Pod Insights Big Technology Podcast Is The Federal Reserve Manufacturing a Financial Crisis? — With Christopher Leonard About this episode Christopher Leonard is the author of The Lords of Easy Money: How the Federal Reserve Broke the American Economy. Ranjan Roy is the author of Margins. Both join Big Technology Podcast for a special episode where we dig into the Federal Reserve's outsized role in the economy, how its recent moves may send asset prices spiraling, and whether we're heading toward a financial crisis as a result. Tune into a timely and important episode as the Fed's aggressive interest rate shock is starting to broadly reverberate.
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0:00 Alex Kantrowitz? New York Times bestselling author Chris Leonard joins us to talk about the Federal Reserve's influence on the economy, the stock market, and how it's influencing the state of Wall Street today. Is it manufacturing a financial crisis? All that and more, right after this. This episode is brought to you by Genesis. What does it actually take to put a Gentic AI to work across an entire enterprise? I recently spoke with Genesis chairman and CEO Tony Bates about why orchestration is emerging as a competitive advantage in customer experience, and what companies need to get right in the AI era. Then, I sat down with Adam Mitchell, head of enterprise business solutions at Voya Financial, to go inside a large-scale
0:42 Alex Kantrowitz? Agentic CX transformation, including the business decisions, trade-offs, and lessons along the way. You can watch both conversations now on my YouTube channel today. It's never been more challenging to get frontier compute. How do you know where to look, who to trust, or how much to pay? Akash is an open cloud that provides easy access, flexibility, and peace of mind. That's how companies like Razer were able to cut their inference cost by 15 times. Visit akash.network/alex for a free consultation. That's akash.network/alex for a free consultation.
1:19 Speaker 01 LinkedIn Presents.
1:25 Alex Kantrowitz? Welcome to Big Technology Podcast, a show for cool-headed, nuanced conversation of the tech world and beyond. We have an amazing show for you today. Joining us today is Chris Leonard. He's the author of The Lords of Easy Money: How the Federal Reserve Broke the American Economy. It's a terrific book. I just finished reading it, and it goes into detail about how the Fed influences our economy. And we're going to talk about that and what it might be doing to our economy today. So first of all, Chris, welcome to the show. Thank you. It's great to be here. Great to have you. And for a special Wednesday treat, Ron John Roy is here with us. We're going to do the interview together. Ron John, welcome.
2:03 Speaker 01 You couldn't keep me away from this one. I've been waiting to talk zerp with Chris Leonard.
2:08 Alex Kantrowitz? Right. I feel like Rajan, we talk about the stuff that's red meat for you. And I feel like if we could cook up a dream episode for this podcast, this would be it. So here we are living the dream. So Chris, thanks for making that happen.
2:20 Speaker 02 My pleasure, man.
2:21 Alex Kantrowitz? Let's start with, at the end, really, and then work backward. So we're definitely in a moment of turbulence in the market. The market's panicking. The Fed is going to hold rates higher for longer. Stocks are tanking. Can you contextualize the moment for us? Why is the Fed having so much influence right now on the economy, the state of our country, state of the stock market?
2:45 Speaker 02 Great, great question. Um, I, listen, here's a headline I want to start with. We are not in a normal world anymore. I think that's the key point is, is what I'm trying to talk about in this book is that over the last decade, the Federal Reserve has done things it has never done before. It has intervened in financial markets in an extraordinary and unprecedented way, and it's dramatically increased its footprint. And so what that means is, you know, here we are today in kind of getting toward late 2023, the Fed is hiking interest rates to fight inflation. And there's sort of this narrative around that that people understand, like, oh, the Fed is hiking
3:27 Speaker 02 rates, it'll slow down the economy, but it'll cool inflation. But that doesn't really capture the intensity of what is happening. Because how do I say this? The Fed has pushed us way, way, way, way, way off the graph of history. So that when the Fed raises rates to 5%, where they are today, we've got to remember rates haven't been that high since 2007, before the financial crash of 08 and the housing market bust. The Fed has been pumping easy money into financial markets at 0% interest rates for 10 years, essentially. So when the Fed's putting rates up to 5%.
4:09 Speaker 02 What it means is that an entire world of investments need to be repriced in a 5% world, which is a short way of saying a lot of asset prices need to go down. So that's why you're seeing in the market right now, this wild seesaw that we've really started seeing since 2022 and the Fed started hiking rates. And it just explains why we're not in this normal textbook world of what you used to think about, that the Fed would kind of engineer rates to fight inflation. We're really in uncharted territory.
4:41 Speaker 01 Yeah, I think if you see today, we had the jobs number, or sorry, last Friday, we had the jobs number, expected 170,000, came in 336,000. Any other context, great for America, great for the economy. Instead, market tanks, bond yields rise because everyone has become so dependent on the Fed needing to drive the economy. So now the idea that if rates stay elevated, they won't be able to cut and juice the economy again. But how do you think then this unwind takes place? Or when does it take place? Because it hasn't happened from 0 to 5%, at least in the scale that I would have thought it would have.
