WEBVTT - Younger and Menand Explain How We Got the Modern Banking System 0:00:10.119 --> 0:00:13.440 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:13.480 --> 0:00:17.000 I'm Tracy Allaway and I'm Joe Wisn't so Joe. This 0:00:17.160 --> 0:00:20.160 is a very special episode of All Thoughts. It is 0:00:20.280 --> 0:00:24.200 a live recording. That's right, We did a live recording. 0:00:24.200 --> 0:00:26.480 There was a big I don't want two hundred something 0:00:26.560 --> 0:00:30.120 people came out, really packed house to talk about Finn Red. 0:00:30.600 --> 0:00:34.400 That's right. Everyone got really into Finn Red. No. So 0:00:34.560 --> 0:00:37.559 this is basically a follow up from the episode we 0:00:37.680 --> 0:00:40.960 did with Josh Younger, one of our favorite guests, in 0:00:41.040 --> 0:00:44.320 which he was talking about the origins of the repo market, 0:00:44.440 --> 0:00:47.159 and we decided that we needed to talk more about it, 0:00:47.240 --> 0:00:51.200 and we wanted to bring in Josh's research partner, Love Men, 0:00:51.240 --> 0:00:54.040 and yeah, that's right. And so we have this sort 0:00:54.040 --> 0:00:57.560 of sprawling financial system, you know there, as you mentioned, 0:00:57.600 --> 0:01:02.640 there's a repo, there's euro dollars, there's crypto stable coins, PayPal, Venmo, 0:01:02.760 --> 0:01:04.920 all of these things that have sort of like some 0:01:05.000 --> 0:01:08.720 banking like qualities but aren't really banks. And so the 0:01:08.800 --> 0:01:11.480 frame after that great episode with Josh I guess that 0:01:11.560 --> 0:01:14.720 was in October is basically like, how did we get here? 0:01:14.720 --> 0:01:17.800 How did we get in this position where we have 0:01:18.000 --> 0:01:21.560 all these sort of various bank entities that aren't traditional 0:01:21.600 --> 0:01:25.120 banks that in somewhere or another, the FED is responsible 0:01:25.200 --> 0:01:28.319 for regulating or backstopping, right, And I think there's a 0:01:28.360 --> 0:01:31.000 lot about the financial system that we tend to take 0:01:31.160 --> 0:01:34.000 for granted. But there's a reason that all of these 0:01:34.040 --> 0:01:37.360 different things exist, for better or worse, and they do 0:01:37.440 --> 0:01:41.360 come with, you know, advantages and drawbacks. So that's really 0:01:41.640 --> 0:01:45.440 the theme of this particular episode, talking about how we 0:01:45.520 --> 0:01:48.840 got here and why and what it means now. So 0:01:49.280 --> 0:01:52.240 please enjoy it. Thank you everyone for coming to a 0:01:52.440 --> 0:01:55.800 very special live recording of the All Thoughts podcast. I'm 0:01:55.840 --> 0:01:58.760 Tracy Alloway and I'm Joe Wasn't so I am very 0:01:58.800 --> 0:02:01.560 pleased to say that to day we have Josh Younger, 0:02:01.640 --> 0:02:04.520 one of our favorite Odd Thoughts guests. We also have 0:02:04.680 --> 0:02:07.520 his research partner, Love Men and he is an associate 0:02:07.520 --> 0:02:10.600 professor of law at Columbia also the author of The 0:02:10.639 --> 0:02:13.760 FED Unbound. And one of the reasons we wanted to 0:02:13.880 --> 0:02:17.000 hold this live event is because we recorded an episode 0:02:17.000 --> 0:02:20.720 with Josh Younger earlier this month, I believe, where we 0:02:20.760 --> 0:02:24.960 talked about the origins of the shadow banking system, specifically 0:02:25.080 --> 0:02:27.840 the repo market. And one of the themes that emerged 0:02:27.840 --> 0:02:31.080 from that discussion is that even if you think the 0:02:31.080 --> 0:02:34.880 shadow banking market has a lot of issues and problems today, 0:02:35.480 --> 0:02:38.600 the reason those issues and problems exist sort of stems 0:02:38.639 --> 0:02:41.680 from these decisions that were made many, many decades ago, 0:02:41.840 --> 0:02:46.720 conscious decisions by regulators, notably the FED, that combined to 0:02:46.919 --> 0:02:49.880 create the shadow banking market as we know it today. Right, 0:02:49.960 --> 0:02:53.000 even if you're not interested in shadow shadow banking market, 0:02:53.400 --> 0:02:57.600 shadow banking market is interested in you basically. So yeah, 0:02:57.680 --> 0:03:01.160 I'm really excited about this. Um plenty to learn, plenty 0:03:01.280 --> 0:03:04.480 to sort of look through history to sort of understand 0:03:04.800 --> 0:03:08.440 where we are now, plenty of finnregg and financial stability 0:03:08.480 --> 0:03:11.120 issues always popping up. So let's go for it. It's 0:03:11.120 --> 0:03:13.480 a good time to talk about financial stability. Good time. 0:03:13.880 --> 0:03:16.960 Just one note before we begin, I think our producer 0:03:17.040 --> 0:03:19.960 already walked you through some of the housekeeping, but we 0:03:20.000 --> 0:03:22.720 are taking questions from the audience. Please write them down 0:03:22.760 --> 0:03:25.640 on your index cards and they will be put into 0:03:26.560 --> 0:03:30.360 the magic box that we have on stage. Alright, So, 0:03:30.480 --> 0:03:33.440 without further ado up, Love, why don't we start with you? 0:03:33.520 --> 0:03:39.240 I mean, researching the evolution of modern banking. How did 0:03:39.280 --> 0:03:42.800 you get into that? And why? So it's really a 0:03:42.920 --> 0:03:46.800 product in my biography in some sense. I graduated from 0:03:47.000 --> 0:03:51.680 college in the midst of the global financial crisis and 0:03:51.720 --> 0:03:56.520 the and it's aftermath, the Great Recession, and I, in 0:03:56.560 --> 0:03:59.840 a in a weird turn of events, got a job 0:04:00.600 --> 0:04:03.240 at the Federal Reserve Bank for New York. So I 0:04:03.360 --> 0:04:07.800 was I was thrown into an economy that was in turmoil, UH, 0:04:07.800 --> 0:04:12.920 financially induced turmoil. And so I was naturally very curious 0:04:12.920 --> 0:04:14.440 about that. And then suddenly I had a job that 0:04:14.520 --> 0:04:18.039 gave me an opportunity to UH to learn about that 0:04:18.120 --> 0:04:21.920 problem and and to confront it UH directly. And so 0:04:21.960 --> 0:04:25.120 I got to work on the first ce CAR, the 0:04:25.160 --> 0:04:28.320 first stress test, and developed that. And I also got 0:04:28.360 --> 0:04:32.080 to UM. I was seconded to the Financial Stability over 0:04:32.080 --> 0:04:35.000 s ACOUNTIL. I got to work on UM preparing the 0:04:35.040 --> 0:04:38.680 first Financial Stability Report for the United States. UH. And 0:04:38.720 --> 0:04:41.279 then you know, once you find a problem that is 0:04:41.320 --> 0:04:44.320 interesting to you, you know, I guess my personality. I've 0:04:44.360 --> 0:04:48.080 just continued sort of chewing at that ever since. UH 0:04:48.120 --> 0:04:49.919 and and and in part because I don't think that 0:04:49.960 --> 0:04:53.040 we've solved the solved the problems from two thousand and eight, 0:04:53.120 --> 0:04:55.440 and I think that the consequences of two thousand and 0:04:55.480 --> 0:04:59.800 eight are are extremely momentous across a number of dimensions 0:04:59.800 --> 0:05:04.160 of society, many problems that we're experiencing today, political, economic, social, 0:05:04.800 --> 0:05:07.240 Two thousand and eight was a was a major shift 0:05:07.279 --> 0:05:09.080 in how we address those problems. In nature of those 0:05:09.080 --> 0:05:11.320 problems made a lot of them worse. And I think 0:05:11.320 --> 0:05:14.480 that monetary and financial stability, what we lost for that 0:05:14.560 --> 0:05:17.440 one moment is a key social good that we need 0:05:17.480 --> 0:05:20.479 to do a better job of preserving and protecting over time. 0:05:20.920 --> 0:05:23.680 So one of the do in um, Josh, you know, 0:05:23.720 --> 0:05:26.480 in terms of like, okay, we had you on recently, 0:05:26.640 --> 0:05:30.479 we talked about the nineteen fifties, What is it about 0:05:30.520 --> 0:05:33.680 the history? Why is it important to take a historical 0:05:33.839 --> 0:05:36.800 lens to think about some of these problems and to 0:05:36.800 --> 0:05:40.000 think about, Okay, what does an optimal financial regulation system 0:05:40.080 --> 0:05:42.840 look like? Why is like the historical lens is sort 0:05:42.839 --> 0:05:45.279 of useful approach for that. Yeah. So I have, in 0:05:45.400 --> 0:05:47.560 many ways the opposite story to live. So I was 0:05:47.560 --> 0:05:51.719 trying as a physicist. I got my PhD two thousand nine, UM, 0:05:51.800 --> 0:05:53.760 and so when the financial crisis was raising, I had 0:05:53.760 --> 0:05:55.200 no idea what was going on. I mean, I was 0:05:55.320 --> 0:05:57.880 entirely focused on I was using a telescope in Hawaii 0:05:58.000 --> 0:06:01.000 like a collecting other physicists or to blame for the 0:06:01.040 --> 0:06:03.520 financial crisis. So at least your blameless, right, I'm not 0:06:03.560 --> 0:06:06.960 going to take a view on that. But um, so 0:06:07.560 --> 0:06:09.720 I think when you're a physicist, like you're turning to 0:06:09.720 --> 0:06:11.960 figure out what the rules are that the input um 0:06:12.000 --> 0:06:13.560 in a sense, and so they're taking you know, I 0:06:13.680 --> 0:06:15.559 just try to post to figure out how the world works, 0:06:15.680 --> 0:06:17.640 because it works a certain way and that's not up 0:06:17.680 --> 0:06:19.479 to me, but it's interesting to figure out what like 0:06:19.560 --> 0:06:22.320 what that is. Um. Financial markets are opposite of that, 0:06:22.360 --> 0:06:23.839 which is we get to set the rules to achieve 0:06:23.839 --> 0:06:26.599 an outcome. And so you know, as I went into 0:06:26.600 --> 0:06:29.920 the industry and and uh sort of got deeper into 0:06:30.600 --> 0:06:32.640 the really fundamental questions of market structure. First you have 0:06:32.640 --> 0:06:34.000 to get your sea legs because I didn't know like 0:06:34.040 --> 0:06:36.040 what bond math was, for example, and then these things 0:06:36.080 --> 0:06:37.960 so you figure out like yields up, prices down. I 0:06:38.279 --> 0:06:41.279 got that right, um. But after you do that, you 0:06:41.279 --> 0:06:43.200 start to think about why the system operates the way 0:06:43.200 --> 0:06:46.000 that it does. And and because it's a construct because 0:06:46.000 --> 0:06:49.880 it's a set of choices that we don't necessarily like 0:06:49.920 --> 0:06:52.160 all the aspects of where it ended up. Raises the 0:06:52.200 --> 0:06:53.880 question as to why we made those choices in the 0:06:53.880 --> 0:06:57.160 first place. Is this just a function of markets, um, 0:06:57.200 --> 0:06:59.240 you know, having their own mind um and going their 0:06:59.240 --> 0:07:01.480 own way, or is this really a set of conscious 0:07:01.480 --> 0:07:06.040 decisions where maybe we don't love some aspects of the system, um, 0:07:06.080 --> 0:07:08.240 but it was set up to solve other problems, right, 0:07:08.279 --> 0:07:09.800 And so the history tells you that, it tells you 0:07:09.800 --> 0:07:12.800 what the intent was, and that's important. One to just 0:07:12.880 --> 0:07:15.600 understand why things are the way they are because to 0:07:15.720 --> 0:07:18.400 a to a new observer, they seem a little odd sometimes, 0:07:18.520 --> 0:07:20.720 but but also to think about the limits of what 0:07:20.760 --> 0:07:23.080 you can do to fix it, because because the the 0:07:23.240 --> 0:07:26.600 entrenched interests that are created by that process are really important. 0:07:27.200 --> 0:07:29.720 So why don't we talk about one of the rule 0:07:29.800 --> 0:07:33.600 making episodes or one of the like conscious decisions that 0:07:33.800 --> 0:07:37.640 was made that reverberates to today. And Josh, this is 0:07:37.640 --> 0:07:39.840 something we spoke about with you on the episode the 0:07:39.960 --> 0:07:43.400 nineteen fifties and one of the outcomes of that particular 0:07:43.480 --> 0:07:47.160 era was the repo market as we know it today. 