1 00:00:15,316 --> 00:00:15,836 Speaker 1: Pushkin. 2 00:00:21,556 --> 00:00:22,876 Speaker 2: I'm Lydia Dean Kott. 3 00:00:22,996 --> 00:00:23,996 Speaker 1: And I'm Michael Lewis. 4 00:00:24,156 --> 00:00:26,876 Speaker 3: This is the Big Short companion series on Against the Rules. 5 00:00:27,156 --> 00:00:29,756 Speaker 3: So in the last couple of episodes we talked to 6 00:00:29,956 --> 00:00:32,756 Speaker 3: people who were in the book, and this episode's going 7 00:00:32,796 --> 00:00:36,196 Speaker 3: to be kind of different because it's actually about an institution, 8 00:00:36,676 --> 00:00:40,236 Speaker 3: the Federal Reserve. In two thousand and eight, the chairman 9 00:00:40,396 --> 00:00:43,996 Speaker 3: of the Fed was an economist called Ben Bernanki, and 10 00:00:44,116 --> 00:00:46,676 Speaker 3: there's a clip of him from your new audiobook of 11 00:00:46,716 --> 00:00:47,116 Speaker 3: The Big. 12 00:00:46,996 --> 00:00:52,156 Speaker 1: Short, Chairman Bernanki, The floor is yours. 13 00:00:52,916 --> 00:00:55,596 Speaker 4: At this juncture, however, the impact on the broader economy 14 00:00:55,636 --> 00:00:58,556 Speaker 4: and financial markets of the problems in the subprime market 15 00:00:58,836 --> 00:01:00,876 Speaker 4: seems likely to be contained. 16 00:01:01,876 --> 00:01:04,756 Speaker 1: Chapter seven, The Great Treasure Hut. 17 00:01:05,276 --> 00:01:07,716 Speaker 4: We will continue to monitor this situation closely. 18 00:01:10,076 --> 00:01:11,996 Speaker 3: That's Ben bernanky of the FAY. Why are we doing 19 00:01:12,036 --> 00:01:14,316 Speaker 3: an episode that's about the Federal Reserve? 20 00:01:14,676 --> 00:01:18,916 Speaker 1: The financial crisis is just an excellent opportunity to teach 21 00:01:18,996 --> 00:01:21,596 Speaker 1: people what the hell of the Federal Reserve is, where 22 00:01:21,596 --> 00:01:25,596 Speaker 1: it came from, why we have it, why it matters 23 00:01:25,636 --> 00:01:28,476 Speaker 1: that it might be in jeopardy right now. And there 24 00:01:28,556 --> 00:01:33,996 Speaker 1: was this person Emi Nakamura, who is World class monetary 25 00:01:33,996 --> 00:01:37,836 Speaker 1: economists knows more about the Federal Reserve and monetary policy 26 00:01:37,916 --> 00:01:42,676 Speaker 1: than like most anybody walking the planet who lives around 27 00:01:42,676 --> 00:01:45,436 Speaker 1: the corner from me, and I just thought, like, sit 28 00:01:45,476 --> 00:01:48,316 Speaker 1: down with Emmy and answer questions I have about it. 29 00:01:48,516 --> 00:01:51,036 Speaker 3: I liked this episode because I went into it not 30 00:01:51,116 --> 00:01:53,836 Speaker 3: knowing anything about the Federal Reserve and kind of feeling 31 00:01:53,876 --> 00:01:57,556 Speaker 3: like I'm too far behind, I'll never know well. 32 00:01:57,676 --> 00:01:59,276 Speaker 1: I mean I feel that way sometimes. 33 00:01:59,316 --> 00:02:00,836 Speaker 3: That's what it was nice about it is that you 34 00:02:00,956 --> 00:02:03,316 Speaker 3: actually had questions, like it seemed like you were learning 35 00:02:03,316 --> 00:02:05,076 Speaker 3: too about the Federal Reserve. So that made me feel 36 00:02:05,076 --> 00:02:07,676 Speaker 3: like there's not something wrong with me for not fully 37 00:02:07,756 --> 00:02:09,996 Speaker 3: understanding it. And it's possible well to understand it. 38 00:02:10,316 --> 00:02:12,516 Speaker 1: I mean, do you feel better having understood it a 39 00:02:12,516 --> 00:02:14,796 Speaker 1: bit more or do you feel like, oh, you learned 40 00:02:14,796 --> 00:02:16,676 Speaker 1: about it and that was an hour of your life 41 00:02:16,716 --> 00:02:17,316 Speaker 1: you can't do, yell. 42 00:02:17,356 --> 00:02:19,116 Speaker 3: I think it's good that I know about it, for sure. 43 00:02:19,356 --> 00:02:21,596 Speaker 1: I mean, it is in the news right now. It 44 00:02:21,716 --> 00:02:25,036 Speaker 1: is a huge deal that the Trump White House wants 45 00:02:25,076 --> 00:02:27,996 Speaker 1: to take control of the Federal Reserve and make decisions 46 00:02:28,036 --> 00:02:31,076 Speaker 1: about monetary policy that were previously made are currently made 47 00:02:31,076 --> 00:02:36,756 Speaker 1: by nonpartisan experts, and the presence of an independent federal 48 00:02:36,796 --> 00:02:41,756 Speaker 1: Reserve in the financial crisis was critical to resolving the crisis. 49 00:02:42,236 --> 00:02:44,916 Speaker 1: It was critical to restoring any kind of trust in 50 00:02:44,956 --> 00:02:48,716 Speaker 1: the system. So that they're fiddling with that institution now 51 00:02:48,836 --> 00:02:51,756 Speaker 1: and threatening the trust. It has such big implications. I 52 00:02:51,796 --> 00:02:54,276 Speaker 1: think that, like our culture should just understand it better. 53 00:02:54,396 --> 00:02:57,156 Speaker 1: My hope for the episode is that people like me, 54 00:02:57,236 --> 00:03:00,116 Speaker 1: who have you any interest in it and some knowledge 55 00:03:00,116 --> 00:03:03,636 Speaker 1: about it, but not expert at all, they find it 56 00:03:03,756 --> 00:03:08,156 Speaker 1: really interesting cause you're hearing it's explained in plain language 57 00:03:08,236 --> 00:03:11,356 Speaker 1: and some deeper questions are being answered. But that also 58 00:03:11,396 --> 00:03:14,836 Speaker 1: people who have no idea what the Federal Reserve does, well, 59 00:03:14,876 --> 00:03:17,596 Speaker 1: all of a sudden have a picture in their mind 60 00:03:17,596 --> 00:03:20,116 Speaker 1: the next time they hear the phrase Federal Reserve bank. 61 00:03:20,396 --> 00:03:22,836 Speaker 3: All right, let's get into it. Here is Michael Lewis's 62 00:03:22,876 --> 00:03:27,116 Speaker 3: conversation with Emmy Nakamura, an economist at UC Berkeley and 63 00:03:27,156 --> 00:03:30,676 Speaker 3: an expert on all things FED, including where they keep 64 00:03:30,676 --> 00:03:34,636 Speaker 3: our goal, which apparently they still have some of quite 65 00:03:34,636 --> 00:03:36,476 Speaker 3: a bit, quite a bit, and if you listen you 66 00:03:36,476 --> 00:03:37,356 Speaker 3: can know where to find it. 67 00:03:42,596 --> 00:03:46,076 Speaker 1: I began my conversation with the economist Ammi Nakamura by 68 00:03:46,076 --> 00:03:48,316 Speaker 1: asking her win the FED got created. 69 00:03:49,076 --> 00:03:52,836 Speaker 2: So the FED is a fairly modern invention as things go. 70 00:03:53,156 --> 00:03:56,836 Speaker 2: It was created in nineteen thirteen, and I think the 71 00:03:56,836 --> 00:03:59,796 Speaker 2: approximate cause is why the FED was created was banking crisis. 72 00:04:00,276 --> 00:04:02,916 Speaker 2: So in the previous century there had been something like 73 00:04:02,996 --> 00:04:06,076 Speaker 2: twelve banking crisis. Basically, these banking crises were happening all 74 00:04:06,116 --> 00:04:06,556 Speaker 2: the time. 75 00:04:06,556 --> 00:04:07,236 Speaker 1: Banks failing. 76 00:04:07,476 --> 00:04:10,516 Speaker 2: That's right, banks failing. Banking crisis is more than just 77 00:04:10,556 --> 00:04:13,716 Speaker 2: one bank failing, it's lots of banks failing. And there 78 00:04:13,756 --> 00:04:16,396 Speaker 2: was a particularly bad one in nineteen oh seven where 79 00:04:16,396 --> 00:04:19,796 Speaker 2: lots of banks failed and the banking crisis didn't end 80 00:04:19,916 --> 00:04:23,796 Speaker 2: until John Pierport Morgan put in his own money to 81 00:04:24,156 --> 00:04:26,476 Speaker 2: try to end this banking crisis. And at that point, 82 00:04:26,796 --> 00:04:29,556 Speaker 2: the story goes that people sort of realized that something 83 00:04:29,596 --> 00:04:31,356 Speaker 2: had to be done so that you didn't have to 84 00:04:31,396 --> 00:04:34,716 Speaker 2: depend on John Pierpoint Morgan to come in and be 85 00:04:34,796 --> 00:04:36,196 Speaker 2: superman and save the day. 86 00:04:36,316 --> 00:04:38,996 Speaker 1: And was this so this was in the United States. 87 00:04:39,756 --> 00:04:42,796 Speaker 1: Did any version of the Federal Reserve exist outside the 88 00:04:42,876 --> 00:04:43,476 Speaker 1: United States? 89 00:04:43,556 --> 00:04:46,756 Speaker 2: Yes, so in some other countries, for example, in England 90 00:04:47,596 --> 00:04:50,396 Speaker 2: there were central banks for a much longer period of time. 91 00:04:50,796 --> 00:04:54,276 Speaker 2: The US was relatively late to the game. This is 92 00:04:54,436 --> 00:04:58,356 Speaker 2: probably connected partly to this sort of fear of government 93 00:04:58,556 --> 00:05:01,956 Speaker 2: and centralized institutions and centralized power that's been around in 94 00:05:01,956 --> 00:05:05,156 Speaker 2: the United States for a long time. There are prominent 95 00:05:05,196 --> 00:05:08,076 Speaker 2: figures in the United States like Andrew Jackson, who actually 96 00:05:09,556 --> 00:05:12,116 Speaker 2: you know, some of the earlier attempts to create a FED. 97 00:05:12,836 --> 00:05:16,076 Speaker 2: But the original reason why why central banks were created 98 00:05:16,116 --> 00:05:17,916 Speaker 2: in other countries, and this is going to become part 99 00:05:17,956 --> 00:05:20,916 Speaker 2: of the FED story also later on, was to finance 100 00:05:20,956 --> 00:05:21,436 Speaker 2: the government. 101 00:05:21,836 --> 00:05:23,396 Speaker 1: So if you want to own to lend money to 102 00:05:23,436 --> 00:05:24,316 Speaker 1: the government. 103 00:05:24,756 --> 00:05:26,756 Speaker 2: Exactly so, you have to have someone like the Bank 104 00:05:26,796 --> 00:05:30,156 Speaker 2: of England, for example. The government needed to borrow money, 105 00:05:30,196 --> 00:05:32,556 Speaker 2: for example, for wars and other purposes, and then someone 106 00:05:32,636 --> 00:05:33,956 Speaker 2: has to oversee that. 107 00:05:34,556 --> 00:05:36,876 Speaker 1: So let's explain what this thing is that gets created 108 00:05:36,916 --> 00:05:40,036 Speaker 1: in nineteen thirteen, is like a central bank. We throw 109 00:05:40,076 --> 00:05:42,836 Speaker 1: that word phrase around, but what is it? What is 110 00:05:42,876 --> 00:05:44,956 Speaker 1: it doing in nineteen thirteen. 111 00:05:44,636 --> 00:05:48,996 Speaker 2: So the most basic thing was to create a system 112 00:05:49,076 --> 00:05:52,636 Speaker 2: for issuing money. So in the so called free banking era, 113 00:05:52,716 --> 00:05:53,796 Speaker 2: which had you know, which. 114 00:05:53,676 --> 00:05:56,196 Speaker 1: Was some time before, there is no central bank, no 115 00:05:56,236 --> 00:05:58,876 Speaker 1: central just a bunch of banks, private banks owned by. 116 00:05:58,916 --> 00:06:01,436 Speaker 2: People yes, but there was paper money. But the thing 117 00:06:01,476 --> 00:06:04,796 Speaker 2: about paper money is that inherently, you know, the paper 118 00:06:04,836 --> 00:06:06,876 Speaker 2: is not worth very much. So the whole point of 119 00:06:06,916 --> 00:06:09,516 Speaker 2: the paper is it's something that you're expecting someone else 120 00:06:09,556 --> 00:06:11,036 Speaker 2: to be willing to take. But in the era of 121 00:06:11,076 --> 00:06:14,316 Speaker 2: free banking, there are all these individual banks that were 122 00:06:14,476 --> 00:06:15,996 Speaker 2: offering this paper money. 123 00:06:15,836 --> 00:06:17,276 Speaker 1: Their own paper money, that's right. 