5:23 Speaker 02 Totally. We are living in bizarre land right now. And you'll see, like in the Wall Street Journal, they'll say, you know, the market is stronger than expected, and you know, surprisingly strong growth. That really understates, you know, I'm sure you all talk to a lot of people in the investment world. And the fact that things are as good as they are now with rates at 5% is shocking. And either there's something going on in the world that really very few people on Wall Street understand, or I think a much more likely and reasonable explanation is that there's something called long and variable lags, meaning when the Fed hikes rates...
6:10 Speaker 02 It's sort of like something happening in the middle of the sun and it takes a long time for that effect to reach the sort of outer parts of the solar system of the economy. That's a dumb metaphor I just came up with. But what I'm saying is
6:22 Alex Kantrowitz? I like it.
6:23 Speaker 02 Yeah, but you get what I'm saying. Like, they hike rates and I'm, we really need to talk about the 10-year treasury bonds because when that jobs number came out, those 10-year yields went up to 4.8%, which is terrifying to me. And what we're talking about here is that when rates like that go up, it takes a long time to filter out into the economy. So there's, there are these long and variable lags. And, you know, what happened in 2022 was that the Federal Reserve raised rates from about 1% to 5%. And the way I describe it, that's not an interest rate hike, that's an interest rate shock.
7:05 Speaker 02 It's the fastest rate of interest rate increase that we've seen since at least World War II. And it's taking time for the economy to really metabolize that. And, and so that's why you're seeing this sort of jerky downward valuation of all these different parts of the market. But the, the full effect hasn't been felt yet. That's, that's all I can say.
7:30 Alex Kantrowitz? Chris, can I give an alternate explanation after reading your book? I'm going to try to use some of your book to sort of push back on this. I don't think people believe that the Fed will let the market get out of hand to the point where like they want to take their money out. Every time in recent history that we've gotten to a place of peril, think about COVID, think about the financial collapses, the Fed has come in and engineered us out of it. And so people see the Fed not only talking but acting tough, and they think that the second things get hairy, the Fed is going to bail them out again.
8:00 Speaker 02 Totally. You know, the term for that is the Fed put, meaning a put is a stock market derivative that means someone will come in and buy a stock when it hits a certain low price. And ever since the days of Alan Greenspan, there has been this understanding on Wall Street that when things go south in asset markets and there's a crash, the Fed is going to step in and use its primary superpower, which is the ability to print dollars out of thin air and flood those dollars into the banking system. There's this belief that the Fed will step in and do that anytime there's a crash. And more or less that has
8:39 Speaker 02 been true. What makes 2023 so different is that price inflation removes the Fed put to a large degree. What I'm saying is, the Fed can turn on the money fire hose and save stocks as long as inflation stays low. But if inflation is at, you know, 5%, 6%, 7%, the Fed can't step in and bail out the stocks. And so that's why we're in this moment where everyone's trying to figure out, there is a clear sentiment on Wall Street. It's so funny, you see it in the pricing of these future Treasury, in the futures markets for
9:22 Speaker 02 Treasury, Wall Street's saying, hey, we think the Fed's going to cut rates. This is crazy to have rates at 5%. We think rates are going to come down, and they're going to start coming down right after the turn of the year. That's this baked in assumption that the Fed isn't really going to tighten for long. But the Federal Reserve itself is saying, no, folks, that's not reality. Price inflation is extremely strong and persistent. And hey, it's getting a lot better, but we're going to keep rates higher for longer. We're going to really tighten. Don't expect the Fed put to jump in the minute prices go down. And you truly are seeing a tug of war over the Fed's credibility. Wall Street's saying, we
10:03 Speaker 02 don't believe them, but the Fed is saying, believe us. And so you're seeing that kind of tension work itself out in equities markets a lot.
10:13 Speaker 01 So one question I had is, do you think the Fed put is one of not corruption, but at least, I mean, one thing I found very interesting in your book was you outlined that in the Fed in the early 2010s, they almost had to step in because of congressional dysfunction, or even legislative dysfunction, that it was essentially the non-democratic institutions of the Supreme Court and the Federal Reserve had to kind of keep the country running itself because other institutions didn't. And I thought that was really interesting because in that way, it makes some of what Bernanke and everyone else were doing feel, you know,
10:54 Speaker 01 at least their noble intentions, whatever the end results were. But then you also outline Powell, Jerome Powell, his lawyer pedigree, his private equity pedigree, his wealth, that, you know, what he was worth when he started at the Fed. And, you know, is it obviously the conspiratorial bent towards the Fed is, you know, the rich trying to keep their rich friends rich? How do you think the Fed themselves approached this? Are they trying to look at this from a completely detached angle and it's just the numbers? Do they worry about the stock market itself? Or are they just trying to do what they think is the best for the economy as a whole?