0:07:47.200 --> 0:07:51.280 But love you have also talked about how the FED 0:07:51.360 --> 0:07:54.760 chair at the time, William Martin, made a big decision 0:07:54.760 --> 0:07:59.480 about breaking with traditional banking and shifting the system into 0:07:59.600 --> 0:08:01.960 something and part of that involved the role of primary 0:08:01.960 --> 0:08:04.360 dealers in the repo market. But talked to us about 0:08:04.400 --> 0:08:08.440 that that break and why it matters today. William Martin 0:08:08.520 --> 0:08:12.280 is one of the most consequential twentieth century figures and 0:08:12.440 --> 0:08:14.560 played a huge role in creating the world as we 0:08:14.600 --> 0:08:16.880 know today. Things that we take for granted, like the 0:08:16.920 --> 0:08:19.680 repo market, the eurodollar market and their centrality and how 0:08:19.720 --> 0:08:22.560 our financial system works, how our economy works. These were 0:08:22.640 --> 0:08:25.520 projects of William Martin, and they were things that he 0:08:25.600 --> 0:08:28.840 tried to construct and bring about. UH. And he was 0:08:29.200 --> 0:08:33.520 not painting on a blank canvas. UH. He was UM. 0:08:33.520 --> 0:08:38.120 He was actively trying to re engineer a system that 0:08:38.200 --> 0:08:40.320 had been set up in the wake of the Great Depression, 0:08:41.200 --> 0:08:45.920 the New Deal banking system UM. And that system was 0:08:46.280 --> 0:08:51.160 constructed around a separation between banking and other financial and 0:08:51.160 --> 0:08:55.880 commercial activity. And banking was a franchise business UH. And 0:08:55.960 --> 0:08:59.960 the point of the business was monetary to issue deposit 0:09:00.040 --> 0:09:02.840 it's deposits with the primary form of money still are 0:09:02.880 --> 0:09:04.720 the primary form of money in the economy. When there's 0:09:04.720 --> 0:09:07.280 more deposits, you get inflationary pressures. When they're seward deposits, 0:09:07.320 --> 0:09:11.440 you get disinflationary pressures. This was the banking franchise banks. 0:09:11.480 --> 0:09:13.960 We're going to do this subject to a bunch of regulations. 0:09:14.280 --> 0:09:18.200 Other things we're gonna happen outside of banks. UM. William 0:09:18.240 --> 0:09:21.960 Martin in an effort to solve a series of problems, 0:09:22.240 --> 0:09:25.320 one of which you talked about with Josh previously, UH 0:09:25.600 --> 0:09:29.920 is keen to UH break down some of these borders. 0:09:29.920 --> 0:09:32.560 So the birth of the repo market is a way 0:09:32.600 --> 0:09:36.240 to allow broker dealer firms who had been pushed out 0:09:36.240 --> 0:09:39.840 of the banking business to UH find a way to 0:09:39.920 --> 0:09:44.360 fund themselves like banks UM by copying the business model 0:09:44.400 --> 0:09:47.480 of banks. UH. And so they're legally barred by the 0:09:47.520 --> 0:09:50.920 New Deal banking laws from maintaining deposits because there's a 0:09:50.920 --> 0:09:54.800 provision in the Banking Act of three that says that 0:09:55.320 --> 0:09:58.280 only a bank can take deposits. UH. So they create 0:09:58.600 --> 0:10:03.360 a structure that mimics UH deposit UH and Martin is 0:10:03.480 --> 0:10:07.040 instrumental in facilitating this, allowing this to happen, providing a 0:10:07.080 --> 0:10:10.280 backstop for it. UM in the fifties. And this is 0:10:10.320 --> 0:10:14.240 really the birth moment of the shadow banking system, UH, 0:10:14.280 --> 0:10:16.880 the idea that we're not going to have a money 0:10:16.880 --> 0:10:21.280 supply that's entirely provided by either the government in the 0:10:21.320 --> 0:10:23.439 form of cash or the banking system in the form 0:10:23.440 --> 0:10:25.640 of deposits, where the deposits are the sort of the 0:10:25.640 --> 0:10:28.360 big the big event, and the cash is a small side. 0:10:28.400 --> 0:10:32.400 So there's actually room in this system for non bank money, 0:10:32.520 --> 0:10:36.199 other forms of private money, UH, namely repo. And this 0:10:36.240 --> 0:10:39.960 starts UH in earnest in the fifties, and and everything 0:10:40.000 --> 0:10:41.880 else that sort of comes along, and I think we'll 0:10:41.880 --> 0:10:45.600 get to it. The eurodollar markets, UH, money market, mutual funds, 0:10:45.600 --> 0:10:51.240 commercial paper of very short duration UH. Stable coins are 0:10:51.440 --> 0:10:54.760 a sort of variation on this same theme. And all 0:10:54.840 --> 0:10:59.000 of these UM are more or less viable based on 0:10:59.240 --> 0:11:02.960 a sort of in more relationship that they can develop 0:11:03.000 --> 0:11:04.880 with with the central bank. You know, if you have 0:11:04.920 --> 0:11:06.920 a central bank back stop, you can you can make 0:11:07.080 --> 0:11:10.079 a viable money alternative. If you don't have access to 0:11:10.160 --> 0:11:12.160 the central bank, you really you can't get very big. 0:11:12.200 --> 0:11:15.840 You can't you can't do that UM. And so Martin's 0:11:15.960 --> 0:11:20.360 key role was to UH was to re arctact the 0:11:20.400 --> 0:11:22.960 system and make it clear that the FED would provide 0:11:22.960 --> 0:11:26.280 backstops for various time types of non bank money UM too. 0:11:26.320 --> 0:11:29.000 In particular that become the dominant the repo market and 0:11:29.040 --> 0:11:32.800 then the euroinour market. So use this word border, which 0:11:32.840 --> 0:11:35.480 I think is interesting, and you describe, okay, the expanding border. 0:11:35.520 --> 0:11:38.360 And there's all these sort of like non bank shadow 0:11:38.400 --> 0:11:42.320 bank type entities that issue deposit like instruments even if 0:11:42.320 --> 0:11:46.480 they're not technically bank deposits, uh nearly defined. What is 0:11:46.520 --> 0:11:49.120 accomplished by this? What is sort of for either of you? 0:11:49.720 --> 0:11:52.080 What is it? What do we get from having the 0:11:52.120 --> 0:11:55.600 benefits from having more of these entities that can issue 0:11:56.040 --> 0:11:59.160 deposit like money. Isn't having this relationship with the Federal 0:11:59.240 --> 0:12:03.040 Reserve outside of like the sort of normal banking system. Well, 0:12:03.120 --> 0:12:05.880 so I'll let Josh sort of get into the details 0:12:06.040 --> 0:12:10.280 on on RIPO and the treasury markets in particular, but 0:12:10.440 --> 0:12:12.720 just sort of at a high level. The banking system 0:12:12.760 --> 0:12:16.240 is heavily regulated under the New Deal banking law framework, 0:12:16.520 --> 0:12:20.440 and so there are lots of requirements on banks and 0:12:20.880 --> 0:12:24.720 UM there's an effort to direct the sorts of assets 0:12:24.760 --> 0:12:27.199 that banks invest in, so they are expanding the money supply. 0:12:27.400 --> 0:12:30.160 Where is the privilege of that going Who gets access 0:12:30.200 --> 0:12:34.240 to that UM money issued based credit that monetary financing, 0:12:34.480 --> 0:12:36.160 And there's lots of rules the government has put in 0:12:36.200 --> 0:12:39.359 place on who who benefits, and there's lots of restrictions 0:12:39.440 --> 0:12:41.320 on the design of the banking system. So at this 0:12:41.360 --> 0:12:43.240 time we have something that looks a lot more like 0:12:43.240 --> 0:12:47.400 a unit banking system. It's very uh decentralized. There's thousands 0:12:47.440 --> 0:12:50.240 and thousands of banks UM. There's limits on how big 0:12:50.360 --> 0:12:53.200 banks can be. There's limits on how much banks can 0:12:53.240 --> 0:12:57.200 pay their depositors. This is rg Q, which exists from 0:12:57.240 --> 0:13:01.160 the thirties until the early a these. And so the 0:13:01.320 --> 0:13:05.480 incentive to create non bank money is an incentive to 0:13:06.040 --> 0:13:10.680 have some UM to direct the benefits of monetary financing 0:13:10.720 --> 0:13:14.319 in some other way not subject to all of these constraints. Uh. 0:13:14.360 --> 0:13:19.320 And so there's just large rents or surplus to extract 0:13:19.760 --> 0:13:22.960 from being able to expand the money supply outside of 0:13:22.960 --> 0:13:25.200 all these constraints. And so that's the impetus that everybody 0:13:25.200 --> 0:13:28.160 that's always leading people to try to create private forms 0:13:28.160 --> 0:13:31.440 of money is to do it without the without all 0:13:31.480 --> 0:13:33.360 the costs. And this is exactly what goes on with 0:13:33.360 --> 0:13:36.400 stable coins as well. So I think the treasure mark 0:13:36.480 --> 0:13:37.880 is a great example. So, like, what do we want 0:13:37.920 --> 0:13:41.400 from the treasury market, Well, the investors want liquidity. Um. 0:13:41.440 --> 0:13:43.720 That means dealers that can expand and contract their balance 0:13:43.760 --> 0:13:46.080 sheets and take on a lot of leverage, because a 0:13:46.160 --> 0:13:48.480 low margin business means lots of liquid it means low 0:13:48.520 --> 0:13:50.559 transaction costs. But like you still have to pay the 0:13:50.600 --> 0:13:53.160 rent um and and so you need to take on 0:13:53.240 --> 0:13:55.440 more leverage to make than a profitable business. And so 0:13:55.480 --> 0:13:57.959 that that doesn't work in a traditional banking framework, in 0:13:58.000 --> 0:14:00.320 part because it shouldn't work in a traditional banking favorite 0:14:00.320 --> 0:14:03.319 in certain ways, like banks are providing this incredibly central 0:14:03.760 --> 0:14:07.640 social service of making money, uh, and so like they're 0:14:07.640 --> 0:14:10.400 held to a higher standard in a sense, and so um, 0:14:10.440 --> 0:14:13.640 you know, dealers get access to money like financing, even 0:14:13.679 --> 0:14:16.120 if it's not strictly money in the classic sense, and 0:14:16.160 --> 0:14:19.560 that gives the market liquidity depth and in particular low 0:14:19.560 --> 0:14:21.600 transaction costs. That's what we're really talking about, right, I 0:14:21.640 --> 0:14:23.120 don't want to pay a lot to trade by treasuries, 0:14:23.240 --> 0:14:26.120 and I want to do it in arbitrary size. Um, 0:14:26.160 --> 0:14:29.920 So for the treasury that beans lower yields liquidity premium. Right, 0:14:29.920 --> 0:14:32.440 liquidity premium means I'm going to pay more because this 0:14:32.480 --> 0:14:35.080 thing has liquidity value, and that's just a lower overall 0:14:35.120 --> 0:14:38.440 cost of debt service um. So all of these things 0:14:38.520 --> 0:14:41.400 are are valuable. And then you rewrap all of that 0:14:41.440 --> 0:14:43.800 in the context of having a lot of elasticity, meaning 0:14:44.120 --> 0:14:46.840 if there's a shock like in for example, people need 0:14:46.880 --> 0:14:49.760 to monetize their treasures, if everyone needs to sell at 0:14:49.800 --> 0:14:52.600 the same time, there has to be new money to 0:14:52.680 --> 0:14:55.800 provide the proceeds of those sales um. Because those bonds 0:14:55.840 --> 0:14:58.000 are held outside of the banking system. When they come 0:14:58.040 --> 0:14:59.880 into the banking system, that gets turned into bank as 0:15:00.040 --> 0:15:02.160 sets and that means they're funded with new money. And 0:15:02.160 --> 0:15:05.160 so then the holders of those bonds now hold money 0:15:05.200 --> 0:15:08.720 in the classic sense, and so that elasticity is not 0:15:08.840 --> 0:15:12.640 easy to provide um within the context of traditional banking. 0:15:12.680 --> 0:15:15.280 And so you know, the shadow banks in a sense 0:15:15.360 --> 0:15:19.200 like augment the money supply as needed under stress in 0:15:19.240 --> 0:15:22.160 a very desirable way. But it comes to costs and 0:15:22.200 --> 0:15:24.040 that that's that's the issue. It's it's a means to 0:15:24.080 --> 0:15:26.960 an end. It's not a generic good. Just to put 0:15:27.000 --> 0:15:30.880 a finer point on what happened in the fifties. Uh, 0:15:30.960 --> 0:15:34.640 the Federal Reserve is providing the elasticity for the treasury 0:15:34.640 --> 0:15:37.240 market coming out of the forties. And so if there 0:15:37.440 --> 0:15:39.800 is the need for balancing capacity, if you want liquidity 0:15:39.800 --> 0:15:42.400 in the market, where's that Where's that elasticity coming to 0:15:42.800 --> 0:15:46.160 the Federal reserves balance sheet? Can the banking system take 0:15:46.200 --> 0:15:49.480 that roll over? Given the regulations in the banking system, 0:15:49.680 --> 0:15:53.040 the liquidity that the amount that of elasticity that they 0:15:53.080 --> 0:15:56.120 can provide is going to be much less. What if 0:15:56.120 --> 0:15:58.120 we turn to broker dealers and provide them with a 0:15:58.200 --> 0:16:02.200 similar ability. Oh, they're not sust all of these restrictions 0:16:02.280 --> 0:16:04.080 on their bountary capacity. They're going to be able to 0:16:04.160 --> 0:16:06.640 mimic the elasticity at the Federal reserve balance sheet was 0:16:06.720 --> 0:16:09.160 able to provide um. But now we don't have the 0:16:09.160 --> 0:16:11.560 Federal Reserve directly in the market anymore. And that's that's 0:16:11.560 --> 0:16:14.800 how this all gets going in the mid fifties, Josh, 0:16:14.840 --> 0:16:17.360 could you maybe talk a little bit about the birth 0:16:17.480 --> 0:16:20.120 of the euro dollar market, because this is also something 0:16:20.160 --> 0:16:24.000 that happens by deliberate policy choice. And I feel like 0:16:24.040 --> 0:16:26.160 nowadays a lot of people talk about the euro dollar 0:16:26.200 --> 0:16:31.119 market like it's some mysterious like shadow pot of synthetic 0:16:31.160 --> 0:16:34.880 dollar deposits just floating around. But why did it happen? 