WEBVTT - Lender of Last Resort 0:00:15.316 --> 0:00:15.836 Pushkin. 0:00:21.556 --> 0:00:22.876 I'm Lydia Dean Kott. 0:00:22.996 --> 0:00:23.996 And I'm Michael Lewis. 0:00:24.156 --> 0:00:26.876 This is the Big Short companion series on Against the Rules. 0:00:27.156 --> 0:00:29.756 So in the last couple of episodes we talked to 0:00:29.956 --> 0:00:32.756 people who were in the book, and this episode's going 0:00:32.796 --> 0:00:36.196 to be kind of different because it's actually about an institution, 0:00:36.676 --> 0:00:40.236 the Federal Reserve. In two thousand and eight, the chairman 0:00:40.396 --> 0:00:43.996 of the Fed was an economist called Ben Bernanki, and 0:00:44.116 --> 0:00:46.676 there's a clip of him from your new audiobook of 0:00:46.716 --> 0:00:47.116 The Big. 0:00:46.996 --> 0:00:52.156 Short, Chairman Bernanki, The floor is yours. 0:00:52.916 --> 0:00:55.596 At this juncture, however, the impact on the broader economy 0:00:55.636 --> 0:00:58.556 and financial markets of the problems in the subprime market 0:00:58.836 --> 0:01:00.876 seems likely to be contained. 0:01:01.876 --> 0:01:04.756 Chapter seven, The Great Treasure Hut. 0:01:05.276 --> 0:01:07.716 We will continue to monitor this situation closely. 0:01:10.076 --> 0:01:11.996 That's Ben bernanky of the FAY. Why are we doing 0:01:12.036 --> 0:01:14.316 an episode that's about the Federal Reserve? 0:01:14.676 --> 0:01:18.916 The financial crisis is just an excellent opportunity to teach 0:01:18.996 --> 0:01:21.596 people what the hell of the Federal Reserve is, where 0:01:21.596 --> 0:01:25.596 it came from, why we have it, why it matters 0:01:25.636 --> 0:01:28.476 that it might be in jeopardy right now. And there 0:01:28.556 --> 0:01:33.996 was this person Emi Nakamura, who is World class monetary 0:01:33.996 --> 0:01:37.836 economists knows more about the Federal Reserve and monetary policy 0:01:37.916 --> 0:01:42.676 than like most anybody walking the planet who lives around 0:01:42.676 --> 0:01:45.436 the corner from me, and I just thought, like, sit 0:01:45.476 --> 0:01:48.316 down with Emmy and answer questions I have about it. 0:01:48.516 --> 0:01:51.036 I liked this episode because I went into it not 0:01:51.116 --> 0:01:53.836 knowing anything about the Federal Reserve and kind of feeling 0:01:53.876 --> 0:01:57.556 like I'm too far behind, I'll never know well. 0:01:57.676 --> 0:01:59.276 I mean I feel that way sometimes. 0:01:59.316 --> 0:02:00.836 That's what it was nice about it is that you 0:02:00.956 --> 0:02:03.316 actually had questions, like it seemed like you were learning 0:02:03.316 --> 0:02:05.076 too about the Federal Reserve. So that made me feel 0:02:05.076 --> 0:02:07.676 like there's not something wrong with me for not fully 0:02:07.756 --> 0:02:09.996 understanding it. And it's possible well to understand it. 0:02:10.316 --> 0:02:12.516 I mean, do you feel better having understood it a 0:02:12.516 --> 0:02:14.796 bit more or do you feel like, oh, you learned 0:02:14.796 --> 0:02:16.676 about it and that was an hour of your life 0:02:16.716 --> 0:02:17.316 you can't do, yell. 0:02:17.356 --> 0:02:19.116 I think it's good that I know about it, for sure. 0:02:19.356 --> 0:02:21.596 I mean, it is in the news right now. It 0:02:21.716 --> 0:02:25.036 is a huge deal that the Trump White House wants 0:02:25.076 --> 0:02:27.996 to take control of the Federal Reserve and make decisions 0:02:28.036 --> 0:02:31.076 about monetary policy that were previously made are currently made 0:02:31.076 --> 0:02:36.756 by nonpartisan experts, and the presence of an independent federal 0:02:36.796 --> 0:02:41.756 Reserve in the financial crisis was critical to resolving the crisis. 0:02:42.236 --> 0:02:44.916 It was critical to restoring any kind of trust in 0:02:44.956 --> 0:02:48.716 the system. So that they're fiddling with that institution now 0:02:48.836 --> 0:02:51.756 and threatening the trust. It has such big implications. I 0:02:51.796 --> 0:02:54.276 think that, like our culture should just understand it better. 0:02:54.396 --> 0:02:57.156 My hope for the episode is that people like me, 0:02:57.236 --> 0:03:00.116 who have you any interest in it and some knowledge 0:03:00.116 --> 0:03:03.636 about it, but not expert at all, they find it 0:03:03.756 --> 0:03:08.156 really interesting cause you're hearing it's explained in plain language 0:03:08.236 --> 0:03:11.356 and some deeper questions are being answered. But that also 0:03:11.396 --> 0:03:14.836 people who have no idea what the Federal Reserve does, well, 0:03:14.876 --> 0:03:17.596 all of a sudden have a picture in their mind 0:03:17.596 --> 0:03:20.116 the next time they hear the phrase Federal Reserve bank. 0:03:20.396 --> 0:03:22.836 All right, let's get into it. Here is Michael Lewis's 0:03:22.876 --> 0:03:27.116 conversation with Emmy Nakamura, an economist at UC Berkeley and 0:03:27.156 --> 0:03:30.676 an expert on all things FED, including where they keep 0:03:30.676 --> 0:03:34.636 our goal, which apparently they still have some of quite 0:03:34.636 --> 0:03:36.476 a bit, quite a bit, and if you listen you 0:03:36.476 --> 0:03:37.356 can know where to find it. 0:03:42.596 --> 0:03:46.076 I began my conversation with the economist Ammi Nakamura by 0:03:46.076 --> 0:03:48.316 asking her win the FED got created. 0:03:49.076 --> 0:03:52.836 So the FED is a fairly modern invention as things go. 0:03:53.156 --> 0:03:56.836 It was created in nineteen thirteen, and I think the 0:03:56.836 --> 0:03:59.796 approximate cause is why the FED was created was banking crisis. 0:04:00.276 --> 0:04:02.916 So in the previous century there had been something like 0:04:02.996 --> 0:04:06.076 twelve banking crisis. Basically, these banking crises were happening all 0:04:06.116 --> 0:04:06.556 the time. 0:04:06.556 --> 0:04:07.236 Banks failing. 0:04:07.476 --> 0:04:10.516 That's right, banks failing. Banking crisis is more than just 0:04:10.556 --> 0:04:13.716 one bank failing, it's lots of banks failing. And there 0:04:13.756 --> 0:04:16.396 was a particularly bad one in nineteen oh seven where 0:04:16.396 --> 0:04:19.796 lots of banks failed and the banking crisis didn't end 0:04:19.916 --> 0:04:23.796 until John Pierport Morgan put in his own money to 0:04:24.156 --> 0:04:26.476 try to end this banking crisis. And at that point, 0:04:26.796 --> 0:04:29.556 the story goes that people sort of realized that something 0:04:29.596 --> 0:04:31.356 had to be done so that you didn't have to 0:04:31.396 --> 0:04:34.716 depend on John Pierpoint Morgan to come in and be 0:04:34.796 --> 0:04:36.196 superman and save the day. 0:04:36.316 --> 0:04:38.996 And was this so this was in the United States. 0:04:39.756 --> 0:04:42.796 Did any version of the Federal Reserve exist outside the 0:04:42.876 --> 0:04:43.476 United States? 0:04:43.556 --> 0:04:46.756 Yes, so in some other countries, for example, in England 0:04:47.596 --> 0:04:50.396 there were central banks for a much longer period of time. 0:04:50.796 --> 0:04:54.276 The US was relatively late to the game. This is 0:04:54.436 --> 0:04:58.356 probably connected partly to this sort of fear of government 0:04:58.556 --> 0:05:01.956 and centralized institutions and centralized power that's been around in 0:05:01.956 --> 0:05:05.156 the United States for a long time. There are prominent 0:05:05.196 --> 0:05:08.076 figures in the United States like Andrew Jackson, who actually 0:05:09.556 --> 0:05:12.116 you know, some of the earlier attempts to create a FED. 0:05:12.836 --> 0:05:16.076 But the original reason why why central banks were created 0:05:16.116 --> 0:05:17.916 in other countries, and this is going to become part 0:05:17.956 --> 0:05:20.916 of the FED story also later on, was to finance 0:05:20.956 --> 0:05:21.436 the government. 0:05:21.836 --> 0:05:23.396 So if you want to own to lend money to 0:05:23.436 --> 0:05:24.316 the government. 0:05:24.756 --> 0:05:26.756 Exactly so, you have to have someone like the Bank 0:05:26.796 --> 0:05:30.156 of England, for example. The government needed to borrow money, 0:05:30.196 --> 0:05:32.556 for example, for wars and other purposes, and then someone 0:05:32.636 --> 0:05:33.956 has to oversee that. 0:05:34.556 --> 0:05:36.876 So let's explain what this thing is that gets created 0:05:36.916 --> 0:05:40.036 in nineteen thirteen, is like a central bank. We throw 0:05:40.076 --> 0:05:42.836 that word phrase around, but what is it? What is 0:05:42.876 --> 0:05:44.956 it doing in nineteen thirteen. 0:05:44.636 --> 0:05:48.996 So the most basic thing was to create a system 0:05:49.076 --> 0:05:52.636 for issuing money. So in the so called free banking era, 0:05:52.716 --> 0:05:53.796 which had you know, which. 0:05:53.676 --> 0:05:56.196 Was some time before, there is no central bank, no 0:05:56.236 --> 0:05:58.876 central just a bunch of banks, private banks owned by. 0:05:58.916 --> 0:06:01.436 People yes, but there was paper money. But the thing 0:06:01.476 --> 0:06:04.796 about paper money is that inherently, you know, the paper 0:06:04.836 --> 0:06:06.876 is not worth very much. So the whole point of 0:06:06.916 --> 0:06:09.516 the paper is it's something that you're expecting someone else 0:06:09.556 --> 0:06:11.036 to be willing to take. But in the era of 0:06:11.076 --> 0:06:14.316 free banking, there are all these individual banks that were 0:06:14.476 --> 0:06:15.996 offering this paper money. 0:06:15.836 --> 0:06:17.276 Their own paper money, that's right. 