 Speaker 1: FED has all these tools that allow it to monitor 427 00:22:57,480 --> 00:23:01,439 Speaker 1: and adjust the size and position of bank balance sheets, 428 00:23:01,960 --> 00:23:06,919 Speaker 1: and it has many fewer tools with respect to broker 429 00:23:06,960 --> 00:23:10,919 Speaker 1: deal or balance sheets um and certainly with respect to 430 00:23:10,960 --> 00:23:14,920 Speaker 1: the balance sheets of foreign financial institutions UM that are 431 00:23:15,040 --> 00:23:19,480 Speaker 1: issuing lots of your dollars or stable coin issuers UH. 432 00:23:19,520 --> 00:23:22,320 Speaker 1: And so the more of the money supply that is 433 00:23:22,560 --> 00:23:25,680 Speaker 1: outside of the mut of the fed's tools, the more 434 00:23:25,920 --> 00:23:30,760 Speaker 1: it's going to be um uh over relying on tools 435 00:23:30,800 --> 00:23:34,560 Speaker 1: like emergency lending, which it can then repurpose. And so 436 00:23:34,640 --> 00:23:36,840 Speaker 1: there's a discount window that's built into the Federal Reserve 437 00:23:36,880 --> 00:23:39,240 Speaker 1: Act for the banking system. That's one of the key 438 00:23:39,280 --> 00:23:41,359 Speaker 1: tools that's built in so that they can manage the 439 00:23:41,359 --> 00:23:44,080 Speaker 1: bank money supply. But then they create all these ad 440 00:23:44,080 --> 00:23:47,360 Speaker 1: hoc facilities. They're basically air sets discount windows for all 441 00:23:47,359 --> 00:23:49,879 Speaker 1: the other shadow moneys that have come along. And you 442 00:23:49,960 --> 00:23:52,320 Speaker 1: see them roll out those facilities, and you see them 443 00:23:52,359 --> 00:23:55,119 Speaker 1: roll them out again because you need those discount windows. 444 00:23:55,160 --> 00:23:57,119 Speaker 1: That's like, that's one of the only mechanisms we have 445 00:23:57,240 --> 00:23:59,520 Speaker 1: now to ensure the monetary stability that the FED is 446 00:23:59,560 --> 00:24:02,520 Speaker 1: there to do. Otherwise you fail on the section to it, 447 00:24:02,680 --> 00:24:06,040 Speaker 1: you get monetary shrinkage, which is which causes recession and depression. 448 00:24:06,520 --> 00:24:10,280 Speaker 1: So in that sense, the FED doesn't have nearly nearly 449 00:24:10,400 --> 00:24:16,919 Speaker 1: enough control. Um. But then in another sense, um, you know, 450 00:24:18,119 --> 00:24:21,439 Speaker 1: it's too involved, because in order to make up for 451 00:24:21,480 --> 00:24:24,159 Speaker 1: the lack of ex anti tools, it becomes ex post 452 00:24:24,240 --> 00:24:26,840 Speaker 1: extremely involved in financial markets in ways that I think 453 00:24:26,880 --> 00:24:30,679 Speaker 1: even FED policymakers are sometimes uncomfortable with. And so you 454 00:24:30,720 --> 00:24:32,960 Speaker 1: have a much much larger balance sheet that's a product 455 00:24:33,200 --> 00:24:36,719 Speaker 1: of of not being able to control the money supply 456 00:24:36,800 --> 00:24:40,480 Speaker 1: in in ordinary traditional ex anti ways. Uh that that 457 00:24:40,560 --> 00:24:43,600 Speaker 1: Congress at least designed the institution to carry out its task, 458 00:24:44,000 --> 00:24:46,280 Speaker 1: you know, and you you've written about this, but I 459 00:24:46,359 --> 00:24:49,720 Speaker 1: wanna following up on this point. I mean one of 460 00:24:49,760 --> 00:24:51,359 Speaker 1: the things that people is like, oh, the FED is 461 00:24:51,400 --> 00:24:55,880 Speaker 1: there to fight inflation because politicians can't be trusted because 462 00:24:55,880 --> 00:24:57,520 Speaker 1: if it weren't for the FED, they would just spend 463 00:24:57,560 --> 00:25:00,679 Speaker 1: and maybe ramp up spending before every election, etcetera. So 464 00:25:00,760 --> 00:25:03,359 Speaker 1: we need this independent FED. And your argument is that 465 00:25:03,480 --> 00:25:05,919 Speaker 1: just really not about that that actually like the deeper 466 00:25:06,000 --> 00:25:10,520 Speaker 1: history of the FED. Your story is like, that's a myth, 467 00:25:10,640 --> 00:25:12,560 Speaker 1: that that's why the FED exists more or less, Yes, 468 00:25:12,600 --> 00:25:14,720 Speaker 1: I mean, the FED almost exists for the opposite reason. 469 00:25:15,119 --> 00:25:19,280 Speaker 1: So we set up the privately owned, investor owned banking 470 00:25:19,320 --> 00:25:22,639 Speaker 1: system we outsourced. We didn't do green backs. This is 471 00:25:22,680 --> 00:25:25,199 Speaker 1: the this is the direct money issue. During the Civil War, 472 00:25:25,240 --> 00:25:27,159 Speaker 1: we we moved away from green backs. We created the 473 00:25:27,240 --> 00:25:30,080 Speaker 1: National Banking System in eighteen sixty three. That was to 474 00:25:30,119 --> 00:25:32,960 Speaker 1: prevent over issue by politicians UH. The idea that we 475 00:25:33,040 --> 00:25:34,879 Speaker 1: just don't want to have the government issue and all 476 00:25:34,880 --> 00:25:37,240 Speaker 1: of the money supply. We need to outsource that some 477 00:25:37,320 --> 00:25:38,560 Speaker 1: of the money is going to have to be lent 478 00:25:38,600 --> 00:25:41,960 Speaker 1: into circulation. We don't want the government to be doing that, 479 00:25:42,080 --> 00:25:45,320 Speaker 1: lending itself having to evaluate credits. This could lead to 480 00:25:45,320 --> 00:25:48,000 Speaker 1: corruption and problems. So we set up the National Paining System, 481 00:25:48,200 --> 00:25:50,760 Speaker 1: and then fifty years later we create the FED because 482 00:25:50,760 --> 00:25:53,920 Speaker 1: what we discover is that the national banking system is 483 00:25:53,960 --> 00:25:56,879 Speaker 1: prone to break downs under issue of money and it 484 00:25:57,000 --> 00:26:01,560 Speaker 1: needs UH an institution to avoid those kedowns UH basically 485 00:26:01,600 --> 00:26:05,080 Speaker 1: to avoid deflation, UH, to avoid contraction, and to ensure 486 00:26:05,359 --> 00:26:09,040 Speaker 1: that the money supply UH grows over time consistent with 487 00:26:09,119 --> 00:26:12,760 Speaker 1: the ability of the economy to grow. And so the 488 00:26:12,800 --> 00:26:16,240 Speaker 1: FED doesn't actually get its section to a UH mandate 489 00:26:16,280 --> 00:26:20,920 Speaker 1: until nine seventy seven. It has a mandate under what's 490 00:26:21,200 --> 00:26:25,720 Speaker 1: called the Employment Act of ninety six, which is to 491 00:26:26,400 --> 00:26:31,240 Speaker 1: pursue maximum employment, maximum purchasing power. But that's that's a 492 00:26:31,280 --> 00:26:33,280 Speaker 1: mandate that applies to the whole federal government. This is 493 00:26:33,320 --> 00:26:36,720 Speaker 1: born of Kansian thinking. Uh, following the Second World War, 494 00:26:37,119 --> 00:26:38,960 Speaker 1: it gets Section two A and I thine seventy seven. 495 00:26:38,960 --> 00:26:42,280 Speaker 1: And the concern of Congress when writing that is about 496 00:26:42,400 --> 00:26:45,320 Speaker 1: high unemployment in the nineteen seventies. Uh, you know, you 497 00:26:45,320 --> 00:26:48,080 Speaker 1: you would think that their concern was the high inflation rate, 498 00:26:48,119 --> 00:26:50,080 Speaker 1: but they were concerned this is the highest unemployment since 499 00:26:50,080 --> 00:26:55,040 Speaker 1: the nineteen thirties, and the FED was was not providing 500 00:26:55,640 --> 00:26:58,920 Speaker 1: enough growth in the money supply. And uh, what's amazing 501 00:26:59,040 --> 00:27:01,280 Speaker 1: is that it's just three three years after this that 502 00:27:01,359 --> 00:27:04,000 Speaker 1: you get the vocal shock and changes our whole way 503 00:27:04,000 --> 00:27:06,200 Speaker 1: of thinking about what the FED is for. And then 504 00:27:06,200 --> 00:27:11,760 Speaker 1: the vulgar FED success or perceived success and taming a 505 00:27:11,880 --> 00:27:16,920 Speaker 1: decade of inflation that various politicians and government officials tried 506 00:27:16,960 --> 00:27:20,919 Speaker 1: to address and we're understood to have failed. Leads to 507 00:27:21,040 --> 00:27:23,600 Speaker 1: a whole reconceptualization of what the purpose of the FED 508 00:27:23,680 --> 00:27:25,920 Speaker 1: is and what a central bank, what role central bankser 509 00:27:26,040 --> 00:27:29,639 Speaker 1: performed in an economy. So, just on this note, like 510 00:27:29,720 --> 00:27:32,920 Speaker 1: I realized we're kind of having an abstract conversation about 511 00:27:32,960 --> 00:27:34,720 Speaker 1: the purpose of the FED. But can you can you 512 00:27:34,760 --> 00:27:40,200 Speaker 1: maybe draw a direct line between that conceptualization of what 513 00:27:40,320 --> 00:27:42,960 Speaker 1: the FED should be doing or could be doing, to 514 00:27:43,240 --> 00:27:46,840 Speaker 1: what happened in for instance, two thousand eight, Like, can 515 00:27:46,840 --> 00:27:50,919 Speaker 1: you connect those two events? Yes, So two thousand and 516 00:27:50,960 --> 00:27:56,280 Speaker 1: eight is the FED confronting it's need to perform its 517 00:27:56,280 --> 00:27:59,960 Speaker 1: fundamental purpose, which is to prevent monetary contraction, the core 518 00:28:00,080 --> 00:28:02,639 Speaker 1: or of its men, the whole reason it was created, 519 00:28:03,240 --> 00:28:08,200 Speaker 1: the reason it's for it's key modifications. Seven. It's all 520 00:28:08,240 --> 00:28:13,320 Speaker 1: about do not allow for a monetary system breakdown to 521 00:28:13,520 --> 00:28:16,679 Speaker 1: cause a terrible recession. That's the FEED is there to 522 00:28:16,720 --> 00:28:21,119 Speaker 1: prevent that from happening. Uh. And they're now they're facing 523 00:28:21,160 --> 00:28:26,240 Speaker 1: this monetary system breakdown and uh it's a product of 524 00:28:26,320 --> 00:28:30,639 Speaker 1: this whole shadow banking system that they had been involved 