0:16:34.920 --> 0:16:37.560 Why does it exist? There's kind of two euro dollar 0:16:37.600 --> 0:16:40.720 markets in the beginning. Um, there's the original euro dollar market, 0:16:40.720 --> 0:16:43.680 which is a communist creation. So uh in the in 0:16:43.720 --> 0:16:46.600 the late forties. Yet it wasn't expecting to hear that. Yeah, 0:16:46.640 --> 0:16:48.400 and so that one of the most important capital markets 0:16:48.400 --> 0:16:50.560 is a communist invention, which is in the late forties. 0:16:50.880 --> 0:16:53.040 People usually when they tell this history, they point to 0:16:53.040 --> 0:16:56.000 the Suis incident where the US froze Soviet assets and 0:16:56.040 --> 0:16:58.560 they said, oh, I don't want to take that risk 0:16:58.680 --> 0:17:00.920 of the U s sezing my my assets. But actually 0:17:00.920 --> 0:17:03.800 goes back a lot further, even before the Korean War. Um, 0:17:03.800 --> 0:17:07.320 there's declassified CIA documents that track the flow of dollars 0:17:07.320 --> 0:17:10.399 from Soviet accunts in New York into Europe. Uh, and 0:17:10.840 --> 0:17:13.600 y Europe. It's because in Europe you could have the 0:17:13.640 --> 0:17:16.600 deposits denominating currencies other than the local currency. That wasn't 0:17:16.600 --> 0:17:17.920 true in the US. So you can get a dollar 0:17:17.960 --> 0:17:21.359 depositent Paris, get a dollar depositent Belgium, and so in 0:17:21.359 --> 0:17:23.600 the late forties, the CIA is reporting a list of 0:17:23.640 --> 0:17:26.679 six or seven banks have taken communist dollars um. The 0:17:26.720 --> 0:17:28.960 problem with that is it's not scalable. But there's a 0:17:28.960 --> 0:17:32.080 lot of problems with that, But like they're it's not 0:17:32.200 --> 0:17:34.080 scalable in the sense that what are you gonna do 0:17:34.119 --> 0:17:37.240 with these dollar liabilities? You need assets to match the liabilities. 0:17:37.280 --> 0:17:40.680 And so they were used primarily for East West trade finance, 0:17:40.760 --> 0:17:43.840 so trade in dollars from from the Communist block to 0:17:43.880 --> 0:17:46.920 the West UM. For a lot of reasons, the Soviet 0:17:47.000 --> 0:17:48.960 Union didn't want a lot of that because they wanted 0:17:48.960 --> 0:17:51.800 to be independent UM, and so they restricted it. And 0:17:51.800 --> 0:17:54.400 so like there was a very small market in the beginning. 0:17:54.800 --> 0:17:57.840 The key development is in ninety four when the UK 0:17:58.160 --> 0:18:02.280 liberalizes convertibility and I can exchange my sterling for dollars 0:18:02.320 --> 0:18:05.520 on shore among banks and specifically in the forward market. 0:18:06.240 --> 0:18:08.840 And the key there is now I can hedge it, right, 0:18:08.880 --> 0:18:10.840 so now I can take a dollar deposit, I can 0:18:10.880 --> 0:18:13.159 hedge it back to sterling, put those sterling into the 0:18:13.200 --> 0:18:15.879 local market, and maybe there's an arbitrage and it turns 0:18:15.880 --> 0:18:17.880 out much like today, people didn't know how to price 0:18:17.920 --> 0:18:21.080 effex forwards, and an arbitrage free framework. And so like 0:18:21.160 --> 0:18:23.359 the the the FX forward market of the of the 0:18:23.359 --> 0:18:27.040 mid fifties had a large cross currency basis, meaning it 0:18:27.080 --> 0:18:30.560 wasn't priced it precisely the interest rate differential, wasn't price 0:18:30.640 --> 0:18:34.680 perfectly fair to take free money borrowing dollars in your 0:18:34.720 --> 0:18:37.159 dollar market going to the f X forward market, swapped 0:18:37.200 --> 0:18:39.320 them for sterling on a forward basis and just buy 0:18:39.400 --> 0:18:42.800 local bills in the UK. And and so then the 0:18:42.840 --> 0:18:45.240 market starts to grow because now there's something I can 0:18:45.240 --> 0:18:47.600 actually do. It's still narrow. There's a lot of like 0:18:47.680 --> 0:18:50.720 echoes of stable coins in this right, it's a specific application. 0:18:50.840 --> 0:18:53.800 We said stable coins three times, so I'm just gonna say, okay, 0:18:53.960 --> 0:18:58.040 it's like nineteen minutes in stable coins have mentioned three times. 0:18:58.080 --> 0:19:00.400 What are we talking so much about stable coin? And 0:19:00.440 --> 0:19:03.560 what is it specifically in the context here? You know, 0:19:03.560 --> 0:19:06.240 you're talking about, Okay, this whole like all these non 0:19:06.359 --> 0:19:10.440 deposit deposits that exist sort of an arbitrage purpose is capables, 0:19:10.480 --> 0:19:12.760 Like how does stable coins fit into this? In your 0:19:12.960 --> 0:19:15.159 your dollars are a great example where you create a 0:19:15.200 --> 0:19:18.480 product for very narrow purpose. So initially it's like sanctions 0:19:18.480 --> 0:19:20.959 of Asian by communist block countries, and like, that's obviously 0:19:21.000 --> 0:19:22.800 not gonna grow. We try that. It's not a great 0:19:22.800 --> 0:19:24.959 business model again for a lot of reasons. So like 0:19:25.000 --> 0:19:28.560 that stays relatively small UM. But but once you find 0:19:28.600 --> 0:19:32.320 a use case, in this case cross border interest rate arbitrage, 0:19:33.040 --> 0:19:36.240 which is still narrow but bigger, the market starts to 0:19:36.240 --> 0:19:39.600 grow and then and then you eventually get to the big, 0:19:39.880 --> 0:19:41.720 big event. Right, so after twenty years you get to 0:19:41.760 --> 0:19:44.959 something really massive, But over time that product starts as 0:19:44.960 --> 0:19:47.240 a seed. In the case of stable coins, it's the 0:19:47.320 --> 0:19:50.760 lack of access to traditional banking among large cryptocurrency exchanges, 0:19:50.800 --> 0:19:53.920 and so stable coins are a way to transfer dollar 0:19:53.960 --> 0:19:57.719 equivalents into a new ecosystem. UM, you're you're a dollars 0:19:57.720 --> 0:20:01.080 were way to transfer or create dollars. In case UM, 0:20:01.080 --> 0:20:02.800 which you could say of algo stable coins as well, 0:20:02.800 --> 0:20:05.600 it's way to create new money UM in the new 0:20:05.640 --> 0:20:08.480 ecosystem that is native to the new ecosystem. In this 0:20:08.520 --> 0:20:13.400 case it's European trade finance UM. And as global trade increases, 0:20:13.400 --> 0:20:16.760 and specifically intra European trade increases, there is demand for 0:20:16.840 --> 0:20:19.679 dollars is the currency of trade UM, and now you 0:20:19.680 --> 0:20:21.280 have a new market, and so that I think the 0:20:21.320 --> 0:20:23.439 interest here for stable coins is we're kind of at 0:20:23.480 --> 0:20:27.240 the beginning of that narrative that we're in where there's 0:20:27.280 --> 0:20:30.760 one bank taking major ear dollar deposits for the purposes 0:20:30.760 --> 0:20:34.040 of cross border arbitrage. And the question is what's the 0:20:34.040 --> 0:20:37.000 next phase in that, and what are the what is 0:20:37.080 --> 0:20:40.440 required of the market and regulators to get to those 0:20:40.480 --> 0:20:43.119 next phases where there's real exponential growth, and will we 0:20:43.200 --> 0:21:02.240 do that and do we want so leve One of 0:21:02.280 --> 0:21:05.440 the things we've been discussing is how how the FED 0:21:05.520 --> 0:21:09.399 basically seded some money creation powers. And I feel like 0:21:09.560 --> 0:21:13.040 nowadays one of the criticisms that you hear about central banks. 0:21:13.080 --> 0:21:14.960 And maybe this is because I spent too much time 0:21:14.960 --> 0:21:18.520 on Twitter, as we all do, but you know, there's 0:21:18.520 --> 0:21:21.919 a perception on Twitter that the FED controls everything, and 0:21:22.000 --> 0:21:25.120 you know, all markets are artificially manipulated by the central bank. 0:21:25.200 --> 0:21:28.000 And so I guess my question is does the FED 0:21:28.640 --> 0:21:32.320 control too little or too much or the wrong things? 0:21:32.359 --> 0:21:36.879 Like how would you view that? It's a it's a 0:21:36.920 --> 0:21:40.560 hard question to answer at the sort of level of abstraction. 0:21:41.240 --> 0:21:44.760 Um I would say that in some senses the FED 0:21:44.800 --> 0:21:51.600 controls too little UM. The FED was designed two UM 0:21:51.880 --> 0:21:56.439 manage the money supply, the bank issued money supply. We 0:21:56.480 --> 0:21:59.560 have an outsourcing system. We don't have a money supply 0:21:59.600 --> 0:22:04.720 that's issue directly in bulk by the government. UM. But 0:22:05.240 --> 0:22:09.040 we have a central authority, the Federal Reserve, whose job 0:22:09.119 --> 0:22:12.080 it is to manage the size and composition of bank 0:22:12.119 --> 0:22:13.840 balance sheets and the rate of expansion. And there's a 0:22:13.840 --> 0:22:17.600 specific mandate they want to UH ensure that that expansion 0:22:17.600 --> 0:22:21.320 continues sufficient with the economy operating at its full capacity 0:22:21.359 --> 0:22:23.760 over the long term, which is what Section two A 0:22:23.880 --> 0:22:28.400 is about. And the FED has a much harder time 0:22:28.760 --> 0:22:32.080 doing its job keeping the money supply expanding at a 0:22:32.160 --> 0:22:36.199 rate consistent with the economy's full capacity potential over the 0:22:36.240 --> 0:22:40.399 long term. UM. When a lot of the money UH 0:22:40.400 --> 0:22:43.879 in the system, that's critical to the system's functioning. UM. 0:22:43.960 --> 0:22:47.399 If it disapplines, you get huge disinflationary deflationary pressures. Is 0:22:47.400 --> 0:22:50.200 exactly what happened in two thou and eight UM. If 0:22:50.240 --> 0:22:53.359 that's being issued outside of the banking system. Because the 0:22:53.400 --> 0:22:56.800 FED has all these tools that allow it to monitor 0:22:57.480 --> 0:23:01.439 and adjust the size and position of bank balance sheets, 0:23:01.960 --> 0:23:06.919 and it has many fewer tools with respect to broker 0:23:06.960 --> 0:23:10.919 deal or balance sheets um and certainly with respect to 0:23:10.960 --> 0:23:14.920 the balance sheets of foreign financial institutions UM that are 0:23:15.040 --> 0:23:19.480 issuing lots of your dollars or stable coin issuers UH. 0:23:19.520 --> 0:23:22.320 And so the more of the money supply that is 0:23:22.560 --> 0:23:25.680 outside of the mut of the fed's tools, the more 0:23:25.920 --> 0:23:30.760 it's going to be um uh over relying on tools 0:23:30.800 --> 0:23:34.560 like emergency lending, which it can then repurpose. And so 0:23:34.640 --> 0:23:36.840 there's a discount window that's built into the Federal Reserve 0:23:36.880 --> 0:23:39.240 Act for the banking system. That's one of the key 0:23:39.280 --> 0:23:41.359 tools that's built in so that they can manage the 0:23:41.359 --> 0:23:44.080 bank money supply. But then they create all these ad 0:23:44.080 --> 0:23:47.360 hoc facilities. They're basically air sets discount windows for all 0:23:47.359 --> 0:23:49.879 the other shadow moneys that have come along. And you 0:23:49.960 --> 0:23:52.320 see them roll out those facilities, and you see them 0:23:52.359 --> 0:23:55.119 roll them out again because you need those discount windows. 0:23:55.160 --> 0:23:57.119 That's like, that's one of the only mechanisms we have 0:23:57.240 --> 0:23:59.520 now to ensure the monetary stability that the FED is 0:23:59.560 --> 0:24:02.520 there to do. Otherwise you fail on the section to it, 0:24:02.680 --> 0:24:06.040 you get monetary shrinkage, which is which causes recession and depression. 0:24:06.520 --> 0:24:10.280 So in that sense, the FED doesn't have nearly nearly 0:24:10.400 --> 0:24:16.919 enough control. Um. But then in another sense, um, you know, 0:24:18.119 --> 0:24:21.439 it's too involved, because in order to make up for 0:24:21.480 --> 0:24:24.159 the lack of ex anti tools, it becomes ex post 0:24:24.240 --> 0:24:26.840 extremely involved in financial markets in ways that I think 0:24:26.880 --> 0:24:30.679 even FED policymakers are sometimes uncomfortable with. And so you 0:24:30.720 --> 0:24:32.960 have a much much larger balance sheet that's a product 0:24:33.200 --> 0:24:36.719 of of not being able to control the money supply 0:24:36.800 --> 0:24:40.480 in in ordinary traditional ex anti ways. Uh that that 0:24:40.560 --> 0:24:43.600 Congress at least designed the institution to carry out its task, 0:24:44.000 --> 0:24:46.280 you know, and you you've written about this, but I 0:24:46.359 --> 0:24:49.720 wanna following up on this point. I mean one of 0:24:49.760 --> 0:24:51.359 the things that people is like, oh, the FED is 0:24:51.400 --> 0:24:55.880 there to fight inflation because politicians can't be trusted because 0:24:55.880 --> 0:24:57.520 if it weren't for the FED, they would just spend 0:24:57.560 --> 0:25:00.679 and maybe ramp up spending before every election, etcetera. So 0:25:00.760 --> 0:25:03.359 we need this independent FED. And your argument is that 0:25:03.480 --> 0:25:05.919 just really not about that that actually like the deeper 0:25:06.000 --> 0:25:10.520 history of the FED. Your story is like, that's a myth, 0:25:10.640 --> 0:25:12.560 that that's why the FED exists more or less, Yes, 0:25:12.600 --> 0:25:14.720 I mean, the FED almost exists for the opposite reason. 