Speaker 1: Pushkin.
Speaker 2: I'm Lydia Dean Kott.
Speaker 1: And I'm Michael Lewis.
Speaker 3: This is the Big Short companion series on Against the Rules.
Speaker 3: So in the last couple of episodes we talked to
Speaker 3: people who were in the book, and this episode's going
Speaker 3: to be kind of different because it's actually about an institution,
Speaker 3: the Federal Reserve. In two thousand and eight, the chairman
Speaker 3: of the Fed was an economist called Ben Bernanki, and
Speaker 3: there's a clip of him from your new audiobook of
Speaker 3: The Big.
Speaker 1: Short, Chairman Bernanki, The floor is yours.
Speaker 4: At this juncture, however, the impact on the broader economy
Speaker 4: and financial markets of the problems in the subprime market
Speaker 4: seems likely to be contained.
Speaker 1: Chapter seven, The Great Treasure Hut.
Speaker 4: We will continue to monitor this situation closely.
Speaker 3: That's Ben bernanky of the FAY. Why are we doing
Speaker 3: an episode that's about the Federal Reserve?
Speaker 1: The financial crisis is just an excellent opportunity to teach
Speaker 1: people what the hell of the Federal Reserve is, where
Speaker 1: it came from, why we have it, why it matters
Speaker 1: that it might be in jeopardy right now. And there
Speaker 1: was this person Emi Nakamura, who is World class monetary
Speaker 1: economists knows more about the Federal Reserve and monetary policy
Speaker 1: than like most anybody walking the planet who lives around
Speaker 1: the corner from me, and I just thought, like, sit
Speaker 1: down with Emmy and answer questions I have about it.
Speaker 3: I liked this episode because I went into it not
Speaker 3: knowing anything about the Federal Reserve and kind of feeling
Speaker 3: like I'm too far behind, I'll never know well.
Speaker 1: I mean I feel that way sometimes.
Speaker 3: That's what it was nice about it is that you
Speaker 3: actually had questions, like it seemed like you were learning
Speaker 3: too about the Federal Reserve. So that made me feel
Speaker 3: like there's not something wrong with me for not fully
Speaker 3: understanding it. And it's possible well to understand it.
Speaker 1: I mean, do you feel better having understood it a
Speaker 1: bit more or do you feel like, oh, you learned
Speaker 1: about it and that was an hour of your life
Speaker 1: you can't do, yell.
Speaker 3: I think it's good that I know about it, for sure.
Speaker 1: I mean, it is in the news right now. It
Speaker 1: is a huge deal that the Trump White House wants
Speaker 1: to take control of the Federal Reserve and make decisions
Speaker 1: about monetary policy that were previously made are currently made
Speaker 1: by nonpartisan experts, and the presence of an independent federal
Speaker 1: Reserve in the financial crisis was critical to resolving the crisis.
Speaker 1: It was critical to restoring any kind of trust in
Speaker 1: the system. So that they're fiddling with that institution now
Speaker 1: and threatening the trust. It has such big implications. I
Speaker 1: think that, like our culture should just understand it better.
Speaker 1: My hope for the episode is that people like me,
Speaker 1: who have you any interest in it and some knowledge
Speaker 1: about it, but not expert at all, they find it
Speaker 1: really interesting cause you're hearing it's explained in plain language
Speaker 1: and some deeper questions are being answered. But that also
Speaker 1: people who have no idea what the Federal Reserve does, well,
Speaker 1: all of a sudden have a picture in their mind
Speaker 1: the next time they hear the phrase Federal Reserve bank.
Speaker 3: All right, let's get into it. Here is Michael Lewis's
Speaker 3: conversation with Emmy Nakamura, an economist at UC Berkeley and
Speaker 3: an expert on all things FED, including where they keep
Speaker 3: our goal, which apparently they still have some of quite
Speaker 3: a bit, quite a bit, and if you listen you
Speaker 3: can know where to find it.
Speaker 1: I began my conversation with the economist Ammi Nakamura by
Speaker 1: asking her win the FED got created.
Speaker 2: So the FED is a fairly modern invention as things go.
Speaker 2: It was created in nineteen thirteen, and I think the
Speaker 2: approximate cause is why the FED was created was banking crisis.
Speaker 2: So in the previous century there had been something like
Speaker 2: twelve banking crisis. Basically, these banking crises were happening all
Speaker 2: the time.
Speaker 1: Banks failing.
Speaker 2: That's right, banks failing. Banking crisis is more than just
Speaker 2: one bank failing, it's lots of banks failing. And there
Speaker 2: was a particularly bad one in nineteen oh seven where
Speaker 2: lots of banks failed and the banking crisis didn't end
Speaker 2: until John Pierport Morgan put in his own money to
Speaker 2: try to end this banking crisis. And at that point,
Speaker 2: the story goes that people sort of realized that something
Speaker 2: had to be done so that you didn't have to
Speaker 2: depend on John Pierpoint Morgan to come in and be
Speaker 2: superman and save the day.
Speaker 1: And was this so this was in the United States.
Speaker 1: Did any version of the Federal Reserve exist outside the
Speaker 1: United States?
Speaker 2: Yes, so in some other countries, for example, in England
Speaker 2: there were central banks for a much longer period of time.
Speaker 2: The US was relatively late to the game. This is
Speaker 2: probably connected partly to this sort of fear of government
Speaker 2: and centralized institutions and centralized power that's been around in
Speaker 2: the United States for a long time. There are prominent
Speaker 2: figures in the United States like Andrew Jackson, who actually
Speaker 2: you know, some of the earlier attempts to create a FED.
Speaker 2: But the original reason why why central banks were created
Speaker 2: in other countries, and this is going to become part
Speaker 2: of the FED story also later on, was to finance
Speaker 2: the government.
Speaker 1: So if you want to own to lend money to
Speaker 1: the government.
Speaker 2: Exactly so, you have to have someone like the Bank
Speaker 2: of England, for example. The government needed to borrow money,
Speaker 2: for example, for wars and other purposes, and then someone
Speaker 2: has to oversee that.
Speaker 1: So let's explain what this thing is that gets created
Speaker 1: in nineteen thirteen, is like a central bank. We throw
Speaker 1: that word phrase around, but what is it? What is
Speaker 1: it doing in nineteen thirteen.
Speaker 2: So the most basic thing was to create a system
Speaker 2: for issuing money. So in the so called free banking era,
Speaker 2: which had you know, which.
Speaker 1: Was some time before, there is no central bank, no
Speaker 1: central just a bunch of banks, private banks owned by.
Speaker 2: People yes, but there was paper money. But the thing
Speaker 2: about paper money is that inherently, you know, the paper
Speaker 2: is not worth very much. So the whole point of
Speaker 2: the paper is it's something that you're expecting someone else
Speaker 2: to be willing to take. But in the era of
Speaker 2: free banking, there are all these individual banks that were
Speaker 2: offering this paper money.
