Bankless - 145 - Is the Fed Corrupt? with Christopher Leonard

Starting point is 00:00:06 Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless, guys. How is money created? Why is it created? Who actually does the job of money creation? And how come everyone always talking about the Fed? This episode is going to unpack everything you need to know about this odd little institution that governs our lives.

Starting point is 00:00:35 A few takeaways for you. We talk about the origins of the Fed, starting this little place called Jekyll Island. Did we even need it in the first place? Number two, has the Fed strayed from its original purpose? Has it become corrupted? We talk about the massive damage that the Fed has done. Number three, what do we do with this institution? If it is corrupt, if there's no path forward, what do we do with it?

Starting point is 00:00:57 Do we reform? Something has to change. What is the path forward? David, this is a really fun episode. I learned a lot about the Fed. But why are we talking about the Fed? I mean, is this just kind of a wonkish detour? Or how is it core to the crypto journey? And why do we need to unpack it on bankless today? Yeah, certainly. Well, the Fed is at the very bottom of the global financial system. So why are we talking about the Fed?

Starting point is 00:01:19 Well, it supports everything. And so it's important to understand how it works. And it's actually crazy that so few people understand how the Fed works. And this was just a really good learning lesson for me. It's like to go and unpack the construction of the Fed. They don't teach this in school, right? No, no, not at all. And I think it's also like emblematic that the Fed is a Federal Reserve or a central bank. You're not supposed to think about it. If it's working, it's invisible. If something is breaking, a symptom of that is that we talk about the Fed. And so the Fed is supposed to be in the background. So the fact that it is on top of investors' minds, that is something that is already off to a bad start. And so there's some things I think that listeners should consider while they listen to Chris here. The Fed, it's not a monolith. It's got a number of different people, 12 different board members. And if it's got different board members, some board members come and go over time. So how does the composition of the Fed change? How has it changed since it was created in 1913? How was the Fed originally formulated and how did time and external influence change what the Fed is? And also perhaps consider what parts of the Federal Reserve story or the character development of the Fed are emblematic of what. our goals and aspirations are in the crypto industry. What part of this story really shows us why we are here in crypto? I think those are questions to consider while we listen to Chris in this episode.

Starting point is 00:02:44 Yeah, definitely. And if you're a premium subscriber, stick around after the episode for an episode. We call the debrief premium subscribers get it in the RSS feed where David and I unpack our thoughts after the episode. Guys, we will be right back with our episode with Christopher Leonard. But before we do, we want to thank the sponsors that made this episode possible. The reality today is that five corporations control the entire world of social media. They own our names, they restrict our content, they monitor our every move. And their time is up thanks to our sponsor, Diso. DOSO is a layer one blockchain built from the ground up to decentralize and scale social networks.

Starting point is 00:03:19 With Diso, you can own your own identity, content, and social graph, and take it with you across hundreds of applications already built on the censorship-resistant D-So blockchain. D-So's storage advantages make it finally possible to build infinite, state. applications that can efficiently store and index large amounts of content and data fully on-chain. DeSo also offers multiple crypto-native monetization primitives for developers and creators, including social NFTs, social dows, social tokens, and social tipping. So in order to experience the social layer of Web3, go to DeSo.com and claim your username. That's d-es-o.com. TrueFi is D-Fi's largest credit protocol, connecting global lenders with institutional-grade lending opportunities. Trufai has completed over $1.7 billion in originations and paid out nearly

Starting point is 00:04:07 $35 million to lenders, proving that Defi is ready to take its next big leap into the $8 trillion credit market. Trufai gives lenders, like you, access to sustainable high-yield opportunities backed by real-world investments, usually reserved for high net worth individuals. At the same time, fund managers use Trufai's financial infrastructure to bring their portfolios on-chain, benefiting from the global liquidity, cost savings, and transparency of defy. TrueFi is a decent financial utility. The protocol is owned and governed by the Trufi Dow, and Trufi is here to bring Defy into the Golden Age, bridging the power and access of crypto with institutional-grade lending opportunities and portfolio tooling. Explore the diverse financial opportunities available on TrueFi