11:36 Speaker 02 What a great question. And I've got to say, here's one of the things that's so important to me. You don't have to be conspiracy minded to say that the Fed's policy are helping the rich. Just look at the structure of the system. The Fed, when it creates new money, it doesn't create it in the checking account of Chris Leonard or my neighbor. It has to create dollars inside these bank accounts on Wall Street. There's 24 banks called the primary dealers, JP Morgan, Wells Fargo, Goldman Sachs, you know, the crew. And so when the Fed's pumping money into Wall Street, which is the only way it can create money, by the way, it's elevating asset prices. And, you know, 1%
12:19 Speaker 02 of the population owns about 40% of all the assets. The bottom half of America owns 7% of the assets. So like by its nature, this structure, when the Fed goes in aggressively, it's benefiting the very rich. And so
12:35 Speaker 02 The way the system is structured benefits the biggest of the big banks and the richest of the rich. So it's not like, you know, Jamie Dimon has to have some furious secret call with Jay Powell, although he does. But, you know, they don't need to say protect our interests. That's just how the system works. But if I could, you open the window on 2010. And so I'd like to jump in there really quick to talk about what has happened, because that's, to me, one of the most important parts to understand. You're exactly right that in 2010, the Fed was feeling this tremendous pressure to do something because we were recovering from the Great Global Financial Crisis. Growth was weak. No one was expecting a recession
13:16 Speaker 02 in 2010 inside the Federal Reserve, but they knew that we were in for a long, slow slog of weak growth. So what the Fed did, here's the extraordinary thing that happened over the last decade that we need to know about right now, which is that the Fed did two key things. The first is, it kept interest rates at zero for seven years with what you just called ZERP, Zero Interest Rate Policy. You know, traditionally, rates have floated between 3% and 6%. Rates had never really touched zero at an extended level before. And we keep that rate zero for seven years, which is just ultra easy money. And then, at the same time, critically, the Fed does this thing it's never done before called quantitative
14:01 Speaker 02 easing, which is basically just printing money inside the banking system. The Fed does that by purchasing assets like Treasury bonds from these primary dealers, one of those 24 banks, and then funding that purchase with just new dollars created out of thin air. And we need to understand the scale of this, okay? In the first 100 years of its existence, 95 for your close listeners, the Fed had created $900 billion in new money. And that, I'm referring to the monetary base. Consider it like the swimming pool of money that the Fed can create. It was $900 billion large, and it had grown steadily over a century.
14:44 Speaker 02 And then between oh eight and 14 with quantitative easing, the Fed prints 3.5 trillion dollars in the banking system. So that's 350 years worth of new money creation in about four and a half years. And that's what pushes us off the graph. Okay. And, and then, by the way, they double that during COVID, the, you know, the, the Alex, the Fed put you mentioned, the, the Fed put on ultra steroids during COVID was, what is the number? I think they printed about four and a half trillion over that summer of 2020. So, you know, the balance sheet of the Fed is now nine trillion.
15:24 Speaker 02 The headline here is Bernanke and then Powell and Yellen's experiment in money printing to drive economic growth rearranged the financial system. It was a decade worth of money printing. And, and to tighten it necessarily, you know, to raise those interest rates from zero to five and to stop printing money through quantitative easing, or to even shrink that balance sheet, it reverses what you did through the loose money policies. So that's why Wall Street is so freaked out because they're like, when you raise from zero to five, we've got 10 years worth of investments created at zero percent, commercial mortgage backed
16:09 Speaker 02 securities, tech stock prices, all these assets, and they need to be repriced in a 5% environment. So that that's just a huge jarring shift. And that's where we are today.
16:22 Alex Kantrowitz? Chris, can I give you the counter to the idea that this only benefit or mostly benefited the rich?
16:28 Speaker 02 Absolutely.
16:29 Alex Kantrowitz? I want to hear what your, your thoughts are when I bring this up, right? So we're at an economy that's at effectively full employment. If these assets were to go down, that would have secondary impact, whether it's in the labor market, people's retirement. I mean, yes, like, you know, you're going to see companies do quite well and stock prices go up. But ultimately, when you have everyday people, like, they're also benefiting, you know, more than if it didn't happen. Like, that would be the counter. So how do you respond to that?
16:58 Speaker 02 You know, I hear that. And with respect, I, I have come to totally disagree with it.
17:07 Speaker 02 We had a decade of trying this method out. And you look at the arguments inside the Fed and they really laid out what you talked about, which is, okay, listen, if we keep rates at zero and we pump this money into Wall Street, it's going to elevate asset prices, okay? Jamie Dimon's going to get a lot wealthier. But at the same time, there will be these knock on effects of the so-called wealth effect, you know? People's 401Ks will go higher, their house prices will rise. A lot of these companies will lend more, you know, build more factories.
17:47 Speaker 02 But the real world effects frankly were miniscule is really a word I would use. They were miniscule compared to the ballooning values of these assets on Wall Street. And at the end of the book, I talk about you kind of go back and measure. Let's look at the real economy during the decade of the 2010s, which is the decade of ZIRP and QE. Productivity growth in the US economy was anemic and weak by historical standards. Overall economic growth was economic and weak at about 2% for a decade. Wages for workers remained flat or really in a lot of key ways, they fell during that
18:32 Speaker 02 decade. While at the same time, asset prices in equity markets doubled, the value of corporate debt markets nearly doubled. And so you see this like huge growth in asset markets while we have a real economy that is truly just treading water. And listen, I'm a print journalist, you know, barely hanging on to the bottom rung of the middle class. I don't want to see another financial crisis. It's awful when you have these downward price corrections and market crashes. Of course, it's bad for everybody.