124 00:06:17,356 --> 00:06:19,676 Speaker 2: And literally, if you went to try to buy something 125 00:06:20,156 --> 00:06:22,076 Speaker 2: grocery store or whatever, they'd have to kind of think 126 00:06:22,076 --> 00:06:25,436 Speaker 2: about how valuable is this piece of paper you're handing 127 00:06:25,476 --> 00:06:26,796 Speaker 2: me as it was to some other piece of paper. 128 00:06:26,876 --> 00:06:28,236 Speaker 2: So that's obviously very inconvenient. 129 00:06:28,276 --> 00:06:31,156 Speaker 1: So if I'm the grocery store, I'm actually have to 130 00:06:31,196 --> 00:06:33,876 Speaker 1: be a bank analyst. That's right, because I'm taking paper 131 00:06:33,876 --> 00:06:35,316 Speaker 1: that was printed by this bank. 132 00:06:35,396 --> 00:06:35,796 Speaker 2: That's right. 133 00:06:35,876 --> 00:06:38,156 Speaker 1: If the bank is sound, what is it back by it? 134 00:06:38,236 --> 00:06:40,876 Speaker 1: Back by gold, gold, gold, So I have to believe 135 00:06:40,956 --> 00:06:44,716 Speaker 1: that I take, you know, Joe Schmo's bank's notes to 136 00:06:44,796 --> 00:06:48,036 Speaker 1: Joe Schmoe, He'll give me gold of this value for it. 137 00:06:48,076 --> 00:06:48,476 Speaker 3: That's right. 138 00:06:48,516 --> 00:06:51,396 Speaker 2: And it's also really crucial that everybody at that bank believes, 139 00:06:51,396 --> 00:06:53,516 Speaker 2: because otherwise they start going to the bank and trying 140 00:06:53,516 --> 00:06:55,716 Speaker 2: to take out their money and then the bank actually 141 00:06:55,716 --> 00:06:58,436 Speaker 2: does veail, which is what was causing all of these 142 00:06:58,436 --> 00:07:02,276 Speaker 2: banking crises. So this was a situation in the free 143 00:07:02,316 --> 00:07:05,996 Speaker 2: banking era. During this whole period, we're on the gold standard, 144 00:07:06,076 --> 00:07:09,996 Speaker 2: so it's a situation where you know, there's sort of 145 00:07:10,596 --> 00:07:13,836 Speaker 2: some rate at which paper money can be exchanged for gold. 146 00:07:14,236 --> 00:07:16,316 Speaker 2: But even before that, there is a period of time 147 00:07:16,356 --> 00:07:19,476 Speaker 2: when people were literally using gold in transactions, and during 148 00:07:19,516 --> 00:07:21,196 Speaker 2: that period of time, the big problem is just the 149 00:07:21,236 --> 00:07:24,836 Speaker 2: gold is very heavy. People have a tendency. So I 150 00:07:24,836 --> 00:07:26,676 Speaker 2: talked about paper money and how you had to check 151 00:07:26,716 --> 00:07:28,916 Speaker 2: whether the paper money was really worthwhile, but that was 152 00:07:28,996 --> 00:07:31,956 Speaker 2: actually even true with gold. If someone gives you a 153 00:07:31,956 --> 00:07:34,076 Speaker 2: gold coin, it might have been that they've shaved off 154 00:07:34,076 --> 00:07:35,876 Speaker 2: a little piece of it and it's actually not worth 155 00:07:35,916 --> 00:07:37,516 Speaker 2: as much as supposed to be. And that was something was. 156 00:07:37,516 --> 00:07:40,156 Speaker 1: Always happening to scale with you when you're doing a transaction, 157 00:07:40,276 --> 00:07:42,156 Speaker 1: to make sure the goal weighs what it's supposed. 158 00:07:41,836 --> 00:07:43,716 Speaker 2: To work, that's right, And this was called the debasement 159 00:07:43,836 --> 00:07:46,476 Speaker 2: of currency, So this was always happening. And then there 160 00:07:46,516 --> 00:07:48,556 Speaker 2: was the fact that during the gold standard era, if 161 00:07:48,556 --> 00:07:52,396 Speaker 2: you had a ship which was filled with gold, and 162 00:07:52,436 --> 00:07:55,356 Speaker 2: it sank that gold was just gone. Yeah, so that 163 00:07:55,476 --> 00:07:58,756 Speaker 2: meant that now the whole economy had to function on 164 00:07:58,876 --> 00:08:01,876 Speaker 2: less money. So there was literally less less money to 165 00:08:01,876 --> 00:08:03,716 Speaker 2: buy all the stuff you wanted to buy. So I 166 00:08:03,716 --> 00:08:06,996 Speaker 2: think in the modern world we never really worry about 167 00:08:07,036 --> 00:08:10,116 Speaker 2: having enough money to buy stuff. That's not a concern, 168 00:08:10,796 --> 00:08:13,316 Speaker 2: But in the in this era, you really did. And 169 00:08:13,356 --> 00:08:16,356 Speaker 2: another example of this was actually the interest rates before 170 00:08:16,356 --> 00:08:18,916 Speaker 2: the founding of the FED, they actually went up during 171 00:08:18,956 --> 00:08:22,516 Speaker 2: the harvest season, and the reason was the farmers needed 172 00:08:22,516 --> 00:08:25,396 Speaker 2: a lot of money to transact during the harvest season, 173 00:08:25,676 --> 00:08:27,996 Speaker 2: and because there was no Federal Reserve, there was basically 174 00:08:28,036 --> 00:08:31,316 Speaker 2: a fixed quantity of money. And when more people weren't 175 00:08:31,356 --> 00:08:32,236 Speaker 2: the farmers. 176 00:08:31,876 --> 00:08:34,316 Speaker 1: One of the more transactions, there's more demand for the 177 00:08:34,396 --> 00:08:35,276 Speaker 1: money cause the. 178 00:08:35,276 --> 00:08:38,396 Speaker 2: Interest rate exactly exactly, so it was actually seasonal. So 179 00:08:38,476 --> 00:08:41,636 Speaker 2: one of the early reasons, aside from you know, dealing 180 00:08:41,636 --> 00:08:44,316 Speaker 2: with the banking panics, that was used for why you 181 00:08:44,316 --> 00:08:45,796 Speaker 2: had to have the founding of the Federal Reserve is 182 00:08:45,836 --> 00:08:49,556 Speaker 2: what they called a more elastic currency. Elastic, you know, 183 00:08:49,556 --> 00:08:52,036 Speaker 2: in the sense of an elastic fad means that when 184 00:08:52,076 --> 00:08:54,916 Speaker 2: people want more money than the FED provides more money. 185 00:08:55,196 --> 00:08:57,316 Speaker 2: So that was one of the earliest functions. And even 186 00:08:57,356 --> 00:08:59,036 Speaker 2: just in terms of the seasons of the year, there's 187 00:08:59,036 --> 00:09:00,636 Speaker 2: some times a year when people want more money. 188 00:09:00,716 --> 00:09:02,916 Speaker 1: We don't get to this till nineteen thirteen, that's right. 189 00:09:02,996 --> 00:09:05,996 Speaker 1: So you're saying, for this country operated for one hundred 190 00:09:05,996 --> 00:09:08,756 Speaker 1: and fifty years basically with this. 191 00:09:08,796 --> 00:09:12,076 Speaker 2: Money's right, and everybody just live with it, lived with it, 192 00:09:12,156 --> 00:09:14,876 Speaker 2: but in various ways poorly. I mean, there were a 193 00:09:14,876 --> 00:09:18,996 Speaker 2: lot of banking crises. You know, we've seen one serious 194 00:09:19,076 --> 00:09:22,116 Speaker 2: banking crisis in the United States since the Great Depression. 195 00:09:23,116 --> 00:09:25,716 Speaker 2: Imagine if that was happening all the time. 196 00:09:25,596 --> 00:09:28,356 Speaker 1: Right, So the thing that gets created in nineteen thirteen, 197 00:09:28,356 --> 00:09:31,716 Speaker 1: what does it explain to me? So I really understand 198 00:09:31,756 --> 00:09:36,156 Speaker 1: it what it's doing, Like, Okay, it's a building somewhere 199 00:09:36,516 --> 00:09:39,596 Speaker 1: with some people in it who have some relationship to 200 00:09:39,676 --> 00:09:42,556 Speaker 1: all the banks in the country. What is that relationship. 201 00:09:43,116 --> 00:09:47,236 Speaker 2: Well, it's it's willing to provide money. So a basic 202 00:09:47,316 --> 00:09:51,036 Speaker 2: situation is so we talked about the case of the harvest. 203 00:09:51,476 --> 00:09:55,716 Speaker 2: So suppose interest rates are rising because people want to 204 00:09:55,796 --> 00:09:58,676 Speaker 2: use more money, but there's no more gold. So if 205 00:09:58,716 --> 00:10:01,436 Speaker 2: you had a very strict kind of system of how 206 00:10:01,596 --> 00:10:03,476 Speaker 2: the ratio between the amount of money and the amount 207 00:10:03,476 --> 00:10:05,236 Speaker 2: of gold, then interests are going to rise. But in 208 00:10:05,276 --> 00:10:06,916 Speaker 2: this case, the central bank is going to say, no, 209 00:10:07,156 --> 00:10:08,396 Speaker 2: we're just going to provide more money. 210 00:10:08,396 --> 00:10:10,356 Speaker 1: So we're not going to Does that mean we are 211 00:10:10,356 --> 00:10:11,676 Speaker 1: abandoned the gold standard? 212 00:10:12,076 --> 00:10:15,716 Speaker 2: So the gold standard is a very complicated concept. Okay. 213 00:10:15,756 --> 00:10:18,636 Speaker 2: The most basic idea in the gold standard is that 214 00:10:18,716 --> 00:10:23,556 Speaker 2: you will exchange one dollar bill for a certain amount 215 00:10:23,556 --> 00:10:26,156 Speaker 2: of gold. And that's how people usually refer to what 216 00:10:26,196 --> 00:10:27,916 Speaker 2: it means to be on a gold standard. And that 217 00:10:28,076 --> 00:10:31,276 Speaker 2: was true before and after the founding of the FED 218 00:10:31,436 --> 00:10:33,716 Speaker 2: until Roosevelt went off gold. 219 00:10:33,956 --> 00:10:36,596 Speaker 1: If so, but how if they can just print money 220 00:10:36,596 --> 00:10:40,316 Speaker 1: whenever in nineteen fourteen, yes, after they've created this bank, right, right, 221 00:10:40,316 --> 00:10:43,236 Speaker 1: how can they maintain the same price of gold? 222 00:10:43,356 --> 00:10:43,516 Speaker 4: Right? 223 00:10:43,996 --> 00:10:47,236 Speaker 1: More paper for the same amount of gold means the 224 00:10:47,236 --> 00:10:48,236 Speaker 1: gold should be. 225 00:10:48,676 --> 00:10:51,036 Speaker 2: So did you know that today you actually cannot go 226 00:10:51,156 --> 00:10:52,636 Speaker 2: to the Fed and ask for gold. 227 00:10:52,796 --> 00:10:53,436 Speaker 1: I did know that. 228 00:10:53,516 --> 00:11:00,356 Speaker 2: So it turns out that that money is something that 229 00:11:00,476 --> 00:11:03,316 Speaker 2: has value in and of itself, even if you can't 230 00:11:03,396 --> 00:11:06,196 Speaker 2: exchange it for gold. So it's not entirely such a 231 00:11:06,196 --> 00:11:09,476 Speaker 2: strict relationship. And there are these two things all the 232 00:11:09,476 --> 00:11:14,876 Speaker 2: gold standard. One is that there's this fixed exchange rate 233 00:11:14,996 --> 00:11:18,756 Speaker 2: of money for gold. But the second is this idea 234 00:11:18,796 --> 00:11:21,116 Speaker 2: of a gold cover ratio that you're actually holding some 235 00:11:21,276 --> 00:11:25,996 Speaker 2: real asset to return for any paper money that you're given. 236 00:11:26,316 --> 00:11:29,396 Speaker 2: But the second part, like how much real assets do 237 00:11:29,396 --> 00:11:31,756 Speaker 2: you have to hold for each dollar, that doesn't have 238 00:11:31,836 --> 00:11:34,636 Speaker 2: to be so inflexible. You know, this is something it 239 00:11:34,676 --> 00:11:37,516 Speaker 2: can vary over time, and in practice, all of the 240 00:11:37,556 --> 00:11:40,916 Speaker 2: countries central banks who are running a gold standard during 241 00:11:40,916 --> 00:11:43,916 Speaker 2: this period of time, their gold cover ratio would. 242 00:11:43,796 --> 00:11:46,116 Speaker 1: Vary over time, but the gold price wouldn't change. 243 00:11:46,436 --> 00:11:47,436 Speaker 2: That's what it meant to be onest. 244 00:11:47,756 --> 00:11:50,876 Speaker 1: So after the central bank is created, the Federal Reserve 245 00:11:50,956 --> 00:11:53,476 Speaker 1: is created in nineteen thirteen, I could still go in 246 00:11:54,036 --> 00:11:57,396 Speaker 1: with my dollars and get gold at the same price. 