Speaker 1: Their own paper money, that's right.
Speaker 2: And literally, if you went to try to buy something
Speaker 2: grocery store or whatever, they'd have to kind of think
Speaker 2: about how valuable is this piece of paper you're handing
Speaker 2: me as it was to some other piece of paper.
Speaker 2: So that's obviously very inconvenient.
Speaker 1: So if I'm the grocery store, I'm actually have to
Speaker 1: be a bank analyst. That's right, because I'm taking paper
Speaker 1: that was printed by this bank.
Speaker 2: That's right.
Speaker 1: If the bank is sound, what is it back by it?
Speaker 1: Back by gold, gold, gold, So I have to believe
Speaker 1: that I take, you know, Joe Schmo's bank's notes to
Speaker 1: Joe Schmoe, He'll give me gold of this value for it.
Speaker 3: That's right.
Speaker 2: And it's also really crucial that everybody at that bank believes,
Speaker 2: because otherwise they start going to the bank and trying
Speaker 2: to take out their money and then the bank actually
Speaker 2: does veail, which is what was causing all of these
Speaker 2: banking crises. So this was a situation in the free
Speaker 2: banking era. During this whole period, we're on the gold standard,
Speaker 2: so it's a situation where you know, there's sort of
Speaker 2: some rate at which paper money can be exchanged for gold.
Speaker 2: But even before that, there is a period of time
Speaker 2: when people were literally using gold in transactions, and during
Speaker 2: that period of time, the big problem is just the
Speaker 2: gold is very heavy. People have a tendency. So I
Speaker 2: talked about paper money and how you had to check
Speaker 2: whether the paper money was really worthwhile, but that was
Speaker 2: actually even true with gold. If someone gives you a
Speaker 2: gold coin, it might have been that they've shaved off
Speaker 2: a little piece of it and it's actually not worth
Speaker 2: as much as supposed to be. And that was something was.
Speaker 1: Always happening to scale with you when you're doing a transaction,
Speaker 1: to make sure the goal weighs what it's supposed.
Speaker 2: To work, that's right, And this was called the debasement
Speaker 2: of currency, So this was always happening. And then there
Speaker 2: was the fact that during the gold standard era, if
Speaker 2: you had a ship which was filled with gold, and
Speaker 2: it sank that gold was just gone. Yeah, so that
Speaker 2: meant that now the whole economy had to function on
Speaker 2: less money. So there was literally less less money to
Speaker 2: buy all the stuff you wanted to buy. So I
Speaker 2: think in the modern world we never really worry about
Speaker 2: having enough money to buy stuff. That's not a concern,
Speaker 2: But in the in this era, you really did. And
Speaker 2: another example of this was actually the interest rates before
Speaker 2: the founding of the FED, they actually went up during
Speaker 2: the harvest season, and the reason was the farmers needed
Speaker 2: a lot of money to transact during the harvest season,
Speaker 2: and because there was no Federal Reserve, there was basically
Speaker 2: a fixed quantity of money. And when more people weren't
Speaker 2: the farmers.
Speaker 1: One of the more transactions, there's more demand for the
Speaker 1: money cause the.
Speaker 2: Interest rate exactly exactly, so it was actually seasonal. So
Speaker 2: one of the early reasons, aside from you know, dealing
Speaker 2: with the banking panics, that was used for why you
Speaker 2: had to have the founding of the Federal Reserve is
Speaker 2: what they called a more elastic currency. Elastic, you know,
Speaker 2: in the sense of an elastic fad means that when
Speaker 2: people want more money than the FED provides more money.
Speaker 2: So that was one of the earliest functions. And even
Speaker 2: just in terms of the seasons of the year, there's
Speaker 2: some times a year when people want more money.
Speaker 1: We don't get to this till nineteen thirteen, that's right.
Speaker 1: So you're saying, for this country operated for one hundred
Speaker 1: and fifty years basically with this.
Speaker 2: Money's right, and everybody just live with it, lived with it,
Speaker 2: but in various ways poorly. I mean, there were a
Speaker 2: lot of banking crises. You know, we've seen one serious
Speaker 2: banking crisis in the United States since the Great Depression.
Speaker 2: Imagine if that was happening all the time.
Speaker 1: Right, So the thing that gets created in nineteen thirteen,
Speaker 1: what does it explain to me? So I really understand
Speaker 1: it what it's doing, Like, Okay, it's a building somewhere
Speaker 1: with some people in it who have some relationship to
Speaker 1: all the banks in the country. What is that relationship.
Speaker 2: Well, it's it's willing to provide money. So a basic
Speaker 2: situation is so we talked about the case of the harvest.
Speaker 2: So suppose interest rates are rising because people want to
Speaker 2: use more money, but there's no more gold. So if
Speaker 2: you had a very strict kind of system of how
Speaker 2: the ratio between the amount of money and the amount
Speaker 2: of gold, then interests are going to rise. But in
Speaker 2: this case, the central bank is going to say, no,
Speaker 2: we're just going to provide more money.
Speaker 1: So we're not going to Does that mean we are
Speaker 1: abandoned the gold standard?
Speaker 2: So the gold standard is a very complicated concept. Okay.
Speaker 2: The most basic idea in the gold standard is that
Speaker 2: you will exchange one dollar bill for a certain amount
Speaker 2: of gold. And that's how people usually refer to what
Speaker 2: it means to be on a gold standard. And that
Speaker 2: was true before and after the founding of the FED
Speaker 2: until Roosevelt went off gold.
Speaker 1: If so, but how if they can just print money
Speaker 1: whenever in nineteen fourteen, yes, after they've created this bank, right, right,
Speaker 1: how can they maintain the same price of gold?
Speaker 4: Right?
Speaker 1: More paper for the same amount of gold means the
Speaker 1: gold should be.
Speaker 2: So did you know that today you actually cannot go
Speaker 2: to the Fed and ask for gold.
Speaker 1: I did know that.
Speaker 2: So it turns out that that money is something that
Speaker 2: has value in and of itself, even if you can't
Speaker 2: exchange it for gold. So it's not entirely such a
Speaker 2: strict relationship. And there are these two things all the
Speaker 2: gold standard. One is that there's this fixed exchange rate
Speaker 2: of money for gold. But the second is this idea
Speaker 2: of a gold cover ratio that you're actually holding some
Speaker 2: real asset to return for any paper money that you're given.
Speaker 2: But the second part, like how much real assets do
Speaker 2: you have to hold for each dollar, that doesn't have
Speaker 2: to be so inflexible. You know, this is something it
Speaker 2: can vary over time, and in practice, all of the
Speaker 2: countries central banks who are running a gold standard during
Speaker 2: this period of time, their gold cover ratio would.
Speaker 1: Vary over time, but the gold price wouldn't change.
Speaker 2: That's what it meant to be onest.