0:06:17.356 --> 0:06:19.676 And literally, if you went to try to buy something 0:06:20.156 --> 0:06:22.076 grocery store or whatever, they'd have to kind of think 0:06:22.076 --> 0:06:25.436 about how valuable is this piece of paper you're handing 0:06:25.476 --> 0:06:26.796 me as it was to some other piece of paper. 0:06:26.876 --> 0:06:28.236 So that's obviously very inconvenient. 0:06:28.276 --> 0:06:31.156 So if I'm the grocery store, I'm actually have to 0:06:31.196 --> 0:06:33.876 be a bank analyst. That's right, because I'm taking paper 0:06:33.876 --> 0:06:35.316 that was printed by this bank. 0:06:35.396 --> 0:06:35.796 That's right. 0:06:35.876 --> 0:06:38.156 If the bank is sound, what is it back by it? 0:06:38.236 --> 0:06:40.876 Back by gold, gold, gold, So I have to believe 0:06:40.956 --> 0:06:44.716 that I take, you know, Joe Schmo's bank's notes to 0:06:44.796 --> 0:06:48.036 Joe Schmoe, He'll give me gold of this value for it. 0:06:48.076 --> 0:06:48.476 That's right. 0:06:48.516 --> 0:06:51.396 And it's also really crucial that everybody at that bank believes, 0:06:51.396 --> 0:06:53.516 because otherwise they start going to the bank and trying 0:06:53.516 --> 0:06:55.716 to take out their money and then the bank actually 0:06:55.716 --> 0:06:58.436 does veail, which is what was causing all of these 0:06:58.436 --> 0:07:02.276 banking crises. So this was a situation in the free 0:07:02.316 --> 0:07:05.996 banking era. During this whole period, we're on the gold standard, 0:07:06.076 --> 0:07:09.996 so it's a situation where you know, there's sort of 0:07:10.596 --> 0:07:13.836 some rate at which paper money can be exchanged for gold. 0:07:14.236 --> 0:07:16.316 But even before that, there is a period of time 0:07:16.356 --> 0:07:19.476 when people were literally using gold in transactions, and during 0:07:19.516 --> 0:07:21.196 that period of time, the big problem is just the 0:07:21.236 --> 0:07:24.836 gold is very heavy. People have a tendency. So I 0:07:24.836 --> 0:07:26.676 talked about paper money and how you had to check 0:07:26.716 --> 0:07:28.916 whether the paper money was really worthwhile, but that was 0:07:28.996 --> 0:07:31.956 actually even true with gold. If someone gives you a 0:07:31.956 --> 0:07:34.076 gold coin, it might have been that they've shaved off 0:07:34.076 --> 0:07:35.876 a little piece of it and it's actually not worth 0:07:35.916 --> 0:07:37.516 as much as supposed to be. And that was something was. 0:07:37.516 --> 0:07:40.156 Always happening to scale with you when you're doing a transaction, 0:07:40.276 --> 0:07:42.156 to make sure the goal weighs what it's supposed. 0:07:41.836 --> 0:07:43.716 To work, that's right, And this was called the debasement 0:07:43.836 --> 0:07:46.476 of currency, So this was always happening. And then there 0:07:46.516 --> 0:07:48.556 was the fact that during the gold standard era, if 0:07:48.556 --> 0:07:52.396 you had a ship which was filled with gold, and 0:07:52.436 --> 0:07:55.356 it sank that gold was just gone. Yeah, so that 0:07:55.476 --> 0:07:58.756 meant that now the whole economy had to function on 0:07:58.876 --> 0:08:01.876 less money. So there was literally less less money to 0:08:01.876 --> 0:08:03.716 buy all the stuff you wanted to buy. So I 0:08:03.716 --> 0:08:06.996 think in the modern world we never really worry about 0:08:07.036 --> 0:08:10.116 having enough money to buy stuff. That's not a concern, 0:08:10.796 --> 0:08:13.316 But in the in this era, you really did. And 0:08:13.356 --> 0:08:16.356 another example of this was actually the interest rates before 0:08:16.356 --> 0:08:18.916 the founding of the FED, they actually went up during 0:08:18.956 --> 0:08:22.516 the harvest season, and the reason was the farmers needed 0:08:22.516 --> 0:08:25.396 a lot of money to transact during the harvest season, 0:08:25.676 --> 0:08:27.996 and because there was no Federal Reserve, there was basically 0:08:28.036 --> 0:08:31.316 a fixed quantity of money. And when more people weren't 0:08:31.356 --> 0:08:32.236 the farmers. 0:08:31.876 --> 0:08:34.316 One of the more transactions, there's more demand for the 0:08:34.396 --> 0:08:35.276 money cause the. 0:08:35.276 --> 0:08:38.396 Interest rate exactly exactly, so it was actually seasonal. So 0:08:38.476 --> 0:08:41.636 one of the early reasons, aside from you know, dealing 0:08:41.636 --> 0:08:44.316 with the banking panics, that was used for why you 0:08:44.316 --> 0:08:45.796 had to have the founding of the Federal Reserve is 0:08:45.836 --> 0:08:49.556 what they called a more elastic currency. Elastic, you know, 0:08:49.556 --> 0:08:52.036 in the sense of an elastic fad means that when 0:08:52.076 --> 0:08:54.916 people want more money than the FED provides more money. 0:08:55.196 --> 0:08:57.316 So that was one of the earliest functions. And even 0:08:57.356 --> 0:08:59.036 just in terms of the seasons of the year, there's 0:08:59.036 --> 0:09:00.636 some times a year when people want more money. 0:09:00.716 --> 0:09:02.916 We don't get to this till nineteen thirteen, that's right. 0:09:02.996 --> 0:09:05.996 So you're saying, for this country operated for one hundred 0:09:05.996 --> 0:09:08.756 and fifty years basically with this. 0:09:08.796 --> 0:09:12.076 Money's right, and everybody just live with it, lived with it, 0:09:12.156 --> 0:09:14.876 but in various ways poorly. I mean, there were a 0:09:14.876 --> 0:09:18.996 lot of banking crises. You know, we've seen one serious 0:09:19.076 --> 0:09:22.116 banking crisis in the United States since the Great Depression. 0:09:23.116 --> 0:09:25.716 Imagine if that was happening all the time. 0:09:25.596 --> 0:09:28.356 Right, So the thing that gets created in nineteen thirteen, 0:09:28.356 --> 0:09:31.716 what does it explain to me? So I really understand 0:09:31.756 --> 0:09:36.156 it what it's doing, Like, Okay, it's a building somewhere 0:09:36.516 --> 0:09:39.596 with some people in it who have some relationship to 0:09:39.676 --> 0:09:42.556 all the banks in the country. What is that relationship. 0:09:43.116 --> 0:09:47.236 Well, it's it's willing to provide money. So a basic 0:09:47.316 --> 0:09:51.036 situation is so we talked about the case of the harvest. 0:09:51.476 --> 0:09:55.716 So suppose interest rates are rising because people want to 0:09:55.796 --> 0:09:58.676 use more money, but there's no more gold. So if 0:09:58.716 --> 0:10:01.436 you had a very strict kind of system of how 0:10:01.596 --> 0:10:03.476 the ratio between the amount of money and the amount 0:10:03.476 --> 0:10:05.236 of gold, then interests are going to rise. But in 0:10:05.276 --> 0:10:06.916 this case, the central bank is going to say, no, 0:10:07.156 --> 0:10:08.396 we're just going to provide more money. 0:10:08.396 --> 0:10:10.356 So we're not going to Does that mean we are 0:10:10.356 --> 0:10:11.676 abandoned the gold standard? 0:10:12.076 --> 0:10:15.716 So the gold standard is a very complicated concept. Okay. 0:10:15.756 --> 0:10:18.636 The most basic idea in the gold standard is that 0:10:18.716 --> 0:10:23.556 you will exchange one dollar bill for a certain amount 0:10:23.556 --> 0:10:26.156 of gold. And that's how people usually refer to what 0:10:26.196 --> 0:10:27.916 it means to be on a gold standard. And that 0:10:28.076 --> 0:10:31.276 was true before and after the founding of the FED 0:10:31.436 --> 0:10:33.716 until Roosevelt went off gold. 0:10:33.956 --> 0:10:36.596 If so, but how if they can just print money 0:10:36.596 --> 0:10:40.316 whenever in nineteen fourteen, yes, after they've created this bank, right, right, 0:10:40.316 --> 0:10:43.236 how can they maintain the same price of gold? 0:10:43.356 --> 0:10:43.516 Right? 0:10:43.996 --> 0:10:47.236 More paper for the same amount of gold means the 0:10:47.236 --> 0:10:48.236 gold should be. 0:10:48.676 --> 0:10:51.036 So did you know that today you actually cannot go 0:10:51.156 --> 0:10:52.636 to the Fed and ask for gold. 0:10:52.796 --> 0:10:53.436 I did know that. 0:10:53.516 --> 0:11:00.356 So it turns out that that money is something that 0:11:00.476 --> 0:11:03.316 has value in and of itself, even if you can't 0:11:03.396 --> 0:11:06.196 exchange it for gold. So it's not entirely such a 0:11:06.196 --> 0:11:09.476 strict relationship. And there are these two things all the 0:11:09.476 --> 0:11:14.876 gold standard. One is that there's this fixed exchange rate 0:11:14.996 --> 0:11:18.756 of money for gold. But the second is this idea 0:11:18.796 --> 0:11:21.116 of a gold cover ratio that you're actually holding some 0:11:21.276 --> 0:11:25.996 real asset to return for any paper money that you're given. 0:11:26.316 --> 0:11:29.396 But the second part, like how much real assets do 0:11:29.396 --> 0:11:31.756 you have to hold for each dollar, that doesn't have 0:11:31.836 --> 0:11:34.636 to be so inflexible. You know, this is something it 0:11:34.676 --> 0:11:37.516 can vary over time, and in practice, all of the 0:11:37.556 --> 0:11:40.916 countries central banks who are running a gold standard during 0:11:40.916 --> 0:11:43.916 this period of time, their gold cover ratio would. 0:11:43.796 --> 0:11:46.116 Vary over time, but the gold price wouldn't change. 0:11:46.436 --> 0:11:47.436 That's what it meant to be onest. 0:11:47.756 --> 0:11:50.876 So after the central bank is created, the Federal Reserve 0:11:50.956 --> 0:11:53.476 is created in nineteen thirteen, I could still go in 0:11:54.036 --> 0:11:57.396 with my dollars and get gold at the same price. 