247 00:11:57,996 --> 00:12:01,236 Speaker 1: So even though they printed dollars, at what point does 248 00:12:01,356 --> 00:12:03,716 Speaker 1: who's the first person to point out that, oh, maybe 249 00:12:03,716 --> 00:12:05,436 Speaker 1: they don't have enough gold for all the dollars. 250 00:12:05,516 --> 00:12:11,076 Speaker 2: So those are called runs, and that happened substantially in 251 00:12:11,116 --> 00:12:14,036 Speaker 2: the early stages of the Great Depression. So all of 252 00:12:14,076 --> 00:12:16,876 Speaker 2: a sudden you had this situation where people should to 253 00:12:16,876 --> 00:12:19,156 Speaker 2: show up at banks and ask for their money back. 254 00:12:19,756 --> 00:12:23,876 Speaker 2: And the Federal Reserve did not provide that money, and 255 00:12:24,476 --> 00:12:26,316 Speaker 2: you know, something like half of all the banks in 256 00:12:26,316 --> 00:12:30,676 Speaker 2: the United States failed, and you could ask why, and 257 00:12:30,836 --> 00:12:33,596 Speaker 2: there you do end up coming back to the gold standard, 258 00:12:33,676 --> 00:12:37,276 Speaker 2: because the fundamental fear that the US Federal Reserve had 259 00:12:37,356 --> 00:12:41,196 Speaker 2: at the time was that itself itself would face a run. 260 00:12:41,076 --> 00:12:43,716 Speaker 1: The government did not have enough gold, and everybody would 261 00:12:43,716 --> 00:12:45,756 Speaker 1: know it, and so they'd be a race to get 262 00:12:46,036 --> 00:12:48,076 Speaker 1: your gold out before it was gone exactly. 263 00:12:48,116 --> 00:12:52,316 Speaker 2: And today there's an academic debate on how constraining that 264 00:12:52,476 --> 00:12:55,676 Speaker 2: really was. I mean, the Fed in the early nineteen 265 00:12:55,716 --> 00:12:58,076 Speaker 2: thirties actually had a pretty decent amount of gold, so 266 00:12:58,156 --> 00:13:02,996 Speaker 2: perhaps they could have withstood the pressure, but they didn't 267 00:13:03,236 --> 00:13:05,756 Speaker 2: think they could, or they certainly worried about it, and 268 00:13:05,836 --> 00:13:09,276 Speaker 2: so that had a real impact on interest rates on 269 00:13:09,316 --> 00:13:11,676 Speaker 2: the extent to which they were willing to provide money 270 00:13:11,996 --> 00:13:15,156 Speaker 2: to banks during this period, and it ended up with 271 00:13:15,396 --> 00:13:18,636 Speaker 2: just a huge amount of banks failing and complete breakdown 272 00:13:18,676 --> 00:13:19,636 Speaker 2: of the financial system. 273 00:13:19,996 --> 00:13:23,356 Speaker 1: So this thing gets created in nineteen thirteen, it isn't 274 00:13:23,396 --> 00:13:28,356 Speaker 1: really tested until the nineteen twenty nine and then their thirties. 275 00:13:28,996 --> 00:13:32,516 Speaker 1: The Federal Reserve was supposed to come in and prevent 276 00:13:32,876 --> 00:13:37,076 Speaker 1: depressions on the back of banking crises. It doesn't do it. 277 00:13:37,636 --> 00:13:42,756 Speaker 1: The depression happens, like half the GNP was lost, you know, 278 00:13:43,436 --> 00:13:48,556 Speaker 1: it was economically catastrophic unemployment of whatever thirty percent. So 279 00:13:48,596 --> 00:13:51,276 Speaker 1: what is explain what they did in that period. 280 00:13:51,596 --> 00:13:54,236 Speaker 2: So I think the first thing to say is that 281 00:13:54,236 --> 00:13:57,556 Speaker 2: the FED actually had a hand in the onset of 282 00:13:57,596 --> 00:14:01,156 Speaker 2: the Great Depression in the sense that, you know, stock 283 00:14:01,236 --> 00:14:03,796 Speaker 2: markets were really booming in the late twenties, and the 284 00:14:03,836 --> 00:14:07,196 Speaker 2: FED actually raised interest rates. So that's that's the first thing. 285 00:14:07,236 --> 00:14:09,556 Speaker 2: So the FED thought that, you know, that there was 286 00:14:09,596 --> 00:14:11,356 Speaker 2: too much speculation on Wall Street and so on. They 287 00:14:11,396 --> 00:14:12,236 Speaker 2: raised interest rates. 288 00:14:12,276 --> 00:14:15,556 Speaker 1: But people the speculation in particular, people were borrowing money 289 00:14:15,596 --> 00:14:18,036 Speaker 1: to buy stocks, right, and it made them upset, right, 290 00:14:18,316 --> 00:14:20,596 Speaker 1: and so they said, we're going to try to stop 291 00:14:20,596 --> 00:14:23,356 Speaker 1: that activity. It was creating this boom in the stock market, right. 292 00:14:23,236 --> 00:14:25,836 Speaker 2: So then they raise interest rates, and of course it 293 00:14:25,876 --> 00:14:28,236 Speaker 2: does lead to a slow down in the economy. The 294 00:14:28,236 --> 00:14:30,796 Speaker 2: banks start to fail, and once the banks start to fail, 295 00:14:30,876 --> 00:14:33,676 Speaker 2: there's a panic. At this point in time, there's no 296 00:14:33,756 --> 00:14:37,436 Speaker 2: deposit insurance, so you really did have to worry that 297 00:14:37,636 --> 00:14:39,836 Speaker 2: if you had your money in a bank see it 298 00:14:39,876 --> 00:14:43,756 Speaker 2: again exactly. So then what happens is that people start 299 00:14:43,756 --> 00:14:46,676 Speaker 2: withdrawing their money from the banks, and there's this thing that, 300 00:14:46,836 --> 00:14:48,756 Speaker 2: you know, all the money that's out there is actually 301 00:14:48,796 --> 00:14:51,916 Speaker 2: much more than just the cash or the gold. There's 302 00:14:51,956 --> 00:14:53,876 Speaker 2: this idea of the money multiplier that if you put 303 00:14:53,876 --> 00:14:56,356 Speaker 2: your money in a bank and then they lend out 304 00:14:56,436 --> 00:14:58,916 Speaker 2: ninety percent of it, that creates a lot more money. 305 00:14:58,956 --> 00:15:00,756 Speaker 2: But then when they take the money out of the bank, 306 00:15:00,836 --> 00:15:03,796 Speaker 2: it means that exactly. And of course some of the 307 00:15:03,836 --> 00:15:06,596 Speaker 2: money that's being created a deposited in other banks, and 308 00:15:06,676 --> 00:15:09,076 Speaker 2: so there's this chain reaction where the banks start to fail. 309 00:15:09,756 --> 00:15:12,436 Speaker 2: But at this point in time, the FED doesn't see 310 00:15:12,476 --> 00:15:19,076 Speaker 2: itself as an institution that was designed to manage the 311 00:15:19,116 --> 00:15:20,716 Speaker 2: economy in the same way that is today. 312 00:15:20,796 --> 00:15:21,196 Speaker 1: It didn't. 313 00:15:21,316 --> 00:15:23,116 Speaker 2: The FED was really still learning its job. 314 00:15:29,556 --> 00:15:32,676 Speaker 5: How did the Volkswagen Beetle go from being Hitler's dream 315 00:15:32,756 --> 00:15:36,076 Speaker 5: car to a hippie icon. How did a disgruntled center 316 00:15:36,116 --> 00:15:39,836 Speaker 5: fielder change the business of sports? I'm Jacob Goldstein, and 317 00:15:39,956 --> 00:15:42,756 Speaker 5: on Business History, my co host Robert Smith and I 318 00:15:42,796 --> 00:15:45,796 Speaker 5: dig into the people and companies who created the modern world. 319 00:15:46,196 --> 00:15:49,796 Speaker 5: Business history is full of innovations and failures, and insights 320 00:15:49,796 --> 00:15:53,036 Speaker 5: into how business works today. At the end of today's 321 00:15:53,076 --> 00:15:55,076 Speaker 5: episode of Against the Rules, we're going to play a 322 00:15:55,076 --> 00:15:59,396 Speaker 5: clip from our episode about Jim Simon's decades ago. Simon's 323 00:15:59,516 --> 00:16:03,996 Speaker 5: basically invented modern algorithmic trading, and after a few early hiccups, 324 00:16:04,276 --> 00:16:07,916 Speaker 5: including buying up all the potatoes in Maine, Simon's built 325 00:16:07,916 --> 00:16:12,276 Speaker 5: a machine that generated had incredible returns for decades. The 326 00:16:12,276 --> 00:16:15,156 Speaker 5: show is called Business History, and the previews coming up. 327 00:16:15,236 --> 00:16:17,876 Speaker 5: At the end of today's episode of Against the Rules. 328 00:16:21,236 --> 00:16:24,036 Speaker 1: I'm back with the economist Emmy Nackhambrock talking about the 329 00:16:24,116 --> 00:16:26,756 Speaker 1: surprisingly dramatic history of the Federal Reserve. 330 00:16:27,396 --> 00:16:30,436 Speaker 2: At many points in the history of central banks, they've 331 00:16:30,436 --> 00:16:32,956 Speaker 2: played this rule of raising money for the government, and 332 00:16:33,036 --> 00:16:35,556 Speaker 2: in the United States, this is one of the things 333 00:16:35,556 --> 00:16:38,276 Speaker 2: the FED was doing during the Korean War. And there 334 00:16:38,396 --> 00:16:42,636 Speaker 2: was some tension between the Fed and the Treasury during 335 00:16:42,676 --> 00:16:45,196 Speaker 2: this period of time, because you know, the Fed was 336 00:16:45,196 --> 00:16:47,556 Speaker 2: starting to get concerned about inflation, and of course the 337 00:16:47,596 --> 00:16:53,276 Speaker 2: Treasury wanted wanted to borrow more money exactly, and so 338 00:16:53,716 --> 00:16:56,956 Speaker 2: partly out of this antagonism, there was this Fed Treasury 339 00:16:56,996 --> 00:16:59,956 Speaker 2: accord in which there was an agreement that the FED 340 00:17:00,036 --> 00:17:03,956 Speaker 2: was going to be able to manage interest rates to 341 00:17:04,116 --> 00:17:08,156 Speaker 2: sort of support the economy, but also to manage inflation. 342 00:17:08,276 --> 00:17:11,636 Speaker 2: And that Fed Treasury record is typically viewed as the 343 00:17:11,676 --> 00:17:14,956 Speaker 2: start of modern monetary policy, when exactly was that nineteen 344 00:17:14,996 --> 00:17:15,596 Speaker 2: fifty one. 345 00:17:15,516 --> 00:17:17,796 Speaker 1: And so the FED now is going to be granted 346 00:17:17,796 --> 00:17:21,836 Speaker 1: some independence and it's going to manage interest rates. That's 347 00:17:21,836 --> 00:17:23,516 Speaker 1: going to be the thing it does, right, which is 348 00:17:23,556 --> 00:17:25,956 Speaker 1: effectively managing money. So it's a price of money, right. 349 00:17:27,116 --> 00:17:30,396 Speaker 2: The next major event that happens is in the nineteen 350 00:17:30,436 --> 00:17:33,596 Speaker 2: seventies and early nineteen eighties. So the early nineteen seventies 351 00:17:33,636 --> 00:17:36,836 Speaker 2: are the time period of the most explicit political pressure 352 00:17:36,956 --> 00:17:39,036 Speaker 2: on the FED. So this is a time when you 353 00:17:39,116 --> 00:17:43,516 Speaker 2: have Nixon as president and you have Arthur Burns as 354 00:17:43,636 --> 00:17:46,476 Speaker 2: Chair of the FED, and we now know, based on 355 00:17:46,836 --> 00:17:48,956 Speaker 2: tapes and so on of their conversations that there was 356 00:17:49,076 --> 00:17:50,596 Speaker 2: a lot of political. 357 00:17:50,076 --> 00:17:52,316 Speaker 1: Pressure Nixon screaming in him to lower interest. 