Speaker 1: So after the central bank is created, the Federal Reserve
Speaker 1: is created in nineteen thirteen, I could still go in
Speaker 1: with my dollars and get gold at the same price.
Speaker 1: So even though they printed dollars, at what point does
Speaker 1: who's the first person to point out that, oh, maybe
Speaker 1: they don't have enough gold for all the dollars.
Speaker 2: So those are called runs, and that happened substantially in
Speaker 2: the early stages of the Great Depression. So all of
Speaker 2: a sudden you had this situation where people should to
Speaker 2: show up at banks and ask for their money back.
Speaker 2: And the Federal Reserve did not provide that money, and
Speaker 2: you know, something like half of all the banks in
Speaker 2: the United States failed, and you could ask why, and
Speaker 2: there you do end up coming back to the gold standard,
Speaker 2: because the fundamental fear that the US Federal Reserve had
Speaker 2: at the time was that itself itself would face a run.
Speaker 1: The government did not have enough gold, and everybody would
Speaker 1: know it, and so they'd be a race to get
Speaker 1: your gold out before it was gone exactly.
Speaker 2: And today there's an academic debate on how constraining that
Speaker 2: really was. I mean, the Fed in the early nineteen
Speaker 2: thirties actually had a pretty decent amount of gold, so
Speaker 2: perhaps they could have withstood the pressure, but they didn't
Speaker 2: think they could, or they certainly worried about it, and
Speaker 2: so that had a real impact on interest rates on
Speaker 2: the extent to which they were willing to provide money
Speaker 2: to banks during this period, and it ended up with
Speaker 2: just a huge amount of banks failing and complete breakdown
Speaker 2: of the financial system.
Speaker 1: So this thing gets created in nineteen thirteen, it isn't
Speaker 1: really tested until the nineteen twenty nine and then their thirties.
Speaker 1: The Federal Reserve was supposed to come in and prevent
Speaker 1: depressions on the back of banking crises. It doesn't do it.
Speaker 1: The depression happens, like half the GNP was lost, you know,
Speaker 1: it was economically catastrophic unemployment of whatever thirty percent. So
Speaker 1: what is explain what they did in that period.
Speaker 2: So I think the first thing to say is that
Speaker 2: the FED actually had a hand in the onset of
Speaker 2: the Great Depression in the sense that, you know, stock
Speaker 2: markets were really booming in the late twenties, and the
Speaker 2: FED actually raised interest rates. So that's that's the first thing.
Speaker 2: So the FED thought that, you know, that there was
Speaker 2: too much speculation on Wall Street and so on. They
Speaker 2: raised interest rates.
Speaker 1: But people the speculation in particular, people were borrowing money
Speaker 1: to buy stocks, right, and it made them upset, right,
Speaker 1: and so they said, we're going to try to stop
Speaker 1: that activity. It was creating this boom in the stock market, right.
Speaker 2: So then they raise interest rates, and of course it
Speaker 2: does lead to a slow down in the economy. The
Speaker 2: banks start to fail, and once the banks start to fail,
Speaker 2: there's a panic. At this point in time, there's no
Speaker 2: deposit insurance, so you really did have to worry that
Speaker 2: if you had your money in a bank see it
Speaker 2: again exactly. So then what happens is that people start
Speaker 2: withdrawing their money from the banks, and there's this thing that,
Speaker 2: you know, all the money that's out there is actually
Speaker 2: much more than just the cash or the gold. There's
Speaker 2: this idea of the money multiplier that if you put
Speaker 2: your money in a bank and then they lend out
Speaker 2: ninety percent of it, that creates a lot more money.
Speaker 2: But then when they take the money out of the bank,
Speaker 2: it means that exactly. And of course some of the
Speaker 2: money that's being created a deposited in other banks, and
Speaker 2: so there's this chain reaction where the banks start to fail.
Speaker 2: But at this point in time, the FED doesn't see
Speaker 2: itself as an institution that was designed to manage the
Speaker 2: economy in the same way that is today.
Speaker 1: It didn't.
Speaker 2: The FED was really still learning its job.
Speaker 5: How did the Volkswagen Beetle go from being Hitler's dream
Speaker 5: car to a hippie icon. How did a disgruntled center
Speaker 5: fielder change the business of sports? I'm Jacob Goldstein, and
Speaker 5: on Business History, my co host Robert Smith and I
Speaker 5: dig into the people and companies who created the modern world.
Speaker 5: Business history is full of innovations and failures, and insights
Speaker 5: into how business works today. At the end of today's
Speaker 5: episode of Against the Rules, we're going to play a
Speaker 5: clip from our episode about Jim Simon's decades ago. Simon's
Speaker 5: basically invented modern algorithmic trading, and after a few early hiccups,
Speaker 5: including buying up all the potatoes in Maine, Simon's built
Speaker 5: a machine that generated had incredible returns for decades. The
Speaker 5: show is called Business History, and the previews coming up.
Speaker 5: At the end of today's episode of Against the Rules.
Speaker 1: I'm back with the economist Emmy Nackhambrock talking about the
Speaker 1: surprisingly dramatic history of the Federal Reserve.
Speaker 2: At many points in the history of central banks, they've
Speaker 2: played this rule of raising money for the government, and
Speaker 2: in the United States, this is one of the things
Speaker 2: the FED was doing during the Korean War. And there
Speaker 2: was some tension between the Fed and the Treasury during
Speaker 2: this period of time, because you know, the Fed was
Speaker 2: starting to get concerned about inflation, and of course the
Speaker 2: Treasury wanted wanted to borrow more money exactly, and so
Speaker 2: partly out of this antagonism, there was this Fed Treasury
Speaker 2: accord in which there was an agreement that the FED
Speaker 2: was going to be able to manage interest rates to
Speaker 2: sort of support the economy, but also to manage inflation.
Speaker 2: And that Fed Treasury record is typically viewed as the
Speaker 2: start of modern monetary policy, when exactly was that nineteen
Speaker 2: fifty one.
Speaker 1: And so the FED now is going to be granted
Speaker 1: some independence and it's going to manage interest rates. That's
Speaker 1: going to be the thing it does, right, which is
Speaker 1: effectively managing money. So it's a price of money, right.
Speaker 2: The next major event that happens is in the nineteen
Speaker 2: seventies and early nineteen eighties. So the early nineteen seventies
Speaker 2: are the time period of the most explicit political pressure
Speaker 2: on the FED. So this is a time when you
Speaker 2: have Nixon as president and you have Arthur Burns as
Speaker 2: Chair of the FED, and we now know, based on
Speaker 2: tapes and so on of their conversations that there was
Speaker 2: a lot of political.
Speaker 1: Pressure Nixon screaming in him to lower interest.