0:11:57.996 --> 0:12:01.236 So even though they printed dollars, at what point does 0:12:01.356 --> 0:12:03.716 who's the first person to point out that, oh, maybe 0:12:03.716 --> 0:12:05.436 they don't have enough gold for all the dollars. 0:12:05.516 --> 0:12:11.076 So those are called runs, and that happened substantially in 0:12:11.116 --> 0:12:14.036 the early stages of the Great Depression. So all of 0:12:14.076 --> 0:12:16.876 a sudden you had this situation where people should to 0:12:16.876 --> 0:12:19.156 show up at banks and ask for their money back. 0:12:19.756 --> 0:12:23.876 And the Federal Reserve did not provide that money, and 0:12:24.476 --> 0:12:26.316 you know, something like half of all the banks in 0:12:26.316 --> 0:12:30.676 the United States failed, and you could ask why, and 0:12:30.836 --> 0:12:33.596 there you do end up coming back to the gold standard, 0:12:33.676 --> 0:12:37.276 because the fundamental fear that the US Federal Reserve had 0:12:37.356 --> 0:12:41.196 at the time was that itself itself would face a run. 0:12:41.076 --> 0:12:43.716 The government did not have enough gold, and everybody would 0:12:43.716 --> 0:12:45.756 know it, and so they'd be a race to get 0:12:46.036 --> 0:12:48.076 your gold out before it was gone exactly. 0:12:48.116 --> 0:12:52.316 And today there's an academic debate on how constraining that 0:12:52.476 --> 0:12:55.676 really was. I mean, the Fed in the early nineteen 0:12:55.716 --> 0:12:58.076 thirties actually had a pretty decent amount of gold, so 0:12:58.156 --> 0:13:02.996 perhaps they could have withstood the pressure, but they didn't 0:13:03.236 --> 0:13:05.756 think they could, or they certainly worried about it, and 0:13:05.836 --> 0:13:09.276 so that had a real impact on interest rates on 0:13:09.316 --> 0:13:11.676 the extent to which they were willing to provide money 0:13:11.996 --> 0:13:15.156 to banks during this period, and it ended up with 0:13:15.396 --> 0:13:18.636 just a huge amount of banks failing and complete breakdown 0:13:18.676 --> 0:13:19.636 of the financial system. 0:13:19.996 --> 0:13:23.356 So this thing gets created in nineteen thirteen, it isn't 0:13:23.396 --> 0:13:28.356 really tested until the nineteen twenty nine and then their thirties. 0:13:28.996 --> 0:13:32.516 The Federal Reserve was supposed to come in and prevent 0:13:32.876 --> 0:13:37.076 depressions on the back of banking crises. It doesn't do it. 0:13:37.636 --> 0:13:42.756 The depression happens, like half the GNP was lost, you know, 0:13:43.436 --> 0:13:48.556 it was economically catastrophic unemployment of whatever thirty percent. So 0:13:48.596 --> 0:13:51.276 what is explain what they did in that period. 0:13:51.596 --> 0:13:54.236 So I think the first thing to say is that 0:13:54.236 --> 0:13:57.556 the FED actually had a hand in the onset of 0:13:57.596 --> 0:14:01.156 the Great Depression in the sense that, you know, stock 0:14:01.236 --> 0:14:03.796 markets were really booming in the late twenties, and the 0:14:03.836 --> 0:14:07.196 FED actually raised interest rates. So that's that's the first thing. 0:14:07.236 --> 0:14:09.556 So the FED thought that, you know, that there was 0:14:09.596 --> 0:14:11.356 too much speculation on Wall Street and so on. They 0:14:11.396 --> 0:14:12.236 raised interest rates. 0:14:12.276 --> 0:14:15.556 But people the speculation in particular, people were borrowing money 0:14:15.596 --> 0:14:18.036 to buy stocks, right, and it made them upset, right, 0:14:18.316 --> 0:14:20.596 and so they said, we're going to try to stop 0:14:20.596 --> 0:14:23.356 that activity. It was creating this boom in the stock market, right. 0:14:23.236 --> 0:14:25.836 So then they raise interest rates, and of course it 0:14:25.876 --> 0:14:28.236 does lead to a slow down in the economy. The 0:14:28.236 --> 0:14:30.796 banks start to fail, and once the banks start to fail, 0:14:30.876 --> 0:14:33.676 there's a panic. At this point in time, there's no 0:14:33.756 --> 0:14:37.436 deposit insurance, so you really did have to worry that 0:14:37.636 --> 0:14:39.836 if you had your money in a bank see it 0:14:39.876 --> 0:14:43.756 again exactly. So then what happens is that people start 0:14:43.756 --> 0:14:46.676 withdrawing their money from the banks, and there's this thing that, 0:14:46.836 --> 0:14:48.756 you know, all the money that's out there is actually 0:14:48.796 --> 0:14:51.916 much more than just the cash or the gold. There's 0:14:51.956 --> 0:14:53.876 this idea of the money multiplier that if you put 0:14:53.876 --> 0:14:56.356 your money in a bank and then they lend out 0:14:56.436 --> 0:14:58.916 ninety percent of it, that creates a lot more money. 0:14:58.956 --> 0:15:00.756 But then when they take the money out of the bank, 0:15:00.836 --> 0:15:03.796 it means that exactly. And of course some of the 0:15:03.836 --> 0:15:06.596 money that's being created a deposited in other banks, and 0:15:06.676 --> 0:15:09.076 so there's this chain reaction where the banks start to fail. 0:15:09.756 --> 0:15:12.436 But at this point in time, the FED doesn't see 0:15:12.476 --> 0:15:19.076 itself as an institution that was designed to manage the 0:15:19.116 --> 0:15:20.716 economy in the same way that is today. 0:15:20.796 --> 0:15:21.196 It didn't. 0:15:21.316 --> 0:15:23.116 The FED was really still learning its job. 0:15:29.556 --> 0:15:32.676 How did the Volkswagen Beetle go from being Hitler's dream 0:15:32.756 --> 0:15:36.076 car to a hippie icon. How did a disgruntled center 0:15:36.116 --> 0:15:39.836 fielder change the business of sports? I'm Jacob Goldstein, and 0:15:39.956 --> 0:15:42.756 on Business History, my co host Robert Smith and I 0:15:42.796 --> 0:15:45.796 dig into the people and companies who created the modern world. 0:15:46.196 --> 0:15:49.796 Business history is full of innovations and failures, and insights 0:15:49.796 --> 0:15:53.036 into how business works today. At the end of today's 0:15:53.076 --> 0:15:55.076 episode of Against the Rules, we're going to play a 0:15:55.076 --> 0:15:59.396 clip from our episode about Jim Simon's decades ago. Simon's 0:15:59.516 --> 0:16:03.996 basically invented modern algorithmic trading, and after a few early hiccups, 0:16:04.276 --> 0:16:07.916 including buying up all the potatoes in Maine, Simon's built 0:16:07.916 --> 0:16:12.276 a machine that generated had incredible returns for decades. The 0:16:12.276 --> 0:16:15.156 show is called Business History, and the previews coming up. 0:16:15.236 --> 0:16:17.876 At the end of today's episode of Against the Rules. 0:16:21.236 --> 0:16:24.036 I'm back with the economist Emmy Nackhambrock talking about the 0:16:24.116 --> 0:16:26.756 surprisingly dramatic history of the Federal Reserve. 0:16:27.396 --> 0:16:30.436 At many points in the history of central banks, they've 0:16:30.436 --> 0:16:32.956 played this rule of raising money for the government, and 0:16:33.036 --> 0:16:35.556 in the United States, this is one of the things 0:16:35.556 --> 0:16:38.276 the FED was doing during the Korean War. And there 0:16:38.396 --> 0:16:42.636 was some tension between the Fed and the Treasury during 0:16:42.676 --> 0:16:45.196 this period of time, because you know, the Fed was 0:16:45.196 --> 0:16:47.556 starting to get concerned about inflation, and of course the 0:16:47.596 --> 0:16:53.276 Treasury wanted wanted to borrow more money exactly, and so 0:16:53.716 --> 0:16:56.956 partly out of this antagonism, there was this Fed Treasury 0:16:56.996 --> 0:16:59.956 accord in which there was an agreement that the FED 0:17:00.036 --> 0:17:03.956 was going to be able to manage interest rates to 0:17:04.116 --> 0:17:08.156 sort of support the economy, but also to manage inflation. 0:17:08.276 --> 0:17:11.636 And that Fed Treasury record is typically viewed as the 0:17:11.676 --> 0:17:14.956 start of modern monetary policy, when exactly was that nineteen 0:17:14.996 --> 0:17:15.596 fifty one. 0:17:15.516 --> 0:17:17.796 And so the FED now is going to be granted 0:17:17.796 --> 0:17:21.836 some independence and it's going to manage interest rates. That's 0:17:21.836 --> 0:17:23.516 going to be the thing it does, right, which is 0:17:23.556 --> 0:17:25.956 effectively managing money. So it's a price of money, right. 0:17:27.116 --> 0:17:30.396 The next major event that happens is in the nineteen 0:17:30.436 --> 0:17:33.596 seventies and early nineteen eighties. So the early nineteen seventies 0:17:33.636 --> 0:17:36.836 are the time period of the most explicit political pressure 0:17:36.956 --> 0:17:39.036 on the FED. So this is a time when you 0:17:39.116 --> 0:17:43.516 have Nixon as president and you have Arthur Burns as 0:17:43.636 --> 0:17:46.476 Chair of the FED, and we now know, based on 0:17:46.836 --> 0:17:48.956 tapes and so on of their conversations that there was 0:17:49.076 --> 0:17:50.596 a lot of political. 0:17:50.076 --> 0:17:52.316 Pressure Nixon screaming in him to lower interest. 