358 00:17:52,076 --> 00:17:56,636 Speaker 2: Rates exactly, and then you know, fastward he does, absolutely 359 00:17:57,196 --> 00:18:00,476 Speaker 2: fast forward, you know several years and inflation is really 360 00:18:00,516 --> 00:18:02,636 Speaker 2: really high, and what we see is that people actually 361 00:18:02,716 --> 00:18:05,956 Speaker 2: hate high inflation. And then this amazing thing happens that 362 00:18:05,996 --> 00:18:09,396 Speaker 2: you have Paul Volker who gets to interview for the 363 00:18:09,516 --> 00:18:12,636 Speaker 2: job of Chairman of the FED, and in his interview 364 00:18:13,236 --> 00:18:15,836 Speaker 2: he explains what he's going to do. He says, I 365 00:18:15,836 --> 00:18:18,796 Speaker 2: don't think gradualism really works. I don't think it's going 366 00:18:18,876 --> 00:18:21,236 Speaker 2: to work to you know, just raise interest rates a 367 00:18:21,276 --> 00:18:22,916 Speaker 2: little bit. I think we're going to have to go 368 00:18:23,036 --> 00:18:26,316 Speaker 2: all out and raise interest rates dramatically. So then he 369 00:18:26,396 --> 00:18:30,076 Speaker 2: goes home and he tells, is you know his wife, 370 00:18:30,476 --> 00:18:32,636 Speaker 2: I don't. I don't think I got the job because 371 00:18:33,516 --> 00:18:35,516 Speaker 2: no politicians is gonna let him do it exactly. And 372 00:18:35,516 --> 00:18:36,796 Speaker 2: then amazingly he gets the job. 373 00:18:37,156 --> 00:18:38,516 Speaker 1: Who gives him the job Carter? 374 00:18:38,756 --> 00:18:41,116 Speaker 2: Carter gives him the job and then loses. It's very 375 00:18:41,156 --> 00:18:43,236 Speaker 2: probably probably over this, so. 376 00:18:43,636 --> 00:18:47,716 Speaker 1: It's an incredibly brave and self sacrificing thing to have done. 377 00:18:48,036 --> 00:18:52,716 Speaker 2: Yes, but inflation was also really unpopular, So I think 378 00:18:52,876 --> 00:18:55,036 Speaker 2: that's something that maybe I didn't have a sense of 379 00:18:55,316 --> 00:18:58,236 Speaker 2: in the politics of until I saw the inflation during COVID. 380 00:18:58,436 --> 00:18:59,876 Speaker 2: People really hate inflation. 381 00:19:00,036 --> 00:19:03,196 Speaker 1: So let me stop you there. Because people hate inflation 382 00:19:03,636 --> 00:19:07,516 Speaker 1: above a certain number, Yes, they're completely fine with steady, 383 00:19:07,556 --> 00:19:09,196 Speaker 1: small inflation, right, So what's. 384 00:19:08,996 --> 00:19:12,556 Speaker 2: The number I think this is something we've been learning about. 385 00:19:12,676 --> 00:19:16,276 Speaker 2: So right now, the FED tries to target two percent inflation, and. 386 00:19:17,156 --> 00:19:19,036 Speaker 1: We all say that's fine, that's right, But if it 387 00:19:19,076 --> 00:19:21,476 Speaker 1: gets to be five percent, we all get furious. 388 00:19:21,076 --> 00:19:24,116 Speaker 2: Right, And the question of where that line is is 389 00:19:24,116 --> 00:19:27,676 Speaker 2: not something we have, you know, scientific evidence on psychological matters. 390 00:19:27,716 --> 00:19:30,796 Speaker 2: It is absolutely psychological. And you know, right now inflation 391 00:19:30,996 --> 00:19:33,476 Speaker 2: is close to three percent, and so there's this obvious 392 00:19:33,556 --> 00:19:35,516 Speaker 2: question maybe we should just leave it at three percent. 393 00:19:35,636 --> 00:19:37,596 Speaker 2: And then the question is how angry does three percent 394 00:19:37,596 --> 00:19:39,476 Speaker 2: inflation make it? And if you talk to people who 395 00:19:39,476 --> 00:19:41,196 Speaker 2: are a little bit older, remember the period of the 396 00:19:41,276 --> 00:19:44,396 Speaker 2: nineteen eighties and so on, they'll say people were five 397 00:19:44,396 --> 00:19:46,916 Speaker 2: with three percent inflation. But then, on the other hand, 398 00:19:46,956 --> 00:19:48,956 Speaker 2: from the perspective of the FED, there's this whole slippery 399 00:19:48,956 --> 00:19:50,916 Speaker 2: slope issue that if we go from two to three, 400 00:19:51,396 --> 00:19:52,236 Speaker 2: you know, who know, we. 401 00:19:52,236 --> 00:19:53,996 Speaker 1: Acclimate them to three, then all of a sudden they'll 402 00:19:53,996 --> 00:19:57,756 Speaker 1: be okay with four exactly. Yeah, Okay, that's but that's interesting, right. 403 00:19:57,916 --> 00:20:01,516 Speaker 1: It's like, it isn't that people hate inflation. People actually 404 00:20:01,596 --> 00:20:05,116 Speaker 1: kind of secretly like inflation in little in small amounts. 405 00:20:04,876 --> 00:20:07,396 Speaker 2: Below two percent. We mostly just don't think about inflation. 406 00:20:07,636 --> 00:20:12,516 Speaker 1: Yes, all right, So Jimmy Carter appoints Paul Volker to 407 00:20:12,556 --> 00:20:14,516 Speaker 1: be the head of the FED in a period of 408 00:20:14,596 --> 00:20:18,396 Speaker 1: high inflation in which everybody's angry about the inflation. And 409 00:20:18,436 --> 00:20:19,036 Speaker 1: what does he do. 410 00:20:19,836 --> 00:20:22,516 Speaker 2: He raises interest rates to something close to twenty percent 411 00:20:22,756 --> 00:20:23,836 Speaker 2: short term rates, that's. 412 00:20:23,756 --> 00:20:28,516 Speaker 1: Right, And how does he do that politically? Like, how 413 00:20:28,516 --> 00:20:29,876 Speaker 1: does he even pull that off? 414 00:20:30,236 --> 00:20:32,036 Speaker 2: It is extremely unpopular. 415 00:20:32,076 --> 00:20:34,076 Speaker 1: Can you imagine someone doing that right now? If we 416 00:20:34,116 --> 00:20:36,876 Speaker 1: woke up tomorrow morning and all of a sudden, the 417 00:20:37,676 --> 00:20:40,396 Speaker 1: FED rate was twenty percent, so your credit card rate 418 00:20:40,436 --> 00:20:43,476 Speaker 1: was forty percent or whatever it was, thirty percent or 419 00:20:43,476 --> 00:20:46,356 Speaker 1: whatever it would be. I mean, they'd be cataclysmic for people. 420 00:20:46,716 --> 00:20:48,796 Speaker 2: What's amazing is that he didn't get fired. 421 00:20:49,036 --> 00:20:51,316 Speaker 1: It sounds like it's almost more of a norm shift 422 00:20:51,316 --> 00:20:52,196 Speaker 1: than a legal shift. 423 00:20:52,596 --> 00:20:53,356 Speaker 2: I think that's right. 424 00:20:53,956 --> 00:20:57,356 Speaker 1: So the institution is the institution, but the norms around 425 00:20:57,396 --> 00:21:00,316 Speaker 1: the institution are changing, and we've realized that we kind 426 00:21:00,356 --> 00:21:03,556 Speaker 1: of need it to be independent for all of us 427 00:21:03,596 --> 00:21:04,956 Speaker 1: to be to prosper. 428 00:21:05,036 --> 00:21:07,436 Speaker 2: That's right, And in so many of our institutions there's 429 00:21:07,476 --> 00:21:10,876 Speaker 2: this complicated relationship between norms and rules. So this is 430 00:21:10,916 --> 00:21:13,756 Speaker 2: one of the most important ideas in monetary economics that 431 00:21:14,196 --> 00:21:18,316 Speaker 2: if politicians have short horizons, they don't have very long 432 00:21:18,436 --> 00:21:20,796 Speaker 2: until they need to get elected again, and in this 433 00:21:20,956 --> 00:21:24,116 Speaker 2: short period of time they want to boost the economy. 434 00:21:24,676 --> 00:21:26,516 Speaker 2: But on the other hand, if you have a really 435 00:21:26,596 --> 00:21:29,556 Speaker 2: high inflation period like the United States did around nineteen eighty, 436 00:21:29,796 --> 00:21:32,116 Speaker 2: and people start to expect this high inflation and they 437 00:21:32,116 --> 00:21:34,476 Speaker 2: build it into wage contracts and all kinds of things, 438 00:21:34,596 --> 00:21:37,796 Speaker 2: it can take a decade to bring inflation down, and 439 00:21:37,796 --> 00:21:39,716 Speaker 2: so that's something that's mostly going to affect a lot 440 00:21:39,716 --> 00:21:43,076 Speaker 2: of future politicians. So there's always this tension, and any 441 00:21:43,116 --> 00:21:47,116 Speaker 2: country that you read about with central banking, this tension 442 00:21:47,156 --> 00:21:48,676 Speaker 2: is sort of front and center. On top of that, 443 00:21:48,676 --> 00:21:50,556 Speaker 2: the government often also just wants to borrow a lot 444 00:21:50,596 --> 00:21:53,076 Speaker 2: of money. So that's another reason why the government wants 445 00:21:53,116 --> 00:21:56,516 Speaker 2: to keep interest rates low, and central bank independence is 446 00:21:56,556 --> 00:21:58,276 Speaker 2: all about trying to manage that tension. 447 00:21:58,476 --> 00:22:00,196 Speaker 1: I was just thinking back to the time when they 448 00:22:00,196 --> 00:22:03,356 Speaker 1: were kings. That's right, that a king actually might be 449 00:22:03,476 --> 00:22:05,676 Speaker 1: quite reasonable about what you do with the money supply, 450 00:22:05,876 --> 00:22:08,636 Speaker 1: because he's going to pay the price if you do 451 00:22:08,796 --> 00:22:12,036 Speaker 1: lower interest rates and jack up the economy artificially. 452 00:22:12,116 --> 00:22:14,396 Speaker 2: For a couple of years, and yet monetary policy was 453 00:22:14,556 --> 00:22:18,276 Speaker 2: terrible during this era, and I attribute that mostly to 454 00:22:18,316 --> 00:22:20,476 Speaker 2: the fact that they really just had had no idea 455 00:22:20,476 --> 00:22:25,556 Speaker 2: what was going on. So I think I think for humans, 456 00:22:25,916 --> 00:22:28,356 Speaker 2: the idea that you can print pieces of paper in 457 00:22:28,396 --> 00:22:32,076 Speaker 2: some form and use them as money and this will 458 00:22:32,116 --> 00:22:35,116 Speaker 2: sort of work out well is just actually a really 459 00:22:35,156 --> 00:22:38,156 Speaker 2: profound idea that takes people a long time to understand 460 00:22:38,236 --> 00:22:43,396 Speaker 2: and a long time to manage. 461 00:22:40,596 --> 00:22:44,276 Speaker 1: And a long time to understand who pays the price 462 00:22:44,356 --> 00:22:45,596 Speaker 1: if you introduce more. 463 00:22:45,756 --> 00:22:49,356 Speaker 2: Exactly exactly so you know, you look at what happened 464 00:22:49,436 --> 00:22:52,116 Speaker 2: in France, for example, under various kings, and there were 465 00:22:52,236 --> 00:22:55,196 Speaker 2: huge amounts of inflation as they created huge amounts of 466 00:22:55,356 --> 00:22:59,836 Speaker 2: money in various forms. And my sense is that a 467 00:22:59,836 --> 00:23:02,276 Speaker 2: lot of this was about just not really understanding cause 468 00:23:02,316 --> 00:23:03,996 Speaker 2: and effect. And I don't blame them. I think this 469 00:23:04,036 --> 00:23:08,556 Speaker 2: is a really subtle concept. There's this really fascinating example 470 00:23:08,556 --> 00:23:11,436 Speaker 2: of this island called the Island of Yap in which 471 00:23:11,756 --> 00:23:14,476 Speaker 2: it was one of the first ledger systems. So there 472 00:23:14,476 --> 00:23:18,356 Speaker 2: were these large stone coins, but they were not moveable, 473 00:23:18,676 --> 00:23:21,036 Speaker 2: and this was actually the monetary system. It was your 474 00:23:21,116 --> 00:23:25,756 Speaker 2: ownership of these stone coins, but they were a very 475 00:23:25,876 --> 00:23:26,796 Speaker 2: large size that. 476 00:23:26,836 --> 00:23:27,876 Speaker 1: You could move around. 477 00:23:27,996 --> 00:23:31,116 Speaker 2: You couldn't move them around, but everybody knew that you 478 00:23:31,156 --> 00:23:33,436 Speaker 2: owned one. So in fact, even if one sank to 479 00:23:33,476 --> 00:23:36,196 Speaker 2: the bottom of the ocean, it didn't matter. You could 480 00:23:36,196 --> 00:23:38,516 Speaker 2: still own a piece of it. So this was kind 481 00:23:38,556 --> 00:23:39,676 Speaker 2: of a very early sense. 482 00:23:39,676 --> 00:23:41,396 Speaker 1: And did they transact. 483 00:23:41,396 --> 00:23:42,836 Speaker 2: It was it was a ledger system, so it was 484 00:23:42,876 --> 00:23:46,196 Speaker 2: just your ownership in bitcoin exactly. It was exactly like 485 00:23:46,236 --> 00:23:50,476 Speaker 2: bitcoin on the island of Yap. That's great, but it's 486 00:23:50,476 --> 00:23:51,196 Speaker 2: a subtle idea. 487 00:23:51,276 --> 00:23:54,156 Speaker 1: But were the stones fixed so that you could never 488 00:23:54,236 --> 00:23:55,476 Speaker 1: introduce a new stone? 