Speaker 2: Rates exactly, and then you know, fastward he does, absolutely
Speaker 2: fast forward, you know several years and inflation is really
Speaker 2: really high, and what we see is that people actually
Speaker 2: hate high inflation. And then this amazing thing happens that
Speaker 2: you have Paul Volker who gets to interview for the
Speaker 2: job of Chairman of the FED, and in his interview
Speaker 2: he explains what he's going to do. He says, I
Speaker 2: don't think gradualism really works. I don't think it's going
Speaker 2: to work to you know, just raise interest rates a
Speaker 2: little bit. I think we're going to have to go
Speaker 2: all out and raise interest rates dramatically. So then he
Speaker 2: goes home and he tells, is you know his wife,
Speaker 2: I don't. I don't think I got the job because
Speaker 2: no politicians is gonna let him do it exactly. And
Speaker 2: then amazingly he gets the job.
Speaker 1: Who gives him the job Carter?
Speaker 2: Carter gives him the job and then loses. It's very
Speaker 2: probably probably over this, so.
Speaker 1: It's an incredibly brave and self sacrificing thing to have done.
Speaker 2: Yes, but inflation was also really unpopular, So I think
Speaker 2: that's something that maybe I didn't have a sense of
Speaker 2: in the politics of until I saw the inflation during COVID.
Speaker 2: People really hate inflation.
Speaker 1: So let me stop you there. Because people hate inflation
Speaker 1: above a certain number, Yes, they're completely fine with steady,
Speaker 1: small inflation, right, So what's.
Speaker 2: The number I think this is something we've been learning about.
Speaker 2: So right now, the FED tries to target two percent inflation, and.
Speaker 1: We all say that's fine, that's right, But if it
Speaker 1: gets to be five percent, we all get furious.
Speaker 2: Right, And the question of where that line is is
Speaker 2: not something we have, you know, scientific evidence on psychological matters.
Speaker 2: It is absolutely psychological. And you know, right now inflation
Speaker 2: is close to three percent, and so there's this obvious
Speaker 2: question maybe we should just leave it at three percent.
Speaker 2: And then the question is how angry does three percent
Speaker 2: inflation make it? And if you talk to people who
Speaker 2: are a little bit older, remember the period of the
Speaker 2: nineteen eighties and so on, they'll say people were five
Speaker 2: with three percent inflation. But then, on the other hand,
Speaker 2: from the perspective of the FED, there's this whole slippery
Speaker 2: slope issue that if we go from two to three,
Speaker 2: you know, who know, we.
Speaker 1: Acclimate them to three, then all of a sudden they'll
Speaker 1: be okay with four exactly. Yeah, Okay, that's but that's interesting, right.
Speaker 1: It's like, it isn't that people hate inflation. People actually
Speaker 1: kind of secretly like inflation in little in small amounts.
Speaker 2: Below two percent. We mostly just don't think about inflation.
Speaker 1: Yes, all right, So Jimmy Carter appoints Paul Volker to
Speaker 1: be the head of the FED in a period of
Speaker 1: high inflation in which everybody's angry about the inflation. And
Speaker 1: what does he do.
Speaker 2: He raises interest rates to something close to twenty percent
Speaker 2: short term rates, that's.
Speaker 1: Right, And how does he do that politically? Like, how
Speaker 1: does he even pull that off?
Speaker 2: It is extremely unpopular.
Speaker 1: Can you imagine someone doing that right now? If we
Speaker 1: woke up tomorrow morning and all of a sudden, the
Speaker 1: FED rate was twenty percent, so your credit card rate
Speaker 1: was forty percent or whatever it was, thirty percent or
Speaker 1: whatever it would be. I mean, they'd be cataclysmic for people.
Speaker 2: What's amazing is that he didn't get fired.
Speaker 1: It sounds like it's almost more of a norm shift
Speaker 1: than a legal shift.
Speaker 2: I think that's right.
Speaker 1: So the institution is the institution, but the norms around
Speaker 1: the institution are changing, and we've realized that we kind
Speaker 1: of need it to be independent for all of us
Speaker 1: to be to prosper.
Speaker 2: That's right, And in so many of our institutions there's
Speaker 2: this complicated relationship between norms and rules. So this is
Speaker 2: one of the most important ideas in monetary economics that
Speaker 2: if politicians have short horizons, they don't have very long
Speaker 2: until they need to get elected again, and in this
Speaker 2: short period of time they want to boost the economy.
Speaker 2: But on the other hand, if you have a really
Speaker 2: high inflation period like the United States did around nineteen eighty,
Speaker 2: and people start to expect this high inflation and they
Speaker 2: build it into wage contracts and all kinds of things,
Speaker 2: it can take a decade to bring inflation down, and
Speaker 2: so that's something that's mostly going to affect a lot
Speaker 2: of future politicians. So there's always this tension, and any
Speaker 2: country that you read about with central banking, this tension
Speaker 2: is sort of front and center. On top of that,
Speaker 2: the government often also just wants to borrow a lot
Speaker 2: of money. So that's another reason why the government wants
Speaker 2: to keep interest rates low, and central bank independence is
Speaker 2: all about trying to manage that tension.
Speaker 1: I was just thinking back to the time when they
Speaker 1: were kings. That's right, that a king actually might be
Speaker 1: quite reasonable about what you do with the money supply,
Speaker 1: because he's going to pay the price if you do
Speaker 1: lower interest rates and jack up the economy artificially.
Speaker 2: For a couple of years, and yet monetary policy was
Speaker 2: terrible during this era, and I attribute that mostly to
Speaker 2: the fact that they really just had had no idea
Speaker 2: what was going on. So I think I think for humans,
Speaker 2: the idea that you can print pieces of paper in
Speaker 2: some form and use them as money and this will
Speaker 2: sort of work out well is just actually a really
Speaker 2: profound idea that takes people a long time to understand
Speaker 2: and a long time to manage.
Speaker 1: And a long time to understand who pays the price
Speaker 1: if you introduce more.
Speaker 2: Exactly exactly so you know, you look at what happened
Speaker 2: in France, for example, under various kings, and there were
Speaker 2: huge amounts of inflation as they created huge amounts of
Speaker 2: money in various forms. And my sense is that a
Speaker 2: lot of this was about just not really understanding cause
Speaker 2: and effect. And I don't blame them. I think this
Speaker 2: is a really subtle concept. There's this really fascinating example
Speaker 2: of this island called the Island of Yap in which
Speaker 2: it was one of the first ledger systems. So there
Speaker 2: were these large stone coins, but they were not moveable,
Speaker 2: and this was actually the monetary system. It was your
Speaker 2: ownership of these stone coins, but they were a very
Speaker 2: large size that.
Speaker 1: You could move around.
Speaker 2: You couldn't move them around, but everybody knew that you
Speaker 2: owned one. So in fact, even if one sank to
Speaker 2: the bottom of the ocean, it didn't matter. You could
Speaker 2: still own a piece of it. So this was kind
Speaker 2: of a very early sense.
Speaker 1: And did they transact.