0:17:52.076 --> 0:17:56.636 Rates exactly, and then you know, fastward he does, absolutely 0:17:57.196 --> 0:18:00.476 fast forward, you know several years and inflation is really 0:18:00.516 --> 0:18:02.636 really high, and what we see is that people actually 0:18:02.716 --> 0:18:05.956 hate high inflation. And then this amazing thing happens that 0:18:05.996 --> 0:18:09.396 you have Paul Volker who gets to interview for the 0:18:09.516 --> 0:18:12.636 job of Chairman of the FED, and in his interview 0:18:13.236 --> 0:18:15.836 he explains what he's going to do. He says, I 0:18:15.836 --> 0:18:18.796 don't think gradualism really works. I don't think it's going 0:18:18.876 --> 0:18:21.236 to work to you know, just raise interest rates a 0:18:21.276 --> 0:18:22.916 little bit. I think we're going to have to go 0:18:23.036 --> 0:18:26.316 all out and raise interest rates dramatically. So then he 0:18:26.396 --> 0:18:30.076 goes home and he tells, is you know his wife, 0:18:30.476 --> 0:18:32.636 I don't. I don't think I got the job because 0:18:33.516 --> 0:18:35.516 no politicians is gonna let him do it exactly. And 0:18:35.516 --> 0:18:36.796 then amazingly he gets the job. 0:18:37.156 --> 0:18:38.516 Who gives him the job Carter? 0:18:38.756 --> 0:18:41.116 Carter gives him the job and then loses. It's very 0:18:41.156 --> 0:18:43.236 probably probably over this, so. 0:18:43.636 --> 0:18:47.716 It's an incredibly brave and self sacrificing thing to have done. 0:18:48.036 --> 0:18:52.716 Yes, but inflation was also really unpopular, So I think 0:18:52.876 --> 0:18:55.036 that's something that maybe I didn't have a sense of 0:18:55.316 --> 0:18:58.236 in the politics of until I saw the inflation during COVID. 0:18:58.436 --> 0:18:59.876 People really hate inflation. 0:19:00.036 --> 0:19:03.196 So let me stop you there. Because people hate inflation 0:19:03.636 --> 0:19:07.516 above a certain number, Yes, they're completely fine with steady, 0:19:07.556 --> 0:19:09.196 small inflation, right, So what's. 0:19:08.996 --> 0:19:12.556 The number I think this is something we've been learning about. 0:19:12.676 --> 0:19:16.276 So right now, the FED tries to target two percent inflation, and. 0:19:17.156 --> 0:19:19.036 We all say that's fine, that's right, But if it 0:19:19.076 --> 0:19:21.476 gets to be five percent, we all get furious. 0:19:21.076 --> 0:19:24.116 Right, And the question of where that line is is 0:19:24.116 --> 0:19:27.676 not something we have, you know, scientific evidence on psychological matters. 0:19:27.716 --> 0:19:30.796 It is absolutely psychological. And you know, right now inflation 0:19:30.996 --> 0:19:33.476 is close to three percent, and so there's this obvious 0:19:33.556 --> 0:19:35.516 question maybe we should just leave it at three percent. 0:19:35.636 --> 0:19:37.596 And then the question is how angry does three percent 0:19:37.596 --> 0:19:39.476 inflation make it? And if you talk to people who 0:19:39.476 --> 0:19:41.196 are a little bit older, remember the period of the 0:19:41.276 --> 0:19:44.396 nineteen eighties and so on, they'll say people were five 0:19:44.396 --> 0:19:46.916 with three percent inflation. But then, on the other hand, 0:19:46.956 --> 0:19:48.956 from the perspective of the FED, there's this whole slippery 0:19:48.956 --> 0:19:50.916 slope issue that if we go from two to three, 0:19:51.396 --> 0:19:52.236 you know, who know, we. 0:19:52.236 --> 0:19:53.996 Acclimate them to three, then all of a sudden they'll 0:19:53.996 --> 0:19:57.756 be okay with four exactly. Yeah, Okay, that's but that's interesting, right. 0:19:57.916 --> 0:20:01.516 It's like, it isn't that people hate inflation. People actually 0:20:01.596 --> 0:20:05.116 kind of secretly like inflation in little in small amounts. 0:20:04.876 --> 0:20:07.396 Below two percent. We mostly just don't think about inflation. 0:20:07.636 --> 0:20:12.516 Yes, all right, So Jimmy Carter appoints Paul Volker to 0:20:12.556 --> 0:20:14.516 be the head of the FED in a period of 0:20:14.596 --> 0:20:18.396 high inflation in which everybody's angry about the inflation. And 0:20:18.436 --> 0:20:19.036 what does he do. 0:20:19.836 --> 0:20:22.516 He raises interest rates to something close to twenty percent 0:20:22.756 --> 0:20:23.836 short term rates, that's. 0:20:23.756 --> 0:20:28.516 Right, And how does he do that politically? Like, how 0:20:28.516 --> 0:20:29.876 does he even pull that off? 0:20:30.236 --> 0:20:32.036 It is extremely unpopular. 0:20:32.076 --> 0:20:34.076 Can you imagine someone doing that right now? If we 0:20:34.116 --> 0:20:36.876 woke up tomorrow morning and all of a sudden, the 0:20:37.676 --> 0:20:40.396 FED rate was twenty percent, so your credit card rate 0:20:40.436 --> 0:20:43.476 was forty percent or whatever it was, thirty percent or 0:20:43.476 --> 0:20:46.356 whatever it would be. I mean, they'd be cataclysmic for people. 0:20:46.716 --> 0:20:48.796 What's amazing is that he didn't get fired. 0:20:49.036 --> 0:20:51.316 It sounds like it's almost more of a norm shift 0:20:51.316 --> 0:20:52.196 than a legal shift. 0:20:52.596 --> 0:20:53.356 I think that's right. 0:20:53.956 --> 0:20:57.356 So the institution is the institution, but the norms around 0:20:57.396 --> 0:21:00.316 the institution are changing, and we've realized that we kind 0:21:00.356 --> 0:21:03.556 of need it to be independent for all of us 0:21:03.596 --> 0:21:04.956 to be to prosper. 0:21:05.036 --> 0:21:07.436 That's right, And in so many of our institutions there's 0:21:07.476 --> 0:21:10.876 this complicated relationship between norms and rules. So this is 0:21:10.916 --> 0:21:13.756 one of the most important ideas in monetary economics that 0:21:14.196 --> 0:21:18.316 if politicians have short horizons, they don't have very long 0:21:18.436 --> 0:21:20.796 until they need to get elected again, and in this 0:21:20.956 --> 0:21:24.116 short period of time they want to boost the economy. 0:21:24.676 --> 0:21:26.516 But on the other hand, if you have a really 0:21:26.596 --> 0:21:29.556 high inflation period like the United States did around nineteen eighty, 0:21:29.796 --> 0:21:32.116 and people start to expect this high inflation and they 0:21:32.116 --> 0:21:34.476 build it into wage contracts and all kinds of things, 0:21:34.596 --> 0:21:37.796 it can take a decade to bring inflation down, and 0:21:37.796 --> 0:21:39.716 so that's something that's mostly going to affect a lot 0:21:39.716 --> 0:21:43.076 of future politicians. So there's always this tension, and any 0:21:43.116 --> 0:21:47.116 country that you read about with central banking, this tension 0:21:47.156 --> 0:21:48.676 is sort of front and center. On top of that, 0:21:48.676 --> 0:21:50.556 the government often also just wants to borrow a lot 0:21:50.596 --> 0:21:53.076 of money. So that's another reason why the government wants 0:21:53.116 --> 0:21:56.516 to keep interest rates low, and central bank independence is 0:21:56.556 --> 0:21:58.276 all about trying to manage that tension. 0:21:58.476 --> 0:22:00.196 I was just thinking back to the time when they 0:22:00.196 --> 0:22:03.356 were kings. That's right, that a king actually might be 0:22:03.476 --> 0:22:05.676 quite reasonable about what you do with the money supply, 0:22:05.876 --> 0:22:08.636 because he's going to pay the price if you do 0:22:08.796 --> 0:22:12.036 lower interest rates and jack up the economy artificially. 0:22:12.116 --> 0:22:14.396 For a couple of years, and yet monetary policy was 0:22:14.556 --> 0:22:18.276 terrible during this era, and I attribute that mostly to 0:22:18.316 --> 0:22:20.476 the fact that they really just had had no idea 0:22:20.476 --> 0:22:25.556 what was going on. So I think I think for humans, 0:22:25.916 --> 0:22:28.356 the idea that you can print pieces of paper in 0:22:28.396 --> 0:22:32.076 some form and use them as money and this will 0:22:32.116 --> 0:22:35.116 sort of work out well is just actually a really 0:22:35.156 --> 0:22:38.156 profound idea that takes people a long time to understand 0:22:38.236 --> 0:22:43.396 and a long time to manage. 0:22:40.596 --> 0:22:44.276 And a long time to understand who pays the price 0:22:44.356 --> 0:22:45.596 if you introduce more. 0:22:45.756 --> 0:22:49.356 Exactly exactly so you know, you look at what happened 0:22:49.436 --> 0:22:52.116 in France, for example, under various kings, and there were 0:22:52.236 --> 0:22:55.196 huge amounts of inflation as they created huge amounts of 0:22:55.356 --> 0:22:59.836 money in various forms. And my sense is that a 0:22:59.836 --> 0:23:02.276 lot of this was about just not really understanding cause 0:23:02.316 --> 0:23:03.996 and effect. And I don't blame them. I think this 0:23:04.036 --> 0:23:08.556 is a really subtle concept. There's this really fascinating example 0:23:08.556 --> 0:23:11.436 of this island called the Island of Yap in which 0:23:11.756 --> 0:23:14.476 it was one of the first ledger systems. So there 0:23:14.476 --> 0:23:18.356 were these large stone coins, but they were not moveable, 0:23:18.676 --> 0:23:21.036 and this was actually the monetary system. It was your 0:23:21.116 --> 0:23:25.756 ownership of these stone coins, but they were a very 0:23:25.876 --> 0:23:26.796 large size that. 0:23:26.836 --> 0:23:27.876 You could move around. 0:23:27.996 --> 0:23:31.116 You couldn't move them around, but everybody knew that you 0:23:31.156 --> 0:23:33.436 owned one. So in fact, even if one sank to 0:23:33.476 --> 0:23:36.196 the bottom of the ocean, it didn't matter. You could 0:23:36.196 --> 0:23:38.516 still own a piece of it. So this was kind 0:23:38.556 --> 0:23:39.676 of a very early sense. 0:23:39.676 --> 0:23:41.396 And did they transact. 0:23:41.396 --> 0:23:42.836 It was it was a ledger system, so it was 0:23:42.876 --> 0:23:46.196 just your ownership in bitcoin exactly. It was exactly like 0:23:46.236 --> 0:23:50.476 bitcoin on the island of Yap. That's great, but it's 0:23:50.476 --> 0:23:51.196 a subtle idea. 0:23:51.276 --> 0:23:54.156 But were the stones fixed so that you could never 0:23:54.236 --> 0:23:55.476 introduce a new stone? 