489 00:23:56,116 --> 00:23:57,716 Speaker 2: So that I think is the crucial thing, right that 490 00:23:57,796 --> 00:23:59,916 Speaker 2: you couldn't I don't know what the details were on 491 00:23:59,996 --> 00:24:03,356 Speaker 2: finding new stones, but they were large objects so that 492 00:24:03,556 --> 00:24:06,356 Speaker 2: it wasn't easy to create new ones. But later on, 493 00:24:06,756 --> 00:24:09,596 Speaker 2: you know, you had this difficulty that other societ that 494 00:24:09,636 --> 00:24:11,756 Speaker 2: came later but weren't as evolved in some sense as 495 00:24:11,796 --> 00:24:14,316 Speaker 2: the Island of Yap. They wanted to have coins that 496 00:24:14,356 --> 00:24:16,316 Speaker 2: you could actually transact with, that you could carry, that 497 00:24:16,356 --> 00:24:18,156 Speaker 2: you could pick up, and so that's kind of how 498 00:24:18,156 --> 00:24:20,516 Speaker 2: we got to gold. You want something that you can't 499 00:24:21,116 --> 00:24:23,956 Speaker 2: just create new gold, but at the same time, it's 500 00:24:23,956 --> 00:24:25,996 Speaker 2: small enough that you can transact in it. 501 00:24:26,196 --> 00:24:30,396 Speaker 1: I love this idea that a central bank as we now, 502 00:24:30,516 --> 00:24:33,796 Speaker 1: the central banks that we now have, are in part 503 00:24:33,836 --> 00:24:37,396 Speaker 1: just an expression of an evolved understanding of what money 504 00:24:37,476 --> 00:24:42,396 Speaker 1: is and how it works, and that we had to 505 00:24:42,476 --> 00:24:43,836 Speaker 1: they have a lot of trial and error. 506 00:24:43,956 --> 00:24:45,916 Speaker 2: Exactly exactly, all right, So. 507 00:24:46,316 --> 00:24:50,156 Speaker 1: Walk me from from Vulcar. When all of a sudden 508 00:24:50,156 --> 00:24:53,076 Speaker 1: we have basically the Federal Reserve that we now know, 509 00:24:53,596 --> 00:24:56,916 Speaker 1: very powerful head of the FED, who becomes a kind 510 00:24:56,916 --> 00:24:57,716 Speaker 1: of high priest of. 511 00:24:57,676 --> 00:25:00,876 Speaker 2: Money and becomes even more powerfully because he raised interestates 512 00:25:00,916 --> 00:25:03,796 Speaker 2: and it worked and inflation fell much more rapidly than 513 00:25:03,796 --> 00:25:04,516 Speaker 2: anyone expected. 514 00:25:04,596 --> 00:25:07,316 Speaker 1: Yes, so he's a success, inflicted a lot of pain, 515 00:25:07,796 --> 00:25:11,876 Speaker 1: but a success. And so from that moment we have 516 00:25:11,996 --> 00:25:14,516 Speaker 1: this character the head of the Fed, who everybody is 517 00:25:14,516 --> 00:25:16,876 Speaker 1: looking to as a kind of priest, the priest of money, 518 00:25:17,156 --> 00:25:21,436 Speaker 1: and who is regarded as outside the reach of politicians. 519 00:25:21,916 --> 00:25:25,476 Speaker 1: They can appoint him, they can grill him, but they 520 00:25:25,476 --> 00:25:27,276 Speaker 1: can't tell him what to do with the money supply. 521 00:25:27,516 --> 00:25:29,996 Speaker 2: So I think in a way that's an exaggeration, because 522 00:25:30,036 --> 00:25:33,556 Speaker 2: if you read the memoirs of central bankers, like for example, 523 00:25:33,636 --> 00:25:37,596 Speaker 2: Alan Greenspan. Even though you have central bank independence, he's 524 00:25:37,636 --> 00:25:40,596 Speaker 2: constantly interacting with members of Congress. 525 00:25:41,076 --> 00:25:42,756 Speaker 1: So it's not true to say that the FED is 526 00:25:42,796 --> 00:25:45,996 Speaker 1: not a political institution, but it's it's not a party 527 00:25:46,036 --> 00:25:49,196 Speaker 1: political institution. What it is is it's managing. It's got 528 00:25:49,236 --> 00:25:51,996 Speaker 1: to manage its relations, and it's more insulated. 529 00:25:51,996 --> 00:25:55,676 Speaker 2: There's no doubt that it has independence. But to say 530 00:25:55,676 --> 00:25:58,676 Speaker 2: that it doesn't have to worry about its independence at 531 00:25:58,716 --> 00:26:02,996 Speaker 2: all is an exaggeration, because there are always political pressures, 532 00:26:03,236 --> 00:26:06,636 Speaker 2: and it's clear that the FED chairs have never thought 533 00:26:06,716 --> 00:26:09,036 Speaker 2: that they could just completely ignore those political pressures. 534 00:26:09,836 --> 00:26:12,636 Speaker 1: Is it fair to say that from the moment that 535 00:26:12,996 --> 00:26:16,156 Speaker 1: Vulgar sort of reinvents the role of the head of 536 00:26:16,156 --> 00:26:18,796 Speaker 1: the FED, that role is not tested again until the 537 00:26:18,836 --> 00:26:20,476 Speaker 1: two thousand and eight financial crisis. 538 00:26:20,956 --> 00:26:22,996 Speaker 2: Yes, I think that was the biggest tust. 539 00:26:23,316 --> 00:26:25,596 Speaker 1: We're going to take a quick break, and when we return, 540 00:26:26,516 --> 00:26:28,716 Speaker 1: Emmy and I will talk about what the FED decided 541 00:26:28,756 --> 00:26:31,796 Speaker 1: to do as banks started to collapse in two thousand 542 00:26:31,836 --> 00:26:43,716 Speaker 1: and eight. I'm back with UC Berkeley economist Emmy Nakamarock 543 00:26:45,076 --> 00:26:47,756 Speaker 1: described to me the FED going into the financial crisis 544 00:26:47,796 --> 00:26:51,036 Speaker 1: and described to me who the players were, what happened 545 00:26:51,036 --> 00:26:52,236 Speaker 1: and what it did in response. 546 00:26:52,636 --> 00:26:56,516 Speaker 2: So Ben Bernanki was at the helm of the thunder 547 00:26:56,596 --> 00:26:58,076 Speaker 2: reserve going into the financials. 548 00:26:58,156 --> 00:26:58,676 Speaker 1: And who is he? 549 00:26:59,116 --> 00:27:03,876 Speaker 2: Ben Bernanki is a scholar who started his career by 550 00:27:03,916 --> 00:27:08,156 Speaker 2: studying the Great Depression, and then it's this incredible coincidence 551 00:27:09,196 --> 00:27:13,516 Speaker 2: that he happens to be the person who's chairman of 552 00:27:13,556 --> 00:27:17,276 Speaker 2: the FED at the time of the next big financial 553 00:27:17,316 --> 00:27:18,596 Speaker 2: crisis in the United States. 554 00:27:19,316 --> 00:27:21,956 Speaker 1: Let's quickly describe what this crisis looked like. 555 00:27:22,916 --> 00:27:25,996 Speaker 2: So going into the financial crisis, you'd had this enormous 556 00:27:26,036 --> 00:27:29,156 Speaker 2: real estate boom. House prices in the United States had 557 00:27:29,236 --> 00:27:32,236 Speaker 2: risen dramatically. This had peaked in two thousand and six, 558 00:27:32,996 --> 00:27:35,316 Speaker 2: so house paces were kind of on their way down 559 00:27:35,356 --> 00:27:38,516 Speaker 2: by two thousand and seven. But there was a general view, 560 00:27:38,596 --> 00:27:41,916 Speaker 2: including at the FED, that this might not be a 561 00:27:41,996 --> 00:27:45,996 Speaker 2: huge issue for the rest of the economy. 562 00:27:46,276 --> 00:27:47,956 Speaker 1: Thousands of prices go up, they go down, but it 563 00:27:47,956 --> 00:27:50,556 Speaker 1: doesn't really affect what Americans are doing with in their. 564 00:27:50,396 --> 00:27:54,196 Speaker 2: Economically exactly exactly. So at the very beginning, there were 565 00:27:54,196 --> 00:27:57,556 Speaker 2: a few hedge funds they lost some money on real 566 00:27:57,636 --> 00:28:01,036 Speaker 2: estate backed assets. But the view of the FED and 567 00:28:01,076 --> 00:28:02,636 Speaker 2: a lot of other people was that this was going 568 00:28:02,676 --> 00:28:04,876 Speaker 2: to be something that you could sort of sail through. 569 00:28:05,796 --> 00:28:09,796 Speaker 2: And so early on the monetary policy they interest rates 570 00:28:09,836 --> 00:28:13,196 Speaker 2: were over five percent. It was sort of normal monetary policy. 571 00:28:13,196 --> 00:28:15,036 Speaker 2: There wasn't at all a sense that this was going 572 00:28:15,076 --> 00:28:17,676 Speaker 2: to become a sort of historic event for the macro 573 00:28:17,716 --> 00:28:20,956 Speaker 2: economy as opposed to some elements of the financial system. 574 00:28:22,316 --> 00:28:26,556 Speaker 2: But then after this sort of benign starting point, you 575 00:28:26,676 --> 00:28:29,396 Speaker 2: started to see things happening more quickly. And so this 576 00:28:29,476 --> 00:28:32,396 Speaker 2: is the beginning of when the Fed in some sense 577 00:28:32,436 --> 00:28:35,636 Speaker 2: starts to gamble. It's independence. What they're arguing. What Bernanki 578 00:28:35,716 --> 00:28:40,156 Speaker 2: argues very forcefully, is that so he says he lived 579 00:28:40,196 --> 00:28:44,476 Speaker 2: as a child on street called Main Street. So he says, 580 00:28:44,596 --> 00:28:46,636 Speaker 2: I don't come from Wall Street. I come from Main Street, 581 00:28:46,876 --> 00:28:47,116 Speaker 2: you know. 582 00:28:47,116 --> 00:28:50,276 Speaker 4: I come from Main Street. That's my background. And I've 583 00:28:50,316 --> 00:28:52,596 Speaker 4: never been on Wall Street. And I care about Wall 584 00:28:52,596 --> 00:28:55,476 Speaker 4: Street for one reason and one reason only because what 585 00:28:55,556 --> 00:28:58,036 Speaker 4: happens on Wall Street matters to Main Street. 586 00:28:58,756 --> 00:29:02,316 Speaker 2: His dad was a pharmacist, you know. And he says, 587 00:29:02,716 --> 00:29:05,516 Speaker 2: the only reason I care about this is because people 588 00:29:05,556 --> 00:29:08,036 Speaker 2: like my dad will not be able to get alone. 589 00:29:08,196 --> 00:29:08,996 Speaker 1: Where do they end up? 590 00:29:09,116 --> 00:29:11,236 Speaker 2: What do they do they end up at that point 591 00:29:12,076 --> 00:29:16,196 Speaker 2: in a situation of backstopping a bunch of loans that 592 00:29:16,276 --> 00:29:18,876 Speaker 2: are made to bear Stearns. Basically, they take on some 593 00:29:18,956 --> 00:29:22,356 Speaker 2: of the worst parts of bear Sterns balance sheet so 594 00:29:22,396 --> 00:29:26,636 Speaker 2: that they facilitate private sector loans to bear Stearns and 595 00:29:27,276 --> 00:29:30,276 Speaker 2: they allow things to continue in a somewhat orderly manner. 596 00:29:30,636 --> 00:29:33,356 Speaker 2: So this is something which even at the time, there's 597 00:29:33,396 --> 00:29:38,276 Speaker 2: a lot of skepticism about, because, first of all, there's 598 00:29:38,316 --> 00:29:40,396 Speaker 2: the idea that, you know, what is the Fed doing 599 00:29:40,556 --> 00:29:42,956 Speaker 2: to be bailing out this private sector actor who made 600 00:29:42,956 --> 00:29:45,116 Speaker 2: a lot of mistakes. And second of all, there's the question, 601 00:29:46,236 --> 00:29:47,996 Speaker 2: even if it was a good idea in terms of 602 00:29:47,996 --> 00:29:50,836 Speaker 2: what's happening right now, shouldn't we be worried about what 603 00:29:50,876 --> 00:29:53,396 Speaker 2: this tells other banks about the risks they. 604 00:29:53,356 --> 00:29:56,596 Speaker 1: Bail you out too. It's kind of incredible this step, right, 605 00:29:57,116 --> 00:30:01,196 Speaker 1: You've got a character chairman of the Federal Reserve who, 606 00:30:01,356 --> 00:30:05,116 Speaker 1: only relatively recently in the grand sweep of history, has 607 00:30:05,196 --> 00:30:08,516 Speaker 1: by norm become this kind of like god of money 608 00:30:08,596 --> 00:30:13,396 Speaker 1: and God of finance, picking winners and losers in the economy. 