525 00:28:30,640 --> 00:28:32,560 Speaker 1: in developing over the years. It turns out to be 526 00:28:32,640 --> 00:28:37,280 Speaker 1: unbelievably fragile, UM and need an enormous amount of central 527 00:28:37,280 --> 00:28:42,160 Speaker 1: bank support in ways that they had not anticipated. And uh, 528 00:28:42,240 --> 00:28:46,960 Speaker 1: and ultimately they don't keep all the balls in the air. Um. 529 00:28:47,080 --> 00:28:50,120 Speaker 1: The Lemon Brothers ball falls, and we have a whole 530 00:28:50,120 --> 00:28:53,400 Speaker 1: conversation about UM you know, whether there were other ways 531 00:28:53,400 --> 00:28:55,040 Speaker 1: to keep that ball in the air and what the 532 00:28:55,120 --> 00:28:57,920 Speaker 1: right response to that was. But the reality is when 533 00:28:57,960 --> 00:29:02,000 Speaker 1: you have shooge chunks of the money supply collapsing like that, 534 00:29:02,120 --> 00:29:05,120 Speaker 1: you get a very acute recession. And that's exactly what 535 00:29:05,200 --> 00:29:09,160 Speaker 1: we have UM. And so the FED does a sort 536 00:29:09,200 --> 00:29:14,000 Speaker 1: of you know, in the period maybe a B B 537 00:29:14,200 --> 00:29:17,280 Speaker 1: plus job. I mean, I'm rucking sort of give it 538 00:29:17,280 --> 00:29:18,800 Speaker 1: a great because it's sort of like, in some ways 539 00:29:18,800 --> 00:29:21,080 Speaker 1: they failed completely and in other ways they succeeded. They 540 00:29:21,680 --> 00:29:24,440 Speaker 1: avoided a much worse crisis. But the Great Recession is 541 00:29:24,480 --> 00:29:28,920 Speaker 1: fundamentally the product of monetary system breakdown that was a 542 00:29:28,920 --> 00:29:32,040 Speaker 1: complete own goal. From a social design perspective, we didn't need. 543 00:29:32,080 --> 00:29:34,560 Speaker 1: It's like the electricity grid turning off for two months. 544 00:29:34,720 --> 00:29:36,920 Speaker 1: Imagine what would happen if the electricity grid is sort 545 00:29:36,960 --> 00:29:40,200 Speaker 1: of shut down for six weeks UM you'd have a 546 00:29:40,240 --> 00:29:44,240 Speaker 1: huge drop in gdp UH. And the monetary system is 547 00:29:44,320 --> 00:29:48,840 Speaker 1: like the electricity grid for the financial system, and if 548 00:29:48,880 --> 00:29:51,000 Speaker 1: you turn it off, you can have an activity just 549 00:29:51,040 --> 00:29:53,760 Speaker 1: sort of grinds to a halt. And and the Fed's 550 00:29:53,800 --> 00:29:55,480 Speaker 1: job is to keep the lights on, and they didn't 551 00:29:55,520 --> 00:29:59,400 Speaker 1: totally nail it, so, Josh, you know, with each of 552 00:29:59,400 --> 00:30:01,520 Speaker 1: these crisis and the two big ones obviously that we've 553 00:30:01,560 --> 00:30:05,000 Speaker 1: experienced recently two thousand and eight, and then all the activity, 554 00:30:05,080 --> 00:30:09,120 Speaker 1: the flurry of activity and spring two thousand twenty when 555 00:30:09,200 --> 00:30:11,440 Speaker 1: COVID hit, you know, obviously there's all these sort of 556 00:30:11,480 --> 00:30:15,200 Speaker 1: de facto discount windows that open up for the non 557 00:30:15,280 --> 00:30:17,800 Speaker 1: banking sector. But then there's also like seems to be 558 00:30:17,800 --> 00:30:20,080 Speaker 1: this legal fight that emerges in terms of like, well, 559 00:30:20,080 --> 00:30:23,640 Speaker 1: what tools are really available under the law? Is there 560 00:30:23,680 --> 00:30:27,240 Speaker 1: any real limit to what the FED can justify to itself? 561 00:30:27,360 --> 00:30:29,960 Speaker 1: Like are there actually hard constraints on what the FED 562 00:30:30,000 --> 00:30:33,479 Speaker 1: can do? Where is it always sure to either one 563 00:30:33,480 --> 00:30:35,280 Speaker 1: of you? Or is it always the sort of like 564 00:30:36,360 --> 00:30:39,120 Speaker 1: the only constraint is the creativity of the lawyers. This 565 00:30:39,200 --> 00:30:41,960 Speaker 1: is an invitation to make fun of lawyers. I think, yeah, well, 566 00:30:41,960 --> 00:30:47,200 Speaker 1: that's fraught for many reasons. But I think the answer 567 00:30:47,280 --> 00:30:49,320 Speaker 1: that question is the answer to any question related to 568 00:30:49,360 --> 00:30:51,560 Speaker 1: the legal constraints on a public institution, which is that 569 00:30:51,920 --> 00:30:54,480 Speaker 1: any public institution can quote unquote get away with whatever 570 00:30:54,520 --> 00:30:57,520 Speaker 1: they can justify. The question is like, is there a 571 00:30:57,560 --> 00:31:00,480 Speaker 1: long history of doing it? Um, that's not enough on 572 00:31:00,520 --> 00:31:02,600 Speaker 1: its own, but like it helps, right, So the fen's 573 00:31:02,600 --> 00:31:06,760 Speaker 1: been doing repost since nineteen seventeen, that's a long time. Um. 574 00:31:06,800 --> 00:31:09,320 Speaker 1: You know it's been doing f X operations since then, 575 00:31:09,360 --> 00:31:12,440 Speaker 1: since the sixties. That's also a long time. And so, like, 576 00:31:12,520 --> 00:31:16,000 Speaker 1: you know, the was like the open and notorious doctrine 577 00:31:16,000 --> 00:31:17,280 Speaker 1: I guess you call it. Is it called the doctor 578 00:31:17,320 --> 00:31:19,600 Speaker 1: and I'm not really sure. Basically, if you walk into 579 00:31:19,600 --> 00:31:22,360 Speaker 1: somebody's house, set up shop and never leave and they 580 00:31:22,400 --> 00:31:24,960 Speaker 1: never kick you out, of call anyone, it's your house. Um, 581 00:31:25,000 --> 00:31:26,960 Speaker 1: And so you know someone who tried to do that, Yeah, 582 00:31:27,360 --> 00:31:29,800 Speaker 1: usually doesn't work. But for real property, that's like a 583 00:31:29,840 --> 00:31:35,480 Speaker 1: real adverse possession, yes, which which shouldn't necessarily apply to 584 00:31:35,760 --> 00:31:38,959 Speaker 1: like administrative practices, but like the principle of the thing 585 00:31:39,040 --> 00:31:41,840 Speaker 1: sort of applies to some extent. I'm kind of avoiding 586 00:31:41,920 --> 00:31:44,360 Speaker 1: your question in the sense that like the answer is 587 00:31:44,680 --> 00:31:48,320 Speaker 1: yes and now, um. But but ultimately you have to 588 00:31:48,320 --> 00:31:50,800 Speaker 1: be answerable to the public. And so you know, I 589 00:31:50,800 --> 00:31:53,320 Speaker 1: think that's on Congress in a sense to say we 590 00:31:53,440 --> 00:31:56,840 Speaker 1: don't like what you did, Um, you can't do it anymore. 591 00:31:57,120 --> 00:31:59,040 Speaker 1: I'm going to write that down. We're all going to 592 00:31:59,120 --> 00:32:01,200 Speaker 1: vote on it and the President's going to sign it. 593 00:32:01,320 --> 00:32:03,200 Speaker 1: Now it's a rule. UM and they've done that in 594 00:32:03,200 --> 00:32:06,920 Speaker 1: the past. UM And and for example, in also nearly fifties, 595 00:32:07,160 --> 00:32:10,720 Speaker 1: there's a voluntary credit restraint program in UH around the 596 00:32:10,760 --> 00:32:15,200 Speaker 1: Korean War, and basically the Congress removed ability to do 597 00:32:15,240 --> 00:32:17,360 Speaker 1: that and they brought it back later. But like there've 598 00:32:17,400 --> 00:32:21,360 Speaker 1: been examples of powers being moved by Congressional action, and 599 00:32:21,600 --> 00:32:24,840 Speaker 1: that's ultimately to another in the remedy. Right, it's not 600 00:32:24,880 --> 00:32:28,280 Speaker 1: that people sue the Fed, it's that Congress passes. Is 601 00:32:28,320 --> 00:32:32,000 Speaker 1: also a great example Dive Frank Act Section thirteen three, 602 00:32:32,040 --> 00:32:35,040 Speaker 1: which is one of the core authorities that the FED 603 00:32:35,120 --> 00:32:39,000 Speaker 1: leans on. In two thousand and eight, Congress makes significant 604 00:32:39,040 --> 00:32:42,800 Speaker 1: modifications because it wasn't pleased with certain ways in which 605 00:32:42,800 --> 00:32:46,440 Speaker 1: Congress use thirteen three in two thousands and its specifically 606 00:32:46,800 --> 00:32:52,120 Speaker 1: Congress made thirteen three launch to support UM the rescue 607 00:32:52,160 --> 00:32:56,520 Speaker 1: of bear Stearns and UH to a I G. And 608 00:32:56,720 --> 00:33:02,280 Speaker 1: the modifications in say that thirteen three lending has to 609 00:33:02,280 --> 00:33:06,880 Speaker 1: be through facilities with broad based eligibility UM, and the 610 00:33:06,920 --> 00:33:10,280 Speaker 1: FED can't make loans to save a particular specific failing 611 00:33:10,360 --> 00:33:14,160 Speaker 1: financial company. And so just recently we had seen that 612 00:33:14,240 --> 00:33:19,120 Speaker 1: mechanism at work, though, I would say in general, the 613 00:33:19,200 --> 00:33:24,680 Speaker 1: government is full of administrative agencies that exercise delegated authority 614 00:33:24,840 --> 00:33:31,320 Speaker 1: from Congress pursuantto enabling statutes, and the ordinary mechanism for 615 00:33:32,600 --> 00:33:37,000 Speaker 1: checking that exercise of authority by those agencies is the 616 00:33:37,040 --> 00:33:39,040 Speaker 1: courts is the judicial process. So so so what the e 617 00:33:39,160 --> 00:33:42,920 Speaker 1: PA decides to regulate air pollution, uh, they often get 618 00:33:42,960 --> 00:33:45,440 Speaker 1: sued and then they have to go and explain why 619 00:33:45,520 --> 00:33:49,320 Speaker 1: the statute authorizes them to regulate air pollution in that way. 620 00:33:49,320 --> 00:33:51,480 Speaker 1: And then there's a bunch of judges who you know, 621 00:33:51,600 --> 00:33:53,920 Speaker 1: are either convinced or not convinced, and they apply various 622 00:33:53,920 --> 00:33:57,920 Speaker 1: doctrines and that process. The FED is subject to very 623 00:33:57,960 --> 00:34:00,560 Speaker 1: little of that, for variety of reasons we can get into. 624 00:34:00,800 --> 