0:23:56.116 --> 0:23:57.716 So that I think is the crucial thing, right that 0:23:57.796 --> 0:23:59.916 you couldn't I don't know what the details were on 0:23:59.996 --> 0:24:03.356 finding new stones, but they were large objects so that 0:24:03.556 --> 0:24:06.356 it wasn't easy to create new ones. But later on, 0:24:06.756 --> 0:24:09.596 you know, you had this difficulty that other societ that 0:24:09.636 --> 0:24:11.756 came later but weren't as evolved in some sense as 0:24:11.796 --> 0:24:14.316 the Island of Yap. They wanted to have coins that 0:24:14.356 --> 0:24:16.316 you could actually transact with, that you could carry, that 0:24:16.356 --> 0:24:18.156 you could pick up, and so that's kind of how 0:24:18.156 --> 0:24:20.516 we got to gold. You want something that you can't 0:24:21.116 --> 0:24:23.956 just create new gold, but at the same time, it's 0:24:23.956 --> 0:24:25.996 small enough that you can transact in it. 0:24:26.196 --> 0:24:30.396 I love this idea that a central bank as we now, 0:24:30.516 --> 0:24:33.796 the central banks that we now have, are in part 0:24:33.836 --> 0:24:37.396 just an expression of an evolved understanding of what money 0:24:37.476 --> 0:24:42.396 is and how it works, and that we had to 0:24:42.476 --> 0:24:43.836 they have a lot of trial and error. 0:24:43.956 --> 0:24:45.916 Exactly exactly, all right, So. 0:24:46.316 --> 0:24:50.156 Walk me from from Vulcar. When all of a sudden 0:24:50.156 --> 0:24:53.076 we have basically the Federal Reserve that we now know, 0:24:53.596 --> 0:24:56.916 very powerful head of the FED, who becomes a kind 0:24:56.916 --> 0:24:57.716 of high priest of. 0:24:57.676 --> 0:25:00.876 Money and becomes even more powerfully because he raised interestates 0:25:00.916 --> 0:25:03.796 and it worked and inflation fell much more rapidly than 0:25:03.796 --> 0:25:04.516 anyone expected. 0:25:04.596 --> 0:25:07.316 Yes, so he's a success, inflicted a lot of pain, 0:25:07.796 --> 0:25:11.876 but a success. And so from that moment we have 0:25:11.996 --> 0:25:14.516 this character the head of the Fed, who everybody is 0:25:14.516 --> 0:25:16.876 looking to as a kind of priest, the priest of money, 0:25:17.156 --> 0:25:21.436 and who is regarded as outside the reach of politicians. 0:25:21.916 --> 0:25:25.476 They can appoint him, they can grill him, but they 0:25:25.476 --> 0:25:27.276 can't tell him what to do with the money supply. 0:25:27.516 --> 0:25:29.996 So I think in a way that's an exaggeration, because 0:25:30.036 --> 0:25:33.556 if you read the memoirs of central bankers, like for example, 0:25:33.636 --> 0:25:37.596 Alan Greenspan. Even though you have central bank independence, he's 0:25:37.636 --> 0:25:40.596 constantly interacting with members of Congress. 0:25:41.076 --> 0:25:42.756 So it's not true to say that the FED is 0:25:42.796 --> 0:25:45.996 not a political institution, but it's it's not a party 0:25:46.036 --> 0:25:49.196 political institution. What it is is it's managing. It's got 0:25:49.236 --> 0:25:51.996 to manage its relations, and it's more insulated. 0:25:51.996 --> 0:25:55.676 There's no doubt that it has independence. But to say 0:25:55.676 --> 0:25:58.676 that it doesn't have to worry about its independence at 0:25:58.716 --> 0:26:02.996 all is an exaggeration, because there are always political pressures, 0:26:03.236 --> 0:26:06.636 and it's clear that the FED chairs have never thought 0:26:06.716 --> 0:26:09.036 that they could just completely ignore those political pressures. 0:26:09.836 --> 0:26:12.636 Is it fair to say that from the moment that 0:26:12.996 --> 0:26:16.156 Vulgar sort of reinvents the role of the head of 0:26:16.156 --> 0:26:18.796 the FED, that role is not tested again until the 0:26:18.836 --> 0:26:20.476 two thousand and eight financial crisis. 0:26:20.956 --> 0:26:22.996 Yes, I think that was the biggest tust. 0:26:23.316 --> 0:26:25.596 We're going to take a quick break, and when we return, 0:26:26.516 --> 0:26:28.716 Emmy and I will talk about what the FED decided 0:26:28.756 --> 0:26:31.796 to do as banks started to collapse in two thousand 0:26:31.836 --> 0:26:43.716 and eight. I'm back with UC Berkeley economist Emmy Nakamarock 0:26:45.076 --> 0:26:47.756 described to me the FED going into the financial crisis 0:26:47.796 --> 0:26:51.036 and described to me who the players were, what happened 0:26:51.036 --> 0:26:52.236 and what it did in response. 0:26:52.636 --> 0:26:56.516 So Ben Bernanki was at the helm of the thunder 0:26:56.596 --> 0:26:58.076 reserve going into the financials. 0:26:58.156 --> 0:26:58.676 And who is he? 0:26:59.116 --> 0:27:03.876 Ben Bernanki is a scholar who started his career by 0:27:03.916 --> 0:27:08.156 studying the Great Depression, and then it's this incredible coincidence 0:27:09.196 --> 0:27:13.516 that he happens to be the person who's chairman of 0:27:13.556 --> 0:27:17.276 the FED at the time of the next big financial 0:27:17.316 --> 0:27:18.596 crisis in the United States. 0:27:19.316 --> 0:27:21.956 Let's quickly describe what this crisis looked like. 0:27:22.916 --> 0:27:25.996 So going into the financial crisis, you'd had this enormous 0:27:26.036 --> 0:27:29.156 real estate boom. House prices in the United States had 0:27:29.236 --> 0:27:32.236 risen dramatically. This had peaked in two thousand and six, 0:27:32.996 --> 0:27:35.316 so house paces were kind of on their way down 0:27:35.356 --> 0:27:38.516 by two thousand and seven. But there was a general view, 0:27:38.596 --> 0:27:41.916 including at the FED, that this might not be a 0:27:41.996 --> 0:27:45.996 huge issue for the rest of the economy. 0:27:46.276 --> 0:27:47.956 Thousands of prices go up, they go down, but it 0:27:47.956 --> 0:27:50.556 doesn't really affect what Americans are doing with in their. 0:27:50.396 --> 0:27:54.196 Economically exactly exactly. So at the very beginning, there were 0:27:54.196 --> 0:27:57.556 a few hedge funds they lost some money on real 0:27:57.636 --> 0:28:01.036 estate backed assets. But the view of the FED and 0:28:01.076 --> 0:28:02.636 a lot of other people was that this was going 0:28:02.676 --> 0:28:04.876 to be something that you could sort of sail through. 0:28:05.796 --> 0:28:09.796 And so early on the monetary policy they interest rates 0:28:09.836 --> 0:28:13.196 were over five percent. It was sort of normal monetary policy. 0:28:13.196 --> 0:28:15.036 There wasn't at all a sense that this was going 0:28:15.076 --> 0:28:17.676 to become a sort of historic event for the macro 0:28:17.716 --> 0:28:20.956 economy as opposed to some elements of the financial system. 0:28:22.316 --> 0:28:26.556 But then after this sort of benign starting point, you 0:28:26.676 --> 0:28:29.396 started to see things happening more quickly. And so this 0:28:29.476 --> 0:28:32.396 is the beginning of when the Fed in some sense 0:28:32.436 --> 0:28:35.636 starts to gamble. It's independence. What they're arguing. What Bernanki 0:28:35.716 --> 0:28:40.156 argues very forcefully, is that so he says he lived 0:28:40.196 --> 0:28:44.476 as a child on street called Main Street. So he says, 0:28:44.596 --> 0:28:46.636 I don't come from Wall Street. I come from Main Street, 0:28:46.876 --> 0:28:47.116 you know. 0:28:47.116 --> 0:28:50.276 I come from Main Street. That's my background. And I've 0:28:50.316 --> 0:28:52.596 never been on Wall Street. And I care about Wall 0:28:52.596 --> 0:28:55.476 Street for one reason and one reason only because what 0:28:55.556 --> 0:28:58.036 happens on Wall Street matters to Main Street. 0:28:58.756 --> 0:29:02.316 His dad was a pharmacist, you know. And he says, 0:29:02.716 --> 0:29:05.516 the only reason I care about this is because people 0:29:05.556 --> 0:29:08.036 like my dad will not be able to get alone. 0:29:08.196 --> 0:29:08.996 Where do they end up? 0:29:09.116 --> 0:29:11.236 What do they do they end up at that point 0:29:12.076 --> 0:29:16.196 in a situation of backstopping a bunch of loans that 0:29:16.276 --> 0:29:18.876 are made to bear Stearns. Basically, they take on some 0:29:18.956 --> 0:29:22.356 of the worst parts of bear Sterns balance sheet so 0:29:22.396 --> 0:29:26.636 that they facilitate private sector loans to bear Stearns and 0:29:27.276 --> 0:29:30.276 they allow things to continue in a somewhat orderly manner. 0:29:30.636 --> 0:29:33.356 So this is something which even at the time, there's 0:29:33.396 --> 0:29:38.276 a lot of skepticism about, because, first of all, there's 0:29:38.316 --> 0:29:40.396 the idea that, you know, what is the Fed doing 0:29:40.556 --> 0:29:42.956 to be bailing out this private sector actor who made 0:29:42.956 --> 0:29:45.116 a lot of mistakes. And second of all, there's the question, 0:29:46.236 --> 0:29:47.996 even if it was a good idea in terms of 0:29:47.996 --> 0:29:50.836 what's happening right now, shouldn't we be worried about what 0:29:50.876 --> 0:29:53.396 this tells other banks about the risks they. 0:29:53.356 --> 0:29:56.596 Bail you out too. It's kind of incredible this step, right, 0:29:57.116 --> 0:30:01.196 You've got a character chairman of the Federal Reserve who, 0:30:01.356 --> 0:30:05.116 only relatively recently in the grand sweep of history, has 0:30:05.196 --> 0:30:08.516 by norm become this kind of like god of money 0:30:08.596 --> 0:30:13.396 and God of finance, picking winners and losers in the economy. 