Speaker 2: It was it was a ledger system, so it was
Speaker 2: just your ownership in bitcoin exactly. It was exactly like
Speaker 2: bitcoin on the island of Yap. That's great, but it's
Speaker 2: a subtle idea.
Speaker 1: But were the stones fixed so that you could never
Speaker 1: introduce a new stone?
Speaker 2: So that I think is the crucial thing, right that
Speaker 2: you couldn't I don't know what the details were on
Speaker 2: finding new stones, but they were large objects so that
Speaker 2: it wasn't easy to create new ones. But later on,
Speaker 2: you know, you had this difficulty that other societ that
Speaker 2: came later but weren't as evolved in some sense as
Speaker 2: the Island of Yap. They wanted to have coins that
Speaker 2: you could actually transact with, that you could carry, that
Speaker 2: you could pick up, and so that's kind of how
Speaker 2: we got to gold. You want something that you can't
Speaker 2: just create new gold, but at the same time, it's
Speaker 2: small enough that you can transact in it.
Speaker 1: I love this idea that a central bank as we now,
Speaker 1: the central banks that we now have, are in part
Speaker 1: just an expression of an evolved understanding of what money
Speaker 1: is and how it works, and that we had to
Speaker 1: they have a lot of trial and error.
Speaker 2: Exactly exactly, all right, So.
Speaker 1: Walk me from from Vulcar. When all of a sudden
Speaker 1: we have basically the Federal Reserve that we now know,
Speaker 1: very powerful head of the FED, who becomes a kind
Speaker 1: of high priest of.
Speaker 2: Money and becomes even more powerfully because he raised interestates
Speaker 2: and it worked and inflation fell much more rapidly than
Speaker 2: anyone expected.
Speaker 1: Yes, so he's a success, inflicted a lot of pain,
Speaker 1: but a success. And so from that moment we have
Speaker 1: this character the head of the Fed, who everybody is
Speaker 1: looking to as a kind of priest, the priest of money,
Speaker 1: and who is regarded as outside the reach of politicians.
Speaker 1: They can appoint him, they can grill him, but they
Speaker 1: can't tell him what to do with the money supply.
Speaker 2: So I think in a way that's an exaggeration, because
Speaker 2: if you read the memoirs of central bankers, like for example,
Speaker 2: Alan Greenspan. Even though you have central bank independence, he's
Speaker 2: constantly interacting with members of Congress.
Speaker 1: So it's not true to say that the FED is
Speaker 1: not a political institution, but it's it's not a party
Speaker 1: political institution. What it is is it's managing. It's got
Speaker 1: to manage its relations, and it's more insulated.
Speaker 2: There's no doubt that it has independence. But to say
Speaker 2: that it doesn't have to worry about its independence at
Speaker 2: all is an exaggeration, because there are always political pressures,
Speaker 2: and it's clear that the FED chairs have never thought
Speaker 2: that they could just completely ignore those political pressures.
Speaker 1: Is it fair to say that from the moment that
Speaker 1: Vulgar sort of reinvents the role of the head of
Speaker 1: the FED, that role is not tested again until the
Speaker 1: two thousand and eight financial crisis.
Speaker 2: Yes, I think that was the biggest tust.
Speaker 1: We're going to take a quick break, and when we return,
Speaker 1: Emmy and I will talk about what the FED decided
Speaker 1: to do as banks started to collapse in two thousand
Speaker 1: and eight. I'm back with UC Berkeley economist Emmy Nakamarock
Speaker 1: described to me the FED going into the financial crisis
Speaker 1: and described to me who the players were, what happened
Speaker 1: and what it did in response.
Speaker 2: So Ben Bernanki was at the helm of the thunder
Speaker 2: reserve going into the financials.
Speaker 1: And who is he?
Speaker 2: Ben Bernanki is a scholar who started his career by
Speaker 2: studying the Great Depression, and then it's this incredible coincidence
Speaker 2: that he happens to be the person who's chairman of
Speaker 2: the FED at the time of the next big financial
Speaker 2: crisis in the United States.
Speaker 1: Let's quickly describe what this crisis looked like.
Speaker 2: So going into the financial crisis, you'd had this enormous
Speaker 2: real estate boom. House prices in the United States had
Speaker 2: risen dramatically. This had peaked in two thousand and six,
Speaker 2: so house paces were kind of on their way down
Speaker 2: by two thousand and seven. But there was a general view,
Speaker 2: including at the FED, that this might not be a
Speaker 2: huge issue for the rest of the economy.
Speaker 1: Thousands of prices go up, they go down, but it
Speaker 1: doesn't really affect what Americans are doing with in their.
Speaker 2: Economically exactly exactly. So at the very beginning, there were
Speaker 2: a few hedge funds they lost some money on real
Speaker 2: estate backed assets. But the view of the FED and
Speaker 2: a lot of other people was that this was going
Speaker 2: to be something that you could sort of sail through.
Speaker 2: And so early on the monetary policy they interest rates
Speaker 2: were over five percent. It was sort of normal monetary policy.
Speaker 2: There wasn't at all a sense that this was going
Speaker 2: to become a sort of historic event for the macro
Speaker 2: economy as opposed to some elements of the financial system.
Speaker 2: But then after this sort of benign starting point, you
Speaker 2: started to see things happening more quickly. And so this
Speaker 2: is the beginning of when the Fed in some sense
Speaker 2: starts to gamble. It's independence. What they're arguing. What Bernanki
Speaker 2: argues very forcefully, is that so he says he lived
Speaker 2: as a child on street called Main Street. So he says,
Speaker 2: I don't come from Wall Street. I come from Main Street,
Speaker 2: you know.
Speaker 4: I come from Main Street. That's my background. And I've
Speaker 4: never been on Wall Street. And I care about Wall
Speaker 4: Street for one reason and one reason only because what
Speaker 4: happens on Wall Street matters to Main Street.
Speaker 2: His dad was a pharmacist, you know. And he says,
Speaker 2: the only reason I care about this is because people
Speaker 2: like my dad will not be able to get alone.
Speaker 1: Where do they end up?
Speaker 2: What do they do they end up at that point
Speaker 2: in a situation of backstopping a bunch of loans that
Speaker 2: are made to bear Stearns. Basically, they take on some
Speaker 2: of the worst parts of bear Sterns balance sheet so
Speaker 2: that they facilitate private sector loans to bear Stearns and
Speaker 2: they allow things to continue in a somewhat orderly manner.
Speaker 2: So this is something which even at the time, there's
Speaker 2: a lot of skepticism about, because, first of all, there's
Speaker 2: the idea that, you know, what is the Fed doing
Speaker 2: to be bailing out this private sector actor who made
Speaker 2: a lot of mistakes. And second of all, there's the question,
Speaker 2: even if it was a good idea in terms of
Speaker 2: what's happening right now, shouldn't we be worried about what
Speaker 2: this tells other banks about the risks they.