00:34:04,280 Speaker 1: And so, unlike many agencies that were familiar with, the 625 00:34:04,280 --> 00:34:08,080 Speaker 1: FED tends to be the final interpreter of its own 626 00:34:08,320 --> 00:34:11,920 Speaker 1: enabling statute. UH. And so it's the FED General Council's 627 00:34:11,960 --> 00:34:15,560 Speaker 1: Office that sort of decides what Section fourteen means because 628 00:34:16,040 --> 00:34:19,080 Speaker 1: there's basically no cases where a judge has ever been involved, 629 00:34:19,239 --> 00:34:22,360 Speaker 1: So we haven't developed a bunch of precedents, and it's 630 00:34:22,480 --> 00:34:24,960 Speaker 1: uh not sort of come about that anybody has sued 631 00:34:25,000 --> 00:34:27,800 Speaker 1: the FED for a variety of reasons, uh, and gotten 632 00:34:28,040 --> 00:34:31,080 Speaker 1: a judge involved in the issue. And that's why the 633 00:34:31,120 --> 00:34:34,719 Speaker 1: sort of main players that are constraining what the FED 634 00:34:34,760 --> 00:34:37,480 Speaker 1: can do are its own General Council's office and then 635 00:34:37,520 --> 00:34:41,840 Speaker 1: Congress Um, which can intervene. It must be nice to 636 00:34:41,840 --> 00:34:43,879 Speaker 1: be able to be the arbiter of your own your 637 00:34:43,880 --> 00:34:48,120 Speaker 1: own powers. Um. I'm going to reluctantly fast forward to 638 00:34:48,520 --> 00:34:51,879 Speaker 1: two and you know, we've been talking a lot about 639 00:34:51,880 --> 00:34:54,399 Speaker 1: this on the podcast. There's been a lot of air 640 00:34:54,719 --> 00:34:57,800 Speaker 1: being taken out of the sort of most frothy parts 641 00:34:58,080 --> 00:34:59,640 Speaker 1: of the market, and there's been a lot of talk 642 00:34:59,640 --> 00:35:03,360 Speaker 1: about the FED raising rates until something breaks. But the 643 00:35:03,560 --> 00:35:07,440 Speaker 1: standard opinion seems to be that the financial system is 644 00:35:07,440 --> 00:35:09,560 Speaker 1: safer than it was in two thousand eight. You don't 645 00:35:09,600 --> 00:35:12,640 Speaker 1: have the build up of leverage that you had back then. 646 00:35:13,000 --> 00:35:15,359 Speaker 1: Is that right? I'd love to hear from both of you, 647 00:35:15,400 --> 00:35:18,839 Speaker 1: like where are the pockets of vulnerabilities right now? And 648 00:35:18,880 --> 00:35:22,200 Speaker 1: should we be worried about financial stability? So the interesting 649 00:35:22,200 --> 00:35:24,719 Speaker 1: answers there's some like idiosyncratic source of leverage that no 650 00:35:24,760 --> 00:35:26,160 Speaker 1: one talks about. And I'm going to tell you right 651 00:35:26,200 --> 00:35:28,560 Speaker 1: now and then we'll have the answer. But I'm not 652 00:35:28,600 --> 00:35:33,000 Speaker 1: going to do that because I tried, Yeah, well I 653 00:35:33,520 --> 00:35:34,880 Speaker 1: can't do that. I should say no, I'm not going 654 00:35:34,880 --> 00:35:38,760 Speaker 1: to do that. But but I think an interesting case studies. 655 00:35:38,760 --> 00:35:42,080 Speaker 1: So I hated to rewind to that. But two eight 656 00:35:42,200 --> 00:35:45,399 Speaker 1: is a credit crisis that is deflationaring in the sense 657 00:35:45,440 --> 00:35:47,840 Speaker 1: that the money that was created to fund new loans 658 00:35:48,000 --> 00:35:50,399 Speaker 1: is now not money good because the loans are bad. 659 00:35:50,719 --> 00:35:52,680 Speaker 1: When the loans go bad, the money goes away, and 660 00:35:52,760 --> 00:35:58,680 Speaker 1: you have deflation. Um in we have a big much 661 00:35:58,719 --> 00:36:01,880 Speaker 1: bigger economics. Then we head into thousan Nate and by 662 00:36:01,920 --> 00:36:04,000 Speaker 1: lots of measures. And yes it was short lived. Yes 663 00:36:04,000 --> 00:36:06,040 Speaker 1: it was like quote unquote V shaped or whatever. Maybe 664 00:36:06,040 --> 00:36:07,680 Speaker 1: it's sort of a check mark shape because we kept 665 00:36:07,719 --> 00:36:12,440 Speaker 1: going up. But like the that wasn't obvious at the time. Um, 666 00:36:12,480 --> 00:36:14,840 Speaker 1: but we don't have a credit crisis, Like nobody's really 667 00:36:14,880 --> 00:36:18,480 Speaker 1: worried about the underlying stability of the banking system in 668 00:36:18,480 --> 00:36:20,600 Speaker 1: a meaningful way at any particular point in that. Now 669 00:36:20,600 --> 00:36:22,600 Speaker 1: we do stress tests, we make sure we're but it's 670 00:36:22,600 --> 00:36:24,719 Speaker 1: more about checking your answer than it is about coming 671 00:36:24,800 --> 00:36:27,080 Speaker 1: up with a new one. And so like that's a 672 00:36:27,120 --> 00:36:29,560 Speaker 1: success in that it's not a credit crisis, it's a 673 00:36:29,560 --> 00:36:32,720 Speaker 1: liquidity crisis. Central banks are designed to deal with liquidity crisis. 674 00:36:33,200 --> 00:36:36,120 Speaker 1: So um, now you could ask the question, should there 675 00:36:36,120 --> 00:36:38,919 Speaker 1: be that much liquidity in the market in general? That's 676 00:36:39,080 --> 00:36:41,400 Speaker 1: ultimately the question of shadow banking, is there's more liquidity 677 00:36:41,400 --> 00:36:44,239 Speaker 1: than necessarily is sustainable. And if the FEDS going to 678 00:36:44,880 --> 00:36:47,840 Speaker 1: or central banks in general are going to backstop liquidity, 679 00:36:47,880 --> 00:36:49,680 Speaker 1: like they should have some limit to what they're willing 680 00:36:49,719 --> 00:36:52,120 Speaker 1: to do. Um. If you think about the current environment, 681 00:36:52,520 --> 00:36:55,160 Speaker 1: you know, just this the simple fact of rising rates 682 00:36:56,040 --> 00:36:59,280 Speaker 1: doesn't seem with some idiots and credit cases left the side, 683 00:36:59,360 --> 00:37:03,160 Speaker 1: like the global economy and for the US economy, um 684 00:37:03,360 --> 00:37:06,279 Speaker 1: is problematic in much more boring ways. Meaning it used 685 00:37:06,320 --> 00:37:07,840 Speaker 1: to be really cheap to our money, it's not so 686 00:37:07,960 --> 00:37:11,120 Speaker 1: cheap anymore. And like that's not a financial system meltdown 687 00:37:11,200 --> 00:37:15,000 Speaker 1: kind of thing. Um Because now you know, that's a 688 00:37:15,040 --> 00:37:18,480 Speaker 1: sanguine look and that's like classic like you know, final 689 00:37:18,520 --> 00:37:20,040 Speaker 1: word on the like it's not going to go well, 690 00:37:20,120 --> 00:37:23,640 Speaker 1: I make that prediction, but like the I think that 691 00:37:23,760 --> 00:37:26,880 Speaker 1: the problem is different, and there's this tendency to say, 692 00:37:27,239 --> 00:37:31,400 Speaker 1: you know, there's this stressor that's applying pressure to the system, 693 00:37:31,719 --> 00:37:33,799 Speaker 1: and the system is vulnerable, and this crack is going 694 00:37:33,840 --> 00:37:36,279 Speaker 1: to open, and it's all going to spread wide, and 695 00:37:36,320 --> 00:37:37,840 Speaker 1: we're going to find out that what we didn't know 696 00:37:37,960 --> 00:37:39,920 Speaker 1: is the only thing that matters. And and I think 697 00:37:39,960 --> 00:37:42,480 Speaker 1: we should open ourselves up with the possibility that this 698 00:37:42,560 --> 00:37:44,959 Speaker 1: is kind of just a rate cycle, and that there's 699 00:37:44,960 --> 00:37:50,319 Speaker 1: no obvious source of monetary and stability UM and that 700 00:37:50,440 --> 00:37:52,480 Speaker 1: it's still gonna be painful at times because it's more 701 00:37:52,480 --> 00:37:54,560 Speaker 1: expensive our money, but it's gonna be about that real 702 00:37:54,560 --> 00:37:58,200 Speaker 1: economy stuff as opposed to like the mechanical or the 703 00:37:58,239 --> 00:38:02,600 Speaker 1: plumbing or the financial your side of things, love did 704 00:38:02,840 --> 00:38:06,280 Speaker 1: did Josh just jinx us into a major credit crisis? 705 00:38:07,840 --> 00:38:10,799 Speaker 1: I'm going to hazard the other position, the other side 706 00:38:10,840 --> 00:38:15,080 Speaker 1: of this um UH. It's certainly the case that we've 707 00:38:15,120 --> 00:38:19,239 Speaker 1: made a lot of improvements UH since two thousand and eight, 708 00:38:19,320 --> 00:38:24,640 Speaker 1: but we still have a fundamentally unstable monetary financial system. 709 00:38:24,719 --> 00:38:29,480 Speaker 1: It's just inherently fragile. The run risk is lurking constantly. 710 00:38:30,080 --> 00:38:33,760 Speaker 1: And that's because repo market, the your dollar market, repo 711 00:38:33,840 --> 00:38:36,359 Speaker 1: issuers and your dollar issuers are not in fact banks. 712 00:38:36,360 --> 00:38:39,080 Speaker 1: There is no deposit insurance, so you can have repo insurance, 713 00:38:39,280 --> 00:38:42,840 Speaker 1: and so there's enormous incentives that are just always hanging 714 00:38:42,920 --> 00:38:46,600 Speaker 1: over to run. You can think of a of a 715 00:38:46,680 --> 00:38:49,759 Speaker 1: cash provider in a repo or a euro dollar depositor 716 00:38:49,880 --> 00:38:53,640 Speaker 1: as picking up pennies. Um, they're getting paid more interest 717 00:38:53,680 --> 00:38:57,880 Speaker 1: than if they're in a bank deposit, and then good times, great, 718 00:38:57,920 --> 00:39:00,440 Speaker 1: pick up those pennies in front of the steam roller. 719 00:39:01,120 --> 00:39:03,400 Speaker 1: But then all that has to happen is a change 720 00:39:03,400 --> 00:39:08,280 Speaker 1: in expectations about the future uh any concern and there's 721 00:39:08,280 --> 00:39:12,239 Speaker 1: just an incentive for the cash providers and your dollar 722 00:39:12,320 --> 00:39:15,360 Speaker 1: depositors to just go back to a regular bank deposit 723 00:39:15,480 --> 00:39:18,319 Speaker 1: or t bill um, you know, to to get out. 724 00:39:18,440 --> 00:39:21,360 Speaker 1: And so Ben Bernanke I think it was his famous 725 00:39:21,400 --> 00:39:26,480 Speaker 1: comment about the subprime mortgage issue. He thought that that 726 00:39:26,600 --> 00:39:29,120 Speaker 1: was contained. He was like, this is too small to 727 00:39:29,239 --> 00:39:32,239 Speaker 1: cause a crisis. But the lesson in some sense of 728 00:39:32,239 --> 00:39:34,520 Speaker 1: two thousand and eight is that if you have an 729 00:39:34,560 --> 00:39:40,600 Speaker 1: inherently fragile monetary system, it doesn't have to be huge losses. 