19:14 Speaker 02 But economic growth through money printing is not broad-based prosperity is what I would say. And I think we have a lot of data to prove it from that last decade. And what ends up happening is you pump up these markets, you know, in our case, for a decade with Zerp, or you know, you look back from the year 2003 to 2008, we were pumping up the housing markets with low interest rates. And there's some growth, some sugar high for a while. But then when there's a crash, you've got to bail out Wall Street.
19:48 Speaker 01 Right.
19:49 Speaker 02 And start over. And I don't think that that benefits the populace as a whole.
19:53 Speaker 01 But at least we got NFTs out of it.
19:56 Speaker 02 I mean, you can't say we didn't get nothing.
19:58 Speaker 01 We got NFTs. We got something. One of the things that you wrote about, and honestly, for me, it's the most memorable part of the book, because having followed the Zerp phenomenon for a number of years now, and thinking it was causing a lot of weirdness in the economy or distortions, was the idea that, and everyone arguing that rates can stay low because there's no price inflation, and you had very specifically said price inflation before, was the fact that no one recognizes asset inflation as a threat or a type of inflation. And still, so obviously, as you said, prices might remain low, the CPI stays low, so Fed can keep rates
20:39 Speaker 01 near zero. But then equity markets are doubling, tripling, houses are, housing markets kind of roaring back, cost of living is increasing, just not the actual consumer goods pricing. How come we've never, but then you also pointed out in the 1970s, Paul Volcker did call asset inflation and price inflation cousins. Like, what do we need to do to make people recognize that asset inflation is a threat right now? Because I honestly, it's nowhere in the conversation right now, still, after all this time, at least that I see.
21:13 Speaker 02 I love that. And it's such a key point.
21:17 Speaker 02 Okay, so as you say, when we talk about the word inflation, everybody talks about inflation, inflation, they're referring to CPI or price inflation, which means stuff we can consume, hot dogs, cars and television sets, things like that. That's one kind of inflation, as you point out, but the other kind is asset inflation, which is, and this is what's so interesting. Like, it's well-known that when the Fed keeps rates too low for too long, or the policies are too easy, it stokes price inflation. And the best way I've heard about it is that you've got too many dollars out there in the economy chasing too few goods, so it bids up the price.
22:00 Speaker 02 But the same thing happens in asset markets, okay? And assets is anything that you can buy that holds value, to put it as simply as possible. Houses, art, stocks, corporate debt, these are all assets. And the Fed can stoke those prices as well. But, and that's what's been happening. And before I talk about asset inflation, it is like documented that, starting in the Greenspan era, the Fed made a choice. We're going to focus on price inflation and we're not going to worry about asset inflation. We're going to let, you know, it's so interesting to look back at the internal debates in the late 90s.
22:45 Speaker 02 The Fed knew it was juicing the stock market and they decided to let it go. And then the dot-com crash happened. And then the awareness of the housing bubble was not as clear, but there were people pointing out that, you know, these housing prices are going up, up, up, this could be trouble. And then boom, that explodes. And that gets it, that gets at the heart of what is the matter with asset inflation? You see, when asset prices are rising by 9% or 10%, it gets really a different headline than when fuel prices or CPI is rising by 9%. Everybody recognizes like when fuel prices are going up by 9%, god, that's awful, we hate that.
23:29 Speaker 02 But when, when equities or tech stocks or commercial mortgage-backed securities are going up by 9%, it's like, great news, hey, this is a boom. But the problem is, when you artificially juice asset prices like that, they don't stay artificially elevated forever. As I talk about in the book, the price of an asset will inevitably converge with the value of that asset. You know, it's just a sad reality. And so the problem of these overinflated asset markets is that there's always a downward correction. And inside the Fed, again and again, over the last decade, you've had people warning
24:14 Speaker 02 that 0% interest rate in QE was setting up the stage for a financial market crash. And so that's, that's what's so dangerous about asset price inflation. And I agree with you, it's not discussed enough, but there is much more of a recognition now that, that the Fed does inflate asset prices and that the resulting calamities, the financial market crashes have got to be contended with. We got to think about it.
24:41 Alex Kantrowitz? Are you saying there's a chance I'm going to be able to afford a house, let's say sometime within the next three or four years? Dude.
24:48 Speaker 01 I mean, that's it. At least we're talking about it right now. At least people are talking about it.
24:53 Speaker 02 And I've tried to like email financial reporters, you know, you see these stories about housing markets in San Francisco going up, and there are a lot of public policies about it. But the Fed is the money fire hose. That's what's inflating asset prices to just an incredible degree. But, you know, what strikes me, Alex, about your comment is the housing market. By all the laws of economics, housing prices should have started to fall after the Fed raised rates. I mean, mortgage rates have gone from ballpark 3% to above 7.5%, close to 8, stunning.