0:25:15.119 --> 0:25:19.280 So we set up the privately owned, investor owned banking 0:25:19.320 --> 0:25:22.639 system we outsourced. We didn't do green backs. This is 0:25:22.680 --> 0:25:25.199 the this is the direct money issue. During the Civil War, 0:25:25.240 --> 0:25:27.159 we we moved away from green backs. We created the 0:25:27.240 --> 0:25:30.080 National Banking System in eighteen sixty three. That was to 0:25:30.119 --> 0:25:32.960 prevent over issue by politicians UH. The idea that we 0:25:33.040 --> 0:25:34.879 just don't want to have the government issue and all 0:25:34.880 --> 0:25:37.240 of the money supply. We need to outsource that some 0:25:37.320 --> 0:25:38.560 of the money is going to have to be lent 0:25:38.600 --> 0:25:41.960 into circulation. We don't want the government to be doing that, 0:25:42.080 --> 0:25:45.320 lending itself having to evaluate credits. This could lead to 0:25:45.320 --> 0:25:48.000 corruption and problems. So we set up the National Paining System, 0:25:48.200 --> 0:25:50.760 and then fifty years later we create the FED because 0:25:50.760 --> 0:25:53.920 what we discover is that the national banking system is 0:25:53.960 --> 0:25:56.879 prone to break downs under issue of money and it 0:25:57.000 --> 0:26:01.560 needs UH an institution to avoid those kedowns UH basically 0:26:01.600 --> 0:26:05.080 to avoid deflation, UH, to avoid contraction, and to ensure 0:26:05.359 --> 0:26:09.040 that the money supply UH grows over time consistent with 0:26:09.119 --> 0:26:12.760 the ability of the economy to grow. And so the 0:26:12.800 --> 0:26:16.240 FED doesn't actually get its section to a UH mandate 0:26:16.280 --> 0:26:20.920 until nine seventy seven. It has a mandate under what's 0:26:21.200 --> 0:26:25.720 called the Employment Act of ninety six, which is to 0:26:26.400 --> 0:26:31.240 pursue maximum employment, maximum purchasing power. But that's that's a 0:26:31.280 --> 0:26:33.280 mandate that applies to the whole federal government. This is 0:26:33.320 --> 0:26:36.720 born of Kansian thinking. Uh, following the Second World War, 0:26:37.119 --> 0:26:38.960 it gets Section two A and I thine seventy seven. 0:26:38.960 --> 0:26:42.280 And the concern of Congress when writing that is about 0:26:42.400 --> 0:26:45.320 high unemployment in the nineteen seventies. Uh, you know, you 0:26:45.320 --> 0:26:48.080 you would think that their concern was the high inflation rate, 0:26:48.119 --> 0:26:50.080 but they were concerned this is the highest unemployment since 0:26:50.080 --> 0:26:55.040 the nineteen thirties, and the FED was was not providing 0:26:55.640 --> 0:26:58.920 enough growth in the money supply. And uh, what's amazing 0:26:59.040 --> 0:27:01.280 is that it's just three three years after this that 0:27:01.359 --> 0:27:04.000 you get the vocal shock and changes our whole way 0:27:04.000 --> 0:27:06.200 of thinking about what the FED is for. And then 0:27:06.200 --> 0:27:11.760 the vulgar FED success or perceived success and taming a 0:27:11.880 --> 0:27:16.920 decade of inflation that various politicians and government officials tried 0:27:16.960 --> 0:27:20.919 to address and we're understood to have failed. Leads to 0:27:21.040 --> 0:27:23.600 a whole reconceptualization of what the purpose of the FED 0:27:23.680 --> 0:27:25.920 is and what a central bank, what role central bankser 0:27:26.040 --> 0:27:29.639 performed in an economy. So, just on this note, like 0:27:29.720 --> 0:27:32.920 I realized we're kind of having an abstract conversation about 0:27:32.960 --> 0:27:34.720 the purpose of the FED. But can you can you 0:27:34.760 --> 0:27:40.200 maybe draw a direct line between that conceptualization of what 0:27:40.320 --> 0:27:42.960 the FED should be doing or could be doing, to 0:27:43.240 --> 0:27:46.840 what happened in for instance, two thousand eight, Like, can 0:27:46.840 --> 0:27:50.919 you connect those two events? Yes, So two thousand and 0:27:50.960 --> 0:27:56.280 eight is the FED confronting it's need to perform its 0:27:56.280 --> 0:27:59.960 fundamental purpose, which is to prevent monetary contraction, the core 0:28:00.080 --> 0:28:02.639 or of its men, the whole reason it was created, 0:28:03.240 --> 0:28:08.200 the reason it's for it's key modifications. Seven. It's all 0:28:08.240 --> 0:28:13.320 about do not allow for a monetary system breakdown to 0:28:13.520 --> 0:28:16.679 cause a terrible recession. That's the FEED is there to 0:28:16.720 --> 0:28:21.119 prevent that from happening. Uh. And they're now they're facing 0:28:21.160 --> 0:28:26.240 this monetary system breakdown and uh it's a product of 0:28:26.320 --> 0:28:30.639 this whole shadow banking system that they had been involved 0:28:30.640 --> 0:28:32.560 in developing over the years. It turns out to be 0:28:32.640 --> 0:28:37.280 unbelievably fragile, UM and need an enormous amount of central 0:28:37.280 --> 0:28:42.160 bank support in ways that they had not anticipated. And uh, 0:28:42.240 --> 0:28:46.960 and ultimately they don't keep all the balls in the air. Um. 0:28:47.080 --> 0:28:50.120 The Lemon Brothers ball falls, and we have a whole 0:28:50.120 --> 0:28:53.400 conversation about UM you know, whether there were other ways 0:28:53.400 --> 0:28:55.040 to keep that ball in the air and what the 0:28:55.120 --> 0:28:57.920 right response to that was. But the reality is when 0:28:57.960 --> 0:29:02.000 you have shooge chunks of the money supply collapsing like that, 0:29:02.120 --> 0:29:05.120 you get a very acute recession. And that's exactly what 0:29:05.200 --> 0:29:09.160 we have UM. And so the FED does a sort 0:29:09.200 --> 0:29:14.000 of you know, in the period maybe a B B 0:29:14.200 --> 0:29:17.280 plus job. I mean, I'm rucking sort of give it 0:29:17.280 --> 0:29:18.800 a great because it's sort of like, in some ways 0:29:18.800 --> 0:29:21.080 they failed completely and in other ways they succeeded. They 0:29:21.680 --> 0:29:24.440 avoided a much worse crisis. But the Great Recession is 0:29:24.480 --> 0:29:28.920 fundamentally the product of monetary system breakdown that was a 0:29:28.920 --> 0:29:32.040 complete own goal. From a social design perspective, we didn't need. 0:29:32.080 --> 0:29:34.560 It's like the electricity grid turning off for two months. 0:29:34.720 --> 0:29:36.920 Imagine what would happen if the electricity grid is sort 0:29:36.960 --> 0:29:40.200 of shut down for six weeks UM you'd have a 0:29:40.240 --> 0:29:44.240 huge drop in gdp UH. And the monetary system is 0:29:44.320 --> 0:29:48.840 like the electricity grid for the financial system, and if 0:29:48.880 --> 0:29:51.000 you turn it off, you can have an activity just 0:29:51.040 --> 0:29:53.760 sort of grinds to a halt. And and the Fed's 0:29:53.800 --> 0:29:55.480 job is to keep the lights on, and they didn't 0:29:55.520 --> 0:29:59.400 totally nail it, so, Josh, you know, with each of 0:29:59.400 --> 0:30:01.520 these crisis and the two big ones obviously that we've 0:30:01.560 --> 0:30:05.000 experienced recently two thousand and eight, and then all the activity, 0:30:05.080 --> 0:30:09.120 the flurry of activity and spring two thousand twenty when 0:30:09.200 --> 0:30:11.440 COVID hit, you know, obviously there's all these sort of 0:30:11.480 --> 0:30:15.200 de facto discount windows that open up for the non 0:30:15.280 --> 0:30:17.800 banking sector. But then there's also like seems to be 0:30:17.800 --> 0:30:20.080 this legal fight that emerges in terms of like, well, 0:30:20.080 --> 0:30:23.640 what tools are really available under the law? Is there 0:30:23.680 --> 0:30:27.240 any real limit to what the FED can justify to itself? 0:30:27.360 --> 0:30:29.960 Like are there actually hard constraints on what the FED 0:30:30.000 --> 0:30:33.479 can do? Where is it always sure to either one 0:30:33.480 --> 0:30:35.280 of you? Or is it always the sort of like 0:30:36.360 --> 0:30:39.120 the only constraint is the creativity of the lawyers. This 0:30:39.200 --> 0:30:41.960 is an invitation to make fun of lawyers. I think, yeah, well, 0:30:41.960 --> 0:30:47.200 that's fraught for many reasons. But I think the answer 0:30:47.280 --> 0:30:49.320 that question is the answer to any question related to 0:30:49.360 --> 0:30:51.560 the legal constraints on a public institution, which is that 0:30:51.920 --> 0:30:54.480 any public institution can quote unquote get away with whatever 0:30:54.520 --> 0:30:57.520 they can justify. The question is like, is there a 0:30:57.560 --> 0:31:00.480 long history of doing it? Um, that's not enough on 0:31:00.520 --> 0:31:02.600 its own, but like it helps, right, So the fen's 0:31:02.600 --> 0:31:06.760 been doing repost since nineteen seventeen, that's a long time. Um. 0:31:06.800 --> 0:31:09.320 You know it's been doing f X operations since then, 0:31:09.360 --> 0:31:12.440 since the sixties. That's also a long time. And so, like, 0:31:12.520 --> 0:31:16.000 you know, the was like the open and notorious doctrine 0:31:16.000 --> 0:31:17.280 I guess you call it. Is it called the doctor 0:31:17.320 --> 0:31:19.600 and I'm not really sure. Basically, if you walk into 0:31:19.600 --> 0:31:22.360 somebody's house, set up shop and never leave and they 0:31:22.400 --> 0:31:24.960 never kick you out, of call anyone, it's your house. Um, 0:31:25.000 --> 0:31:26.960 And so you know someone who tried to do that, Yeah, 0:31:27.360 --> 0:31:29.800 usually doesn't work. But for real property, that's like a 0:31:29.840 --> 0:31:35.480 real adverse possession, yes, which which shouldn't necessarily apply to 0:31:35.760 --> 0:31:38.959 like administrative practices, but like the principle of the thing 0:31:39.040 --> 0:31:41.840 sort of applies to some extent. I'm kind of avoiding 0:31:41.920 --> 0:31:44.360 your question in the sense that like the answer is 0:31:44.680 --> 0:31:48.320 yes and now, um. But but ultimately you have to 0:31:48.320 --> 0:31:50.800 be answerable to the public. And so you know, I 0:31:50.800 --> 0:31:53.320 think that's on Congress in a sense to say we 0:31:53.440 --> 0:31:56.840 don't like what you did, Um, you can't do it anymore. 