730 00:39:40,600 --> 00:39:43,400 Speaker 1: It just has to be sufficient uncertainty about the distribution 731 00:39:43,480 --> 00:39:48,640 Speaker 1: of those losses to cause all of the shadow money 732 00:39:48,880 --> 00:39:51,279 Speaker 1: people to try to rush into the good money. And 733 00:39:51,360 --> 00:39:53,399 Speaker 1: I would say that right now, where we're looking at 734 00:39:53,680 --> 00:39:58,919 Speaker 1: is balance sheets of of shadow banks that are under 735 00:39:58,920 --> 00:40:01,640 Speaker 1: pressure from a frustrate rises because they have a lot 736 00:40:01,640 --> 00:40:04,359 Speaker 1: of dead instruments that become less valuable when interest rates 737 00:40:04,440 --> 00:40:09,520 Speaker 1: go up. And so the more pressure the assets side 738 00:40:09,880 --> 00:40:14,840 Speaker 1: of financial institutions UH that are issuing money instruments, the 739 00:40:14,920 --> 00:40:19,040 Speaker 1: more pressure that that is under, the higher the likelihood 740 00:40:19,160 --> 00:40:21,959 Speaker 1: that there will be a moment where everybody looks down 741 00:40:22,040 --> 00:40:24,520 Speaker 1: and says, wait a second, I don't know if this 742 00:40:24,560 --> 00:40:27,759 Speaker 1: guy is UH is such a good bet anymore. Let 743 00:40:27,760 --> 00:40:30,160 Speaker 1: me just move my money to JP Morgan Chase. And 744 00:40:30,160 --> 00:40:33,120 Speaker 1: that's what happened in two thousand and eight some sense. Alright, 745 00:40:33,200 --> 00:40:35,600 Speaker 1: we're forty minutes in and we'll get to audience questions 746 00:40:35,600 --> 00:40:37,719 Speaker 1: in a second. But there's one since I want to 747 00:40:37,719 --> 00:40:40,400 Speaker 1: bring it up. You know, Tracy mentioned like, well, nothing 748 00:40:40,560 --> 00:40:42,719 Speaker 1: is broken yet, but one thing has broken and it's 749 00:40:42,760 --> 00:40:45,760 Speaker 1: the crypto market or there was a pretty big break there. 750 00:40:46,160 --> 00:40:49,600 Speaker 1: But here's the thing. People hate bailouts. So thank god, 751 00:40:50,160 --> 00:40:53,160 Speaker 1: nothing so far knock on wood with the FTX story 752 00:40:53,239 --> 00:40:55,520 Speaker 1: has like caused any sort of financial institution to need 753 00:40:55,560 --> 00:40:58,839 Speaker 1: to bail out what should be done so that never 754 00:40:59,000 --> 00:41:01,200 Speaker 1: in my life do I have to hear about a 755 00:41:01,200 --> 00:41:04,840 Speaker 1: crypto company getting built out. What would you like to 756 00:41:04,840 --> 00:41:07,040 Speaker 1: go first? Either one of you is how do we 757 00:41:07,080 --> 00:41:14,640 Speaker 1: avoid that risk forever? So the crypto ecosystem is I 758 00:41:14,680 --> 00:41:17,440 Speaker 1: think eager for And if they're not eager for it, 759 00:41:17,480 --> 00:41:23,440 Speaker 1: they should be uh some official sector recognition that will 760 00:41:23,480 --> 00:41:29,440 Speaker 1: allow ordinary financial institutions to hold and trade and deal 761 00:41:29,760 --> 00:41:34,440 Speaker 1: in cryptocurrencies, because right now what they have is a 762 00:41:34,480 --> 00:41:36,640 Speaker 1: whole little world that just exists on the internet, is 763 00:41:36,680 --> 00:41:40,800 Speaker 1: completely divorced from any economic activity in the real world. 764 00:41:40,920 --> 00:41:44,080 Speaker 1: It's like the apopiosis of finance. The purpose of finance 765 00:41:44,120 --> 00:41:46,960 Speaker 1: is to help us allocate real resources in the real world, 766 00:41:47,400 --> 00:41:50,719 Speaker 1: and here's crypto and they're doing it, except they're not 767 00:41:50,760 --> 00:41:53,440 Speaker 1: allocating any resources in the real there's no there's no 768 00:41:53,520 --> 00:41:57,240 Speaker 1: connect The only point of connection between the crypto world, 769 00:41:57,760 --> 00:42:00,359 Speaker 1: the only significant point of connection with crypto world right 770 00:42:00,400 --> 00:42:04,799 Speaker 1: now and real economy is stable coins, which is the bridge. 771 00:42:04,840 --> 00:42:06,400 Speaker 1: It's how you get in and out. And so the 772 00:42:06,440 --> 00:42:09,480 Speaker 1: stable coin issues actually have real dollar assets, they're the 773 00:42:09,520 --> 00:42:14,040 Speaker 1: only ones um. And so the way you avoid ever 774 00:42:14,080 --> 00:42:16,200 Speaker 1: having a crypto bailout is you keep it that way, 775 00:42:16,440 --> 00:42:21,440 Speaker 1: you don't have the actual economy ever become reliant or 776 00:42:21,480 --> 00:42:24,000 Speaker 1: exposed to the value of these tokens, and you don't 777 00:42:24,120 --> 00:42:27,520 Speaker 1: end up with massive stable coin issuers that you know 778 00:42:27,560 --> 00:42:30,359 Speaker 1: are issuing stable coins that people use to buy real 779 00:42:30,400 --> 00:42:32,760 Speaker 1: goods and services. If the only use of a stable 780 00:42:32,760 --> 00:42:36,560 Speaker 1: point is to buy a token with no value, then 781 00:42:37,640 --> 00:42:40,279 Speaker 1: you know, it's just not it's not a real risk. 782 00:42:40,320 --> 00:42:43,840 Speaker 1: But if people are using stable coins to buy actual stuff, 783 00:42:43,880 --> 00:42:45,360 Speaker 1: then it becomes part of the money supply, And if 784 00:42:45,360 --> 00:42:48,480 Speaker 1: all those stable coins disappear, you could get contractionary pressures 785 00:42:48,480 --> 00:42:52,680 Speaker 1: that have to be counteracted by some official sector action 786 00:42:52,760 --> 00:42:55,720 Speaker 1: and doesn't have necessarily be a bailout, but a bailout 787 00:42:55,760 --> 00:42:58,360 Speaker 1: is often the most efficient means. You know, UH, it 788 00:42:58,400 --> 00:43:01,480 Speaker 1: would have been easier to have bailed out leaving brothers 789 00:43:01,560 --> 00:43:04,080 Speaker 1: than to try to get the money supply expanding through 790 00:43:04,120 --> 00:43:09,080 Speaker 1: other UH central bank actions. So I think it's um, Like, 791 00:43:09,120 --> 00:43:11,880 Speaker 1: I completely agree with that. I mean, maybe I'm exposed 792 00:43:11,840 --> 00:43:13,960 Speaker 1: to be supposed to Twitter flame by saying that, but like, 793 00:43:14,600 --> 00:43:17,040 Speaker 1: I mean, I think the sorry you're not on Twitter, 794 00:43:17,239 --> 00:43:20,640 Speaker 1: there's another Jeosh Younger on Twitter who's not him, not me, Um, 795 00:43:21,400 --> 00:43:25,440 Speaker 1: very very much, but there's probably more than one fairness. Um, 796 00:43:25,480 --> 00:43:29,320 Speaker 1: but I think that the thing that money is supposed 797 00:43:29,360 --> 00:43:31,160 Speaker 1: to do something for you, right, So that's kind of 798 00:43:31,200 --> 00:43:33,000 Speaker 1: along the lines of less argument, which is like it 799 00:43:33,040 --> 00:43:36,959 Speaker 1: has some real economy purpose and so like, ultimately bank 800 00:43:37,000 --> 00:43:39,920 Speaker 1: deposits are good and good money in the sense that 801 00:43:39,960 --> 00:43:42,160 Speaker 1: I can guess by goods and services, but there's an 802 00:43:42,200 --> 00:43:45,160 Speaker 1: underlying transfer of federal reserve liabilities behind that, like banks 803 00:43:45,600 --> 00:43:48,400 Speaker 1: interact with them between each other in federal reserve money, 804 00:43:48,840 --> 00:43:51,680 Speaker 1: and so and then and and that bank deposits value 805 00:43:51,680 --> 00:43:52,759 Speaker 1: in the sense that I can go to the bank 806 00:43:53,000 --> 00:43:55,600 Speaker 1: and get paper money and then in principle pay my 807 00:43:55,640 --> 00:43:59,000 Speaker 1: taxes with it, right, because that's definitely use of government 808 00:43:59,040 --> 00:44:01,080 Speaker 1: issue money. Is that, oh, the government a hundred dollars, 809 00:44:01,120 --> 00:44:02,560 Speaker 1: I take my hundred dollars, I give it to the government. 810 00:44:02,560 --> 00:44:05,439 Speaker 1: I don't go to jail. Much better outcome. And so 811 00:44:06,200 --> 00:44:09,800 Speaker 1: like the question is in crypto, like where's that convertibility? 812 00:44:09,800 --> 00:44:11,560 Speaker 1: And so this is where the your dollar analogy comes up, 813 00:44:11,600 --> 00:44:14,759 Speaker 1: which is like building up an infrastructure that guaranteed that 814 00:44:14,800 --> 00:44:17,759 Speaker 1: convertibility in the way that let the market scale was 815 00:44:17,800 --> 00:44:20,279 Speaker 1: a lot of work and took a long time, and 816 00:44:20,360 --> 00:44:22,440 Speaker 1: it involved the direct involvement of the Federal Reserve at 817 00:44:22,480 --> 00:44:24,719 Speaker 1: many steps and all the other central banks. And so 818 00:44:25,239 --> 00:44:29,359 Speaker 1: you know, the crypto ecosystem is similarly offshore, involving many 819 00:44:29,360 --> 00:44:33,640 Speaker 1: different regulatory authorities. Um. And if I can't take my bitcoin, 820 00:44:33,719 --> 00:44:36,040 Speaker 1: turn it into a tether, turned it into a dollar, 821 00:44:36,680 --> 00:44:38,279 Speaker 1: turn it into a paper dollar, and give it to 822 00:44:38,320 --> 00:44:40,120 Speaker 1: the treasury to pay my taxes, like, if that chain 823 00:44:40,200 --> 00:44:43,640 Speaker 1: is not guaranteed, it's hard to see how it scales, 824 00:44:44,320 --> 00:44:47,000 Speaker 1: um and so like to last point, you just don't 825 00:44:47,040 --> 00:44:49,680 Speaker 1: do anything, and you're gonna end up not necessarily with 826 00:44:49,719 --> 00:44:52,440 Speaker 1: crypto exchanges being like iron clad, because probably won't get 827 00:44:52,440 --> 00:44:54,960 Speaker 1: that either. But it won't have like a real economy impact. 