25:36 Speaker 02 But the prices remain elevated. And I think some of that is idiosyncratic to the housing market. There are all these problems with supply and not enough home building. We could talk about all that. But it's a similar thing you're seeing across the economy in 2023.
25:54 Speaker 02 The Fed has changed the dynamic in a way that should be bringing asset prices down, and it has brought asset prices down, but not as much as most people expected. And it's just, we are living, honestly, my take is we're living in bizarro land. Like, a lot of the markets just don't make sense right now.
26:17 Alex Kantrowitz? We're here with Chris Leonard. He's the author of The Lords of Easy Money: How the Federal Reserve Broke the American Economy. Can't recommend this book enough. It's a book about the Fed and it's actually a page turner. I'm not even exaggerating. Couldn't put it down. So go check it out. It's on Amazon and any of your local booksellers, Barnes & Noble as well, and Target. You can find it. Wherever you buy your books. We'll be back right after this. This episode is brought to you by AVPoint. Everyone's racing to roll out AI right now: copilots, chatbots, agents doing real work. But here's the part nobody loves talking about: all that AI runs on your data. And most teams have no single way to see it, secure it, and prove it's under control. That's exactly what AVPoint does. For 25 years,
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28:45 Alex Kantrowitz? And we're back here on Big Technology Podcast with Chris Leonard. He's the New York Times bestselling author of The Lords of Easy Money, How the Federal Reserve Broke the American Economy. Came out in January 22. I just read it and it was on my list. And as I'm reading it, I'm marking down so many different parts of it that I was like, I wish I could speak to Chris about it. It's awesome to be here with you, Chris. Quick question for you. You said in the beginning of our first segment that seeing the 10-year bonds go to 4.8% really worried you. Let me just, let me ask a question this way. When we saw even the shorter term bonds go up, we had Silicon Valley, Silicon Valley Bank crash because it had like taken on a lot of this interest rate risk, expecting that zero interest rate policy would continue on forever
29:31 Alex Kantrowitz? and just couldn't manage it. And that, was that like the canary in the coal mine? Like, what are like the real risks are there? When we see interest rates go up to 4.8% on a 10-year bond? I mean, is that, is that it? Or are there other things that are going to happen that I'm not even thinking about?
29:45 Speaker 02 Well, I think that there are a lot of other things that can happen. The 10-year Treasury bond is just.
29:54 Speaker 02 Hard to overstate what a vitally important financial instrument that is. I mean, it is the bedrock of our financial system. Treasury bonds in many ways are the bedrock of our financial system. But I like to think about it with this metaphor of the seesaw of risk, which, you know, a lot of this book about the Fed was informed by talking to people on Wall Street. I actually think that that's a key disconnect. You've got people who write about the Fed who only hang out in Fed circles with all these economists and central bankers. But, you know, the Fed acts, but then Wall Street implements it.
30:34 Speaker 02 And you get a totally different, and frankly, a lot more unsentimental view of Fed policy. When you talk to private equity people, hedge fund managers, commercial real estate, you know, stockbrokers, they have this totally different view of it. And when the Fed kept interest rates at zero and then printed, you know, three and a half trillion dollars in quantitative easing, it changed what I've called the seesaw of risk. And here's how I think of it. Treasury bonds are super safe. And the 10-year Treasury bond is sort of like the savings account of Wall Street. It's where I can put my money, where I know it's going to be safe and Uncle Sam will pay me back.
31:18 Speaker 02 So when the 10-year Treasury bond is at 4%, like, that's a pretty good savings rate. And if I'm running a private equity firm, I can stash some money in there at 4% knowing that I'm going to earn that. But what the Fed did was it intentionally and artificially suppressed that interest rate on the 10-year bonds down to like 1% ballpark. So now when I'm running a hedge fund, I know I can only earn 1% in this ultra-safe checking account. So when people come in the door asking me for money to invest, they only need to give me a yield or a return that beats 1%. But in a four or 5% world, I can stash my money safely. And if you come in my door,
32:01 Speaker 02 you better have a pretty good business plan that's going to return, you know, five or 6% to me, if that makes sense.
32:08 Speaker 01 But then, but then, Chris, one thing, again, in terms of what this unwind looks like, because you, you, you very clearly outlined the point that like pension funds who never would have dreamed of going into risky investments, once rates are zero, have to move in. And we, even in startup land, you know, series C moves to series B, series B moves to series A, series A moves to C, like, everyone starts moving up the risk curve. But then what happens now? Are you saying that pension funds that bought late-stage private investments are going to unwind it? Private, does private equity after 12 straight years of growth finally start to take
32:50 Speaker 01 a hit? Or, and when, how disorderly is this if it, if it happens?
32:55 Speaker 02 The one lesson I've learned is that somehow private equity never takes a hit.
32:59 Speaker 01 It's always going to be okay.
33:01 Speaker 02 We're all in the wrong line of work.
33:03 Speaker 01 And whatever happens, private equity will be okay.