Starting point is 00:04:46 or launch your own portfolio at Trufi.io. If you've been listening to Bankless, you know that we're fans of the modular blockchain thesis. The idea that blockchains will separate execution from data availability and consensus, allowing all three to become the best versions of themselves. And fuel has built the fastest modular execution layer in the industry. By supporting parallel transaction execution, fuel unlocks significantly faster throughput for the web free world. Fuel also goes beyond the limitations of the EVM, with its own Fuel VM,

Starting point is 00:05:15 which is more efficient and optimized, opening up the design space for developers. And lastly, fuel brings a powerful developer experience with its own domain-specific language, sway, and a supportive tool chain called Fork. With Fuel, you can have the benefits of smart contract languages like Solidity, while adopting the improvements made by the rest tool and ecosystem,

Starting point is 00:05:33 letting the fuel development environment go beyond the limitations of the EVM. If you want to learn more, there's a link in the show notes to see how you can get involved with a fuel network. Bankless Nation, we are super excited to introduce you to our next guest. Chris Leonard is going to help us get into the minds of the Fed. He is an American investigative journalist. He's an author. Christopher's newest book is called The Lords of Easy Money.

Starting point is 00:05:56 And that's an investigation into this institution. we call the Federal Reserve. The sub-title of that book is how the Federal Reserve broke the American economy. Man, it sure feels broke right now. And of course, this is a crypto podcast primarily, but the Fed impacts everything. Chris, welcome to Bankless. Thanks for having me. So we want to get into the story of the Fed. I guess, you know, a high-level question, though, is what the Fed is doing right now? Is that a new thing? Like, should we be worried? Yeah, we should totally be worried. I mean, that's a high-level question, though, is what the Fed is. the undertone.

Starting point is 00:06:30 All right, cool. Yeah. Just checking. Yeah. I'm pretty worried about a lot of stuff. And what the Fed is doing right now is not normal in any respect. And, you know, I don't want to just launch into a soliloquy about it. But I think to answer your question, the core point that people need to know is that

Starting point is 00:06:50 between 2010 and 2020, the Fed just broke into an entirely new graph. Like, they started doing these. experiments with easy money that changed their role in the economy, that changed the financial system in really, really deep ways. And again, it just broke the graph of what they've been doing. So they really broke the charts, starting in 2010. They've changed the entire landscape of monetary policy. And that's the backdrop for everything they're trying to do right now. So, you know, we're sitting here in late 2022, and the Fed is trying to so-called tighten, They're trying to hike interest rates and do all this stuff.

Starting point is 00:07:31 We'll talk about like quantitative tightening to fight inflation. And that sounds pretty normal. That sounds like the job of what the central bank does at hikes rates to fight inflation. But the backdrop is that they're doing it in this wildly distorted environment that they themselves have created, which means that they don't really know what's going to happen. They really are like a person feeling their way through a dark room right now. and there's a tremendous amount of volatility and risk sort of underpinning what they're doing. So my headline is things are the opposite of normal right now.

Starting point is 00:08:07 And if there's one party that really has no clue how this is all going to play out, it is the Federal Reserve itself. This is something that I think a lot of people in the crypto industry are learning. We are all kind of learning for the first time, especially because the crypto industry can skews younger, the role and importance of the Fed. while also what the Fed is actually doing is also becoming very significant and new. And as I kind of zoom out and come to terms with what the Fed is, Chris, it kind of just seems absolutely insane. And I think what I mostly mean by that is they're making very big choices that there's no one else checking on them. And like there's no other entity that's like, hey, Fed, that is, that's lunatic. That's crazy. And everyone is else, oh, the Fed is, uh,

Starting point is 00:08:54 0% interest rates for this long and now jacking them up this fast in this way. And like, sometimes I just zoom out. It's like, this is insane. Is that your reaction to? Yeah. And the insanity exists on two levels that you just kind of nodded toward. Okay. You know, first of all, I think a lot of young people don't know about the Fed because it seems really boring. It seems like it's way over on the margins. Like it's not very involved in our daily lives. the Fed is really practiced at talking about everything they do in an extremely boring way and presenting themselves as just sort of like bureaucrats that are just solving math equations. But again, the insanity is happening in two key ways.