828 00:44:54,960 --> 00:44:57,959 Speaker 1: It won't be a major component of the monetary system. 829 00:44:58,000 --> 00:44:59,960 Speaker 1: It won't be a major component of the financial systematic 830 00:45:00,040 --> 00:45:03,560 Speaker 1: can be segmented off. You know, the the FTX stuff 831 00:45:03,600 --> 00:45:08,600 Speaker 1: like is mostly about crypto um and there's real economy complications. 832 00:45:08,640 --> 00:45:12,040 Speaker 1: But like you and there's really like bad outcomes for 833 00:45:12,160 --> 00:45:13,719 Speaker 1: lots of people, and I don't want to diminish that 834 00:45:13,760 --> 00:45:34,000 Speaker 1: at all, But like the banking system will survive, should 835 00:45:34,040 --> 00:45:36,399 Speaker 1: we take some audience questions? So We have some really 836 00:45:36,440 --> 00:45:38,480 Speaker 1: good ones. I have to say about half of them 837 00:45:38,520 --> 00:45:41,440 Speaker 1: are about crypto. But this is where we did them 838 00:45:41,480 --> 00:45:44,320 Speaker 1: buy a card? Yeah, they are. They're good crypto questions. 839 00:45:44,320 --> 00:45:48,120 Speaker 1: It's not like would you buy bitcoin? But but okay, 840 00:45:48,160 --> 00:45:50,520 Speaker 1: when you hold the magic box, you're gonna get that 841 00:45:51,000 --> 00:45:55,800 Speaker 1: to that one on on this convertibility point, um, here's 842 00:45:55,840 --> 00:45:58,000 Speaker 1: one question. So do you think that some of the 843 00:45:58,040 --> 00:46:02,520 Speaker 1: shadow banking solutions or other types of solutions could reach 844 00:46:02,640 --> 00:46:06,600 Speaker 1: the retail level through payment solution companies such as PayPal, 845 00:46:07,080 --> 00:46:11,640 Speaker 1: so that, for instance, you could have repoat availability for 846 00:46:11,760 --> 00:46:15,479 Speaker 1: your average person on the street. And this person didn't 847 00:46:15,480 --> 00:46:18,319 Speaker 1: mention this, but I'll just tack this on central bank 848 00:46:18,360 --> 00:46:21,880 Speaker 1: digital currencies. I mean, one of the use cases for 849 00:46:21,920 --> 00:46:25,560 Speaker 1: those is this idea that people could potentially have access 850 00:46:25,800 --> 00:46:29,080 Speaker 1: to the FED directly in some way. You do have 851 00:46:29,120 --> 00:46:31,479 Speaker 1: that right, that's a money market fund. So the money 852 00:46:31,480 --> 00:46:33,319 Speaker 1: market fund gives you direct access. Fore, it gives you 853 00:46:33,320 --> 00:46:36,800 Speaker 1: direct access to FEDS balanchie the reverse repot facilities and 854 00:46:36,920 --> 00:46:40,160 Speaker 1: money market fund asset almost exclusively. And so like that 855 00:46:40,239 --> 00:46:43,600 Speaker 1: functionality exists, and people are utilizing at the government money 856 00:46:43,600 --> 00:46:46,880 Speaker 1: market fund complex, which is this like risk free component 857 00:46:46,920 --> 00:46:50,600 Speaker 1: of money market funds, multi trillion dollar business, so so 858 00:46:50,680 --> 00:46:54,680 Speaker 1: it's happening. I think with central bank digital currencies, the 859 00:46:54,760 --> 00:46:56,480 Speaker 1: question is what problem we're trying to solve. That's what 860 00:46:56,520 --> 00:46:59,080 Speaker 1: everyone starts with when they talk about CBDCs. They say like, well, 861 00:46:59,080 --> 00:47:00,920 Speaker 1: what are we trying to solve? And I think, like 862 00:47:00,960 --> 00:47:03,640 Speaker 1: a center bank digital currency has two like unique aspects. 863 00:47:03,640 --> 00:47:07,799 Speaker 1: One is it is a digital asset blockchain or not uh, 864 00:47:07,840 --> 00:47:09,560 Speaker 1: and the other is it is not a bank, it's 865 00:47:09,600 --> 00:47:12,239 Speaker 1: the central bank. So if we want a central bank 866 00:47:12,239 --> 00:47:15,840 Speaker 1: digital currency available to retail investors because wholesale has access 867 00:47:15,880 --> 00:47:18,799 Speaker 1: to the central bank's balance sheet. Um, the questions, do 868 00:47:18,920 --> 00:47:22,560 Speaker 1: retail investors have a have serious concerns about the stability 869 00:47:22,600 --> 00:47:26,960 Speaker 1: of commercial banks that would warrant a different counterparty right there? 870 00:47:26,960 --> 00:47:29,840 Speaker 1: Their counterparty is currently a commercial bank. They'd rather be 871 00:47:29,840 --> 00:47:31,279 Speaker 1: the central bank. And you only do that if you 872 00:47:31,280 --> 00:47:33,080 Speaker 1: really don't think that commercial bank is gonna be good 873 00:47:33,120 --> 00:47:36,080 Speaker 1: for the convertibility and everything about the way bank depositor 874 00:47:36,160 --> 00:47:38,759 Speaker 1: price tells you people are perfectly comfortable with with the 875 00:47:38,760 --> 00:47:41,480 Speaker 1: ability to the banking system to deliver on their promise 876 00:47:41,520 --> 00:47:45,000 Speaker 1: of convertibility. So then it's a question of the settlement 877 00:47:45,040 --> 00:47:47,480 Speaker 1: cycle and the payment system. And one of the things 878 00:47:47,560 --> 00:47:51,080 Speaker 1: that I think is really interesting about the the discussion 879 00:47:51,160 --> 00:47:54,080 Speaker 1: of payments. Anyone who's like talk to me is probably 880 00:47:54,080 --> 00:47:56,000 Speaker 1: brought up the statistic at some point. But the FED 881 00:47:56,040 --> 00:47:58,479 Speaker 1: does a survey, They say, have you used a check 882 00:47:58,480 --> 00:48:01,680 Speaker 1: hasher or another non bank financial media in the past year, 883 00:48:01,880 --> 00:48:05,359 Speaker 1: so Casher's paid loans, all that kind of stuff, um, 884 00:48:05,440 --> 00:48:08,320 Speaker 1: and people say yes or no. It's multively small fraction people, 885 00:48:08,320 --> 00:48:11,080 Speaker 1: but it's it's non trivial. And then they say, do 886 00:48:11,120 --> 00:48:14,120 Speaker 1: you have a bank account? And so of people who 887 00:48:14,160 --> 00:48:16,879 Speaker 1: use a check casher also have a bank account. So 888 00:48:17,040 --> 00:48:19,120 Speaker 1: this is about the payment system for those folks, and 889 00:48:19,120 --> 00:48:22,799 Speaker 1: that's why the financial inclusion bit of CBDC. I think 890 00:48:22,800 --> 00:48:25,080 Speaker 1: the question is can the backing system solve that through 891 00:48:25,080 --> 00:48:28,799 Speaker 1: a better payment system of faster settlement cycle. Is it 892 00:48:28,920 --> 00:48:31,759 Speaker 1: really about access to central bank money or is it 893 00:48:31,800 --> 00:48:35,200 Speaker 1: access to faster payments? And that's why segmenting the problem 894 00:48:35,280 --> 00:48:37,200 Speaker 1: is useful because then you can look at the technology 895 00:48:37,200 --> 00:48:39,359 Speaker 1: and say this piece is useful, this piece is not. 896 00:48:39,600 --> 00:48:41,759 Speaker 1: So the banking system has been telling us that they're 897 00:48:41,760 --> 00:48:45,840 Speaker 1: going to solve the unbanked under banked problem since the 898 00:48:45,920 --> 00:48:50,160 Speaker 1: nineteen eighties when Congress had a hearing and UH and 899 00:48:50,200 --> 00:48:54,640 Speaker 1: the Fed actually said, don't worry, the bank banking system 900 00:48:54,640 --> 00:48:57,799 Speaker 1: is going to address this. Will will will get that 901 00:48:57,920 --> 00:49:02,239 Speaker 1: number of unbanked down to the level of other advanced economies, which, 902 00:49:02,239 --> 00:49:05,800 Speaker 1: by the way, is plus other advanced economies are banked. 903 00:49:05,960 --> 00:49:07,480 Speaker 1: And we have actually made a lot of progress in 904 00:49:07,480 --> 00:49:11,120 Speaker 1: the last ten years UM for reasons having to do 905 00:49:11,200 --> 00:49:15,880 Speaker 1: with technology making it cheaper to offer bank accounts, but 906 00:49:16,000 --> 00:49:20,960 Speaker 1: we still have around five of households unbanked, which is 907 00:49:21,000 --> 00:49:24,120 Speaker 1: millions of people. And so I do think that's one 908 00:49:24,560 --> 00:49:29,000 Speaker 1: reason why central bank money UH, public option for central 909 00:49:29,000 --> 00:49:32,680 Speaker 1: bank money could be appealing. Obviously agree with Josh that 910 00:49:32,760 --> 00:49:38,160 Speaker 1: there's not a safety stability deficiency for bank account money. 911 00:49:38,239 --> 00:49:40,440 Speaker 1: Of course, that's because the public stands behind that through 912 00:49:40,480 --> 00:49:43,239 Speaker 1: deposit insurance and the discount window UH. And so the 913 00:49:43,280 --> 00:49:46,360 Speaker 1: government has given a franchise for the banking system to 914 00:49:46,560 --> 00:49:50,640 Speaker 1: create that safe money. And so fundamentally, the question should 915 00:49:50,640 --> 00:49:53,359 Speaker 1: we have a CBDC is a question about do we 916 00:49:53,480 --> 00:49:56,400 Speaker 1: want to re engineer or change that arrangement and change 917 00:49:56,440 --> 00:50:00,200 Speaker 1: the nature of the banking franchise and and and and 918 00:50:00,360 --> 00:50:04,400 Speaker 1: introduce a public option that competes with the banking franchise. 