0:30:13.956 --> 0:30:17.916 So briefly, walk me through the rest of the financial crisis. 0:30:18.636 --> 0:30:21.196 I think there's a hope that things will simmer down 0:30:21.316 --> 0:30:23.996 after this point, and maybe for a period of time 0:30:24.196 --> 0:30:27.476 it looks like they might, but there's still problems being 0:30:27.516 --> 0:30:29.156 caused by these real estate assets. 0:30:29.396 --> 0:30:32.156 All these banks have made really stupid loans, and. 0:30:32.116 --> 0:30:34.676 You can sort of line them up in order of 0:30:35.276 --> 0:30:39.156 which banks have the most of these that for me, 0:30:39.476 --> 0:30:42.476 so Lehman is sort of next on the list. And 0:30:42.516 --> 0:30:45.556 then the question is with these banks that are at 0:30:45.676 --> 0:30:48.436 risk because they have a lot of these real estate 0:30:48.476 --> 0:30:51.036 assets on their balance sheets, which have lost a lot 0:30:51.036 --> 0:30:53.516 of money, there's a question of what does that bank do. 0:30:54.036 --> 0:30:57.156 So if there was no one who was going to 0:30:57.236 --> 0:30:59.516 help them, then a natural thing for them to do 0:30:59.556 --> 0:31:02.396 would basically be to sell themselves to another bank which 0:31:02.396 --> 0:31:05.116 had a stronger balance sheet. And actually there are some 0:31:05.276 --> 0:31:07.556 banks that sell themselves during this period of time. But 0:31:07.556 --> 0:31:10.276 there's a big pushback again that because there's of course 0:31:10.316 --> 0:31:13.156 this hope that maybe the federal Reserve will will step 0:31:13.236 --> 0:31:15.476 in and help you, right, And so this is one 0:31:15.516 --> 0:31:18.476 of the immediate reasons why you start to see what 0:31:18.516 --> 0:31:21.916 people call moral hazard, that if you think somebody might 0:31:21.996 --> 0:31:24.276 save you, right, like you know, when you go hiking 0:31:24.356 --> 0:31:26.036 or something like that, if you know that there's a 0:31:26.036 --> 0:31:28.476 mountain patrol, then you might be a little bit more 0:31:28.476 --> 0:31:30.916 blase about whether you might go on this you know, 0:31:31.036 --> 0:31:33.396 tough mountain trail because you really want to go and 0:31:34.476 --> 0:31:36.436 you think someone will save you in the event that 0:31:36.516 --> 0:31:38.436 you kind of get stuck, you might do it. And 0:31:38.476 --> 0:31:41.396 so this is this is happening over the over the 0:31:41.516 --> 0:31:44.756 over the summer that you know, Leman, for example, you know, 0:31:44.836 --> 0:31:47.996 clearly has these bad assets on its balance sheet. So 0:31:48.116 --> 0:31:52.996 Leman actually becomes insolvent, bankrupt, and then there's some question. 0:31:52.796 --> 0:31:55.556 S Nike does not save Lehman Brothers, right, if he 0:31:55.636 --> 0:31:58.876 believes it's so important to save these places because of 0:31:58.956 --> 0:32:00.716 what he's learned about the Great Depression, why does any 0:32:00.756 --> 0:32:01.556 save Leman Brothers. 0:32:01.596 --> 0:32:04.796 So in the aftermath that's become a big question. And 0:32:05.036 --> 0:32:08.036 at the time, what Brnanki said was that it was 0:32:08.116 --> 0:32:10.796 not within the federal reserves perview to do that, that 0:32:10.836 --> 0:32:14.036 they simply didn't have enough good collateral. I've spoken to 0:32:15.116 --> 0:32:20.636 various economists after this crisis, you know, including people on 0:32:20.716 --> 0:32:22.796 the right of the political spectrum, and there are quite 0:32:22.796 --> 0:32:25.236 a few people who will say that if they had 0:32:25.276 --> 0:32:27.236 known how bad the financial crisis would be they they 0:32:27.276 --> 0:32:29.956 would have said that the feed should have offered more support. 0:32:30.956 --> 0:32:34.276 So you now have Lehman Brothers fail. Then what happens? 0:32:34.716 --> 0:32:38.276 So after Lehman Brothers fail, then the whole financial market 0:32:38.316 --> 0:32:40.236 really starts to freak out. And if you think about 0:32:40.276 --> 0:32:43.796 the mortgage market, so this is something that affects you know, 0:32:43.876 --> 0:32:47.076 lots of people, you know, including you know, like Ben 0:32:47.076 --> 0:32:49.956 Bernanki's dad, the pharmacist, if he had been trying to 0:32:49.956 --> 0:32:53.716 get a loan for his business at the time. That market, 0:32:53.756 --> 0:32:57.316 all of these asset backed securities that were being used 0:32:57.356 --> 0:33:00.036 to finance a lot of mortgages. That market is completely 0:33:00.116 --> 0:33:01.676 falling apart during this period of time. 0:33:01.796 --> 0:33:03.836 So now we're so we're in a vicious cycle of 0:33:03.876 --> 0:33:07.876 mistrust and real problems. I want to stop right there, 0:33:07.876 --> 0:33:10.676 and I want you to imagine from me, if from 0:33:10.676 --> 0:33:13.636 that moment on, there is no Federal Reserve, there is 0:33:13.676 --> 0:33:16.876 no central Bank, how do you think it plays out. 0:33:18.196 --> 0:33:20.356 I think that a lot of banks would fail. 0:33:20.796 --> 0:33:22.116 Do you think all of them would have failed? 0:33:22.316 --> 0:33:22.516 No? 0:33:23.196 --> 0:33:25.836 I mean my baseline starting point is this is the 0:33:25.876 --> 0:33:28.156 Great Depression when half of them failed. But there were 0:33:28.196 --> 0:33:31.476 some improvements relative the Great Depression, even without the Federal Reserve, 0:33:31.556 --> 0:33:34.956 So in particular, there's deposit insurance, so that's sort of 0:33:35.236 --> 0:33:37.236 keeping things a little bit more stable than you would 0:33:37.236 --> 0:33:39.676 have seen without the Federal Reserve. But there are a 0:33:39.676 --> 0:33:43.316 lot of sort of non bank bank like entities that 0:33:43.356 --> 0:33:47.276 are out there that would have failed, and there would 0:33:47.276 --> 0:33:49.116 have been a lot of fear associated with that. One 0:33:49.116 --> 0:33:53.716 of the anecdotes that I remember people really thought was 0:33:53.756 --> 0:33:56.956 scary at the time was was General Electric. I think 0:33:56.956 --> 0:33:58.996 it was trying to get a working capital loone. A 0:33:59.036 --> 0:34:02.556 working capital loone is just companies in general, when they 0:34:02.596 --> 0:34:04.836 want to pay their employees, they often have to borrow 0:34:04.916 --> 0:34:07.396 money because they have to pay their employees before they 0:34:07.436 --> 0:34:10.196 get paid for the products that the employees are producing. 0:34:10.876 --> 0:34:14.156 And so this type of loan is typically quite safe, 0:34:14.356 --> 0:34:17.516 you know, happens at very low interest rates. But even 0:34:17.556 --> 0:34:21.716 a company like General Electric was having trouble borrowing money 0:34:21.716 --> 0:34:26.236 to pay its employees. So this idea that companies have 0:34:26.276 --> 0:34:28.596 to borrow money even just to pay their employees, even 0:34:28.596 --> 0:34:31.236 in the normal course of business, sort of tells you 0:34:31.796 --> 0:34:34.436 what could have happened in the event that the financial 0:34:34.636 --> 0:34:37.036 and financial system it sort of started to destruct in. 0:34:36.956 --> 0:34:38.876 This So if we imagine a world in which is 0:34:38.916 --> 0:34:42.316 just the irascibility of the American public and this suspicion 0:34:42.356 --> 0:34:45.436 of centralized power and all the rest had got us 0:34:45.436 --> 0:34:47.716 to two thousand, as far as two thousand and eight 0:34:47.876 --> 0:34:52.156 without a central bank or or or without a FED 0:34:52.196 --> 0:34:55.796 that's got real powers. Just how bad do you think 0:34:55.836 --> 0:34:58.516 things could have gotten in the economy? What kind of unemployment? 0:34:58.796 --> 0:35:00.636 What kind of cost a GDP? 0:35:01.796 --> 0:35:04.396 I think you could have had, you know, twenty percent unemployment? 0:35:04.476 --> 0:35:07.636 You know we had we had almost ten percent unemployment, 0:35:07.636 --> 0:35:09.436 but you could have had twenty percent ONU employment. You 0:35:09.476 --> 0:35:12.196 could have had, you know, investment sort of almost stop 0:35:12.236 --> 0:35:14.676 for you to have another great depression something like that. 0:35:15.076 --> 0:35:20.356 So Burneki goes into this with bear Stearn's eyes open, 0:35:20.796 --> 0:35:24.516 realizing that he is jeopardizing the independence of the FED 0:35:25.756 --> 0:35:29.116 gambling I would gambling gambling the independent FED, because he 0:35:29.236 --> 0:35:32.956 knows that it's going to get hot politically when you 0:35:32.996 --> 0:35:36.676 were picking winners and losers, when you are distorting. 0:35:36.156 --> 0:35:38.996 Markets, and when there are always critics of the FED. 0:35:39.156 --> 0:35:41.396 So there, if you look at Congress, there are always 0:35:41.436 --> 0:35:42.996 people who are saying that we should go back to 0:35:43.036 --> 0:35:48.716 the gold standard. So previously, the FED pretty narrowly had 0:35:48.796 --> 0:35:50.716 a balance sheet. So if the FED is kind of 0:35:50.916 --> 0:35:55.756 like a bank, it has assets and liabilities. The assets 0:35:55.836 --> 0:35:59.876 were almost entirely government debt. So I mentioned before, US 0:35:59.956 --> 0:36:03.836 government debt is viewed as the safest debt there is, right, right, So. 0:36:03.796 --> 0:36:06.516 When they print money, they get collateral, right right, and 0:36:06.596 --> 0:36:10.916 so so until two thousand and eight, that collateral is treasuries. 