Starting point is 00:09:37 The first is the one you kind of mentioned, which is that this institution is undemocratic. Like it was built to be insulated from voters because it has a really hard job to do to manage the currency. And that means it has to do the hard thing sometimes of hiking interest rates, pushing the economy into a recession. But for that reason, the Fed was created to be run by this committee of 12 voting members in Washington, D.C. And these people meet every six weeks. They make these hugely consequential decisions, like whether or not they're going to plunge the economy into a recession. And like you're saying, this committee never faces voters. They're never up for election. There's no sort of outside entity that can kind of veto what they're doing. It is entirely

Starting point is 00:10:24 up to them. So that's kind of insane to think about a committee of 12 people making these decisions. But then the second level is that what they've done over the last decade has been so experimental and unprecedented that it's raising the stakes of everything. So let me just quickly, if I can, like, lay the groundwork for what I'm talking about. When I keep talking about, oh my God, they've like changed the graph of history. The Federal Reserve is the only institution in the world that can create new U.S. dollars out of thin air. That's the Fed's superpower. They make money.

Starting point is 00:11:02 They literally create new dollars out of thin air. Okay. So when the Fed creates new dollars, it's like putting water into a swimming pool. And that swimming pool is called the monetary base. It's like how many original new dollars the Fed has created. So when the Fed creates more dollars, that monetary base grows. And when the Fed basically sucks dollars out of circulation, the monetary base shrinks. Okay, for the first 95 years of its existence, the Fed kind of gradually and steadily created more dollars. It expanded the monetary base to be about $900 billion.

Starting point is 00:11:42 That was like the core foundation of U.S. money, $900 billion. And then between 08 and 14, okay, in about five and a half years, the Fed created three and a half trillion new dollars. Okay. So that's 300 and, yeah, more than three X. The way I put it is more than three centuries of money printing in about four and a half years. Is it fair to say for the first 95 years of the fed's existence, they were largely responsible and effective in their controlled metering of adding money to the pool and then they just blew it out of proportion? Is that a fair description? That is a fair description. And we could sit here for a long time and kind of debate, you know, did the Fed mess up in the 1960s, for example, by keeping rates too low for too long and stoking inflation. But the way I would put it is that from the day was created in 1913 until about 2008, the Fed stayed inside these lanes. Okay? The Fed said we have a lot of power, but we're going to use it to do a couple important things. The first is to just manage U.S. currency. We're going to make sure we don't have massive inflation or massive deflation.

Starting point is 00:12:52 We're going to keep the Goldilocks pot bubbling on the U.S. dollar. And then the second key job was that the Fed was going to be there as a lender of last resort. If there was a banking panic, the Fed would bail out otherwise healthy banks and stop bank panics. So for decades, the Fed really stayed in this lane. And what happened after 08 is that you had this very activist kind of heroism. aspirationally heroic Fed chairman named Ben Bernanke, who is just like, you know what, we are going to be like the jobs program for America. We're going to be the engine of economic growth in America after 2010. We're going to do everything we can to stoke economic growth.

Starting point is 00:13:34 And that's when they print 300 years worth of money in four and a half years. Another way to talk about this, you hear this really boring term of the Fed's balance sheet. We'll just call that the size of the Fed's footprint. When they print more money, it increases their balance sheet. The balance sheet exploded from 900 billion in 08 to 4.5 trillion in 2014, and today it's 9 trillion. So you're seeing the footprint just expand dramatically, and it's broken outside the bounds of the job it was created to do. So there's 10x more money than there was in 2008 right now. Core money, original money created by the Fed. And And like, we don't need to get into this, but there's this sort of second layer of, you know, banks actually create money when they lend on reserves and stuff.

Starting point is 00:14:24 But yeah, 10x monetary base, 10x Fed balance sheet, totally uncharted territory. And you're telling us that this was all done through an undemocratic, unelected group of 12 bankers and suits sitting in rooms somewhere. Yes. Most of them were economists. You know, they weren't even an actual. bankers. Well, can we talk about this, Chris? So give us a history lesson here. All right. So the listeners to bank lists, they definitely dabble in investing. Very excited to be in crypto, kind of on the journey. They've heard a lot of the memes, I think, you know, the money printer memes that circulate nowadays, of course. But I think very few are familiar with the actual history. And I think some people in our circles think of the Fed as this evil sort of octopus type of creature.

Starting point is 00:15:16 and that's become kind of a meme. But I don't think it started out that way, certainly. And can you give us a history lesson of the Fed? So how old is it? How did it originate? And we could talk maybe a little bit more about governance, but tell us about this institution. How did it come to be?