919 00:50:04,480 --> 00:50:06,920 Speaker 1: Do we think that will lead to a solution of 920 00:50:06,960 --> 00:50:10,200 Speaker 1: the on bank problem that's more robust, uh, a solution 921 00:50:10,239 --> 00:50:14,759 Speaker 1: to the payments problem. The banking industry has spent decades 922 00:50:15,400 --> 00:50:20,839 Speaker 1: um not investing in fast payments because banks have an 923 00:50:20,840 --> 00:50:24,799 Speaker 1: interest in the float and in having additional time to 924 00:50:24,840 --> 00:50:29,160 Speaker 1: prevent fraud, which because of federal law, generally they have 925 00:50:29,239 --> 00:50:32,600 Speaker 1: to absorb those costs. And so whereas other advanced countries 926 00:50:32,600 --> 00:50:35,840 Speaker 1: have had real time growth settlement, real time payments the 927 00:50:35,840 --> 00:50:40,360 Speaker 1: retail level for decades, uh, here we are in two 928 00:50:40,640 --> 00:50:43,960 Speaker 1: and it's it's patches here and there in the u 929 00:50:44,080 --> 00:50:46,400 Speaker 1: S where you can move your money quickly. And this 930 00:50:46,440 --> 00:50:48,000 Speaker 1: is part of the reason why you end up with 931 00:50:48,040 --> 00:50:50,719 Speaker 1: the stable coins. In some sense, stable coin issues make 932 00:50:50,719 --> 00:50:53,560 Speaker 1: this argument it's going to be more efficient transaction. So 933 00:50:54,040 --> 00:50:57,200 Speaker 1: I think there's a question on those sort of bread 934 00:50:57,239 --> 00:51:00,000 Speaker 1: and butter dimensions. Would a public option for bank accoun 935 00:51:00,000 --> 00:51:03,799 Speaker 1: out money improve the private options that exist? And then 936 00:51:03,840 --> 00:51:08,439 Speaker 1: there's the larger question about the shadow bank money. What's 937 00:51:08,480 --> 00:51:12,520 Speaker 1: a major reason why you have repo market, what's a 938 00:51:12,560 --> 00:51:15,520 Speaker 1: major reason why you have money funds? Because ft I 939 00:51:15,560 --> 00:51:18,319 Speaker 1: C insurance caps out at two fifty dollars, and there's 940 00:51:18,360 --> 00:51:20,640 Speaker 1: actually a deficiency in the nature of the bank franchise. 941 00:51:20,840 --> 00:51:23,400 Speaker 1: We don't actually have this level of safety that we 942 00:51:23,440 --> 00:51:26,480 Speaker 1: would want. And so there's large corporations that have very 943 00:51:26,560 --> 00:51:28,800 Speaker 1: large balances. Maybe they want to have a five hundred 944 00:51:28,840 --> 00:51:31,759 Speaker 1: million dollar cash balance, and there may be not so 945 00:51:31,800 --> 00:51:34,759 Speaker 1: comfortable about having that all in one bank, and do 946 00:51:34,800 --> 00:51:37,279 Speaker 1: we need to fix that? And maybe should Apple be 947 00:51:37,360 --> 00:51:40,400 Speaker 1: able to just hold a billion dollar cash balance at 948 00:51:40,400 --> 00:51:43,799 Speaker 1: the federals or that's nondefaultable. Why not make non defaultable 949 00:51:43,800 --> 00:51:47,640 Speaker 1: money more widely available? And that's I think that's sort 950 00:51:47,680 --> 00:51:50,080 Speaker 1: of the the pro case. Or central bank digital currency, 951 00:51:50,120 --> 00:51:53,839 Speaker 1: not necessarily like on the blockchain, uh, not token eye, 952 00:51:53,880 --> 00:51:57,480 Speaker 1: central bank digital currency, but just what you know, fed 953 00:51:57,520 --> 00:51:59,800 Speaker 1: accounts for all, which is something that I've been in 954 00:52:00,000 --> 00:52:02,719 Speaker 1: favor up for many years now. So I don't know 955 00:52:02,719 --> 00:52:04,840 Speaker 1: if you guys knew that that that I was for that. 956 00:52:04,920 --> 00:52:09,200 Speaker 1: But by the way, future episode we should do one, 957 00:52:09,280 --> 00:52:11,759 Speaker 1: just like why there's no instant payments in the US. 958 00:52:11,840 --> 00:52:13,279 Speaker 1: I think that would do really well and just like 959 00:52:13,320 --> 00:52:16,480 Speaker 1: some of the yeah, that's a good future episode. Can 960 00:52:16,520 --> 00:52:19,799 Speaker 1: you um you know you've written about like the sort 961 00:52:19,840 --> 00:52:23,919 Speaker 1: of coevolution or the different evolution. So we talked about, Okay, 962 00:52:23,960 --> 00:52:26,040 Speaker 1: the FED having to like come up with all these 963 00:52:26,040 --> 00:52:30,440 Speaker 1: new mechanisms um to deal with the growth of deposit 964 00:52:30,520 --> 00:52:34,279 Speaker 1: like things outside of the banking system. Can you compare that, like, 965 00:52:34,320 --> 00:52:36,160 Speaker 1: what does it look like for the other major central 966 00:52:36,200 --> 00:52:38,640 Speaker 1: banks and their evolution E, C, B, B, O, J. 967 00:52:38,760 --> 00:52:41,200 Speaker 1: Have they also roughly had to do the same thing, 968 00:52:41,719 --> 00:52:44,239 Speaker 1: or is because there is not as similar like sort 969 00:52:44,239 --> 00:52:47,840 Speaker 1: of as big offshore market for some of these other currencies, 970 00:52:47,880 --> 00:52:50,240 Speaker 1: has it not been pressing up an issue? So Josh 971 00:52:50,320 --> 00:52:52,960 Speaker 1: might be deeper on this than I am, But generally 972 00:52:53,600 --> 00:52:58,080 Speaker 1: the dollar based shadow banking system is vastly larger than 973 00:52:58,680 --> 00:53:02,160 Speaker 1: for other currencies, and there's a variety of reasons for this. 974 00:53:02,760 --> 00:53:05,760 Speaker 1: One has to do with exactly what we were talking about, 975 00:53:06,120 --> 00:53:12,480 Speaker 1: the stance of US policymakers, in particular Treasury Department and 976 00:53:12,600 --> 00:53:15,960 Speaker 1: the Federal Reserve in the latter half of the twentie 977 00:53:16,120 --> 00:53:21,640 Speaker 1: century to actually facilitate its growth um and to allow 978 00:53:21,800 --> 00:53:25,279 Speaker 1: for the sort of impairment of the bank franchise, not 979 00:53:25,360 --> 00:53:29,440 Speaker 1: just to allow to nurture it. Another has to do 980 00:53:29,560 --> 00:53:33,200 Speaker 1: with the fact that in a lot of other countries, 981 00:53:33,840 --> 00:53:36,520 Speaker 1: the currency that everybody wants to be in as dollars. 982 00:53:36,800 --> 00:53:40,359 Speaker 1: And so for US where we just we just use 983 00:53:40,440 --> 00:53:43,759 Speaker 1: dollars here, but in a lot of other countries there 984 00:53:43,800 --> 00:53:46,279 Speaker 1: are there is the presence of multiple currencies. The other 985 00:53:46,280 --> 00:53:52,160 Speaker 1: currency is dollars and UH and so in European countries, 986 00:53:52,520 --> 00:53:55,799 Speaker 1: the sort of shadow banking problem that they have is 987 00:53:56,120 --> 00:53:58,960 Speaker 1: the creation of dollar deposits, which then they have to manage. 988 00:53:59,719 --> 00:54:03,640 Speaker 1: As Josh pointed out, one way to have managed that 989 00:54:03,880 --> 00:54:08,680 Speaker 1: is just to prohibit institutions in your country from issuing 990 00:54:08,880 --> 00:54:12,880 Speaker 1: deposits denominated in another currency. If you don't, if you 991 00:54:12,920 --> 00:54:15,799 Speaker 1: allow it, you're gonna want to regulate it because if 992 00:54:16,040 --> 00:54:21,560 Speaker 1: these liabilities build up, you the central bank um you 993 00:54:21,600 --> 00:54:25,560 Speaker 1: know of Japan or UH in the UK, you can't 994 00:54:25,600 --> 00:54:27,719 Speaker 1: create dollars. And so now you have a run in 995 00:54:27,760 --> 00:54:31,880 Speaker 1: your economy amongst your institutions, and you call up the 996 00:54:31,920 --> 00:54:34,319 Speaker 1: federal Reserve and ask for a swap line. You need 997 00:54:34,360 --> 00:54:36,920 Speaker 1: to phone a friend or you're gonna lose your economy 998 00:54:36,960 --> 00:54:40,080 Speaker 1: and you can't carry out your mandate. And so I 999 00:54:40,080 --> 00:54:43,640 Speaker 1: would say that's that's been the big shadow banking problem. 1000 00:54:43,640 --> 00:54:46,200 Speaker 1: And I do think that in a lot of these jurisdictions. 1001 00:54:46,760 --> 00:54:51,320 Speaker 1: The Euro dollars are are issued by banks, but they're 1002 00:54:51,320 --> 00:54:53,680 Speaker 1: often issued by other types of financial companies, which we 1003 00:54:53,719 --> 00:54:57,120 Speaker 1: would consider sort of traditional shadow banks for here, so UH, 1004 00:54:57,160 --> 00:55:00,360 Speaker 1: you know in Asia life insurance companies, they're of various 1005 00:55:00,360 --> 00:55:05,440 Speaker 1: companies engaged in short term don a liability creation. And 1006 00:55:05,480 --> 00:55:07,040 Speaker 1: how did the Bank of Japan deal with that in 1007 00:55:07,760 --> 00:55:10,200 Speaker 1: when it when it ran it borrowed over three hundred 1008 00:55:10,200 --> 00:55:13,719 Speaker 1: billion dollars from the FED to online. I think that 1009 00:55:14,320 --> 00:55:16,440 Speaker 1: it's all part of the plan basically, which is that 1010 00:55:16,560 --> 00:55:18,480 Speaker 1: in the in the fifties and sixties, the goal was 1011 00:55:18,560 --> 00:55:22,120 Speaker 1: to cement and entrenched UH and grow the dollar system 1012 00:55:22,160 --> 00:55:24,640 Speaker 1: because it offered all of these benefits. This is exorbitant privilege. 1013 00:55:24,680 --> 00:55:26,800 Speaker 1: This is the idea that I borrowed my own currency. 1014 00:55:27,120 --> 00:55:29,719 Speaker 1: There's also the currency of global trade, and so like 1015 00:55:30,160 --> 00:55:32,680 Speaker 1: the first generation of your dollars, this is a benefit 1016 00:55:32,719 --> 00:55:34,640 Speaker 1: to other countries as well, right, because there's the idea 1017 00:55:34,680 --> 00:55:37,000 Speaker 1: of a global currency. So of all trade happens in 1018 00:55:37,000 --> 00:55:39,960 Speaker 1: the same currency, I can finance it in that currency. 