609 00:30:13,956 --> 00:30:17,916 Speaker 1: So briefly, walk me through the rest of the financial crisis. 610 00:30:18,636 --> 00:30:21,196 Speaker 2: I think there's a hope that things will simmer down 611 00:30:21,316 --> 00:30:23,996 Speaker 2: after this point, and maybe for a period of time 612 00:30:24,196 --> 00:30:27,476 Speaker 2: it looks like they might, but there's still problems being 613 00:30:27,516 --> 00:30:29,156 Speaker 2: caused by these real estate assets. 614 00:30:29,396 --> 00:30:32,156 Speaker 1: All these banks have made really stupid loans, and. 615 00:30:32,116 --> 00:30:34,676 Speaker 2: You can sort of line them up in order of 616 00:30:35,276 --> 00:30:39,156 Speaker 2: which banks have the most of these that for me, 617 00:30:39,476 --> 00:30:42,476 Speaker 2: so Lehman is sort of next on the list. And 618 00:30:42,516 --> 00:30:45,556 Speaker 2: then the question is with these banks that are at 619 00:30:45,676 --> 00:30:48,436 Speaker 2: risk because they have a lot of these real estate 620 00:30:48,476 --> 00:30:51,036 Speaker 2: assets on their balance sheets, which have lost a lot 621 00:30:51,036 --> 00:30:53,516 Speaker 2: of money, there's a question of what does that bank do. 622 00:30:54,036 --> 00:30:57,156 Speaker 2: So if there was no one who was going to 623 00:30:57,236 --> 00:30:59,516 Speaker 2: help them, then a natural thing for them to do 624 00:30:59,556 --> 00:31:02,396 Speaker 2: would basically be to sell themselves to another bank which 625 00:31:02,396 --> 00:31:05,116 Speaker 2: had a stronger balance sheet. And actually there are some 626 00:31:05,276 --> 00:31:07,556 Speaker 2: banks that sell themselves during this period of time. But 627 00:31:07,556 --> 00:31:10,276 Speaker 2: there's a big pushback again that because there's of course 628 00:31:10,316 --> 00:31:13,156 Speaker 2: this hope that maybe the federal Reserve will will step 629 00:31:13,236 --> 00:31:15,476 Speaker 2: in and help you, right, And so this is one 630 00:31:15,516 --> 00:31:18,476 Speaker 2: of the immediate reasons why you start to see what 631 00:31:18,516 --> 00:31:21,916 Speaker 2: people call moral hazard, that if you think somebody might 632 00:31:21,996 --> 00:31:24,276 Speaker 2: save you, right, like you know, when you go hiking 633 00:31:24,356 --> 00:31:26,036 Speaker 2: or something like that, if you know that there's a 634 00:31:26,036 --> 00:31:28,476 Speaker 2: mountain patrol, then you might be a little bit more 635 00:31:28,476 --> 00:31:30,916 Speaker 2: blase about whether you might go on this you know, 636 00:31:31,036 --> 00:31:33,396 Speaker 2: tough mountain trail because you really want to go and 637 00:31:34,476 --> 00:31:36,436 Speaker 2: you think someone will save you in the event that 638 00:31:36,516 --> 00:31:38,436 Speaker 2: you kind of get stuck, you might do it. And 639 00:31:38,476 --> 00:31:41,396 Speaker 2: so this is this is happening over the over the 640 00:31:41,516 --> 00:31:44,756 Speaker 2: over the summer that you know, Leman, for example, you know, 641 00:31:44,836 --> 00:31:47,996 Speaker 2: clearly has these bad assets on its balance sheet. So 642 00:31:48,116 --> 00:31:52,996 Speaker 2: Leman actually becomes insolvent, bankrupt, and then there's some question. 643 00:31:52,796 --> 00:31:55,556 Speaker 1: S Nike does not save Lehman Brothers, right, if he 644 00:31:55,636 --> 00:31:58,876 Speaker 1: believes it's so important to save these places because of 645 00:31:58,956 --> 00:32:00,716 Speaker 1: what he's learned about the Great Depression, why does any 646 00:32:00,756 --> 00:32:01,556 Speaker 1: save Leman Brothers. 647 00:32:01,596 --> 00:32:04,796 Speaker 2: So in the aftermath that's become a big question. And 648 00:32:05,036 --> 00:32:08,036 Speaker 2: at the time, what Brnanki said was that it was 649 00:32:08,116 --> 00:32:10,796 Speaker 2: not within the federal reserves perview to do that, that 650 00:32:10,836 --> 00:32:14,036 Speaker 2: they simply didn't have enough good collateral. I've spoken to 651 00:32:15,116 --> 00:32:20,636 Speaker 2: various economists after this crisis, you know, including people on 652 00:32:20,716 --> 00:32:22,796 Speaker 2: the right of the political spectrum, and there are quite 653 00:32:22,796 --> 00:32:25,236 Speaker 2: a few people who will say that if they had 654 00:32:25,276 --> 00:32:27,236 Speaker 2: known how bad the financial crisis would be they they 655 00:32:27,276 --> 00:32:29,956 Speaker 2: would have said that the feed should have offered more support. 656 00:32:30,956 --> 00:32:34,276 Speaker 1: So you now have Lehman Brothers fail. Then what happens? 657 00:32:34,716 --> 00:32:38,276 Speaker 2: So after Lehman Brothers fail, then the whole financial market 658 00:32:38,316 --> 00:32:40,236 Speaker 2: really starts to freak out. And if you think about 659 00:32:40,276 --> 00:32:43,796 Speaker 2: the mortgage market, so this is something that affects you know, 660 00:32:43,876 --> 00:32:47,076 Speaker 2: lots of people, you know, including you know, like Ben 661 00:32:47,076 --> 00:32:49,956 Speaker 2: Bernanki's dad, the pharmacist, if he had been trying to 662 00:32:49,956 --> 00:32:53,716 Speaker 2: get a loan for his business at the time. That market, 663 00:32:53,756 --> 00:32:57,316 Speaker 2: all of these asset backed securities that were being used 664 00:32:57,356 --> 00:33:00,036 Speaker 2: to finance a lot of mortgages. That market is completely 665 00:33:00,116 --> 00:33:01,676 Speaker 2: falling apart during this period of time. 666 00:33:01,796 --> 00:33:03,836 Speaker 1: So now we're so we're in a vicious cycle of 667 00:33:03,876 --> 00:33:07,876 Speaker 1: mistrust and real problems. I want to stop right there, 668 00:33:07,876 --> 00:33:10,676 Speaker 1: and I want you to imagine from me, if from 669 00:33:10,676 --> 00:33:13,636 Speaker 1: that moment on, there is no Federal Reserve, there is 670 00:33:13,676 --> 00:33:16,876 Speaker 1: no central Bank, how do you think it plays out. 671 00:33:18,196 --> 00:33:20,356 Speaker 2: I think that a lot of banks would fail. 672 00:33:20,796 --> 00:33:22,116 Speaker 1: Do you think all of them would have failed? 673 00:33:22,316 --> 00:33:22,516 Speaker 4: No? 674 00:33:23,196 --> 00:33:25,836 Speaker 2: I mean my baseline starting point is this is the 675 00:33:25,876 --> 00:33:28,156 Speaker 2: Great Depression when half of them failed. But there were 676 00:33:28,196 --> 00:33:31,476 Speaker 2: some improvements relative the Great Depression, even without the Federal Reserve, 677 00:33:31,556 --> 00:33:34,956 Speaker 2: So in particular, there's deposit insurance, so that's sort of 678 00:33:35,236 --> 00:33:37,236 Speaker 2: keeping things a little bit more stable than you would 679 00:33:37,236 --> 00:33:39,676 Speaker 2: have seen without the Federal Reserve. But there are a 680 00:33:39,676 --> 00:33:43,316 Speaker 2: lot of sort of non bank bank like entities that 681 00:33:43,356 --> 00:33:47,276 Speaker 2: are out there that would have failed, and there would 682 00:33:47,276 --> 00:33:49,116 Speaker 2: have been a lot of fear associated with that. One 683 00:33:49,116 --> 00:33:53,716 Speaker 2: of the anecdotes that I remember people really thought was 684 00:33:53,756 --> 00:33:56,956 Speaker 2: scary at the time was was General Electric. I think 685 00:33:56,956 --> 00:33:58,996 Speaker 2: it was trying to get a working capital loone. A 686 00:33:59,036 --> 00:34:02,556 Speaker 2: working capital loone is just companies in general, when they 687 00:34:02,596 --> 00:34:04,836 Speaker 2: want to pay their employees, they often have to borrow 688 00:34:04,916 --> 00:34:07,396 Speaker 2: money because they have to pay their employees before they 689 00:34:07,436 --> 00:34:10,196 Speaker 2: get paid for the products that the employees are producing. 690 00:34:10,876 --> 00:34:14,156 Speaker 2: And so this type of loan is typically quite safe, 691 00:34:14,356 --> 00:34:17,516 Speaker 2: you know, happens at very low interest rates. But even 692 00:34:17,556 --> 00:34:21,716 Speaker 2: a company like General Electric was having trouble borrowing money 693 00:34:21,716 --> 00:34:26,236 Speaker 2: to pay its employees. So this idea that companies have 694 00:34:26,276 --> 00:34:28,596 Speaker 2: to borrow money even just to pay their employees, even 695 00:34:28,596 --> 00:34:31,236 Speaker 2: in the normal course of business, sort of tells you 696 00:34:31,796 --> 00:34:34,436 Speaker 2: what could have happened in the event that the financial 697 00:34:34,636 --> 00:34:37,036 Speaker 2: and financial system it sort of started to destruct in. 698 00:34:36,956 --> 00:34:38,876 Speaker 1: This So if we imagine a world in which is 699 00:34:38,916 --> 00:34:42,316 Speaker 1: just the irascibility of the American public and this suspicion 700 00:34:42,356 --> 00:34:45,436 Speaker 1: of centralized power and all the rest had got us 701 00:34:45,436 --> 00:34:47,716 Speaker 1: to two thousand, as far as two thousand and eight 702 00:34:47,876 --> 00:34:52,156 Speaker 1: without a central bank or or or without a FED 703 00:34:52,196 --> 00:34:55,796 Speaker 1: that's got real powers. Just how bad do you think 704 00:34:55,836 --> 00:34:58,516 Speaker 1: things could have gotten in the economy? What kind of unemployment? 705 00:34:58,796 --> 00:35:00,636 Speaker 1: What kind of cost a GDP? 706 00:35:01,796 --> 00:35:04,396 Speaker 2: I think you could have had, you know, twenty percent unemployment? 707 00:35:04,476 --> 00:35:07,636 Speaker 2: You know we had we had almost ten percent unemployment, 708 00:35:07,636 --> 00:35:09,436 Speaker 2: but you could have had twenty percent ONU employment. You 709 00:35:09,476 --> 00:35:12,196 Speaker 2: could have had, you know, investment sort of almost stop 710 00:35:12,236 --> 00:35:14,676 Speaker 2: for you to have another great depression something like that. 711 00:35:15,076 --> 00:35:20,356 Speaker 1: So Burneki goes into this with bear Stearn's eyes open, 712 00:35:20,796 --> 00:35:24,516 Speaker 1: realizing that he is jeopardizing the independence of the FED 713 00:35:25,756 --> 00:35:29,116 Speaker 1: gambling I would gambling gambling the independent FED, because he 714 00:35:29,236 --> 00:35:32,956 Speaker 1: knows that it's going to get hot politically when you 715 00:35:32,996 --> 00:35:36,676 Speaker 1: were picking winners and losers, when you are distorting. 716 00:35:36,156 --> 00:35:38,996 Speaker 2: Markets, and when there are always critics of the FED. 717 00:35:39,156 --> 00:35:41,396 Speaker 2: So there, if you look at Congress, there are always 718 00:35:41,436 --> 00:35:42,996 Speaker 2: people who are saying that we should go back to 719 00:35:43,036 --> 00:35:48,716 Speaker 2: the gold standard. So previously, the FED pretty narrowly had 720 00:35:48,796 --> 00:35:50,716 Speaker 2: a balance sheet. So if the FED is kind of 721 00:35:50,916 --> 00:35:55,756 Speaker 2: like a bank, it has assets and liabilities. The assets 722 00:35:55,836 --> 00:35:59,876 Speaker 2: were almost entirely government debt. So I mentioned before, US 723 00:35:59,956 --> 00:36:03,836 Speaker 2: government debt is viewed as the safest debt there is, right, right, So. 724 00:36:03,796 --> 00:36:06,516 Speaker 1: When they print money, they get collateral, right right, and 725 00:36:06,596 --> 00:36:10,916 Speaker 1: so so until two thousand and eight, that collateral is treasuries. 