0:31:57.120 --> 0:31:59.040 I'm going to write that down. We're all going to 0:31:59.120 --> 0:32:01.200 vote on it and the President's going to sign it. 0:32:01.320 --> 0:32:03.200 Now it's a rule. UM and they've done that in 0:32:03.200 --> 0:32:06.920 the past. UM And and for example, in also nearly fifties, 0:32:07.160 --> 0:32:10.720 there's a voluntary credit restraint program in UH around the 0:32:10.760 --> 0:32:15.200 Korean War, and basically the Congress removed ability to do 0:32:15.240 --> 0:32:17.360 that and they brought it back later. But like there've 0:32:17.400 --> 0:32:21.360 been examples of powers being moved by Congressional action, and 0:32:21.600 --> 0:32:24.840 that's ultimately to another in the remedy. Right, it's not 0:32:24.880 --> 0:32:28.280 that people sue the Fed, it's that Congress passes. Is 0:32:28.320 --> 0:32:32.000 also a great example Dive Frank Act Section thirteen three, 0:32:32.040 --> 0:32:35.040 which is one of the core authorities that the FED 0:32:35.120 --> 0:32:39.000 leans on. In two thousand and eight, Congress makes significant 0:32:39.040 --> 0:32:42.800 modifications because it wasn't pleased with certain ways in which 0:32:42.800 --> 0:32:46.440 Congress use thirteen three in two thousands and its specifically 0:32:46.800 --> 0:32:52.120 Congress made thirteen three launch to support UM the rescue 0:32:52.160 --> 0:32:56.520 of bear Stearns and UH to a I G. And 0:32:56.720 --> 0:33:02.280 the modifications in say that thirteen three lending has to 0:33:02.280 --> 0:33:06.880 be through facilities with broad based eligibility UM, and the 0:33:06.920 --> 0:33:10.280 FED can't make loans to save a particular specific failing 0:33:10.360 --> 0:33:14.160 financial company. And so just recently we had seen that 0:33:14.240 --> 0:33:19.120 mechanism at work, though, I would say in general, the 0:33:19.200 --> 0:33:24.680 government is full of administrative agencies that exercise delegated authority 0:33:24.840 --> 0:33:31.320 from Congress pursuantto enabling statutes, and the ordinary mechanism for 0:33:32.600 --> 0:33:37.000 checking that exercise of authority by those agencies is the 0:33:37.040 --> 0:33:39.040 courts is the judicial process. So so so what the e 0:33:39.160 --> 0:33:42.920 PA decides to regulate air pollution, uh, they often get 0:33:42.960 --> 0:33:45.440 sued and then they have to go and explain why 0:33:45.520 --> 0:33:49.320 the statute authorizes them to regulate air pollution in that way. 0:33:49.320 --> 0:33:51.480 And then there's a bunch of judges who you know, 0:33:51.600 --> 0:33:53.920 are either convinced or not convinced, and they apply various 0:33:53.920 --> 0:33:57.920 doctrines and that process. The FED is subject to very 0:33:57.960 --> 0:34:00.560 little of that, for variety of reasons we can get into. 0:34:00.800 --> 0:34:04.280 And so, unlike many agencies that were familiar with, the 0:34:04.280 --> 0:34:08.080 FED tends to be the final interpreter of its own 0:34:08.320 --> 0:34:11.920 enabling statute. UH. And so it's the FED General Council's 0:34:11.960 --> 0:34:15.560 Office that sort of decides what Section fourteen means because 0:34:16.040 --> 0:34:19.080 there's basically no cases where a judge has ever been involved, 0:34:19.239 --> 0:34:22.360 So we haven't developed a bunch of precedents, and it's 0:34:22.480 --> 0:34:24.960 uh not sort of come about that anybody has sued 0:34:25.000 --> 0:34:27.800 the FED for a variety of reasons, uh, and gotten 0:34:28.040 --> 0:34:31.080 a judge involved in the issue. And that's why the 0:34:31.120 --> 0:34:34.719 sort of main players that are constraining what the FED 0:34:34.760 --> 0:34:37.480 can do are its own General Council's office and then 0:34:37.520 --> 0:34:41.840 Congress Um, which can intervene. It must be nice to 0:34:41.840 --> 0:34:43.879 be able to be the arbiter of your own your 0:34:43.880 --> 0:34:48.120 own powers. Um. I'm going to reluctantly fast forward to 0:34:48.520 --> 0:34:51.879 two and you know, we've been talking a lot about 0:34:51.880 --> 0:34:54.399 this on the podcast. There's been a lot of air 0:34:54.719 --> 0:34:57.800 being taken out of the sort of most frothy parts 0:34:58.080 --> 0:34:59.640 of the market, and there's been a lot of talk 0:34:59.640 --> 0:35:03.360 about the FED raising rates until something breaks. But the 0:35:03.560 --> 0:35:07.440 standard opinion seems to be that the financial system is 0:35:07.440 --> 0:35:09.560 safer than it was in two thousand eight. You don't 0:35:09.600 --> 0:35:12.640 have the build up of leverage that you had back then. 0:35:13.000 --> 0:35:15.359 Is that right? I'd love to hear from both of you, 0:35:15.400 --> 0:35:18.839 like where are the pockets of vulnerabilities right now? And 0:35:18.880 --> 0:35:22.200 should we be worried about financial stability? So the interesting 0:35:22.200 --> 0:35:24.719 answers there's some like idiosyncratic source of leverage that no 0:35:24.760 --> 0:35:26.160 one talks about. And I'm going to tell you right 0:35:26.200 --> 0:35:28.560 now and then we'll have the answer. But I'm not 0:35:28.600 --> 0:35:33.000 going to do that because I tried, Yeah, well I 0:35:33.520 --> 0:35:34.880 can't do that. I should say no, I'm not going 0:35:34.880 --> 0:35:38.760 to do that. But but I think an interesting case studies. 0:35:38.760 --> 0:35:42.080 So I hated to rewind to that. But two eight 0:35:42.200 --> 0:35:45.399 is a credit crisis that is deflationaring in the sense 0:35:45.440 --> 0:35:47.840 that the money that was created to fund new loans 0:35:48.000 --> 0:35:50.399 is now not money good because the loans are bad. 0:35:50.719 --> 0:35:52.680 When the loans go bad, the money goes away, and 0:35:52.760 --> 0:35:58.680 you have deflation. Um in we have a big much 0:35:58.719 --> 0:36:01.880 bigger economics. Then we head into thousan Nate and by 0:36:01.920 --> 0:36:04.000 lots of measures. And yes it was short lived. Yes 0:36:04.000 --> 0:36:06.040 it was like quote unquote V shaped or whatever. Maybe 0:36:06.040 --> 0:36:07.680 it's sort of a check mark shape because we kept 0:36:07.719 --> 0:36:12.440 going up. But like the that wasn't obvious at the time. Um, 0:36:12.480 --> 0:36:14.840 but we don't have a credit crisis, Like nobody's really 0:36:14.880 --> 0:36:18.480 worried about the underlying stability of the banking system in 0:36:18.480 --> 0:36:20.600 a meaningful way at any particular point in that. Now 0:36:20.600 --> 0:36:22.600 we do stress tests, we make sure we're but it's 0:36:22.600 --> 0:36:24.719 more about checking your answer than it is about coming 0:36:24.800 --> 0:36:27.080 up with a new one. And so like that's a 0:36:27.120 --> 0:36:29.560 success in that it's not a credit crisis, it's a 0:36:29.560 --> 0:36:32.720 liquidity crisis. Central banks are designed to deal with liquidity crisis. 0:36:33.200 --> 0:36:36.120 So um, now you could ask the question, should there 0:36:36.120 --> 0:36:38.919 be that much liquidity in the market in general? That's 0:36:39.080 --> 0:36:41.400 ultimately the question of shadow banking, is there's more liquidity 0:36:41.400 --> 0:36:44.239 than necessarily is sustainable. And if the FEDS going to 0:36:44.880 --> 0:36:47.840 or central banks in general are going to backstop liquidity, 0:36:47.880 --> 0:36:49.680 like they should have some limit to what they're willing 0:36:49.719 --> 0:36:52.120 to do. Um. If you think about the current environment, 0:36:52.520 --> 0:36:55.160 you know, just this the simple fact of rising rates 0:36:56.040 --> 0:36:59.280 doesn't seem with some idiots and credit cases left the side, 0:36:59.360 --> 0:37:03.160 like the global economy and for the US economy, um 0:37:03.360 --> 0:37:06.279 is problematic in much more boring ways. Meaning it used 0:37:06.320 --> 0:37:07.840 to be really cheap to our money, it's not so 0:37:07.960 --> 0:37:11.120 cheap anymore. And like that's not a financial system meltdown 0:37:11.200 --> 0:37:15.000 kind of thing. Um Because now you know, that's a 0:37:15.040 --> 0:37:18.480 sanguine look and that's like classic like you know, final 0:37:18.520 --> 0:37:20.040 word on the like it's not going to go well, 0:37:20.120 --> 0:37:23.640 I make that prediction, but like the I think that 0:37:23.760 --> 0:37:26.880 the problem is different, and there's this tendency to say, 0:37:27.239 --> 0:37:31.400 you know, there's this stressor that's applying pressure to the system, 0:37:31.719 --> 0:37:33.799 and the system is vulnerable, and this crack is going 0:37:33.840 --> 0:37:36.279 to open, and it's all going to spread wide, and 0:37:36.320 --> 0:37:37.840 we're going to find out that what we didn't know 0:37:37.960 --> 0:37:39.920 is the only thing that matters. And and I think 0:37:39.960 --> 0:37:42.480 we should open ourselves up with the possibility that this 0:37:42.560 --> 0:37:44.959 is kind of just a rate cycle, and that there's 0:37:44.960 --> 0:37:50.319 no obvious source of monetary and stability UM and that 0:37:50.440 --> 0:37:52.480 it's still gonna be painful at times because it's more 0:37:52.480 --> 0:37:54.560 expensive our money, but it's gonna be about that real 0:37:54.560 --> 0:37:58.200 economy stuff as opposed to like the mechanical or the 0:37:58.239 --> 0:38:02.600 plumbing or the financial your side of things, love did 0:38:02.840 --> 0:38:06.280 did Josh just jinx us into a major credit crisis? 0:38:07.840 --> 0:38:10.799 I'm going to hazard the other position, the other side 0:38:10.840 --> 0:38:15.080 of this um UH. It's certainly the case that we've 0:38:15.120 --> 0:38:19.239 made a lot of improvements UH since two thousand and eight, 0:38:19.320 --> 0:38:24.640 but we still have a fundamentally unstable monetary financial system. 0:38:24.719 --> 0:38:29.480 It's just inherently fragile. The run risk is lurking constantly. 0:38:30.080 --> 0:38:33.760 And that's because repo market, the your dollar market, repo 0:38:33.840 --> 0:38:36.359 issuers and your dollar issuers are not in fact banks. 0:38:36.360 --> 0:38:39.080 There is no deposit insurance, so you can have repo insurance, 0:38:39.280 --> 0:38:42.840 and so there's enormous incentives that are just always hanging 0:38:42.920 --> 0:38:46.600 over to run. You can think of a of a 0:38:46.680 --> 0:38:49.759 cash provider in a repo or a euro dollar depositor 0:38:49.880 --> 0:38:53.640 as picking up pennies. Um, they're getting paid more interest 0:38:53.680 --> 0:38:57.880 than if they're in a bank deposit, and then good times, great, 0:38:57.920 --> 0:39:00.440 pick up those pennies in front of the steam roller. 0:39:01.120 --> 0:39:03.400 But then all that has to happen is a change 0:39:03.400 --> 0:39:08.280 in expectations about the future uh any concern and there's 0:39:08.280 --> 0:39:12.239 just an incentive for the cash providers and your dollar 0:39:12.320 --> 0:39:15.360 depositors to just go back to a regular bank deposit 0:39:15.480 --> 0:39:18.319 or t bill um, you know, to to get out. 0:39:18.440 --> 0:39:21.360 And so Ben Bernanke I think it was his famous 0:39:21.400 --> 0:39:26.480 comment about the subprime mortgage issue. He thought that that 0:39:26.600 --> 0:39:29.120 was contained. He was like, this is too small to 0:39:29.239 --> 0:39:32.239 cause a crisis. But the lesson in some sense of 0:39:32.239 --> 0:39:34.520 two thousand and eight is that if you have an 0:39:34.560 --> 0:39:40.600 inherently fragile monetary system, it doesn't have to be huge losses. 0:39:40.600 --> 0:39:43.400 It just has to be sufficient uncertainty about the distribution 0:39:43.480 --> 0:39:48.640 of those losses to cause all of the shadow money 0:39:48.880 --> 0:39:51.279 people to try to rush into the good money. And 0:39:51.360 --> 0:39:53.399 I would say that right now, where we're looking at 0:39:53.680 --> 0:39:58.919 is balance sheets of of shadow banks that are under 0:39:58.920 --> 0:40:01.640 pressure from a frustrate rises because they have a lot 0:40:01.640 --> 0:40:04.359 of dead instruments that become less valuable when interest rates 0:40:04.440 --> 0:40:09.520 go up. And so the more pressure the assets side 0:40:09.880 --> 0:40:14.840 of financial institutions UH that are issuing money instruments, the 0:40:14.920 --> 0:40:19.040 more pressure that that is under, the higher the likelihood 0:40:19.160 --> 0:40:21.959 that there will be a moment where everybody looks down 0:40:22.040 --> 0:40:24.520 and says, wait a second, I don't know if this 0:40:24.560 --> 0:40:27.759 guy is UH is such a good bet anymore. Let 0:40:27.760 --> 0:40:30.160 me just move my money to JP Morgan Chase. And 0:40:30.160 --> 0:40:33.120 that's what happened in two thousand and eight some sense. Alright, 0:40:33.200 --> 0:40:35.600 we're forty minutes in and we'll get to audience questions 0:40:35.600 --> 0:40:37.719 in a second. But there's one since I want to 0:40:37.719 --> 0:40:40.400 bring it up. You know, Tracy mentioned like, well, nothing 0:40:40.560 --> 0:40:42.719 is broken yet, but one thing has broken and it's 0:40:42.760 --> 0:40:45.760 the crypto market or there was a pretty big break there. 0:40:46.160 --> 0:40:49.600 But here's the thing. People hate bailouts. So thank god, 0:40:50.160 --> 0:40:53.160 nothing so far knock on wood with the FTX story 0:40:53.239 --> 0:40:55.520 has like caused any sort of financial institution to need 0:40:55.560 --> 0:40:58.839 to bail out what should be done so that never 0:40:59.000 --> 0:41:01.200 in my life do I have to hear about a 0:41:01.200 --> 0:41:04.840 crypto company getting built out. What would you like to 0:41:04.840 --> 0:41:07.040 go first? Either one of you is how do we 0:41:07.080 --> 0:41:14.640 avoid that risk forever? So the crypto ecosystem is I 0:41:14.680 --> 0:41:17.440 think eager for And if they're not eager for it, 0:41:17.480 --> 0:41:23.440 they should be uh some official sector recognition that will 0:41:23.480 --> 0:41:29.440 allow ordinary financial institutions to hold and trade and deal 0:41:29.760 --> 0:41:34.440 in cryptocurrencies, because right now what they have is a 0:41:34.480 --> 0:41:36.640 whole little world that just exists on the internet, is 0:41:36.680 --> 0:41:40.800 completely divorced from any economic activity in the real world. 