0:36:10.956 --> 0:36:13.356 Did it used to be gold in gold? 0:36:13.476 --> 0:36:15.956 Yes? Yes, And in fact the FED still has some gold. 0:36:16.156 --> 0:36:18.876 Yes. And back in the day you want money, I 0:36:18.876 --> 0:36:20.756 have to come for gold, and they give me some money. 0:36:20.836 --> 0:36:23.036 And you can actually go to the New York Fed 0:36:23.156 --> 0:36:25.196 and you can go on the gold tour. You can 0:36:25.236 --> 0:36:28.236 see the gold. You can see they have gold in 0:36:28.316 --> 0:36:31.916 little cages from different countries around the world. They have 0:36:32.396 --> 0:36:36.636 special shoes, special titanium shoes that you wear when you're 0:36:36.676 --> 0:36:39.276 holding a gold bar, because if you drop a gold 0:36:39.316 --> 0:36:41.636 bar on your foot, you know you'll break your toes. 0:36:42.516 --> 0:36:43.156 Is that true? 0:36:43.276 --> 0:36:47.036 Yes? And they have a scale for measuring, you know, 0:36:47.196 --> 0:36:49.756 gold in the event of a transaction from between two countries, 0:36:49.756 --> 0:36:52.196 which just means moving one piece of gold from the 0:36:52.236 --> 0:36:54.916 cage of one country to another country. And they have 0:36:54.956 --> 0:36:56.916 a person who knows how to use this scale and 0:36:56.916 --> 0:36:59.556 the titanium shoes. But when I visited the New York 0:36:59.556 --> 0:37:02.116 FED and went on this gold tour, I asked them 0:37:02.156 --> 0:37:05.756 when the last transaction, you know, it was like five 0:37:05.836 --> 0:37:10.076 years ten years ago, you know, so I think you know, 0:37:10.236 --> 0:37:13.116 we built like the stones and yap, you know, absolutely, 0:37:13.196 --> 0:37:14.316 it's a relic, relic. 0:37:16.276 --> 0:37:18.596 We went down on a rabbit hole there. But it's 0:37:19.196 --> 0:37:22.116 so back to the two thousand and eight. Up to 0:37:22.156 --> 0:37:26.516 this moment, the FED is accepting treasuries to get if 0:37:26.556 --> 0:37:30.236 you want dollars, right, and now it will accept other things. 0:37:30.036 --> 0:37:30.476 That's right. 0:37:30.516 --> 0:37:31.436 What other things? 0:37:31.796 --> 0:37:36.676 Well, for example, they're starting to loan against asset backed securities, 0:37:37.036 --> 0:37:38.996 so in particular mortgage backed security. 0:37:39.036 --> 0:37:41.356 So we talked about my home mortgage. 0:37:40.876 --> 0:37:43.236 That's right. So we talked about the idea that you know, 0:37:43.276 --> 0:37:46.556 the US housing market was starting to slow down, peaked 0:37:46.556 --> 0:37:48.836 in two thousand and six, and there were all of 0:37:48.836 --> 0:37:52.156 these mortgages. And it's not that the FED was holding 0:37:52.196 --> 0:37:55.476 individual mortgages, but the banks had played a big role 0:37:55.676 --> 0:37:59.316 in repackaging these mortgages into what we're called mortgage back securities, 0:37:59.476 --> 0:38:03.556 and some of them are guaranteed by these quasi governmental 0:38:03.556 --> 0:38:03.956 at the time. 0:38:03.996 --> 0:38:06.476 Institutionals, they're almost like tragedy, that's right, But. 0:38:06.436 --> 0:38:09.076 The market wasn't treating things that way at the time, 0:38:09.356 --> 0:38:11.716 And so that's the sense at which it was a 0:38:11.756 --> 0:38:15.316 real decision by the FED to be willing to take 0:38:15.356 --> 0:38:17.356 these kinds of assets. 0:38:17.716 --> 0:38:20.036 But if I'm the pharmacist on Main Street and I'm 0:38:20.036 --> 0:38:23.436 just watching this from a distance, what it looks like is, oh, 0:38:23.516 --> 0:38:26.996 these banks made these crappy loans. Now they get to 0:38:27.036 --> 0:38:29.476 go take those loans to the FED, and the FED 0:38:29.516 --> 0:38:33.396 will give them actual dollars for those loans, right, getting 0:38:33.396 --> 0:38:34.556 them out of their problem. 0:38:34.716 --> 0:38:39.556 Right, And that's not wrong. But what brend Burnanke said, 0:38:39.596 --> 0:38:42.036 and this was one of the things he did to 0:38:42.196 --> 0:38:45.756 try to sort of battle against risking the indepedance of 0:38:45.796 --> 0:38:47.756 the FED, was he tried to speak directly to people. 0:38:47.836 --> 0:38:50.436 So there was this famous moment when he went on 0:38:50.476 --> 0:38:54.236 sixty minutes, which was not something that any prior FED 0:38:54.316 --> 0:38:56.716 chair and had done. But he wanted to speak directly 0:38:56.756 --> 0:39:00.516 to the public, and he made the argument that while 0:39:00.636 --> 0:39:03.276 it looks terrible for the FED to be bailing out 0:39:03.276 --> 0:39:06.156 these banks that lost a lot of money, and probably, 0:39:06.156 --> 0:39:08.676 you know, maybe should have known better. On the other hand, 0:39:08.796 --> 0:39:12.076 if we don't do something about this banking crisis, then 0:39:12.076 --> 0:39:13.476 you're not going to be able to get a mortgage. 0:39:13.676 --> 0:39:15.836 Let me give you an analogy. If you have a 0:39:15.836 --> 0:39:19.556 neighbor who smokes in bed, and he's a risked everybody, 0:39:20.156 --> 0:39:22.916 and suppose he sets fire to his house, and you 0:39:22.996 --> 0:39:24.796 might say to yourself, I'm not going to call the 0:39:24.876 --> 0:39:25.556 fire department. 0:39:25.916 --> 0:39:27.716 Let his house burn down. It's fine with me. 0:39:28.276 --> 0:39:29.876 But then, of course, what if your house is made 0:39:29.916 --> 0:39:31.636 of wood and it's right next door to his house. 0:39:31.796 --> 0:39:34.276 What if the whole town is made of wood. That's 0:39:34.276 --> 0:39:35.116 where we are now. 0:39:35.356 --> 0:39:37.196 It was a very unusual thing that he was making 0:39:37.236 --> 0:39:39.076 this case directly to the public, But it was really 0:39:39.116 --> 0:39:41.836 brought on by the fact that the FED couldn't afford 0:39:41.996 --> 0:39:45.116 to be a completely technocratic, insular organization. 0:39:45.596 --> 0:39:49.796 Right. What I'm hearing is that the actions of Ben 0:39:49.836 --> 0:39:55.756 Bernaki and the FED probably prevented another depression. It avoided 0:39:55.836 --> 0:39:59.596 a lot of pain on the one hand. On the 0:39:59.636 --> 0:40:05.156 other hand, it infuriated a huge number of Americans. 0:40:06.396 --> 0:40:11.716 I think it just feels terrible to see these institutions 0:40:12.116 --> 0:40:15.756 get bailed out who made such bad decisions. It was 0:40:15.796 --> 0:40:17.996 also the case that there were big bonuses that were 0:40:17.996 --> 0:40:21.196 paid out by the Wall Street banks during this period 0:40:21.236 --> 0:40:23.236 of time, you know, which was a period of time 0:40:23.276 --> 0:40:28.396 when a lot of Americans didn't have jobs. And it's 0:40:28.436 --> 0:40:32.116 also the fact that in macroeconomics in general, but in 0:40:32.156 --> 0:40:34.596 this episode for sure, you never get to see what 0:40:34.756 --> 0:40:40.636 would have happened without the intervention. So in the Great Depression, 0:40:40.796 --> 0:40:44.876 we saw this awful thing happen. The argument that Ben 0:40:44.916 --> 0:40:46.556 Bernanki was trying to make is it well, it could 0:40:46.596 --> 0:40:48.916 have been even worse, and he, you know, he made 0:40:48.956 --> 0:40:49.996 it compellingly enough. 0:40:50.556 --> 0:40:53.516 He's maybe the world's expert on this subject. 0:40:53.116 --> 0:40:56.356 That's right, and he convinced congress people on both sides 0:40:56.396 --> 0:40:57.916 of the aisle that it was true. And that's why 0:40:59.396 --> 0:41:00.756 the interventions were so large. 0:41:01.076 --> 0:41:05.956 Right, So we go from nineteen thirteen with a FED 0:41:06.076 --> 0:41:10.316 that's yoked to the political process and is there mainly 0:41:10.356 --> 0:41:13.036 to kind of smooth out the money supply over the harvests, 0:41:13.236 --> 0:41:16.836 to two thousand and eight, where you've got a FED 0:41:16.916 --> 0:41:22.076 that is master manipulator of the entire economy. Two things. 0:41:22.276 --> 0:41:27.316 One is, is it now just generally understood that the 0:41:27.436 --> 0:41:29.676 role of the FED is not just to smooth out 0:41:29.676 --> 0:41:32.276 the money supply over the harvest, just to run the 0:41:32.276 --> 0:41:36.276 money supply. But it's also got this other unconventional role 0:41:36.436 --> 0:41:39.236 in the event of crises, where it can buy and 0:41:39.276 --> 0:41:42.716 sell all kinds of stuff to make things better in 0:41:42.756 --> 0:41:43.196 their view. 0:41:44.116 --> 0:41:46.396 I think it is widely understood that that part of 0:41:46.436 --> 0:41:50.276 what the FED does is probably here to stay. There 0:41:50.316 --> 0:41:51.876 are these questions. You know, the FED is a big 0:41:51.916 --> 0:41:56.036 actor in financial markets that affects people. It affects different 0:41:56.036 --> 0:41:59.636 people in different companies in different ways. And how does 0:41:59.676 --> 0:42:01.996 it sort of try to make that neutral or can 0:42:02.036 --> 0:42:05.236 it make it neutral? Those are things that are certainly 0:42:05.356 --> 0:42:07.476 sources of controversy today it's. 0:42:07.316 --> 0:42:10.916 A source of controversy, but it's kind of undeniable. But 0:42:10.996 --> 0:42:13.716 the power of this or potential power of this institution 0:42:13.836 --> 0:42:16.836 has just grown. It's incredible, the power of this institution, 0:42:16.996 --> 0:42:19.196 and it is happening now in a climate where it's 0:42:19.236 --> 0:42:22.716 independence is being threatened. Right that a private actor, a 0:42:22.796 --> 0:42:25.836 president could get a hold of this institution and use 0:42:25.916 --> 0:42:28.236 these new powers in a completely unorthodox way. 0:42:28.276 --> 0:42:30.276 Now, one thing I would say is that its power 0:42:30.316 --> 0:42:33.156 can also be destroyed. In the nineteen seventies, nobody believe 0:42:33.196 --> 0:42:36.116 the set about anything, So you really had to get 0:42:36.116 --> 0:42:38.956 into a situation with Fulker where you know, people didn't 0:42:38.956 --> 0:42:40.796 believe them until they saw it. Right, He just he 0:42:40.876 --> 0:42:43.756 raised interest rates dramatically. But the that of that time 0:42:43.796 --> 0:42:46.236 did not have the power to promise things. And the 0:42:46.236 --> 0:42:51.116 same goes for inflation. So during the post COVID inflation surge, 0:42:51.316 --> 0:42:54.116 inflation got up, you know, to something like seven percent. 