Speaker 1: Bail you out too. It's kind of incredible this step, right,
Speaker 1: You've got a character chairman of the Federal Reserve who,
Speaker 1: only relatively recently in the grand sweep of history, has
Speaker 1: by norm become this kind of like god of money
Speaker 1: and God of finance, picking winners and losers in the economy.
Speaker 1: So briefly, walk me through the rest of the financial crisis.
Speaker 2: I think there's a hope that things will simmer down
Speaker 2: after this point, and maybe for a period of time
Speaker 2: it looks like they might, but there's still problems being
Speaker 2: caused by these real estate assets.
Speaker 1: All these banks have made really stupid loans, and.
Speaker 2: You can sort of line them up in order of
Speaker 2: which banks have the most of these that for me,
Speaker 2: so Lehman is sort of next on the list. And
Speaker 2: then the question is with these banks that are at
Speaker 2: risk because they have a lot of these real estate
Speaker 2: assets on their balance sheets, which have lost a lot
Speaker 2: of money, there's a question of what does that bank do.
Speaker 2: So if there was no one who was going to
Speaker 2: help them, then a natural thing for them to do
Speaker 2: would basically be to sell themselves to another bank which
Speaker 2: had a stronger balance sheet. And actually there are some
Speaker 2: banks that sell themselves during this period of time. But
Speaker 2: there's a big pushback again that because there's of course
Speaker 2: this hope that maybe the federal Reserve will will step
Speaker 2: in and help you, right, And so this is one
Speaker 2: of the immediate reasons why you start to see what
Speaker 2: people call moral hazard, that if you think somebody might
Speaker 2: save you, right, like you know, when you go hiking
Speaker 2: or something like that, if you know that there's a
Speaker 2: mountain patrol, then you might be a little bit more
Speaker 2: blase about whether you might go on this you know,
Speaker 2: tough mountain trail because you really want to go and
Speaker 2: you think someone will save you in the event that
Speaker 2: you kind of get stuck, you might do it. And
Speaker 2: so this is this is happening over the over the
Speaker 2: over the summer that you know, Leman, for example, you know,
Speaker 2: clearly has these bad assets on its balance sheet. So
Speaker 2: Leman actually becomes insolvent, bankrupt, and then there's some question.
Speaker 1: S Nike does not save Lehman Brothers, right, if he
Speaker 1: believes it's so important to save these places because of
Speaker 1: what he's learned about the Great Depression, why does any
Speaker 1: save Leman Brothers.
Speaker 2: So in the aftermath that's become a big question. And
Speaker 2: at the time, what Brnanki said was that it was
Speaker 2: not within the federal reserves perview to do that, that
Speaker 2: they simply didn't have enough good collateral. I've spoken to
Speaker 2: various economists after this crisis, you know, including people on
Speaker 2: the right of the political spectrum, and there are quite
Speaker 2: a few people who will say that if they had
Speaker 2: known how bad the financial crisis would be they they
Speaker 2: would have said that the feed should have offered more support.
Speaker 1: So you now have Lehman Brothers fail. Then what happens?
Speaker 2: So after Lehman Brothers fail, then the whole financial market
Speaker 2: really starts to freak out. And if you think about
Speaker 2: the mortgage market, so this is something that affects you know,
Speaker 2: lots of people, you know, including you know, like Ben
Speaker 2: Bernanki's dad, the pharmacist, if he had been trying to
Speaker 2: get a loan for his business at the time. That market,
Speaker 2: all of these asset backed securities that were being used
Speaker 2: to finance a lot of mortgages. That market is completely
Speaker 2: falling apart during this period of time.
Speaker 1: So now we're so we're in a vicious cycle of
Speaker 1: mistrust and real problems. I want to stop right there,
Speaker 1: and I want you to imagine from me, if from
Speaker 1: that moment on, there is no Federal Reserve, there is
Speaker 1: no central Bank, how do you think it plays out.
Speaker 2: I think that a lot of banks would fail.
Speaker 1: Do you think all of them would have failed?
Speaker 4: No?
Speaker 2: I mean my baseline starting point is this is the
Speaker 2: Great Depression when half of them failed. But there were
Speaker 2: some improvements relative the Great Depression, even without the Federal Reserve,
Speaker 2: So in particular, there's deposit insurance, so that's sort of
Speaker 2: keeping things a little bit more stable than you would
Speaker 2: have seen without the Federal Reserve. But there are a
Speaker 2: lot of sort of non bank bank like entities that
Speaker 2: are out there that would have failed, and there would
Speaker 2: have been a lot of fear associated with that. One
Speaker 2: of the anecdotes that I remember people really thought was
Speaker 2: scary at the time was was General Electric. I think
Speaker 2: it was trying to get a working capital loone. A
Speaker 2: working capital loone is just companies in general, when they
Speaker 2: want to pay their employees, they often have to borrow
Speaker 2: money because they have to pay their employees before they
Speaker 2: get paid for the products that the employees are producing.
Speaker 2: And so this type of loan is typically quite safe,
Speaker 2: you know, happens at very low interest rates. But even
Speaker 2: a company like General Electric was having trouble borrowing money
Speaker 2: to pay its employees. So this idea that companies have
Speaker 2: to borrow money even just to pay their employees, even
Speaker 2: in the normal course of business, sort of tells you
Speaker 2: what could have happened in the event that the financial
Speaker 2: and financial system it sort of started to destruct in.
Speaker 1: This So if we imagine a world in which is
Speaker 1: just the irascibility of the American public and this suspicion
Speaker 1: of centralized power and all the rest had got us
Speaker 1: to two thousand, as far as two thousand and eight
Speaker 1: without a central bank or or or without a FED
Speaker 1: that's got real powers. Just how bad do you think
Speaker 1: things could have gotten in the economy? What kind of unemployment?
Speaker 1: What kind of cost a GDP?
Speaker 2: I think you could have had, you know, twenty percent unemployment?
Speaker 2: You know we had we had almost ten percent unemployment,
Speaker 2: but you could have had twenty percent ONU employment. You
Speaker 2: could have had, you know, investment sort of almost stop
Speaker 2: for you to have another great depression something like that.
Speaker 1: So Burneki goes into this with bear Stearn's eyes open,
Speaker 1: realizing that he is jeopardizing the independence of the FED
Speaker 1: gambling I would gambling gambling the independent FED, because he
Speaker 1: knows that it's going to get hot politically when you
Speaker 1: were picking winners and losers, when you are distorting.
Speaker 2: Markets, and when there are always critics of the FED.
Speaker 2: So there, if you look at Congress, there are always
Speaker 2: people who are saying that we should go back to
Speaker 2: the gold standard. So previously, the FED pretty narrowly had
Speaker 2: a balance sheet. So if the FED is kind of
Speaker 2: like a bank, it has assets and liabilities. The assets
Speaker 2: were almost entirely government debt. So I mentioned before, US
Speaker 2: government debt is viewed as the safest debt there is, right, right, So.