0:41:40.920 --> 0:41:44.080 It's like the apopiosis of finance. The purpose of finance 0:41:44.120 --> 0:41:46.960 is to help us allocate real resources in the real world, 0:41:47.400 --> 0:41:50.719 and here's crypto and they're doing it, except they're not 0:41:50.760 --> 0:41:53.440 allocating any resources in the real there's no there's no 0:41:53.520 --> 0:41:57.240 connect The only point of connection between the crypto world, 0:41:57.760 --> 0:42:00.359 the only significant point of connection with crypto world right 0:42:00.400 --> 0:42:04.799 now and real economy is stable coins, which is the bridge. 0:42:04.840 --> 0:42:06.400 It's how you get in and out. And so the 0:42:06.440 --> 0:42:09.480 stable coin issues actually have real dollar assets, they're the 0:42:09.520 --> 0:42:14.040 only ones um. And so the way you avoid ever 0:42:14.080 --> 0:42:16.200 having a crypto bailout is you keep it that way, 0:42:16.440 --> 0:42:21.440 you don't have the actual economy ever become reliant or 0:42:21.480 --> 0:42:24.000 exposed to the value of these tokens, and you don't 0:42:24.120 --> 0:42:27.520 end up with massive stable coin issuers that you know 0:42:27.560 --> 0:42:30.359 are issuing stable coins that people use to buy real 0:42:30.400 --> 0:42:32.760 goods and services. If the only use of a stable 0:42:32.760 --> 0:42:36.560 point is to buy a token with no value, then 0:42:37.640 --> 0:42:40.279 you know, it's just not it's not a real risk. 0:42:40.320 --> 0:42:43.840 But if people are using stable coins to buy actual stuff, 0:42:43.880 --> 0:42:45.360 then it becomes part of the money supply, And if 0:42:45.360 --> 0:42:48.480 all those stable coins disappear, you could get contractionary pressures 0:42:48.480 --> 0:42:52.680 that have to be counteracted by some official sector action 0:42:52.760 --> 0:42:55.720 and doesn't have necessarily be a bailout, but a bailout 0:42:55.760 --> 0:42:58.360 is often the most efficient means. You know, UH, it 0:42:58.400 --> 0:43:01.480 would have been easier to have bailed out leaving brothers 0:43:01.560 --> 0:43:04.080 than to try to get the money supply expanding through 0:43:04.120 --> 0:43:09.080 other UH central bank actions. So I think it's um, Like, 0:43:09.120 --> 0:43:11.880 I completely agree with that. I mean, maybe I'm exposed 0:43:11.840 --> 0:43:13.960 to be supposed to Twitter flame by saying that, but like, 0:43:14.600 --> 0:43:17.040 I mean, I think the sorry you're not on Twitter, 0:43:17.239 --> 0:43:20.640 there's another Jeosh Younger on Twitter who's not him, not me, Um, 0:43:21.400 --> 0:43:25.440 very very much, but there's probably more than one fairness. Um, 0:43:25.480 --> 0:43:29.320 but I think that the thing that money is supposed 0:43:29.360 --> 0:43:31.160 to do something for you, right, So that's kind of 0:43:31.200 --> 0:43:33.000 along the lines of less argument, which is like it 0:43:33.040 --> 0:43:36.959 has some real economy purpose and so like, ultimately bank 0:43:37.000 --> 0:43:39.920 deposits are good and good money in the sense that 0:43:39.960 --> 0:43:42.160 I can guess by goods and services, but there's an 0:43:42.200 --> 0:43:45.160 underlying transfer of federal reserve liabilities behind that, like banks 0:43:45.600 --> 0:43:48.400 interact with them between each other in federal reserve money, 0:43:48.840 --> 0:43:51.680 and so and then and and that bank deposits value 0:43:51.680 --> 0:43:52.759 in the sense that I can go to the bank 0:43:53.000 --> 0:43:55.600 and get paper money and then in principle pay my 0:43:55.640 --> 0:43:59.000 taxes with it, right, because that's definitely use of government 0:43:59.040 --> 0:44:01.080 issue money. Is that, oh, the government a hundred dollars, 0:44:01.120 --> 0:44:02.560 I take my hundred dollars, I give it to the government. 0:44:02.560 --> 0:44:05.439 I don't go to jail. Much better outcome. And so 0:44:06.200 --> 0:44:09.800 like the question is in crypto, like where's that convertibility? 0:44:09.800 --> 0:44:11.560 And so this is where the your dollar analogy comes up, 0:44:11.600 --> 0:44:14.759 which is like building up an infrastructure that guaranteed that 0:44:14.800 --> 0:44:17.759 convertibility in the way that let the market scale was 0:44:17.800 --> 0:44:20.279 a lot of work and took a long time, and 0:44:20.360 --> 0:44:22.440 it involved the direct involvement of the Federal Reserve at 0:44:22.480 --> 0:44:24.719 many steps and all the other central banks. And so 0:44:25.239 --> 0:44:29.359 you know, the crypto ecosystem is similarly offshore, involving many 0:44:29.360 --> 0:44:33.640 different regulatory authorities. Um. And if I can't take my bitcoin, 0:44:33.719 --> 0:44:36.040 turn it into a tether, turned it into a dollar, 0:44:36.680 --> 0:44:38.279 turn it into a paper dollar, and give it to 0:44:38.320 --> 0:44:40.120 the treasury to pay my taxes, like, if that chain 0:44:40.200 --> 0:44:43.640 is not guaranteed, it's hard to see how it scales, 0:44:44.320 --> 0:44:47.000 um and so like to last point, you just don't 0:44:47.040 --> 0:44:49.680 do anything, and you're gonna end up not necessarily with 0:44:49.719 --> 0:44:52.440 crypto exchanges being like iron clad, because probably won't get 0:44:52.440 --> 0:44:54.960 that either. But it won't have like a real economy impact. 0:44:54.960 --> 0:44:57.959 It won't be a major component of the monetary system. 0:44:58.000 --> 0:44:59.960 It won't be a major component of the financial systematic 0:45:00.040 --> 0:45:03.560 can be segmented off. You know, the the FTX stuff 0:45:03.600 --> 0:45:08.600 like is mostly about crypto um and there's real economy complications. 0:45:08.640 --> 0:45:12.040 But like you and there's really like bad outcomes for 0:45:12.160 --> 0:45:13.719 lots of people, and I don't want to diminish that 0:45:13.760 --> 0:45:34.000 at all, But like the banking system will survive, should 0:45:34.040 --> 0:45:36.399 we take some audience questions? So We have some really 0:45:36.440 --> 0:45:38.480 good ones. I have to say about half of them 0:45:38.520 --> 0:45:41.440 are about crypto. But this is where we did them 0:45:41.480 --> 0:45:44.320 buy a card? Yeah, they are. They're good crypto questions. 0:45:44.320 --> 0:45:48.120 It's not like would you buy bitcoin? But but okay, 0:45:48.160 --> 0:45:50.520 when you hold the magic box, you're gonna get that 0:45:51.000 --> 0:45:55.800 to that one on on this convertibility point, um, here's 0:45:55.840 --> 0:45:58.000 one question. So do you think that some of the 0:45:58.040 --> 0:46:02.520 shadow banking solutions or other types of solutions could reach 0:46:02.640 --> 0:46:06.600 the retail level through payment solution companies such as PayPal, 0:46:07.080 --> 0:46:11.640 so that, for instance, you could have repoat availability for 0:46:11.760 --> 0:46:15.479 your average person on the street. And this person didn't 0:46:15.480 --> 0:46:18.319 mention this, but I'll just tack this on central bank 0:46:18.360 --> 0:46:21.880 digital currencies. I mean, one of the use cases for 0:46:21.920 --> 0:46:25.560 those is this idea that people could potentially have access 0:46:25.800 --> 0:46:29.080 to the FED directly in some way. You do have 0:46:29.120 --> 0:46:31.479 that right, that's a money market fund. So the money 0:46:31.480 --> 0:46:33.319 market fund gives you direct access. Fore, it gives you 0:46:33.320 --> 0:46:36.800 direct access to FEDS balanchie the reverse repot facilities and 0:46:36.920 --> 0:46:40.160 money market fund asset almost exclusively. And so like that 0:46:40.239 --> 0:46:43.600 functionality exists, and people are utilizing at the government money 0:46:43.600 --> 0:46:46.880 market fund complex, which is this like risk free component 0:46:46.920 --> 0:46:50.600 of money market funds, multi trillion dollar business, so so 0:46:50.680 --> 0:46:54.680 it's happening. I think with central bank digital currencies, the 0:46:54.760 --> 0:46:56.480 question is what problem we're trying to solve. That's what 0:46:56.520 --> 0:46:59.080 everyone starts with when they talk about CBDCs. They say like, well, 0:46:59.080 --> 0:47:00.920 what are we trying to solve? And I think, like 0:47:00.960 --> 0:47:03.640 a center bank digital currency has two like unique aspects. 0:47:03.640 --> 0:47:07.799 One is it is a digital asset blockchain or not uh, 0:47:07.840 --> 0:47:09.560 and the other is it is not a bank, it's 0:47:09.600 --> 0:47:12.239 the central bank. So if we want a central bank 0:47:12.239 --> 0:47:15.840 digital currency available to retail investors because wholesale has access 0:47:15.880 --> 0:47:18.799 to the central bank's balance sheet. Um, the questions, do 0:47:18.920 --> 0:47:22.560 retail investors have a have serious concerns about the stability 0:47:22.600 --> 0:47:26.960 of commercial banks that would warrant a different counterparty right there? 0:47:26.960 --> 0:47:29.840 Their counterparty is currently a commercial bank. They'd rather be 0:47:29.840 --> 0:47:31.279 the central bank. And you only do that if you 0:47:31.280 --> 0:47:33.080 really don't think that commercial bank is gonna be good 0:47:33.120 --> 0:47:36.080 for the convertibility and everything about the way bank depositor 0:47:36.160 --> 0:47:38.759 price tells you people are perfectly comfortable with with the 0:47:38.760 --> 0:47:41.480 ability to the banking system to deliver on their promise 0:47:41.520 --> 0:47:45.000 of convertibility. So then it's a question of the settlement 0:47:45.040 --> 0:47:47.480 cycle and the payment system. And one of the things 0:47:47.560 --> 0:47:51.080 that I think is really interesting about the the discussion 0:47:51.160 --> 0:47:54.080 of payments. Anyone who's like talk to me is probably 0:47:54.080 --> 0:47:56.000 brought up the statistic at some point. But the FED 0:47:56.040 --> 0:47:58.479 does a survey, They say, have you used a check 0:47:58.480 --> 0:48:01.680 hasher or another non bank financial media in the past year, 0:48:01.880 --> 0:48:05.359 so Casher's paid loans, all that kind of stuff, um, 0:48:05.440 --> 0:48:08.320 and people say yes or no. It's multively small fraction people, 0:48:08.320 --> 0:48:11.080 but it's it's non trivial. And then they say, do 0:48:11.120 --> 0:48:14.120 you have a bank account? And so of people who 0:48:14.160 --> 0:48:16.879 use a check casher also have a bank account. So 0:48:17.040 --> 0:48:19.120 this is about the payment system for those folks, and 0:48:19.120 --> 0:48:22.799 that's why the financial inclusion bit of CBDC. I think 0:48:22.800 --> 0:48:25.080 the question is can the backing system solve that through 0:48:25.080 --> 0:48:28.799 a better payment system of faster settlement cycle. Is it 0:48:28.920 --> 0:48:31.759 really about access to central bank money or is it 0:48:31.800 --> 0:48:35.200 access to faster payments? And that's why segmenting the problem 0:48:35.280 --> 0:48:37.200 is useful because then you can look at the technology 0:48:37.200 --> 0:48:39.359 and say this piece is useful, this piece is not. 0:48:39.600 --> 0:48:41.759 So the banking system has been telling us that they're 0:48:41.760 --> 0:48:45.840 going to solve the unbanked under banked problem since the 0:48:45.920 --> 0:48:50.160 nineteen eighties when Congress had a hearing and UH and 0:48:50.200 --> 0:48:54.640 the Fed actually said, don't worry, the bank banking system 0:48:54.640 --> 0:48:57.799 is going to address this. Will will will get that 0:48:57.920 --> 0:49:02.239 number of unbanked down to the level of other advanced economies, which, 0:49:02.239 --> 0:49:05.800 by the way, is plus other advanced economies are banked. 0:49:05.960 --> 0:49:07.480 And we have actually made a lot of progress in 0:49:07.480 --> 0:49:11.120 the last ten years UM for reasons having to do 0:49:11.200 --> 0:49:15.880 with technology making it cheaper to offer bank accounts, but 0:49:16.000 --> 0:49:20.960 we still have around five of households unbanked, which is 0:49:21.000 --> 0:49:24.120 millions of people. And so I do think that's one 0:49:24.560 --> 0:49:29.000 reason why central bank money UH, public option for central 0:49:29.000 --> 0:49:32.680 bank money could be appealing. Obviously agree with Josh that 0:49:32.760 --> 0:49:38.160 there's not a safety stability deficiency for bank account money. 