0:42:54.676 --> 0:42:59.876 Through that whole time, professional forecasters were completely convinced inflation 0:42:59.916 --> 0:43:03.156 would get down two percent again, completely convinced basically, you know, 0:43:03.196 --> 0:43:05.556 they had no worries about this, and that actually matters 0:43:05.596 --> 0:43:07.876 for regular people because if you went to get a mortgage, 0:43:07.996 --> 0:43:10.196 the mortgage rate you faced was based on the idea 0:43:10.636 --> 0:43:12.396 that inflation was going to be two percent. 0:43:12.156 --> 0:43:13.876 Again, right, because they believe the FED. 0:43:13.916 --> 0:43:15.636 Because they believed it, so that there's. 0:43:15.636 --> 0:43:18.716 Enormous value in the trust in this industr that's right, 0:43:18.796 --> 0:43:21.436 and that absolutely can be destroyed. Do you worry about 0:43:21.436 --> 0:43:22.436 the Fed's independence? 0:43:22.996 --> 0:43:26.596 Of course, this is probably one of the most frightening 0:43:26.636 --> 0:43:30.076 times for FED independence, or maybe the most frightening time 0:43:30.116 --> 0:43:33.556 for FED independence since maybe the Mulcar disinplace or something 0:43:33.596 --> 0:43:35.036 like that, for a long. 0:43:34.876 --> 0:43:38.476 Time since Nixon. Yes, but it's happening in a different 0:43:38.516 --> 0:43:41.516 environment where the importance of the institution is just bigger 0:43:41.556 --> 0:43:44.796 than it was. The awareness of how to use it 0:43:44.836 --> 0:43:48.316 is for more top of mind. It's like this big 0:43:48.356 --> 0:43:51.916 insurance policy in the on the financial markets, and it's 0:43:51.956 --> 0:43:53.476 a money maker, and it's a money maker. 0:43:53.556 --> 0:43:56.476 It's a huge money maker. So you know, around the world, 0:43:56.636 --> 0:44:00.716 investors are willing to lend the US government money at 0:44:00.796 --> 0:44:04.836 incredibly low interest rates. So that means the US government 0:44:04.916 --> 0:44:08.436 can run these huge deficits year after year and pay 0:44:08.516 --> 0:44:11.316 very little. But most countries around the world don't have 0:44:11.396 --> 0:44:12.636 that luxury. 0:44:12.436 --> 0:44:15.116 And we would lose that luxury if people cease to 0:44:15.156 --> 0:44:15.756 trust the FED. 0:44:15.796 --> 0:44:17.876 Because part of the reason people want to hold US 0:44:17.916 --> 0:44:21.556 debt is because they trust that the US government will 0:44:21.556 --> 0:44:23.796 not default in a sense, if you borrow one hundred dollars, 0:44:23.836 --> 0:44:25.596 you'll pay you back hundred dollars. But also they won't 0:44:25.596 --> 0:44:28.516 have a lot of inflation. Right, So those two things 0:44:28.596 --> 0:44:31.996 are required to make people really value your debt. And 0:44:32.036 --> 0:44:34.516 the second one is controlled by the FED. 0:44:35.676 --> 0:44:38.756 What do you make the odds that we're going to 0:44:38.756 --> 0:44:42.876 emerge from the Trump years with an independent FED? You're 0:44:42.876 --> 0:44:48.716 a betting lady that will have it. I hope so, yeah, 0:44:48.756 --> 0:44:55.036 that sounds about right. Yeah, that sounds about right. I 0:44:55.036 --> 0:44:57.796 want to thank Emmy Nakamura for giving us an absolute 0:44:57.956 --> 0:45:01.636 master class on the Federal Reserve Bank, its history and 0:45:01.676 --> 0:45:05.316 the way it's changed. Emmy is the Chancellor's Professor of 0:45:05.356 --> 0:45:08.156 Economics at UC Berkeley. You can find links to her 0:45:08.196 --> 0:45:09.196 work in our show. 0:45:08.956 --> 0:45:14.196 Note Against the Rules. The Big Short Companion is hosted 0:45:14.196 --> 0:45:17.676 by Michael Lewis. It's produced by Me Ludy, Jane Kott, 0:45:17.916 --> 0:45:22.716 and Catherine Girodel. Our editor is Julia Barton. Our theme 0:45:22.916 --> 0:45:26.796 was composed by Nick Burtel, and our engineer is Hans Dale. 0:45:26.876 --> 0:45:32.916 She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela 0:45:32.996 --> 0:45:37.196 Lawrence and the rest of the Pushkin Audiobooks team. Against 0:45:37.236 --> 0:45:40.796 the Rules is the production of Pushkin Industries. To find 0:45:40.836 --> 0:45:45.316 more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts, 0:45:45.676 --> 0:45:48.476 or wherever you listen to podcasts, and if you'd like 0:45:48.516 --> 0:45:51.956 to listen ad free and learn about other exclusive offerings, 0:45:52.236 --> 0:45:54.676 don't forget to sign up for a Pushkin Plus subscription 0:45:55.236 --> 0:46:00.196 at Pushkin, dot Fm, Slash Plus or honor Apple show page, 0:46:00.356 --> 0:46:03.236 and you can get The Big Short now at Pushkin, 0:46:03.396 --> 0:46:09.356 dot FM, slash Audiobooks, or wherever audiobooks are sold. 0:46:20.396 --> 0:46:22.476 It's Jacob Goldstein. I'm the co host of a new 0:46:22.516 --> 0:46:25.436 show called Business History, and we're bringing you a clip 0:46:25.516 --> 0:46:28.396 right now from an episode we did about a mathematician 0:46:28.516 --> 0:46:32.556 named Jim Simon's. Simons wanted to take human emotions out 0:46:32.596 --> 0:46:36.556 of investing, and after a few early hiccups, including buying 0:46:36.636 --> 0:46:39.476 up all the potatoes in Maine, he created one of 0:46:39.476 --> 0:46:42.716 the greatest money machines in history. I really hope you 0:46:42.756 --> 0:46:44.636 like the clip, and if you want to hear more, 0:46:44.756 --> 0:46:47.876 please check out the show. It's called Business History and 0:46:47.916 --> 0:46:52.396 it's available wherever you're listening right now. They were doing 0:46:52.436 --> 0:46:54.996 what we would call today machine learning. 0:46:55.036 --> 0:46:59.396 A machine learning is like, essentially, you build a system 0:46:59.396 --> 0:47:01.316 in a computer. You feeded a bunch of data and 0:47:01.356 --> 0:47:04.356 the system sort of builds a map of the relationships 0:47:04.356 --> 0:47:06.556 in that data, and then with new data it can 0:47:06.636 --> 0:47:10.236 kind of interpolate or extrapolate and guesses about. 0:47:09.996 --> 0:47:10.916 What should come next. 0:47:11.236 --> 0:47:14.676 And of course today we have an exciting, maybe misleading, 0:47:14.796 --> 0:47:16.836 confounding term for machine learning. 0:47:17.356 --> 0:47:18.156 We call it AI. 0:47:18.476 --> 0:47:21.836 Exactly right right, this is still very basic machine learning, 0:47:22.036 --> 0:47:25.836 and the computer at the time keeps making mistakes that 0:47:25.836 --> 0:47:29.956 they didn't really understand. So, for instance, once the computer 0:47:30.636 --> 0:47:36.836 developed a taste for potatoes, main potatoes, the system kept 0:47:36.956 --> 0:47:42.836 buying main potato futures in the state of Maine, potato. 0:47:42.436 --> 0:47:45.036 Potatoes, big harvest next year or whatever. 0:47:45.276 --> 0:47:49.356 Yes, okay, until two thirds of the company's money was 0:47:49.396 --> 0:47:52.196 in potatoes. They were all in potatoes. And they got 0:47:52.236 --> 0:47:56.196 a call from the regulators, the cft A CFPPS. 0:47:55.996 --> 0:47:57.956 Come out of Futures Trading Commission. 0:47:57.596 --> 0:48:01.316 Right yeah, saying whoa who are you guys, Like, what 0:48:01.316 --> 0:48:03.716 are you doing over there? You have almost cornered the 0:48:03.756 --> 0:48:07.636 market on potatoes. You have to sell And they ended 0:48:07.756 --> 0:48:12.756 up losing money on the trade because blown out on potatoes, 0:48:12.876 --> 0:48:16.516 they had stopped the computer or whatever the computer's plan was. 0:48:17.156 --> 0:48:19.956 But you know, this was just one small weird thing. 0:48:20.356 --> 0:48:24.116 Simon and Baum were really kind of nervous about this 0:48:24.156 --> 0:48:27.036 whole thing. They had taken investors' money, they didn't really 0:48:27.036 --> 0:48:31.276 know if their system worked. And as the story gets told, 0:48:31.316 --> 0:48:34.476 they start to like second guess the computer and themselves, 0:48:34.516 --> 0:48:36.796 and they start to think, well, I have this intuition 0:48:36.876 --> 0:48:40.596 that gold's gonna go up because of the geopolitical situation, 0:48:40.836 --> 0:48:42.596 and they'd make some money on that, and then they'd 0:48:42.596 --> 0:48:45.836 lose some money on that, and so by doubting their 0:48:45.876 --> 0:48:49.316 own system, it just wasn't really working. And at that 0:48:49.396 --> 0:48:51.756 point they're just Wall Street investors, right when the big 0:48:51.756 --> 0:48:55.156 computer trying to buy more potatoes and the man won't 0:48:55.196 --> 0:48:56.276 let them buy potatoes