726 00:36:10,956 --> 00:36:13,356 Speaker 1: Did it used to be gold in gold? 727 00:36:13,476 --> 00:36:15,956 Speaker 2: Yes? Yes, And in fact the FED still has some gold. 728 00:36:16,156 --> 00:36:18,876 Speaker 1: Yes. And back in the day you want money, I 729 00:36:18,876 --> 00:36:20,756 Speaker 1: have to come for gold, and they give me some money. 730 00:36:20,836 --> 00:36:23,036 Speaker 2: And you can actually go to the New York Fed 731 00:36:23,156 --> 00:36:25,196 Speaker 2: and you can go on the gold tour. You can 732 00:36:25,236 --> 00:36:28,236 Speaker 2: see the gold. You can see they have gold in 733 00:36:28,316 --> 00:36:31,916 Speaker 2: little cages from different countries around the world. They have 734 00:36:32,396 --> 00:36:36,636 Speaker 2: special shoes, special titanium shoes that you wear when you're 735 00:36:36,676 --> 00:36:39,276 Speaker 2: holding a gold bar, because if you drop a gold 736 00:36:39,316 --> 00:36:41,636 Speaker 2: bar on your foot, you know you'll break your toes. 737 00:36:42,516 --> 00:36:43,156 Speaker 1: Is that true? 738 00:36:43,276 --> 00:36:47,036 Speaker 2: Yes? And they have a scale for measuring, you know, 739 00:36:47,196 --> 00:36:49,756 Speaker 2: gold in the event of a transaction from between two countries, 740 00:36:49,756 --> 00:36:52,196 Speaker 2: which just means moving one piece of gold from the 741 00:36:52,236 --> 00:36:54,916 Speaker 2: cage of one country to another country. And they have 742 00:36:54,956 --> 00:36:56,916 Speaker 2: a person who knows how to use this scale and 743 00:36:56,916 --> 00:36:59,556 Speaker 2: the titanium shoes. But when I visited the New York 744 00:36:59,556 --> 00:37:02,116 Speaker 2: FED and went on this gold tour, I asked them 745 00:37:02,156 --> 00:37:05,756 Speaker 2: when the last transaction, you know, it was like five 746 00:37:05,836 --> 00:37:10,076 Speaker 2: years ten years ago, you know, so I think you know, 747 00:37:10,236 --> 00:37:13,116 Speaker 2: we built like the stones and yap, you know, absolutely, 748 00:37:13,196 --> 00:37:14,316 Speaker 2: it's a relic, relic. 749 00:37:16,276 --> 00:37:18,596 Speaker 1: We went down on a rabbit hole there. But it's 750 00:37:19,196 --> 00:37:22,116 Speaker 1: so back to the two thousand and eight. Up to 751 00:37:22,156 --> 00:37:26,516 Speaker 1: this moment, the FED is accepting treasuries to get if 752 00:37:26,556 --> 00:37:30,236 Speaker 1: you want dollars, right, and now it will accept other things. 753 00:37:30,036 --> 00:37:30,476 Speaker 2: That's right. 754 00:37:30,516 --> 00:37:31,436 Speaker 1: What other things? 755 00:37:31,796 --> 00:37:36,676 Speaker 2: Well, for example, they're starting to loan against asset backed securities, 756 00:37:37,036 --> 00:37:38,996 Speaker 2: so in particular mortgage backed security. 757 00:37:39,036 --> 00:37:41,356 Speaker 1: So we talked about my home mortgage. 758 00:37:40,876 --> 00:37:43,236 Speaker 2: That's right. So we talked about the idea that you know, 759 00:37:43,276 --> 00:37:46,556 Speaker 2: the US housing market was starting to slow down, peaked 760 00:37:46,556 --> 00:37:48,836 Speaker 2: in two thousand and six, and there were all of 761 00:37:48,836 --> 00:37:52,156 Speaker 2: these mortgages. And it's not that the FED was holding 762 00:37:52,196 --> 00:37:55,476 Speaker 2: individual mortgages, but the banks had played a big role 763 00:37:55,676 --> 00:37:59,316 Speaker 2: in repackaging these mortgages into what we're called mortgage back securities, 764 00:37:59,476 --> 00:38:03,556 Speaker 2: and some of them are guaranteed by these quasi governmental 765 00:38:03,556 --> 00:38:03,956 Speaker 2: at the time. 766 00:38:03,996 --> 00:38:06,476 Speaker 1: Institutionals, they're almost like tragedy, that's right, But. 767 00:38:06,436 --> 00:38:09,076 Speaker 2: The market wasn't treating things that way at the time, 768 00:38:09,356 --> 00:38:11,716 Speaker 2: And so that's the sense at which it was a 769 00:38:11,756 --> 00:38:15,316 Speaker 2: real decision by the FED to be willing to take 770 00:38:15,356 --> 00:38:17,356 Speaker 2: these kinds of assets. 771 00:38:17,716 --> 00:38:20,036 Speaker 1: But if I'm the pharmacist on Main Street and I'm 772 00:38:20,036 --> 00:38:23,436 Speaker 1: just watching this from a distance, what it looks like is, oh, 773 00:38:23,516 --> 00:38:26,996 Speaker 1: these banks made these crappy loans. Now they get to 774 00:38:27,036 --> 00:38:29,476 Speaker 1: go take those loans to the FED, and the FED 775 00:38:29,516 --> 00:38:33,396 Speaker 1: will give them actual dollars for those loans, right, getting 776 00:38:33,396 --> 00:38:34,556 Speaker 1: them out of their problem. 777 00:38:34,716 --> 00:38:39,556 Speaker 2: Right, And that's not wrong. But what brend Burnanke said, 778 00:38:39,596 --> 00:38:42,036 Speaker 2: and this was one of the things he did to 779 00:38:42,196 --> 00:38:45,756 Speaker 2: try to sort of battle against risking the indepedance of 780 00:38:45,796 --> 00:38:47,756 Speaker 2: the FED, was he tried to speak directly to people. 781 00:38:47,836 --> 00:38:50,436 Speaker 2: So there was this famous moment when he went on 782 00:38:50,476 --> 00:38:54,236 Speaker 2: sixty minutes, which was not something that any prior FED 783 00:38:54,316 --> 00:38:56,716 Speaker 2: chair and had done. But he wanted to speak directly 784 00:38:56,756 --> 00:39:00,516 Speaker 2: to the public, and he made the argument that while 785 00:39:00,636 --> 00:39:03,276 Speaker 2: it looks terrible for the FED to be bailing out 786 00:39:03,276 --> 00:39:06,156 Speaker 2: these banks that lost a lot of money, and probably, 787 00:39:06,156 --> 00:39:08,676 Speaker 2: you know, maybe should have known better. On the other hand, 788 00:39:08,796 --> 00:39:12,076 Speaker 2: if we don't do something about this banking crisis, then 789 00:39:12,076 --> 00:39:13,476 Speaker 2: you're not going to be able to get a mortgage. 790 00:39:13,676 --> 00:39:15,836 Speaker 4: Let me give you an analogy. If you have a 791 00:39:15,836 --> 00:39:19,556 Speaker 4: neighbor who smokes in bed, and he's a risked everybody, 792 00:39:20,156 --> 00:39:22,916 Speaker 4: and suppose he sets fire to his house, and you 793 00:39:22,996 --> 00:39:24,796 Speaker 4: might say to yourself, I'm not going to call the 794 00:39:24,876 --> 00:39:25,556 Speaker 4: fire department. 795 00:39:25,916 --> 00:39:27,716 Speaker 1: Let his house burn down. It's fine with me. 796 00:39:28,276 --> 00:39:29,876 Speaker 4: But then, of course, what if your house is made 797 00:39:29,916 --> 00:39:31,636 Speaker 4: of wood and it's right next door to his house. 798 00:39:31,796 --> 00:39:34,276 Speaker 4: What if the whole town is made of wood. That's 799 00:39:34,276 --> 00:39:35,116 Speaker 4: where we are now. 800 00:39:35,356 --> 00:39:37,196 Speaker 2: It was a very unusual thing that he was making 801 00:39:37,236 --> 00:39:39,076 Speaker 2: this case directly to the public, But it was really 802 00:39:39,116 --> 00:39:41,836 Speaker 2: brought on by the fact that the FED couldn't afford 803 00:39:41,996 --> 00:39:45,116 Speaker 2: to be a completely technocratic, insular organization. 804 00:39:45,596 --> 00:39:49,796 Speaker 1: Right. What I'm hearing is that the actions of Ben 805 00:39:49,836 --> 00:39:55,756 Speaker 1: Bernaki and the FED probably prevented another depression. It avoided 806 00:39:55,836 --> 00:39:59,596 Speaker 1: a lot of pain on the one hand. On the 807 00:39:59,636 --> 00:40:05,156 Speaker 1: other hand, it infuriated a huge number of Americans. 808 00:40:06,396 --> 00:40:11,716 Speaker 2: I think it just feels terrible to see these institutions 809 00:40:12,116 --> 00:40:15,756 Speaker 2: get bailed out who made such bad decisions. It was 810 00:40:15,796 --> 00:40:17,996 Speaker 2: also the case that there were big bonuses that were 811 00:40:17,996 --> 00:40:21,196 Speaker 2: paid out by the Wall Street banks during this period 812 00:40:21,236 --> 00:40:23,236 Speaker 2: of time, you know, which was a period of time 813 00:40:23,276 --> 00:40:28,396 Speaker 2: when a lot of Americans didn't have jobs. And it's 814 00:40:28,436 --> 00:40:32,116 Speaker 2: also the fact that in macroeconomics in general, but in 815 00:40:32,156 --> 00:40:34,596 Speaker 2: this episode for sure, you never get to see what 816 00:40:34,756 --> 00:40:40,636 Speaker 2: would have happened without the intervention. So in the Great Depression, 817 00:40:40,796 --> 00:40:44,876 Speaker 2: we saw this awful thing happen. The argument that Ben 818 00:40:44,916 --> 00:40:46,556 Speaker 2: Bernanki was trying to make is it well, it could 819 00:40:46,596 --> 00:40:48,916 Speaker 2: have been even worse, and he, you know, he made 820 00:40:48,956 --> 00:40:49,996 Speaker 2: it compellingly enough. 821 00:40:50,556 --> 00:40:53,516 Speaker 1: He's maybe the world's expert on this subject. 822 00:40:53,116 --> 00:40:56,356 Speaker 2: That's right, and he convinced congress people on both sides 823 00:40:56,396 --> 00:40:57,916 Speaker 2: of the aisle that it was true. And that's why 824 00:40:59,396 --> 00:41:00,756 Speaker 2: the interventions were so large. 825 00:41:01,076 --> 00:41:05,956 Speaker 1: Right, So we go from nineteen thirteen with a FED 826 00:41:06,076 --> 00:41:10,316 Speaker 1: that's yoked to the political process and is there mainly 827 00:41:10,356 --> 00:41:13,036 Speaker 1: to kind of smooth out the money supply over the harvests, 828 00:41:13,236 --> 00:41:16,836 Speaker 1: to two thousand and eight, where you've got a FED 829 00:41:16,916 --> 00:41:22,076 Speaker 1: that is master manipulator of the entire economy. Two things. 830 00:41:22,276 --> 00:41:27,316 Speaker 1: One is, is it now just generally understood that the 831 00:41:27,436 --> 00:41:29,676 Speaker 1: role of the FED is not just to smooth out 832 00:41:29,676 --> 00:41:32,276 Speaker 1: the money supply over the harvest, just to run the 833 00:41:32,276 --> 00:41:36,276 Speaker 1: money supply. But it's also got this other unconventional role 834 00:41:36,436 --> 00:41:39,236 Speaker 1: in the event of crises, where it can buy and 835 00:41:39,276 --> 00:41:42,716 Speaker 1: sell all kinds of stuff to make things better in 836 00:41:42,756 --> 00:41:43,196 Speaker 1: their view. 837 00:41:44,116 --> 00:41:46,396 Speaker 2: I think it is widely understood that that part of 838 00:41:46,436 --> 00:41:50,276 Speaker 2: what the FED does is probably here to stay. There 839 00:41:50,316 --> 00:41:51,876 Speaker 2: are these questions. You know, the FED is a big 840 00:41:51,916 --> 00:41:56,036 Speaker 2: actor in financial markets that affects people. It affects different 841 00:41:56,036 --> 00:41:59,636 Speaker 2: people in different companies in different ways. And how does 842 00:41:59,676 --> 00:42:01,996 Speaker 2: it sort of try to make that neutral or can 843 00:42:02,036 --> 00:42:05,236 Speaker 2: it make it neutral? Those are things that are certainly 844 00:42:05,356 --> 00:42:07,476 Speaker 2: sources of controversy today it's. 845 00:42:07,316 --> 00:42:10,916 Speaker 1: A source of controversy, but it's kind of undeniable. But 846 00:42:10,996 --> 00:42:13,716 Speaker 1: the power of this or potential power of this institution 847 00:42:13,836 --> 00:42:16,836 Speaker 1: has just grown. It's incredible, the power of this institution, 848 00:42:16,996 --> 00:42:19,196 Speaker 1: and it is happening now in a climate where it's 849 00:42:19,236 --> 00:42:22,716 Speaker 1: independence is being threatened. Right that a private actor, a 850 00:42:22,796 --> 00:42:25,836 Speaker 1: president could get a hold of this institution and use 851 00:42:25,916 --> 00:42:28,236 Speaker 1: these new powers in a completely unorthodox way. 852 00:42:28,276 --> 00:42:30,276 Speaker 2: Now, one thing I would say is that its power 853 00:42:30,316 --> 00:42:33,156 Speaker 2: can also be destroyed. In the nineteen seventies, nobody believe 854 00:42:33,196 --> 00:42:36,116 Speaker 2: the set about anything, So you really had to get 855 00:42:36,116 --> 00:42:38,956 Speaker 2: into a situation with Fulker where you know, people didn't 856 00:42:38,956 --> 00:42:40,796 Speaker 2: believe them until they saw it. Right, He just he 857 00:42:40,876 --> 00:42:43,756 Speaker 2: raised interest rates dramatically. But the that of that time 858 00:42:43,796 --> 00:42:46,236 Speaker 2: did not have the power to promise things. And the 859 00:42:46,236 --> 00:42:51,116 Speaker 2: same goes for inflation. So during the post COVID inflation surge, 860 00:42:51,316 --> 00:42:54,116 Speaker 2: inflation got up, you know, to something like seven percent. 