33:06 Speaker 02 And I don't know how they do it, but they do it. But that's exactly what I'm trying to say is over 10 years, the Fed intentionally moved all this capital to the risky side of the seesaw. And you couldn't keep your capital over there in the safe side. And now, the 10-year Treasury bond has risen from 1% to like 4.7 ish right now. A startling, incredible move. And that moves the seesaw. All this capital is going to go flowing back into the safe haven of the 10-year Treasury bill, because now it's offering to pay you 4.7%. And so that means, it, it just,
33:51 Speaker 02 all that capital is going to move away from these riskier structures that were funded, whether it's corporate junk debt on fracking companies that weren't really producing much oil, commercial mortgage-backed securities on tons of office space in downtown San Francisco, tech stocks. Yes, the capital will move away from those. And the unwinding doesn't happen overnight. But with
34:21 Speaker 02 It just is like mathematics that it it's going to lower the price of those riskier assets, if that makes sense. But like, one investor described this to me really well. I mean, figuring out how that's going to happen, like in what timeframe and, you know, was Silicon Valley Bank the canary in the coal mine? And then these other banks will follow next? Where's the next explosion going to be? It's like that game at the carnival, he told me, where you drop the coin in the top of that wall with all the needles in it, and you can't guess where it's going to fall. There's just so much unpredictability in how this shakes out in the market. But the fact that it will shake out in the market,
35:01 Speaker 02 big picture, seems totally undeniable. That's why 4.7% Treasury yields, to me, make me sick to my stomach. Because it's like, oh, my God. I mean, think about everything on the other side of that equation that's going to have to be repriced downward. I mean, this is just a huge change.
35:23 Speaker 01 What's the, what's the best case scenario? Because let's say, inflate, price inflation manages to come down a little more. It's definitely at least feels momentarily like it's peaked. Does, and the Fed starts cutting again, does that push us back into another cycle of asset inflation? And the income inequality rises again? And, and this only gets worse if inflation comes down and the Fed is able to cut?
35:51 Speaker 02 So, it's such a great question. First of all, best case scenario, to a large degree, is kind of happening. And it's that decline of price inflation. Price inflation was like fire at the back of the Federal Reserve, forcing the Fed to tighten aggressively and dangerously, honestly. This tightening is dangerous because of the wreckage it can cause that we've been talking about. And so to see inflation fall as quickly as it has, has been like tremendous. I think we should all be super grateful for that. And it's going to take time for economists to kind of go back and excavate the last couple of years.
36:36 Speaker 02 Because I saw this with the inflation in the 1970s. It really took us like 20 to 30 years to truly figure out what was going on there and why inflation got so high. And I mean, it'll kind of take us that same amount of time now, but all we can say in the moment is thank goodness inflation is falling. So best case scenario is that price inflation keeps falling and the Fed can moderate.
37:03 Speaker 02 You know, I'm kind of like a broken record. The Fed went hardcore, unprecedented intervention, easy money, experimental policies that frankly are kind of financially dangerous. And what the Fed really needs is a long runway to unwind that. When you pump trillions into the banking system, keep rates at zero, you want to unpack that gradually. So our best case scenario is that inflation falls and the Fed will have plenty of time to kind of, you know, slowly moderate the situation. That's the best case.
37:37 Speaker 01 One thing, reading your book, I'd be very curious because again, you outlined how Jerome Powell, you know, grew up wealthy, but not obscenely wealthy, but became obscenely wealthy before becoming the Fed chair. Even Bernanke, you know, coming through Princeton economics and always like being around Wall Street circles, like all of these people watch the stock market all day. Like probably, you know, the first thing they're looking at, I'm sure when Jerome Powell finishes one of his pressers after the rate announcements, he's checking, how did the market respond to my comments? Who should be in charge of the Fed? Should it be someone who has never spent a day in private equity, who's never worked in an econ department?
38:22 Speaker 01 I don't, I don't, yeah, who, who, who should run the Fed?
38:27 Speaker 02 What a great question. And like, It's unpacked. Dude, cuz like, okay, you know, first, the the the starting point we've got to start with here is it's kind of extraordinary. You know, you mentioned undemocratic institutions, which is something I talk about a lot. But, you know, the Fed is not really accountable to voters. The the Policy Committee that controls it are all people who are appointed by the President, approved by the Senate, but never face an election. They have tremendous power. And the chairperson has tremendous power. And Greenspan really started to centralize that power. And I think one of the take home points that I've,
39:09 Speaker 02 you know, that one of the big take home points I'm trying to convey in this book is, we should not leave this much power to the Fed. They should not be America's jobs program, for the very reason that they're not democratically accountable. And also, they have really limited tools, you know, the Fed can't put a shovel in someone's hand, or educate a kid, or build a dam. They can only print money on Wall Street. Terrible vehicle to grow our economy. So I think to me, and boy, this is easy to sit here and say, but like, we need to move the political onus, or the responsibility for economic growth away from the central bank, and back into Congress and the
39:51 Speaker 02 White House. And like, this is where I don't really care what your political theory is. If you're hardcore conservative, Congress and the White House needs to do the conservative agenda, you know, get rid of regulation, et cetera, et cetera. If you're liberal, they need to do a new deal, and they need to build dams and hire people to work. But it's got to be the mechanisms of Congress, not printing money. And so I think that's the bigger question. Maybe I maybe I'm going to dodge your question and say we shouldn't focus as much on like, who's running the Fed? But what are we asking the Fed to do? They shouldn't be our jobs program. It doesn't really work well at all.