Speaker 1: When they print money, they get collateral, right right, and
Speaker 1: so so until two thousand and eight, that collateral is treasuries.
Speaker 1: Did it used to be gold in gold?
Speaker 2: Yes? Yes, And in fact the FED still has some gold.
Speaker 1: Yes. And back in the day you want money, I
Speaker 1: have to come for gold, and they give me some money.
Speaker 2: And you can actually go to the New York Fed
Speaker 2: and you can go on the gold tour. You can
Speaker 2: see the gold. You can see they have gold in
Speaker 2: little cages from different countries around the world. They have
Speaker 2: special shoes, special titanium shoes that you wear when you're
Speaker 2: holding a gold bar, because if you drop a gold
Speaker 2: bar on your foot, you know you'll break your toes.
Speaker 1: Is that true?
Speaker 2: Yes? And they have a scale for measuring, you know,
Speaker 2: gold in the event of a transaction from between two countries,
Speaker 2: which just means moving one piece of gold from the
Speaker 2: cage of one country to another country. And they have
Speaker 2: a person who knows how to use this scale and
Speaker 2: the titanium shoes. But when I visited the New York
Speaker 2: FED and went on this gold tour, I asked them
Speaker 2: when the last transaction, you know, it was like five
Speaker 2: years ten years ago, you know, so I think you know,
Speaker 2: we built like the stones and yap, you know, absolutely,
Speaker 2: it's a relic, relic.
Speaker 1: We went down on a rabbit hole there. But it's
Speaker 1: so back to the two thousand and eight. Up to
Speaker 1: this moment, the FED is accepting treasuries to get if
Speaker 1: you want dollars, right, and now it will accept other things.
Speaker 2: That's right.
Speaker 1: What other things?
Speaker 2: Well, for example, they're starting to loan against asset backed securities,
Speaker 2: so in particular mortgage backed security.
Speaker 1: So we talked about my home mortgage.
Speaker 2: That's right. So we talked about the idea that you know,
Speaker 2: the US housing market was starting to slow down, peaked
Speaker 2: in two thousand and six, and there were all of
Speaker 2: these mortgages. And it's not that the FED was holding
Speaker 2: individual mortgages, but the banks had played a big role
Speaker 2: in repackaging these mortgages into what we're called mortgage back securities,
Speaker 2: and some of them are guaranteed by these quasi governmental
Speaker 2: at the time.
Speaker 1: Institutionals, they're almost like tragedy, that's right, But.
Speaker 2: The market wasn't treating things that way at the time,
Speaker 2: And so that's the sense at which it was a
Speaker 2: real decision by the FED to be willing to take
Speaker 2: these kinds of assets.
Speaker 1: But if I'm the pharmacist on Main Street and I'm
Speaker 1: just watching this from a distance, what it looks like is, oh,
Speaker 1: these banks made these crappy loans. Now they get to
Speaker 1: go take those loans to the FED, and the FED
Speaker 1: will give them actual dollars for those loans, right, getting
Speaker 1: them out of their problem.
Speaker 2: Right, And that's not wrong. But what brend Burnanke said,
Speaker 2: and this was one of the things he did to
Speaker 2: try to sort of battle against risking the indepedance of
Speaker 2: the FED, was he tried to speak directly to people.
Speaker 2: So there was this famous moment when he went on
Speaker 2: sixty minutes, which was not something that any prior FED
Speaker 2: chair and had done. But he wanted to speak directly
Speaker 2: to the public, and he made the argument that while
Speaker 2: it looks terrible for the FED to be bailing out
Speaker 2: these banks that lost a lot of money, and probably,
Speaker 2: you know, maybe should have known better. On the other hand,
Speaker 2: if we don't do something about this banking crisis, then
Speaker 2: you're not going to be able to get a mortgage.
Speaker 4: Let me give you an analogy. If you have a
Speaker 4: neighbor who smokes in bed, and he's a risked everybody,
Speaker 4: and suppose he sets fire to his house, and you
Speaker 4: might say to yourself, I'm not going to call the
Speaker 4: fire department.
Speaker 1: Let his house burn down. It's fine with me.
Speaker 4: But then, of course, what if your house is made
Speaker 4: of wood and it's right next door to his house.
Speaker 4: What if the whole town is made of wood. That's
Speaker 4: where we are now.
Speaker 2: It was a very unusual thing that he was making
Speaker 2: this case directly to the public, But it was really
Speaker 2: brought on by the fact that the FED couldn't afford
Speaker 2: to be a completely technocratic, insular organization.
Speaker 1: Right. What I'm hearing is that the actions of Ben
Speaker 1: Bernaki and the FED probably prevented another depression. It avoided
Speaker 1: a lot of pain on the one hand. On the
Speaker 1: other hand, it infuriated a huge number of Americans.
Speaker 2: I think it just feels terrible to see these institutions
Speaker 2: get bailed out who made such bad decisions. It was
Speaker 2: also the case that there were big bonuses that were
Speaker 2: paid out by the Wall Street banks during this period
Speaker 2: of time, you know, which was a period of time
Speaker 2: when a lot of Americans didn't have jobs. And it's
Speaker 2: also the fact that in macroeconomics in general, but in
Speaker 2: this episode for sure, you never get to see what
Speaker 2: would have happened without the intervention. So in the Great Depression,
Speaker 2: we saw this awful thing happen. The argument that Ben
Speaker 2: Bernanki was trying to make is it well, it could
Speaker 2: have been even worse, and he, you know, he made
Speaker 2: it compellingly enough.
Speaker 1: He's maybe the world's expert on this subject.
Speaker 2: That's right, and he convinced congress people on both sides
Speaker 2: of the aisle that it was true. And that's why
Speaker 2: the interventions were so large.
Speaker 1: Right, So we go from nineteen thirteen with a FED
Speaker 1: that's yoked to the political process and is there mainly
Speaker 1: to kind of smooth out the money supply over the harvests,
Speaker 1: to two thousand and eight, where you've got a FED
Speaker 1: that is master manipulator of the entire economy. Two things.
Speaker 1: One is, is it now just generally understood that the
Speaker 1: role of the FED is not just to smooth out
Speaker 1: the money supply over the harvest, just to run the
Speaker 1: money supply. But it's also got this other unconventional role
Speaker 1: in the event of crises, where it can buy and
Speaker 1: sell all kinds of stuff to make things better in
Speaker 1: their view.
Speaker 2: I think it is widely understood that that part of
Speaker 2: what the FED does is probably here to stay. There
Speaker 2: are these questions. You know, the FED is a big
Speaker 2: actor in financial markets that affects people. It affects different
Speaker 2: people in different companies in different ways. And how does
Speaker 2: it sort of try to make that neutral or can
Speaker 2: it make it neutral? Those are things that are certainly
Speaker 2: sources of controversy today it's.