0:49:38.239 --> 0:49:40.440 Of course, that's because the public stands behind that through 0:49:40.480 --> 0:49:43.239 deposit insurance and the discount window UH. And so the 0:49:43.280 --> 0:49:46.360 government has given a franchise for the banking system to 0:49:46.560 --> 0:49:50.640 create that safe money. And so fundamentally, the question should 0:49:50.640 --> 0:49:53.359 we have a CBDC is a question about do we 0:49:53.480 --> 0:49:56.400 want to re engineer or change that arrangement and change 0:49:56.440 --> 0:50:00.200 the nature of the banking franchise and and and and 0:50:00.360 --> 0:50:04.400 introduce a public option that competes with the banking franchise. 0:50:04.480 --> 0:50:06.920 Do we think that will lead to a solution of 0:50:06.960 --> 0:50:10.200 the on bank problem that's more robust, uh, a solution 0:50:10.239 --> 0:50:14.759 to the payments problem. The banking industry has spent decades 0:50:15.400 --> 0:50:20.839 um not investing in fast payments because banks have an 0:50:20.840 --> 0:50:24.799 interest in the float and in having additional time to 0:50:24.840 --> 0:50:29.160 prevent fraud, which because of federal law, generally they have 0:50:29.239 --> 0:50:32.600 to absorb those costs. And so whereas other advanced countries 0:50:32.600 --> 0:50:35.840 have had real time growth settlement, real time payments the 0:50:35.840 --> 0:50:40.360 retail level for decades, uh, here we are in two 0:50:40.640 --> 0:50:43.960 and it's it's patches here and there in the u 0:50:44.080 --> 0:50:46.400 S where you can move your money quickly. And this 0:50:46.440 --> 0:50:48.000 is part of the reason why you end up with 0:50:48.040 --> 0:50:50.719 the stable coins. In some sense, stable coin issues make 0:50:50.719 --> 0:50:53.560 this argument it's going to be more efficient transaction. So 0:50:54.040 --> 0:50:57.200 I think there's a question on those sort of bread 0:50:57.239 --> 0:51:00.000 and butter dimensions. Would a public option for bank accoun 0:51:00.000 --> 0:51:03.799 out money improve the private options that exist? And then 0:51:03.840 --> 0:51:08.439 there's the larger question about the shadow bank money. What's 0:51:08.480 --> 0:51:12.520 a major reason why you have repo market, what's a 0:51:12.560 --> 0:51:15.520 major reason why you have money funds? Because ft I 0:51:15.560 --> 0:51:18.319 C insurance caps out at two fifty dollars, and there's 0:51:18.360 --> 0:51:20.640 actually a deficiency in the nature of the bank franchise. 0:51:20.840 --> 0:51:23.400 We don't actually have this level of safety that we 0:51:23.440 --> 0:51:26.480 would want. And so there's large corporations that have very 0:51:26.560 --> 0:51:28.800 large balances. Maybe they want to have a five hundred 0:51:28.840 --> 0:51:31.759 million dollar cash balance, and there may be not so 0:51:31.800 --> 0:51:34.759 comfortable about having that all in one bank, and do 0:51:34.800 --> 0:51:37.279 we need to fix that? And maybe should Apple be 0:51:37.360 --> 0:51:40.400 able to just hold a billion dollar cash balance at 0:51:40.400 --> 0:51:43.799 the federals or that's nondefaultable. Why not make non defaultable 0:51:43.800 --> 0:51:47.640 money more widely available? And that's I think that's sort 0:51:47.680 --> 0:51:50.080 of the the pro case. Or central bank digital currency, 0:51:50.120 --> 0:51:53.839 not necessarily like on the blockchain, uh, not token eye, 0:51:53.880 --> 0:51:57.480 central bank digital currency, but just what you know, fed 0:51:57.520 --> 0:51:59.800 accounts for all, which is something that I've been in 0:52:00.000 --> 0:52:02.719 favor up for many years now. So I don't know 0:52:02.719 --> 0:52:04.840 if you guys knew that that that I was for that. 0:52:04.920 --> 0:52:09.200 But by the way, future episode we should do one, 0:52:09.280 --> 0:52:11.759 just like why there's no instant payments in the US. 0:52:11.840 --> 0:52:13.279 I think that would do really well and just like 0:52:13.320 --> 0:52:16.480 some of the yeah, that's a good future episode. Can 0:52:16.520 --> 0:52:19.799 you um you know you've written about like the sort 0:52:19.840 --> 0:52:23.919 of coevolution or the different evolution. So we talked about, Okay, 0:52:23.960 --> 0:52:26.040 the FED having to like come up with all these 0:52:26.040 --> 0:52:30.440 new mechanisms um to deal with the growth of deposit 0:52:30.520 --> 0:52:34.279 like things outside of the banking system. Can you compare that, like, 0:52:34.320 --> 0:52:36.160 what does it look like for the other major central 0:52:36.200 --> 0:52:38.640 banks and their evolution E, C, B, B, O, J. 0:52:38.760 --> 0:52:41.200 Have they also roughly had to do the same thing, 0:52:41.719 --> 0:52:44.239 or is because there is not as similar like sort 0:52:44.239 --> 0:52:47.840 of as big offshore market for some of these other currencies, 0:52:47.880 --> 0:52:50.240 has it not been pressing up an issue? So Josh 0:52:50.320 --> 0:52:52.960 might be deeper on this than I am, But generally 0:52:53.600 --> 0:52:58.080 the dollar based shadow banking system is vastly larger than 0:52:58.680 --> 0:53:02.160 for other currencies, and there's a variety of reasons for this. 0:53:02.760 --> 0:53:05.760 One has to do with exactly what we were talking about, 0:53:06.120 --> 0:53:12.480 the stance of US policymakers, in particular Treasury Department and 0:53:12.600 --> 0:53:15.960 the Federal Reserve in the latter half of the twentie 0:53:16.120 --> 0:53:21.640 century to actually facilitate its growth um and to allow 0:53:21.800 --> 0:53:25.279 for the sort of impairment of the bank franchise, not 0:53:25.360 --> 0:53:29.440 just to allow to nurture it. Another has to do 0:53:29.560 --> 0:53:33.200 with the fact that in a lot of other countries, 0:53:33.840 --> 0:53:36.520 the currency that everybody wants to be in as dollars. 0:53:36.800 --> 0:53:40.359 And so for US where we just we just use 0:53:40.440 --> 0:53:43.759 dollars here, but in a lot of other countries there 0:53:43.800 --> 0:53:46.279 are there is the presence of multiple currencies. The other 0:53:46.280 --> 0:53:52.160 currency is dollars and UH and so in European countries, 0:53:52.520 --> 0:53:55.799 the sort of shadow banking problem that they have is 0:53:56.120 --> 0:53:58.960 the creation of dollar deposits, which then they have to manage. 0:53:59.719 --> 0:54:03.640 As Josh pointed out, one way to have managed that 0:54:03.880 --> 0:54:08.680 is just to prohibit institutions in your country from issuing 0:54:08.880 --> 0:54:12.880 deposits denominated in another currency. If you don't, if you 0:54:12.920 --> 0:54:15.799 allow it, you're gonna want to regulate it because if 0:54:16.040 --> 0:54:21.560 these liabilities build up, you the central bank um you 0:54:21.600 --> 0:54:25.560 know of Japan or UH in the UK, you can't 0:54:25.600 --> 0:54:27.719 create dollars. And so now you have a run in 0:54:27.760 --> 0:54:31.880 your economy amongst your institutions, and you call up the 0:54:31.920 --> 0:54:34.319 federal Reserve and ask for a swap line. You need 0:54:34.360 --> 0:54:36.920 to phone a friend or you're gonna lose your economy 0:54:36.960 --> 0:54:40.080 and you can't carry out your mandate. And so I 0:54:40.080 --> 0:54:43.640 would say that's that's been the big shadow banking problem. 0:54:43.640 --> 0:54:46.200 And I do think that in a lot of these jurisdictions. 0:54:46.760 --> 0:54:51.320 The Euro dollars are are issued by banks, but they're 0:54:51.320 --> 0:54:53.680 often issued by other types of financial companies, which we 0:54:53.719 --> 0:54:57.120 would consider sort of traditional shadow banks for here, so UH, 0:54:57.160 --> 0:55:00.360 you know in Asia life insurance companies, they're of various 0:55:00.360 --> 0:55:05.440 companies engaged in short term don a liability creation. And 0:55:05.480 --> 0:55:07.040 how did the Bank of Japan deal with that in 0:55:07.760 --> 0:55:10.200 when it when it ran it borrowed over three hundred 0:55:10.200 --> 0:55:13.719 billion dollars from the FED to online. I think that 0:55:14.320 --> 0:55:16.440 it's all part of the plan basically, which is that 0:55:16.560 --> 0:55:18.480 in the in the fifties and sixties, the goal was 0:55:18.560 --> 0:55:22.120 to cement and entrenched UH and grow the dollar system 0:55:22.160 --> 0:55:24.640 because it offered all of these benefits. This is exorbitant privilege. 0:55:24.680 --> 0:55:26.800 This is the idea that I borrowed my own currency. 0:55:27.120 --> 0:55:29.719 There's also the currency of global trade, and so like 0:55:30.160 --> 0:55:32.680 the first generation of your dollars, this is a benefit 0:55:32.719 --> 0:55:34.640 to other countries as well, right, because there's the idea 0:55:34.680 --> 0:55:37.000 of a global currency. So of all trade happens in 0:55:37.000 --> 0:55:39.960 the same currency, I can finance it in that currency. 0:55:40.040 --> 0:55:42.960 I can deposit the proceeds of my trade in that currency, 0:55:43.440 --> 0:55:45.719 and now I'm sort of all in all in the 0:55:45.760 --> 0:55:48.839 family kind of thing. And so the first generation of 0:55:48.840 --> 0:55:52.080 your dollars is primarily deposits of central banks. So central 0:55:52.080 --> 0:55:55.560 banks are the seed for the modern euro dollar market. Uh, 0:55:55.680 --> 0:55:58.120 they are the depositors. Um. So they're making a choice 0:55:58.120 --> 0:56:00.120 to park their funds added your dollar issue or and 0:56:00.200 --> 0:56:03.320 not in T bills or other sorts of dollar denominated assets. 0:56:03.440 --> 0:56:06.920 Is because they see value in that system for themselves. 0:56:07.440 --> 0:56:10.080 And and the FED goes one step further and says 0:56:10.120 --> 0:56:12.200 like you need to find a friend, call me right, 0:56:12.239 --> 0:56:15.960 which is here's some swap lines. It's two start with Switzerland, 0:56:16.120 --> 0:56:17.680 move on to the b I S and the Bank 0:56:17.680 --> 0:56:21.000 of England, and and grow that that network which sort 0:56:21.040 --> 0:56:24.960 of connects all central banks into one globalized dollar system. 0:56:25.000 --> 0:56:27.560 So you can do open market operations in the your 0:56:27.600 --> 0:56:30.799 dollar market. Because ultimately the chain leads back to the 0:56:30.880 --> 0:56:33.200 issuer of dollars, which is which is the Federal Reserve. 0:56:33.440 --> 0:56:36.000 I think you guys have paramariland on recently. I was 0:56:36.040 --> 0:56:39.480 going to say, we've come full circle to our previous limber. 0:56:40.120 --> 0:56:42.600 You know, has a book about Charlie Kinda Burger, uh, 0:56:42.640 --> 0:56:44.920 and the and the point that Charlie Kindle Burger makes 0:56:45.400 --> 0:56:48.200 uh and that Paramariland makes is that the huge network 0:56:48.200 --> 0:56:50.719 effects and money, and so it's much more efficient if 0:56:50.719 --> 0:56:52.960 we're all on the same sort of currency. And so 0:56:53.040 --> 0:56:56.120 the construction of the euro dollar market, which is apparently 0:56:56.200 --> 0:56:58.640 in stale market in a lot of ways UH is 0:56:58.680 --> 0:57:00.920 also it's a more efficient market. And so for all 0:57:00.920 --> 0:57:03.480 of the other countries that have different currencies, if they 0:57:03.480 --> 0:57:05.680 can get dollar funding, it's going to be cheaper, it's 0:57:05.680 --> 0:57:08.080 gonna be better for their businesses. And so this system 0:57:08.120 --> 0:57:12.040 was built up over decades too because of its superiority 0:57:12.040 --> 0:57:16.600 on certain efficiency dimensions. When pots Namors never really worked 0:57:16.640 --> 0:57:18.960 out was how to keep it stable in a business 0:57:19.000 --> 0:57:22.200 cycle downturn, and also various governance and distributional issues which 0:57:22.200 --> 0:57:24.160 are sort of shoved under the rug and are really 0:57:24.160 --> 0:57:26.960 significant in terms of who wins and who loses in 0:57:27.080 --> 0:57:30.000 terms of adopting what is a currency issued by the 0:57:30.080 --> 0:57:32.360 United States and what that means for businesses in the 0:57:32.440 --> 0:57:36.320 United States UH and also businesses in other countries. UM, 0:57:36.360 --> 0:57:38.439 we are running out of time, so I'm gonna ask 0:57:38.480 --> 0:57:40.800 one more audience question, and I would encourage you all 0:57:40.880 --> 0:57:44.280 to to seek out Josh and Love after this because 0:57:44.280 --> 0:57:47.800 we will be having drinks um over there, but in 0:57:47.840 --> 0:57:51.440 the meantime, h This question is from Yakov, who is 0:57:51.480 --> 0:57:56.080 on Twitter at Yakov, and the question is what does 0:57:56.240 --> 0:58:01.400 pal fantasize about doing? What is poal fantasize about doing 0:58:02.280 --> 0:58:04.480 if he wasn't constrained by the dual mandate. I'm going 0:58:04.560 --> 0:58:07.120 to rephrase this slightly and say, like, if the FED 0:58:07.240 --> 0:58:10.840 could start over today when it comes to designing the 0:58:10.840 --> 0:58:13.400 financial system, what do you think it would do differently? 