1019 00:55:40,040 --> 00:55:42,960 Speaker 1: I can deposit the proceeds of my trade in that currency, 1020 00:55:43,440 --> 00:55:45,719 Speaker 1: and now I'm sort of all in all in the 1021 00:55:45,760 --> 00:55:48,839 Speaker 1: family kind of thing. And so the first generation of 1022 00:55:48,840 --> 00:55:52,080 Speaker 1: your dollars is primarily deposits of central banks. So central 1023 00:55:52,080 --> 00:55:55,560 Speaker 1: banks are the seed for the modern euro dollar market. Uh, 1024 00:55:55,680 --> 00:55:58,120 Speaker 1: they are the depositors. Um. So they're making a choice 1025 00:55:58,120 --> 00:56:00,120 Speaker 1: to park their funds added your dollar issue or and 1026 00:56:00,200 --> 00:56:03,320 Speaker 1: not in T bills or other sorts of dollar denominated assets. 1027 00:56:03,440 --> 00:56:06,920 Speaker 1: Is because they see value in that system for themselves. 1028 00:56:07,440 --> 00:56:10,080 Speaker 1: And and the FED goes one step further and says 1029 00:56:10,120 --> 00:56:12,200 Speaker 1: like you need to find a friend, call me right, 1030 00:56:12,239 --> 00:56:15,960 Speaker 1: which is here's some swap lines. It's two start with Switzerland, 1031 00:56:16,120 --> 00:56:17,680 Speaker 1: move on to the b I S and the Bank 1032 00:56:17,680 --> 00:56:21,000 Speaker 1: of England, and and grow that that network which sort 1033 00:56:21,040 --> 00:56:24,960 Speaker 1: of connects all central banks into one globalized dollar system. 1034 00:56:25,000 --> 00:56:27,560 Speaker 1: So you can do open market operations in the your 1035 00:56:27,600 --> 00:56:30,799 Speaker 1: dollar market. Because ultimately the chain leads back to the 1036 00:56:30,880 --> 00:56:33,200 Speaker 1: issuer of dollars, which is which is the Federal Reserve. 1037 00:56:33,440 --> 00:56:36,000 Speaker 1: I think you guys have paramariland on recently. I was 1038 00:56:36,040 --> 00:56:39,480 Speaker 1: going to say, we've come full circle to our previous limber. 1039 00:56:40,120 --> 00:56:42,600 Speaker 1: You know, has a book about Charlie Kinda Burger, uh, 1040 00:56:42,640 --> 00:56:44,920 Speaker 1: and the and the point that Charlie Kindle Burger makes 1041 00:56:45,400 --> 00:56:48,200 Speaker 1: uh and that Paramariland makes is that the huge network 1042 00:56:48,200 --> 00:56:50,719 Speaker 1: effects and money, and so it's much more efficient if 1043 00:56:50,719 --> 00:56:52,960 Speaker 1: we're all on the same sort of currency. And so 1044 00:56:53,040 --> 00:56:56,120 Speaker 1: the construction of the euro dollar market, which is apparently 1045 00:56:56,200 --> 00:56:58,640 Speaker 1: in stale market in a lot of ways UH is 1046 00:56:58,680 --> 00:57:00,920 Speaker 1: also it's a more efficient market. And so for all 1047 00:57:00,920 --> 00:57:03,480 Speaker 1: of the other countries that have different currencies, if they 1048 00:57:03,480 --> 00:57:05,680 Speaker 1: can get dollar funding, it's going to be cheaper, it's 1049 00:57:05,680 --> 00:57:08,080 Speaker 1: gonna be better for their businesses. And so this system 1050 00:57:08,120 --> 00:57:12,040 Speaker 1: was built up over decades too because of its superiority 1051 00:57:12,040 --> 00:57:16,600 Speaker 1: on certain efficiency dimensions. When pots Namors never really worked 1052 00:57:16,640 --> 00:57:18,960 Speaker 1: out was how to keep it stable in a business 1053 00:57:19,000 --> 00:57:22,200 Speaker 1: cycle downturn, and also various governance and distributional issues which 1054 00:57:22,200 --> 00:57:24,160 Speaker 1: are sort of shoved under the rug and are really 1055 00:57:24,160 --> 00:57:26,960 Speaker 1: significant in terms of who wins and who loses in 1056 00:57:27,080 --> 00:57:30,000 Speaker 1: terms of adopting what is a currency issued by the 1057 00:57:30,080 --> 00:57:32,360 Speaker 1: United States and what that means for businesses in the 1058 00:57:32,440 --> 00:57:36,320 Speaker 1: United States UH and also businesses in other countries. UM, 1059 00:57:36,360 --> 00:57:38,439 Speaker 1: we are running out of time, so I'm gonna ask 1060 00:57:38,480 --> 00:57:40,800 Speaker 1: one more audience question, and I would encourage you all 1061 00:57:40,880 --> 00:57:44,280 Speaker 1: to to seek out Josh and Love after this because 1062 00:57:44,280 --> 00:57:47,800 Speaker 1: we will be having drinks um over there, but in 1063 00:57:47,840 --> 00:57:51,440 Speaker 1: the meantime, h This question is from Yakov, who is 1064 00:57:51,480 --> 00:57:56,080 Speaker 1: on Twitter at Yakov, and the question is what does 1065 00:57:56,240 --> 00:58:01,400 Speaker 1: pal fantasize about doing? What is poal fantasize about doing 1066 00:58:02,280 --> 00:58:04,480 Speaker 1: if he wasn't constrained by the dual mandate. I'm going 1067 00:58:04,560 --> 00:58:07,120 Speaker 1: to rephrase this slightly and say, like, if the FED 1068 00:58:07,240 --> 00:58:10,840 Speaker 1: could start over today when it comes to designing the 1069 00:58:10,840 --> 00:58:13,400 Speaker 1: financial system, what do you think it would do differently? 1070 00:58:13,840 --> 00:58:16,120 Speaker 1: And since there's another question that's very similar to this, 1071 00:58:16,160 --> 00:58:18,520 Speaker 1: I'll just add what would you do different you know, 1072 00:58:18,640 --> 00:58:21,560 Speaker 1: it's like someone else basically like, well the one the 1073 00:58:21,560 --> 00:58:24,920 Speaker 1: one changed you'd like to see. I'm not I actually 1074 00:58:24,960 --> 00:58:27,760 Speaker 1: don't have a can answer that question, in part because like, 1075 00:58:27,880 --> 00:58:30,840 Speaker 1: for all of its issues, like chatter, banking has yielded 1076 00:58:30,880 --> 00:58:34,320 Speaker 1: great benefits to the United States, and so like is 1077 00:58:34,360 --> 00:58:37,880 Speaker 1: it too much to pay the boatman? I'm not sure, um, 1078 00:58:37,960 --> 00:58:40,120 Speaker 1: But I think that the key is it takes a 1079 00:58:40,120 --> 00:58:43,880 Speaker 1: crisis to figure out how to fix it, and so like, 1080 00:58:43,960 --> 00:58:46,280 Speaker 1: in some sense, the hypothetical is if you knew all 1081 00:58:46,280 --> 00:58:48,880 Speaker 1: the things that could go wrong, would you just build 1082 00:58:48,920 --> 00:58:51,720 Speaker 1: in systems that can handle it? Um. The other version 1083 00:58:51,760 --> 00:58:53,080 Speaker 1: of this is to say, Look, you know the money 1084 00:58:53,120 --> 00:58:57,240 Speaker 1: supply should be issued by banks and investments are for investors, 1085 00:58:57,840 --> 00:59:00,680 Speaker 1: and you know there should be some lubrication into the system. 1086 00:59:00,760 --> 00:59:04,080 Speaker 1: But the continuum of money is sort of too diffuse 1087 00:59:04,360 --> 00:59:06,040 Speaker 1: in a sense, like it's hard to see where one 1088 00:59:06,080 --> 00:59:08,760 Speaker 1: ends and the other begins, and and so you know, 1089 00:59:08,880 --> 00:59:12,200 Speaker 1: either drawing very clear lines, not necessarily at bank deposits, 1090 00:59:12,240 --> 00:59:15,000 Speaker 1: but like being very explicitly behind certain forms of and 1091 00:59:15,000 --> 00:59:19,040 Speaker 1: not others in advance. UM. Again with some policy goal 1092 00:59:19,040 --> 00:59:21,200 Speaker 1: in mind. In this case, probably the global dollar system 1093 00:59:21,240 --> 00:59:23,920 Speaker 1: is worth preserving UM in lots of ways, and so 1094 00:59:24,400 --> 00:59:26,640 Speaker 1: that kind of force it would be useful. What would 1095 00:59:26,680 --> 00:59:29,680 Speaker 1: I do? UM? Maybe I should have pretended like I 1096 00:59:29,680 --> 00:59:32,320 Speaker 1: didn't remember that that part of the question. Um. You 1097 00:59:32,360 --> 00:59:35,240 Speaker 1: know that that the the old Lombard Street logic I 1098 00:59:35,240 --> 00:59:37,760 Speaker 1: think applies really strongly, which is a lend against good 1099 00:59:37,760 --> 00:59:40,560 Speaker 1: collateral at a penalty rate. UM. So liquidity should never 1100 00:59:40,600 --> 00:59:43,400 Speaker 1: be the reason why the financial system goes down. UM. 1101 00:59:43,440 --> 00:59:45,919 Speaker 1: Now that means making sure you're comfortable with what people 1102 00:59:45,960 --> 00:59:48,480 Speaker 1: are doing the providers of that liquidity are doing with 1103 00:59:48,520 --> 00:59:52,960 Speaker 1: the proceeds of it. UM. So like data collection, transparency 1104 00:59:52,960 --> 00:59:55,400 Speaker 1: to regulators, not necessarily to the public, but certainly transparently 1105 00:59:55,360 --> 00:59:58,640 Speaker 1: to regulators and the public where it's useful and beneficial 1106 00:59:58,680 --> 01:00:01,720 Speaker 1: and in the public interest. I think that's all really important. 1107 01:00:01,720 --> 01:00:05,240 Speaker 1: And part of the big problem with with markets structured 1108 01:00:05,280 --> 01:00:08,280 Speaker 1: with this continuum of money is transparency is very hard 1109 01:00:08,320 --> 01:00:11,400 Speaker 1: to achieve um and so policymakers don't really know what 1110 01:00:11,440 --> 01:00:14,160 Speaker 1: they're looking at. They don't have all the information. And 1111 01:00:14,240 --> 01:00:16,760 Speaker 1: we tend to sort of put together a data collection 1112 01:00:16,760 --> 01:00:19,080 Speaker 1: program that solves the last crisis. So we're getting really 1113 01:00:19,120 --> 01:00:22,120 Speaker 1: good at the treasury market now, and I'm not convinced 1114 01:00:22,160 --> 01:00:23,840 Speaker 1: that's going to be the next big thing that breaks, 1115 01:00:24,000 --> 01:00:25,520 Speaker 1: you know, And we have to avoid this tendency to 1116 01:00:25,600 --> 01:00:28,560 Speaker 1: kind of like investigate the thing after it goes wrong 1117 01:00:28,640 --> 01:00:30,760 Speaker 1: and then have all the information about it. But the 1118 01:00:30,800 --> 01:00:33,280 Speaker 1: next thing is not is not on a rator. So 1119 01:00:33,440 --> 01:00:38,400 Speaker 1: I mean, I'm gonna take a stronger position against the 1120 01:00:38,400 --> 01:00:42,320 Speaker 1: shadow banking system. I would say that the the benefits 1121 01:00:42,320 --> 01:00:47,680 Speaker 1: tend to be very overstated and to often be articulated 1122 01:00:47,720 --> 01:00:52,000 Speaker 1: and stated by members of the financial sector who tend 1123 01:00:52,040 --> 01:00:55,360 Speaker 1: to reap a lot of those benefits. And on the 1124 01:00:55,400 --> 01:00:58,240 Speaker 1: other side of the ledger, I think the costs tend 1125 01:00:58,280 --> 01:01:02,160 Speaker 1: to be under a appreciated the full range of costs 1126 01:01:02,640 --> 01:01:06,680 Speaker 1: of the shadow banking system, and so you know, there's 1127 01:01:06,720 --> 01:01:09,520 Speaker 1: one way of thinking about the euro dollar system as 1128 01:01:09,920 --> 01:01:12,600 Speaker 1: you know, a form of Dutch disease that has had 1129 01:01:12,680 --> 01:01:17,080 Speaker 1: all sorts of bad UH consequences within the US economy. 