40:31 Alex Kantrowitz? And one of the things that I would just say that one of the things that really struck me reading the book is what the Fed did, and we referenced it already, what it did before COVID, right? Like, or mid-COVID, where they did that four and a half trillion dollars with everyone's focused on the stimulus, but they were able to do all that printing. And they did it, and this was kind of remarkably laid out in your book. They did it before they even really got author, like even had a head nod from Congress. They're like, we're not going to talk to Congress. This is so dire, we need to act now. And they just went ahead and did it and rolled out a series of relief programs that, you know, might have saved the stock market, but also just like the, what it did strike me just how unilateral, undemocratic. I mean, how does something like that even happen?
41:17 Speaker 02 Oh, God, man. Great question. You know, I don't mean to be glib, but you remind me that movie Frost Nixon where President Nixon says, you know, if the president does it, it's not illegal.
41:29 Alex Kantrowitz? Oh, yeah. We hear that more and more these days.
41:32 Speaker 02 Yeah, right. And I don't, I mean, the Fed did not wait for congressional approval for some of these truly like unprecedented actions it took during COVID. And there is a good case to be made that they, they pushed beyond the law in the way they did it really, really quickly. But again, people don't complain because they're pumping money into Wall Street and elevating asset prices. So, you know, it's not a kind of maneuvering around the law that gets a lot of like pushback or complaint. When COVID hit.
42:15 Speaker 02 It was obviously like a black swan event, real, real economy downturn, huge, huge, huge. But it also started triggering all these, you know, as I, as I put it, like COVID was a needle that hit a balloon in our financial markets. I mean, the markets were already truly teetering in 2019. I know Trump wants, I interviewed a lot of people in the Trump administration and they want to talk about how great things were in 2019, but they were deeply fragile. And, and then when COVID hit, the, the chickens came home to roost. And I mean, for example, a, a big, a big market that got inflated by the Fed was junk
42:58 Speaker 02 bonds. And there was a front page New York Times story talking about the time bomb that was about to detonate when all these junk bonds started to default. And so the Fed stepped in and literally started buying junk debt, like potentially really illegal. The Fed was never supposed to buy assets like that or take on credit risk.
43:23 Alex Kantrowitz? Yeah. You talked about how they, they socialized, they now socialize credit risk.
43:28 Speaker 02 And that point you just made is coming from that guy at Guggenheim Investments, Scott Minard, who's like this grizzled conservative bond trader. And he's like, yeah, they have socialized credit risk. This is unbelievable. And now, when you're making a loan on a corporate junk bond, you're not thinking, is this person going to be able to pay me back? You're thinking, is the Fed going to buy this if this thing goes south? That's what the Fed did with that.
43:57 Speaker 01 And how do they get there? Like why, what do you think the reasoning is? Again, going back to that question of like noble intention versus corruption versus malice? Like, again, it's a certain point, they're buying commercial mortgages and junk debt and whatever else. Is it just one decision leads to the other and everyone is just kind of in an ivory tower or something? Or they're just looking at the equity charts all day? Like, how do they get there?
44:25 Speaker 02 Ah, great question. And you know, as a reporter, I can only build on the evidence I can get, you know? And so that's interviewing people. Like, you know, during the COVID crash, Jay Powell was on the phone with Larry Fink from BlackRock like eight times a day, the record show. What were they talking about? I don't know. But, but you can look back and see what the Fed's top policy committee was debating about. And I, and listen, I do think, maybe this is just my view of the world, but it does tend to be a lot of bureaucratic decisions driven by short-term thinking. And then you get trapped inside of a policy.
45:08 Speaker 02 And by that, like Jay Powell is a perfect example. I mean, as you know, like the first chapter about Jay Powell is called The Fixer. He's, he's just like that guy who was always in the upper echelons of Wall Street or Washington who fixed problems. He's a smooth operator. He's charming as can be, and he knows how to get things done. But when he came into the Fed in 2012, he argued more vociferously than anybody that 0% interest rates and QE was going to create a financial crash and, and that they should stop doing it. And he, he kind of lost that argument. And then he came around to the other point of view.
45:49 Speaker 02 But what I'm saying is that by the time, you know, the material is hitting the fan in 2020, Jay Powell is in the seat where he's got a choice of, I either stop a calamity that we helped create by purchasing corporate junk debt, or we live with the corporate junk debt collapse. So I feel like a lot of it is this sort of bureaucratic decision-making and, and that they're just sort of chasing, trying to stay ahead of a problem.
46:29 Speaker 01 Yeah, you almost, you almost feel it right now. And you had mentioned earlier, like, right now, the Fed is begging Wall Street to understand that they're not going to cut. Yet, Wall Street's like, oh yeah, you guys will cut. We know. But it does feel like that, that they, they're trying to, it's almost like Powell's trying, he sees his legacy in the rearview mirror and he understands that if, if he blinks now, it's just going to happen again. And that's all that he'll be remembered for.