861 00:42:54,676 --> 00:42:59,876 Speaker 2: Through that whole time, professional forecasters were completely convinced inflation 862 00:42:59,916 --> 00:43:03,156 Speaker 2: would get down two percent again, completely convinced basically, you know, 863 00:43:03,196 --> 00:43:05,556 Speaker 2: they had no worries about this, and that actually matters 864 00:43:05,596 --> 00:43:07,876 Speaker 2: for regular people because if you went to get a mortgage, 865 00:43:07,996 --> 00:43:10,196 Speaker 2: the mortgage rate you faced was based on the idea 866 00:43:10,636 --> 00:43:12,396 Speaker 2: that inflation was going to be two percent. 867 00:43:12,156 --> 00:43:13,876 Speaker 1: Again, right, because they believe the FED. 868 00:43:13,916 --> 00:43:15,636 Speaker 2: Because they believed it, so that there's. 869 00:43:15,636 --> 00:43:18,716 Speaker 1: Enormous value in the trust in this industr that's right, 870 00:43:18,796 --> 00:43:21,436 Speaker 1: and that absolutely can be destroyed. Do you worry about 871 00:43:21,436 --> 00:43:22,436 Speaker 1: the Fed's independence? 872 00:43:22,996 --> 00:43:26,596 Speaker 2: Of course, this is probably one of the most frightening 873 00:43:26,636 --> 00:43:30,076 Speaker 2: times for FED independence, or maybe the most frightening time 874 00:43:30,116 --> 00:43:33,556 Speaker 2: for FED independence since maybe the Mulcar disinplace or something 875 00:43:33,596 --> 00:43:35,036 Speaker 2: like that, for a long. 876 00:43:34,876 --> 00:43:38,476 Speaker 1: Time since Nixon. Yes, but it's happening in a different 877 00:43:38,516 --> 00:43:41,516 Speaker 1: environment where the importance of the institution is just bigger 878 00:43:41,556 --> 00:43:44,796 Speaker 1: than it was. The awareness of how to use it 879 00:43:44,836 --> 00:43:48,316 Speaker 1: is for more top of mind. It's like this big 880 00:43:48,356 --> 00:43:51,916 Speaker 1: insurance policy in the on the financial markets, and it's 881 00:43:51,956 --> 00:43:53,476 Speaker 1: a money maker, and it's a money maker. 882 00:43:53,556 --> 00:43:56,476 Speaker 2: It's a huge money maker. So you know, around the world, 883 00:43:56,636 --> 00:44:00,716 Speaker 2: investors are willing to lend the US government money at 884 00:44:00,796 --> 00:44:04,836 Speaker 2: incredibly low interest rates. So that means the US government 885 00:44:04,916 --> 00:44:08,436 Speaker 2: can run these huge deficits year after year and pay 886 00:44:08,516 --> 00:44:11,316 Speaker 2: very little. But most countries around the world don't have 887 00:44:11,396 --> 00:44:12,636 Speaker 2: that luxury. 888 00:44:12,436 --> 00:44:15,116 Speaker 1: And we would lose that luxury if people cease to 889 00:44:15,156 --> 00:44:15,756 Speaker 1: trust the FED. 890 00:44:15,796 --> 00:44:17,876 Speaker 2: Because part of the reason people want to hold US 891 00:44:17,916 --> 00:44:21,556 Speaker 2: debt is because they trust that the US government will 892 00:44:21,556 --> 00:44:23,796 Speaker 2: not default in a sense, if you borrow one hundred dollars, 893 00:44:23,836 --> 00:44:25,596 Speaker 2: you'll pay you back hundred dollars. But also they won't 894 00:44:25,596 --> 00:44:28,516 Speaker 2: have a lot of inflation. Right, So those two things 895 00:44:28,596 --> 00:44:31,996 Speaker 2: are required to make people really value your debt. And 896 00:44:32,036 --> 00:44:34,516 Speaker 2: the second one is controlled by the FED. 897 00:44:35,676 --> 00:44:38,756 Speaker 1: What do you make the odds that we're going to 898 00:44:38,756 --> 00:44:42,876 Speaker 1: emerge from the Trump years with an independent FED? You're 899 00:44:42,876 --> 00:44:48,716 Speaker 1: a betting lady that will have it. I hope so, yeah, 900 00:44:48,756 --> 00:44:55,036 Speaker 1: that sounds about right. Yeah, that sounds about right. I 901 00:44:55,036 --> 00:44:57,796 Speaker 1: want to thank Emmy Nakamura for giving us an absolute 902 00:44:57,956 --> 00:45:01,636 Speaker 1: master class on the Federal Reserve Bank, its history and 903 00:45:01,676 --> 00:45:05,316 Speaker 1: the way it's changed. Emmy is the Chancellor's Professor of 904 00:45:05,356 --> 00:45:08,156 Speaker 1: Economics at UC Berkeley. You can find links to her 905 00:45:08,196 --> 00:45:09,196 Speaker 1: work in our show. 906 00:45:08,956 --> 00:45:14,196 Speaker 3: Note Against the Rules. The Big Short Companion is hosted 907 00:45:14,196 --> 00:45:17,676 Speaker 3: by Michael Lewis. It's produced by Me Ludy, Jane Kott, 908 00:45:17,916 --> 00:45:22,716 Speaker 3: and Catherine Girodel. Our editor is Julia Barton. Our theme 909 00:45:22,916 --> 00:45:26,796 Speaker 3: was composed by Nick Burtel, and our engineer is Hans Dale. 910 00:45:26,876 --> 00:45:32,916 Speaker 3: She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela 911 00:45:32,996 --> 00:45:37,196 Speaker 3: Lawrence and the rest of the Pushkin Audiobooks team. Against 912 00:45:37,236 --> 00:45:40,796 Speaker 3: the Rules is the production of Pushkin Industries. To find 913 00:45:40,836 --> 00:45:45,316 Speaker 3: more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts, 914 00:45:45,676 --> 00:45:48,476 Speaker 3: or wherever you listen to podcasts, and if you'd like 915 00:45:48,516 --> 00:45:51,956 Speaker 3: to listen ad free and learn about other exclusive offerings, 916 00:45:52,236 --> 00:45:54,676 Speaker 3: don't forget to sign up for a Pushkin Plus subscription 917 00:45:55,236 --> 00:46:00,196 Speaker 3: at Pushkin, dot Fm, Slash Plus or honor Apple show page, 918 00:46:00,356 --> 00:46:03,236 Speaker 3: and you can get The Big Short now at Pushkin, 919 00:46:03,396 --> 00:46:09,356 Speaker 3: dot FM, slash Audiobooks, or wherever audiobooks are sold. 920 00:46:20,396 --> 00:46:22,476 Speaker 5: It's Jacob Goldstein. I'm the co host of a new 921 00:46:22,516 --> 00:46:25,436 Speaker 5: show called Business History, and we're bringing you a clip 922 00:46:25,516 --> 00:46:28,396 Speaker 5: right now from an episode we did about a mathematician 923 00:46:28,516 --> 00:46:32,556 Speaker 5: named Jim Simon's. Simons wanted to take human emotions out 924 00:46:32,596 --> 00:46:36,556 Speaker 5: of investing, and after a few early hiccups, including buying 925 00:46:36,636 --> 00:46:39,476 Speaker 5: up all the potatoes in Maine, he created one of 926 00:46:39,476 --> 00:46:42,716 Speaker 5: the greatest money machines in history. I really hope you 927 00:46:42,756 --> 00:46:44,636 Speaker 5: like the clip, and if you want to hear more, 928 00:46:44,756 --> 00:46:47,876 Speaker 5: please check out the show. It's called Business History and 929 00:46:47,916 --> 00:46:52,396 Speaker 5: it's available wherever you're listening right now. They were doing 930 00:46:52,436 --> 00:46:54,996 Speaker 5: what we would call today machine learning. 931 00:46:55,036 --> 00:46:59,396 Speaker 6: A machine learning is like, essentially, you build a system 932 00:46:59,396 --> 00:47:01,316 Speaker 6: in a computer. You feeded a bunch of data and 933 00:47:01,356 --> 00:47:04,356 Speaker 6: the system sort of builds a map of the relationships 934 00:47:04,356 --> 00:47:06,556 Speaker 6: in that data, and then with new data it can 935 00:47:06,636 --> 00:47:10,236 Speaker 6: kind of interpolate or extrapolate and guesses about. 936 00:47:09,996 --> 00:47:10,916 Speaker 1: What should come next. 937 00:47:11,236 --> 00:47:14,676 Speaker 6: And of course today we have an exciting, maybe misleading, 938 00:47:14,796 --> 00:47:16,836 Speaker 6: confounding term for machine learning. 939 00:47:17,356 --> 00:47:18,156 Speaker 1: We call it AI. 940 00:47:18,476 --> 00:47:21,836 Speaker 7: Exactly right right, this is still very basic machine learning, 941 00:47:22,036 --> 00:47:25,836 Speaker 7: and the computer at the time keeps making mistakes that 942 00:47:25,836 --> 00:47:29,956 Speaker 7: they didn't really understand. So, for instance, once the computer 943 00:47:30,636 --> 00:47:36,836 Speaker 7: developed a taste for potatoes, main potatoes, the system kept 944 00:47:36,956 --> 00:47:42,836 Speaker 7: buying main potato futures in the state of Maine, potato. 945 00:47:42,436 --> 00:47:45,036 Speaker 1: Potatoes, big harvest next year or whatever. 946 00:47:45,276 --> 00:47:49,356 Speaker 7: Yes, okay, until two thirds of the company's money was 947 00:47:49,396 --> 00:47:52,196 Speaker 7: in potatoes. They were all in potatoes. And they got 948 00:47:52,236 --> 00:47:56,196 Speaker 7: a call from the regulators, the cft A CFPPS. 949 00:47:55,996 --> 00:47:57,956 Speaker 1: Come out of Futures Trading Commission. 950 00:47:57,596 --> 00:48:01,316 Speaker 7: Right yeah, saying whoa who are you guys, Like, what 951 00:48:01,316 --> 00:48:03,716 Speaker 7: are you doing over there? You have almost cornered the 952 00:48:03,756 --> 00:48:07,636 Speaker 7: market on potatoes. You have to sell And they ended 953 00:48:07,756 --> 00:48:12,756 Speaker 7: up losing money on the trade because blown out on potatoes, 954 00:48:12,876 --> 00:48:16,516 Speaker 7: they had stopped the computer or whatever the computer's plan was. 955 00:48:17,156 --> 00:48:19,956 Speaker 7: But you know, this was just one small weird thing. 956 00:48:20,356 --> 00:48:24,116 Speaker 7: Simon and Baum were really kind of nervous about this 957 00:48:24,156 --> 00:48:27,036 Speaker 7: whole thing. They had taken investors' money, they didn't really 958 00:48:27,036 --> 00:48:31,276 Speaker 7: know if their system worked. And as the story gets told, 959 00:48:31,316 --> 00:48:34,476 Speaker 7: they start to like second guess the computer and themselves, 960 00:48:34,516 --> 00:48:36,796 Speaker 7: and they start to think, well, I have this intuition 961 00:48:36,876 --> 00:48:40,596 Speaker 7: that gold's gonna go up because of the geopolitical situation, 962 00:48:40,836 --> 00:48:42,596 Speaker 7: and they'd make some money on that, and then they'd 963 00:48:42,596 --> 00:48:45,836 Speaker 7: lose some money on that, and so by doubting their 964 00:48:45,876 --> 00:48:49,316 Speaker 7: own system, it just wasn't really working. And at that 965 00:48:49,396 --> 00:48:51,756 Speaker 7: point they're just Wall Street investors, right when the big 966 00:48:51,756 --> 00:48:55,156 Speaker 7: computer trying to buy more potatoes and the man won't 967 00:48:55,196 --> 00:48:56,276 Speaker 7: let them buy potatoes