1130 01:01:17,400 --> 01:01:20,800 Speaker 1: Although that's not my main reason to be concerned about it, 1131 01:01:21,800 --> 01:01:24,280 Speaker 1: I do think that those issues should be looked at 1132 01:01:24,320 --> 01:01:27,120 Speaker 1: much more closely than policymakers seem to have looked at 1133 01:01:27,160 --> 01:01:29,680 Speaker 1: them so far. There's such a focus on stability for 1134 01:01:29,680 --> 01:01:34,080 Speaker 1: the system, but there's huge political economy effects of having 1135 01:01:34,080 --> 01:01:37,320 Speaker 1: a system like this, and what you have is sort 1136 01:01:37,360 --> 01:01:41,040 Speaker 1: of an open ended government backstop for financial sector risk taking. 1137 01:01:41,600 --> 01:01:46,160 Speaker 1: And you know, I don't get great comfort in the 1138 01:01:46,200 --> 01:01:50,640 Speaker 1: sort of invocation of the badget rule. Uh. Walter Badgett's 1139 01:01:51,760 --> 01:01:54,720 Speaker 1: second half of the nineteenth century vision for how society 1140 01:01:54,800 --> 01:01:57,959 Speaker 1: should be structured is not one that I think many 1141 01:01:58,000 --> 01:02:00,880 Speaker 1: of us would find appealing today. This was a monetary 1142 01:02:00,920 --> 01:02:07,320 Speaker 1: financial system for an imperial power in a highly liberalized 1143 01:02:07,400 --> 01:02:10,160 Speaker 1: economy in the second half of the nineteenth century, and 1144 01:02:10,840 --> 01:02:15,520 Speaker 1: I think that there's uh a real concern that we 1145 01:02:15,560 --> 01:02:20,320 Speaker 1: should have about a system that is as unstructured as 1146 01:02:20,520 --> 01:02:24,840 Speaker 1: the one we have where the public sector is um 1147 01:02:24,960 --> 01:02:30,080 Speaker 1: so frequently on the back foot. And I think that 1148 01:02:30,120 --> 01:02:34,760 Speaker 1: the solution isn't as hard as it sometimes seems, and 1149 01:02:34,800 --> 01:02:38,080 Speaker 1: that the history that Josh has done such a good 1150 01:02:38,120 --> 01:02:40,800 Speaker 1: job of elucidating on the other podcast about the fifties 1151 01:02:40,840 --> 01:02:43,920 Speaker 1: and we talked a little bit about eurodollars, shows that 1152 01:02:44,000 --> 01:02:48,360 Speaker 1: the public sector actually has huge control over whether you 1153 01:02:48,440 --> 01:02:52,680 Speaker 1: have an inherently unstable system or a stable system. And 1154 01:02:52,760 --> 01:02:55,280 Speaker 1: we just sort of we have experience of this in 1155 01:02:55,360 --> 01:02:58,760 Speaker 1: other areas, and so think about other areas of financial 1156 01:02:58,800 --> 01:03:02,560 Speaker 1: regulation with the speck to the regulatory perimeter. The reasons 1157 01:03:02,600 --> 01:03:06,640 Speaker 1: securities regulation works is that we have a functional definition 1158 01:03:06,680 --> 01:03:10,960 Speaker 1: of a security, and anything that comes within the functional 1159 01:03:11,000 --> 01:03:13,920 Speaker 1: definition as supposed to a formalistic definition, you can't dress 1160 01:03:13,960 --> 01:03:16,600 Speaker 1: it up as something else and then not comply with 1161 01:03:16,720 --> 01:03:20,240 Speaker 1: securities regulation. Anything like it's covered by the functional definition 1162 01:03:20,280 --> 01:03:23,640 Speaker 1: of security is subject to the same set of rules. UH. 1163 01:03:23,720 --> 01:03:26,760 Speaker 1: Insurance regulation works like this. You know, if you call 1164 01:03:26,840 --> 01:03:29,520 Speaker 1: it an insurance document, obviously you have to follow the 1165 01:03:29,560 --> 01:03:33,400 Speaker 1: insurance regulation rules. UM, but there's an incentive if you 1166 01:03:33,440 --> 01:03:36,040 Speaker 1: could maybe dress it up as something else. There's so 1167 01:03:36,080 --> 01:03:38,760 Speaker 1: many ways to dress up an insurance agreement and not 1168 01:03:38,840 --> 01:03:41,400 Speaker 1: call it insurance. UM. If you could dress it up 1169 01:03:41,400 --> 01:03:43,640 Speaker 1: as something else and not be covered by the insurance rules, 1170 01:03:43,720 --> 01:03:47,160 Speaker 1: the insurance rules are going to fall apart. And this 1171 01:03:47,200 --> 01:03:50,920 Speaker 1: is true for mortgages. UH. There's so many areas of regulation, 1172 01:03:50,920 --> 01:03:53,720 Speaker 1: and financial regulation in particular. The fundamental problem we've had 1173 01:03:53,720 --> 01:03:57,880 Speaker 1: in money and banking going back forever is that we 1174 01:03:57,920 --> 01:04:00,320 Speaker 1: have not had a functional definition that had has been 1175 01:04:00,760 --> 01:04:04,280 Speaker 1: UH in force. And Josh is right there there's a spectrum, 1176 01:04:04,480 --> 01:04:07,440 Speaker 1: but you can pick ninety day you know, ninety day maturity. 1177 01:04:07,480 --> 01:04:11,040 Speaker 1: Any instrument that matures in ninety days or less is 1178 01:04:11,080 --> 01:04:13,920 Speaker 1: a banking instrument that has to be UM issued by 1179 01:04:14,000 --> 01:04:16,200 Speaker 1: an entity that is subject to the same sort of 1180 01:04:16,240 --> 01:04:18,560 Speaker 1: coherent body of banking regulations. And that would just sort 1181 01:04:18,600 --> 01:04:23,840 Speaker 1: of regularized, rationalized, normalized, put some logic on on a 1182 01:04:23,920 --> 01:04:28,000 Speaker 1: system that has become very ad hoc and unpredictable in 1183 01:04:28,000 --> 01:04:30,960 Speaker 1: a way that I think is on that not in 1184 01:04:31,040 --> 01:04:34,160 Speaker 1: the in the public interest. And are there challenges like 1185 01:04:34,480 --> 01:04:39,840 Speaker 1: preserving the benefits of Parian Marylyn Charlie Kendall Burger's UM 1186 01:04:39,880 --> 01:04:44,080 Speaker 1: you know, international finance system with low frictions. Yeah, we've 1187 01:04:44,080 --> 01:04:46,800 Speaker 1: got to figure out some ways to preserve the benefits. 1188 01:04:47,160 --> 01:04:50,720 Speaker 1: But I think there are ways to preserve the benefits. Uh, 1189 01:04:50,760 --> 01:04:54,920 Speaker 1: And the costs of doing nothing are large, and we 1190 01:04:54,960 --> 01:04:59,720 Speaker 1: could be facing the consequences, uh, you know, in more 1191 01:04:59,800 --> 01:05:02,720 Speaker 1: on that order of months and as opposed to years. 1192 01:05:03,080 --> 01:05:04,800 Speaker 1: Shall we leave it there. Yeah, I was gonna say, 1193 01:05:04,800 --> 01:05:08,560 Speaker 1: we could talk for hours on this, but let's leave 1194 01:05:08,560 --> 01:05:11,320 Speaker 1: it there. So many future episodes. I know a ton 1195 01:05:11,360 --> 01:05:13,800 Speaker 1: of ideas here. Um, Josh Younger and love Men, and 1196 01:05:13,920 --> 01:05:17,200 Speaker 1: thank you so much. Fantastic discussion. Really great to have 1197 01:05:17,320 --> 01:05:19,720 Speaker 1: you here. Thank you to the audience for coming into 1198 01:05:20,040 --> 01:05:22,920 Speaker 1: the Bloomberg Offices to actually listen to this. Thank you 1199 01:05:22,960 --> 01:05:25,360 Speaker 1: for your excellent questions. Sorry we couldn't get to more 1200 01:05:25,400 --> 01:05:53,800 Speaker 1: of them. Thank you everyone. So that was our live 1201 01:05:53,880 --> 01:05:57,200 Speaker 1: recording with Josh Younger and Love Men, and thank you 1202 01:05:57,240 --> 01:06:00,680 Speaker 1: to everyone who came to Bloomberg's offices to you actually 1203 01:06:00,760 --> 01:06:04,200 Speaker 1: watch and listen and engage in that conversation. Thank you 1204 01:06:04,240 --> 01:06:08,280 Speaker 1: as well to our producers Carmen Rodriguez and Dash Bennett. 1205 01:06:08,560 --> 01:06:11,160 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 1206 01:06:11,160 --> 01:06:14,280 Speaker 1: Tracy Alloway. And I'm Joe wisntal. You can follow me 1207 01:06:14,440 --> 01:06:18,040 Speaker 1: on Twitter at the Stalwart, follow Carmen on Twitter at 1208 01:06:18,120 --> 01:06:21,880 Speaker 1: Carmen armand follow Dash on Twitter at Dash but oh, 1209 01:06:21,920 --> 01:06:25,120 Speaker 1: and follow Levi Menon on Twitter at lev men And. 1210 01:06:25,120 --> 01:06:27,960 Speaker 1: And we're probably gonna do several more of these, or 1211 01:06:28,040 --> 01:06:31,000 Speaker 1: hopefully we plan and tend to do several more of 1212 01:06:31,000 --> 01:06:34,840 Speaker 1: these three. So keep a listen on the podcast, follow 1213 01:06:34,960 --> 01:06:37,160 Speaker 1: us on Twitter so that you know about the next one, 1214 01:06:37,240 --> 01:06:40,920 Speaker 1: and YouTube can join in person, and odd lots listeners, 1215 01:06:40,960 --> 01:06:42,680 Speaker 1: Tracy and I are going to be doing an A 1216 01:06:42,880 --> 01:06:45,560 Speaker 1: M A Ask Me Anything episode where you can ask 1217 01:06:45,680 --> 01:06:49,120 Speaker 1: us questions, send us a voice memo, state your name, 1218 01:06:49,240 --> 01:06:51,440 Speaker 1: where you're from, and one question. Put it in an 1219 01:06:51,520 --> 01:06:54,200 Speaker 1: email to odd Lots at Bloomberg dot net, and we 1220 01:06:54,200 --> 01:07:00,240 Speaker 1: will give you our answers. Thanks for listening to