46:55 Speaker 02 It's stunning.
46:58 Speaker 02 Stunning how much credibility the Federal Reserve has lost on this topic since the Greenspan era. There was a graph floating around earlier this year that showed where the Fed says rates will be. And the Fed was saying, Wall Street, we're going to keep rates at 5% or above for the entire year, this line. And then there was the futures market on Treasuries, which was the bet Wall Street was making on where the Fed would be. And it showed the Fed cutting dramatically after June. And you see this disconnect. Now, to this point in time, the Fed has remained solid. And you're right, that like Powell and the leadership of the Fed
47:43 Speaker 02 is trying to send this message. We are not going to step in and start cutting rates. We are dead set on getting inflation back down to 2%. Where are we now? I think we're a little under 4%, which is amazing. We were at 9% in the summer of 22. But there's still a long way to go. And he's saying, yeah, we're going to hold higher for longer.
48:06 Alex Kantrowitz? It's almost as if like, there's no good option here, right? You have like, either you maintain a system that has led to some bad outcomes. And of course, inflation is part of that. Or you try to crack down, and that's what's happening now. So I'm curious, like, do you think at this moment, the Fed is going to manufacture a financial crisis? If so, is that sort of a way for them to get out of the actions that they've taken over the past decade?
48:35 Speaker 02 So, quick note, I really, you know, accountability is a big part of journalism. And the Fed needs to be, it needs to be acknowledged what they did back in 2010 through 2012. That's when they decided, we're going to just pedal to the metal, do quantitative easing. In spite of the internal warnings of, you are creating long-term risks. Like, they knew that they were doing that. And now, we're having to pay for that. So it's not like, it's all, I mean, they put us in this position. And that needs to be acknowledged. The evidence is public at this point. You can go back and look at all of it.
49:16 Speaker 02 But I'm putting that in as a side point to answer your question. I don't, it's so interesting. If you're sitting in Jay Powell's chair in Washington DC, price inflation has scared the heck out of you. Because it is a very volatile and dangerous thing. And I know that there's this huge critique of the Fed. And, and listen, I've done a lot of books about middle-class workers, labor unions. We gotta increase wages. It's terrible how the middle class has been hollowed out. I sympathize with that. And, and when the Fed raises rates, they hurt
50:00 Speaker 02 working people by depressing the economy and wage growth. But what I'm trying to get across here is that if you're Jay Powell, inflation is terrifying because it can become a self-fulfilling loop, positive feedback loop and inflation spiral. And that's why rates are high. They're not trying to necessarily put people out of work or create a financial crisis. They are just terrified of a financial, I'm sorry. They're terrified of an inflation spiral. And they need to kill inflation. And that's why rates are so high. And so they don't need to create a financial crisis. It's almost inevitable that a financial crisis will happen if rates stay this high for another
50:45 Speaker 02 matter of time. You know, we don't know how long it's going to take for that to fully filter out in the economy.
50:53 Alex Kantrowitz? Right.
50:53 Speaker 02 But so I don't think, yeah, I don't think Jay Powell wants to create a financial crisis. I don't think he wants to create a recession. But it's going to be the sort of necessary impact of fighting inflation.
51:05 Alex Kantrowitz? Yeah, this is not a financial advice podcast, but I'm going to hedge some of the money I have in the market after hearing you talk about this.
51:11 Speaker 01 But I also love that the week after the House voted out a speaker and a speakerless for the first time in its history. Our hope is that the Fed has to give up some power and move it back to the legislative branch.
51:26 Alex Kantrowitz? But also this is the big story. So it sort of goes to show you that like even with the craziness in the House, like still the Fed.
51:31 Speaker 01 Yeah.
51:33 Alex Kantrowitz? Yeah.
51:33 Speaker 02 Yep. No, I mean, what can you say? I mean, we've got to learn how to do democracy again. And, and I mean, like, you know, the fiscal agencies of the people we vote have got to deal with these deep issues we've got. Yeah.
51:48 Alex Kantrowitz? Okay, let's end here. Chris, thank you so much for joining. Great to speak with you. Great to read your words and get a chance to speak with you about what you've written and how it connects to the modern day. So thank you so much for coming on.
52:00 Speaker 02 Yeah, thank you. I appreciate it.
52:01 Alex Kantrowitz? We will have to have you back when the recession is official. So stand by.
52:06 Speaker 02 I'll be here, though.
52:08 Alex Kantrowitz? Okay, awesome. Ron John, thanks again. Glad we did this, right?
52:12 Speaker 02 Yeah, thank you. This was a good one. Yeah, thank you.
52:16 Alex Kantrowitz? Okay, thank you, Nick Watney, for handling the audio. LinkedIn, for having me as part of your podcast network. And to all you, the listeners, really appreciate you being here week after week. Ron John and I will be back on Friday, breaking down the week's news. Until then, I hope you have a great rest of your week, and we'll see you next time on Big Technology Podcast.
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