0:58:13.840 --> 0:58:16.120 And since there's another question that's very similar to this, 0:58:16.160 --> 0:58:18.520 I'll just add what would you do different you know, 0:58:18.640 --> 0:58:21.560 it's like someone else basically like, well the one the 0:58:21.560 --> 0:58:24.920 one changed you'd like to see. I'm not I actually 0:58:24.960 --> 0:58:27.760 don't have a can answer that question, in part because like, 0:58:27.880 --> 0:58:30.840 for all of its issues, like chatter, banking has yielded 0:58:30.880 --> 0:58:34.320 great benefits to the United States, and so like is 0:58:34.360 --> 0:58:37.880 it too much to pay the boatman? I'm not sure, um, 0:58:37.960 --> 0:58:40.120 But I think that the key is it takes a 0:58:40.120 --> 0:58:43.880 crisis to figure out how to fix it, and so like, 0:58:43.960 --> 0:58:46.280 in some sense, the hypothetical is if you knew all 0:58:46.280 --> 0:58:48.880 the things that could go wrong, would you just build 0:58:48.920 --> 0:58:51.720 in systems that can handle it? Um. The other version 0:58:51.760 --> 0:58:53.080 of this is to say, Look, you know the money 0:58:53.120 --> 0:58:57.240 supply should be issued by banks and investments are for investors, 0:58:57.840 --> 0:59:00.680 and you know there should be some lubrication into the system. 0:59:00.760 --> 0:59:04.080 But the continuum of money is sort of too diffuse 0:59:04.360 --> 0:59:06.040 in a sense, like it's hard to see where one 0:59:06.080 --> 0:59:08.760 ends and the other begins, and and so you know, 0:59:08.880 --> 0:59:12.200 either drawing very clear lines, not necessarily at bank deposits, 0:59:12.240 --> 0:59:15.000 but like being very explicitly behind certain forms of and 0:59:15.000 --> 0:59:19.040 not others in advance. UM. Again with some policy goal 0:59:19.040 --> 0:59:21.200 in mind. In this case, probably the global dollar system 0:59:21.240 --> 0:59:23.920 is worth preserving UM in lots of ways, and so 0:59:24.400 --> 0:59:26.640 that kind of force it would be useful. What would 0:59:26.680 --> 0:59:29.680 I do? UM? Maybe I should have pretended like I 0:59:29.680 --> 0:59:32.320 didn't remember that that part of the question. Um. You 0:59:32.360 --> 0:59:35.240 know that that the the old Lombard Street logic I 0:59:35.240 --> 0:59:37.760 think applies really strongly, which is a lend against good 0:59:37.760 --> 0:59:40.560 collateral at a penalty rate. UM. So liquidity should never 0:59:40.600 --> 0:59:43.400 be the reason why the financial system goes down. UM. 0:59:43.440 --> 0:59:45.919 Now that means making sure you're comfortable with what people 0:59:45.960 --> 0:59:48.480 are doing the providers of that liquidity are doing with 0:59:48.520 --> 0:59:52.960 the proceeds of it. UM. So like data collection, transparency 0:59:52.960 --> 0:59:55.400 to regulators, not necessarily to the public, but certainly transparently 0:59:55.360 --> 0:59:58.640 to regulators and the public where it's useful and beneficial 0:59:58.680 --> 1:00:01.720 and in the public interest. I think that's all really important. 1:00:01.720 --> 1:00:05.240 And part of the big problem with with markets structured 1:00:05.280 --> 1:00:08.280 with this continuum of money is transparency is very hard 1:00:08.320 --> 1:00:11.400 to achieve um and so policymakers don't really know what 1:00:11.440 --> 1:00:14.160 they're looking at. They don't have all the information. And 1:00:14.240 --> 1:00:16.760 we tend to sort of put together a data collection 1:00:16.760 --> 1:00:19.080 program that solves the last crisis. So we're getting really 1:00:19.120 --> 1:00:22.120 good at the treasury market now, and I'm not convinced 1:00:22.160 --> 1:00:23.840 that's going to be the next big thing that breaks, 1:00:24.000 --> 1:00:25.520 you know, And we have to avoid this tendency to 1:00:25.600 --> 1:00:28.560 kind of like investigate the thing after it goes wrong 1:00:28.640 --> 1:00:30.760 and then have all the information about it. But the 1:00:30.800 --> 1:00:33.280 next thing is not is not on a rator. So 1:00:33.440 --> 1:00:38.400 I mean, I'm gonna take a stronger position against the 1:00:38.400 --> 1:00:42.320 shadow banking system. I would say that the the benefits 1:00:42.320 --> 1:00:47.680 tend to be very overstated and to often be articulated 1:00:47.720 --> 1:00:52.000 and stated by members of the financial sector who tend 1:00:52.040 --> 1:00:55.360 to reap a lot of those benefits. And on the 1:00:55.400 --> 1:00:58.240 other side of the ledger, I think the costs tend 1:00:58.280 --> 1:01:02.160 to be under a appreciated the full range of costs 1:01:02.640 --> 1:01:06.680 of the shadow banking system, and so you know, there's 1:01:06.720 --> 1:01:09.520 one way of thinking about the euro dollar system as 1:01:09.920 --> 1:01:12.600 you know, a form of Dutch disease that has had 1:01:12.680 --> 1:01:17.080 all sorts of bad UH consequences within the US economy. 1:01:17.400 --> 1:01:20.800 Although that's not my main reason to be concerned about it, 1:01:21.800 --> 1:01:24.280 I do think that those issues should be looked at 1:01:24.320 --> 1:01:27.120 much more closely than policymakers seem to have looked at 1:01:27.160 --> 1:01:29.680 them so far. There's such a focus on stability for 1:01:29.680 --> 1:01:34.080 the system, but there's huge political economy effects of having 1:01:34.080 --> 1:01:37.320 a system like this, and what you have is sort 1:01:37.360 --> 1:01:41.040 of an open ended government backstop for financial sector risk taking. 1:01:41.600 --> 1:01:46.160 And you know, I don't get great comfort in the 1:01:46.200 --> 1:01:50.640 sort of invocation of the badget rule. Uh. Walter Badgett's 1:01:51.760 --> 1:01:54.720 second half of the nineteenth century vision for how society 1:01:54.800 --> 1:01:57.959 should be structured is not one that I think many 1:01:58.000 --> 1:02:00.880 of us would find appealing today. This was a monetary 1:02:00.920 --> 1:02:07.320 financial system for an imperial power in a highly liberalized 1:02:07.400 --> 1:02:10.160 economy in the second half of the nineteenth century, and 1:02:10.840 --> 1:02:15.520 I think that there's uh a real concern that we 1:02:15.560 --> 1:02:20.320 should have about a system that is as unstructured as 1:02:20.520 --> 1:02:24.840 the one we have where the public sector is um 1:02:24.960 --> 1:02:30.080 so frequently on the back foot. And I think that 1:02:30.120 --> 1:02:34.760 the solution isn't as hard as it sometimes seems, and 1:02:34.800 --> 1:02:38.080 that the history that Josh has done such a good 1:02:38.120 --> 1:02:40.800 job of elucidating on the other podcast about the fifties 1:02:40.840 --> 1:02:43.920 and we talked a little bit about eurodollars, shows that 1:02:44.000 --> 1:02:48.360 the public sector actually has huge control over whether you 1:02:48.440 --> 1:02:52.680 have an inherently unstable system or a stable system. And 1:02:52.760 --> 1:02:55.280 we just sort of we have experience of this in 1:02:55.360 --> 1:02:58.760 other areas, and so think about other areas of financial 1:02:58.800 --> 1:03:02.560 regulation with the speck to the regulatory perimeter. The reasons 1:03:02.600 --> 1:03:06.640 securities regulation works is that we have a functional definition 1:03:06.680 --> 1:03:10.960 of a security, and anything that comes within the functional 1:03:11.000 --> 1:03:13.920 definition as supposed to a formalistic definition, you can't dress 1:03:13.960 --> 1:03:16.600 it up as something else and then not comply with 1:03:16.720 --> 1:03:20.240 securities regulation. Anything like it's covered by the functional definition 1:03:20.280 --> 1:03:23.640 of security is subject to the same set of rules. UH. 1:03:23.720 --> 1:03:26.760 Insurance regulation works like this. You know, if you call 1:03:26.840 --> 1:03:29.520 it an insurance document, obviously you have to follow the 1:03:29.560 --> 1:03:33.400 insurance regulation rules. UM, but there's an incentive if you 1:03:33.440 --> 1:03:36.040 could maybe dress it up as something else. There's so 1:03:36.080 --> 1:03:38.760 many ways to dress up an insurance agreement and not 1:03:38.840 --> 1:03:41.400 call it insurance. UM. If you could dress it up 1:03:41.400 --> 1:03:43.640 as something else and not be covered by the insurance rules, 1:03:43.720 --> 1:03:47.160 the insurance rules are going to fall apart. And this 1:03:47.200 --> 1:03:50.920 is true for mortgages. UH. There's so many areas of regulation, 1:03:50.920 --> 1:03:53.720 and financial regulation in particular. The fundamental problem we've had 1:03:53.720 --> 1:03:57.880 in money and banking going back forever is that we 1:03:57.920 --> 1:04:00.320 have not had a functional definition that had has been 1:04:00.760 --> 1:04:04.280 UH in force. And Josh is right there there's a spectrum, 1:04:04.480 --> 1:04:07.440 but you can pick ninety day you know, ninety day maturity. 1:04:07.480 --> 1:04:11.040 Any instrument that matures in ninety days or less is 1:04:11.080 --> 1:04:13.920 a banking instrument that has to be UM issued by 1:04:14.000 --> 1:04:16.200 an entity that is subject to the same sort of 1:04:16.240 --> 1:04:18.560 coherent body of banking regulations. And that would just sort 1:04:18.600 --> 1:04:23.840 of regularized, rationalized, normalized, put some logic on on a 1:04:23.920 --> 1:04:28.000 system that has become very ad hoc and unpredictable in 1:04:28.000 --> 1:04:30.960 a way that I think is on that not in 1:04:31.040 --> 1:04:34.160 the in the public interest. And are there challenges like 1:04:34.480 --> 1:04:39.840 preserving the benefits of Parian Marylyn Charlie Kendall Burger's UM 1:04:39.880 --> 1:04:44.080 you know, international finance system with low frictions. Yeah, we've 1:04:44.080 --> 1:04:46.800 got to figure out some ways to preserve the benefits. 1:04:47.160 --> 1:04:50.720 But I think there are ways to preserve the benefits. Uh, 1:04:50.760 --> 1:04:54.920 And the costs of doing nothing are large, and we 1:04:54.960 --> 1:04:59.720 could be facing the consequences, uh, you know, in more 1:04:59.800 --> 1:05:02.720 on that order of months and as opposed to years. 1:05:03.080 --> 1:05:04.800 Shall we leave it there. Yeah, I was gonna say, 1:05:04.800 --> 1:05:08.560 we could talk for hours on this, but let's leave 1:05:08.560 --> 1:05:11.320 it there. So many future episodes. I know a ton 1:05:11.360 --> 1:05:13.800 of ideas here. Um, Josh Younger and love Men, and 1:05:13.920 --> 1:05:17.200 thank you so much. Fantastic discussion. Really great to have 1:05:17.320 --> 1:05:19.720 you here. Thank you to the audience for coming into 1:05:20.040 --> 1:05:22.920 the Bloomberg Offices to actually listen to this. Thank you 1:05:22.960 --> 1:05:25.360 for your excellent questions. Sorry we couldn't get to more 1:05:25.400 --> 1:05:53.800 of them. Thank you everyone. So that was our live 1:05:53.880 --> 1:05:57.200 recording with Josh Younger and Love Men, and thank you 1:05:57.240 --> 1:06:00.680 to everyone who came to Bloomberg's offices to you actually 1:06:00.760 --> 1:06:04.200 watch and listen and engage in that conversation. Thank you 1:06:04.240 --> 1:06:08.280 as well to our producers Carmen Rodriguez and Dash Bennett. 1:06:08.560 --> 1:06:11.160 I'm Tracy Alloway. You can follow me on Twitter at 1:06:11.160 --> 1:06:14.280 Tracy Alloway. And I'm Joe wisntal. You can follow me 1:06:14.440 --> 1:06:18.040 on Twitter at the Stalwart, follow Carmen on Twitter at 1:06:18.120 --> 1:06:21.880 Carmen armand follow Dash on Twitter at Dash but oh, 1:06:21.920 --> 1:06:25.120 and follow Levi Menon on Twitter at lev men And. 1:06:25.120 --> 1:06:27.960 And we're probably gonna do several more of these, or 1:06:28.040 --> 1:06:31.000 hopefully we plan and tend to do several more of 1:06:31.000 --> 1:06:34.840 these three. So keep a listen on the podcast, follow 1:06:34.960 --> 1:06:37.160 us on Twitter so that you know about the next one, 1:06:37.240 --> 1:06:40.920 and YouTube can join in person, and odd lots listeners, 1:06:40.960 --> 1:06:42.680 Tracy and I are going to be doing an A 1:06:42.880 --> 1:06:45.560 M A Ask Me Anything episode where you can ask 1:06:45.680 --> 1:06:49.120 us questions, send us a voice memo, state your name, 1:06:49.240 --> 1:06:51.440 where you're from, and one question. Put it in an 1:06:51.520 --> 1:06:54.200 email to odd Lots at Bloomberg dot net, and we 1:06:54.200 --> 1:07:00.240 will give you our answers. Thanks for listening to