Speaker 1: A source of controversy, but it's kind of undeniable. But
Speaker 1: the power of this or potential power of this institution
Speaker 1: has just grown. It's incredible, the power of this institution,
Speaker 1: and it is happening now in a climate where it's
Speaker 1: independence is being threatened. Right that a private actor, a
Speaker 1: president could get a hold of this institution and use
Speaker 1: these new powers in a completely unorthodox way.
Speaker 2: Now, one thing I would say is that its power
Speaker 2: can also be destroyed. In the nineteen seventies, nobody believe
Speaker 2: the set about anything, So you really had to get
Speaker 2: into a situation with Fulker where you know, people didn't
Speaker 2: believe them until they saw it. Right, He just he
Speaker 2: raised interest rates dramatically. But the that of that time
Speaker 2: did not have the power to promise things. And the
Speaker 2: same goes for inflation. So during the post COVID inflation surge,
Speaker 2: inflation got up, you know, to something like seven percent.
Speaker 2: Through that whole time, professional forecasters were completely convinced inflation
Speaker 2: would get down two percent again, completely convinced basically, you know,
Speaker 2: they had no worries about this, and that actually matters
Speaker 2: for regular people because if you went to get a mortgage,
Speaker 2: the mortgage rate you faced was based on the idea
Speaker 2: that inflation was going to be two percent.
Speaker 1: Again, right, because they believe the FED.
Speaker 2: Because they believed it, so that there's.
Speaker 1: Enormous value in the trust in this industr that's right,
Speaker 1: and that absolutely can be destroyed. Do you worry about
Speaker 1: the Fed's independence?
Speaker 2: Of course, this is probably one of the most frightening
Speaker 2: times for FED independence, or maybe the most frightening time
Speaker 2: for FED independence since maybe the Mulcar disinplace or something
Speaker 2: like that, for a long.
Speaker 1: Time since Nixon. Yes, but it's happening in a different
Speaker 1: environment where the importance of the institution is just bigger
Speaker 1: than it was. The awareness of how to use it
Speaker 1: is for more top of mind. It's like this big
Speaker 1: insurance policy in the on the financial markets, and it's
Speaker 1: a money maker, and it's a money maker.
Speaker 2: It's a huge money maker. So you know, around the world,
Speaker 2: investors are willing to lend the US government money at
Speaker 2: incredibly low interest rates. So that means the US government
Speaker 2: can run these huge deficits year after year and pay
Speaker 2: very little. But most countries around the world don't have
Speaker 2: that luxury.
Speaker 1: And we would lose that luxury if people cease to
Speaker 1: trust the FED.
Speaker 2: Because part of the reason people want to hold US
Speaker 2: debt is because they trust that the US government will
Speaker 2: not default in a sense, if you borrow one hundred dollars,
Speaker 2: you'll pay you back hundred dollars. But also they won't
Speaker 2: have a lot of inflation. Right, So those two things
Speaker 2: are required to make people really value your debt. And
Speaker 2: the second one is controlled by the FED.
Speaker 1: What do you make the odds that we're going to
Speaker 1: emerge from the Trump years with an independent FED? You're
Speaker 1: a betting lady that will have it. I hope so, yeah,
Speaker 1: that sounds about right. Yeah, that sounds about right. I
Speaker 1: want to thank Emmy Nakamura for giving us an absolute
Speaker 1: master class on the Federal Reserve Bank, its history and
Speaker 1: the way it's changed. Emmy is the Chancellor's Professor of
Speaker 1: Economics at UC Berkeley. You can find links to her
Speaker 1: work in our show.
Speaker 3: Note Against the Rules. The Big Short Companion is hosted
Speaker 3: by Michael Lewis. It's produced by Me Ludy, Jane Kott,
Speaker 3: and Catherine Girodel. Our editor is Julia Barton. Our theme
Speaker 3: was composed by Nick Burtel, and our engineer is Hans Dale.
Speaker 3: She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela
Speaker 3: Lawrence and the rest of the Pushkin Audiobooks team. Against
Speaker 3: the Rules is the production of Pushkin Industries. To find
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Speaker 3: dot FM, slash Audiobooks, or wherever audiobooks are sold.
Speaker 5: It's Jacob Goldstein. I'm the co host of a new
Speaker 5: show called Business History, and we're bringing you a clip
Speaker 5: right now from an episode we did about a mathematician
Speaker 5: named Jim Simon's. Simons wanted to take human emotions out
Speaker 5: of investing, and after a few early hiccups, including buying
Speaker 5: up all the potatoes in Maine, he created one of
Speaker 5: the greatest money machines in history. I really hope you
Speaker 5: like the clip, and if you want to hear more,
Speaker 5: please check out the show. It's called Business History and
Speaker 5: it's available wherever you're listening right now. They were doing
Speaker 5: what we would call today machine learning.
Speaker 6: A machine learning is like, essentially, you build a system
Speaker 6: in a computer. You feeded a bunch of data and
Speaker 6: the system sort of builds a map of the relationships
Speaker 6: in that data, and then with new data it can
Speaker 6: kind of interpolate or extrapolate and guesses about.
Speaker 1: What should come next.
Speaker 6: And of course today we have an exciting, maybe misleading,
Speaker 6: confounding term for machine learning.
Speaker 1: We call it AI.
Speaker 7: Exactly right right, this is still very basic machine learning,
Speaker 7: and the computer at the time keeps making mistakes that
Speaker 7: they didn't really understand. So, for instance, once the computer
Speaker 7: developed a taste for potatoes, main potatoes, the system kept
Speaker 7: buying main potato futures in the state of Maine, potato.
Speaker 1: Potatoes, big harvest next year or whatever.
Speaker 7: Yes, okay, until two thirds of the company's money was
Speaker 7: in potatoes. They were all in potatoes. And they got
Speaker 7: a call from the regulators, the cft A CFPPS.
Speaker 1: Come out of Futures Trading Commission.
Speaker 7: Right yeah, saying whoa who are you guys, Like, what
Speaker 7: are you doing over there? You have almost cornered the
Speaker 7: market on potatoes. You have to sell And they ended
Speaker 7: up losing money on the trade because blown out on potatoes,
Speaker 7: they had stopped the computer or whatever the computer's plan was.
Speaker 7: But you know, this was just one small weird thing.
Speaker 7: Simon and Baum were really kind of nervous about this
Speaker 7: whole thing. They had taken investors' money, they didn't really
Speaker 7: know if their system worked. And as the story gets told,
Speaker 7: they start to like second guess the computer and themselves,
Speaker 7: and they start to think, well, I have this intuition
Speaker 7: that gold's gonna go up because of the geopolitical situation,
Speaker 7: and they'd make some money on that, and then they'd
Speaker 7: lose some money on that, and so by doubting their
Speaker 7: own system, it just wasn't really working. And at that
Speaker 7: point they're just Wall Street investors, right when the big
Speaker 7: computer trying to buy more potatoes and the man won't
Speaker 7: let them buy potatoes