Starting point is 00:15:33 What's the full history here? Yeah, you bet. So first of all, in American history, our government created a central bank, which is a government-run bank. we did this twice and then backed off. You know, we charted a central bank and then revoked the charter two times because, you know, America as a country is built on the idea of like fractured power

Starting point is 00:15:58 and checks and balances and competing powers. And there was this idea that if the government created its own bank, it would have too much power. But without a central bank, the U.S. kept encountering this problem of trying to to have a stable currency. So, you know, we'll just start quickly, like after the Civil War in the 1860s, the United States is becoming kind of an industrial power. We've got these, you know, the railroad spans, the nation, we've got these huge corporations starting to be born. But our currency system was extremely chaotic in the late 1800s, into the early 1900s.

Starting point is 00:16:39 We kept having these periodic bank runs. We had long. periods of deflation. And, you know, this might be interesting to your listeners. When you look back at this time, late 1800s, early 1900s, there were actually thousands of currencies in the United States. Each bank could basically issue its own currency. And this is a true thing that, you know, if I was a business guy in 1883, I could have currency from a bank in Illinois. And then if I went on a business trip to Oregon, you know, I'm at the hotel front desk, I would have to kind of convince the hotel clerk that my currency from Illinois is sound. I mean, that's how many currencies there were kind of floating around the United States, and currencies would keep value or collapse

Starting point is 00:17:27 depending on the bank behind them. So to solve this problem, the U.S. did a few things. They started doing these national chartered banks. And what's interesting about the Fed, is that a lot of the impetus to do it and a lot of the momentum actually started from the populace level, from farmers in the Midwest, who wanted to create a currency system that broke the power of the Eastern banking elite. And so these populace were pushing for these government-run banking systems. and they had all these wild ideas like to have a dispersed group of national treasuries that would be like basically like use grain as a commodity of these dispersed treasury systems. Okay. Fast forward.

Starting point is 00:18:17 You all have heard of Czechos Island. I'm sure. Okay. Maybe not. There's this meeting in around 1912. I forget the exact year. But now we're getting to the creation of the central bank. And these senators and bankers,

Starting point is 00:18:33 realize the currency chaos is unsustainable. There's going to be a central bank. And we either, you know, ride the train or drive the train. And so these senators and bankers go have a meeting at this resort island called Jekyll Island off the coast of Georgia. And they're like, okay, this is what the central bank is going to look like. We're going to create a government bank, but it'll be sort of decentralized. It'll be like a federal system. We'll have actually like 12 regional banks and then a governing body in D.C., which is that unelected committee I just mentioned, although that committee gets kind of like more sharply shaped in the 30s. But suffice it to say, they create this banking system, but they make sure that the banking system's

Starting point is 00:19:18 not going to displace the Wall Street banking system. And that happened in really interesting ways we can talk about. But in 1913, the feds created, the job was to create a stable national currency that's called the U.S. dollar, which is actually a federal reserve note. And it was a way to start. So there wasn't a U.S. dollar before this. This is when the U.S. dollar, as we know it today, was created. Yes, 1913. 100%. And it's created because of the Fed. So, Chris, this period before, I think it's really hard for people to imagine, this period before Jackal Island. By the way, what an ominous name. Jackal Island? It just like just sounds evil. But pre this, it wasn't great. the U.S. banking and monetary system wasn't very great because it'd be like living in a world

Starting point is 00:20:06 where you had like Wells Fargo dollars and Bank of America dollars and they were all trading at different rates because they were all kind of independent currencies. And of course, you'd have to pick your bank to trust. Pick your bank to trust. And of course, this is before the era of a fiat currency as well in that like all of the, you know, the currencies, U.S. currencies had to be backed by commodity at some level. And I know there were also debates about like silver or gold kind of being a backing for some of this. But it was not, we call it today. It was very poor user experience if you were trying to like do any commerce in the U.S., right? You just like, I don't know if these bank notes are good or not. Like,

Starting point is 00:20:47 what's your bank? Well, I don't know. Trust me. And by the way, this is coming on the back of as we're recording this, coming on the back of a major, we call them shorthand crypto banks, right, because they somewhat resemble banks, although, you know, it's lowercase B. It's not the capital B, but a major exchange that just went belly up, for example, as if this exchange was saying it had a stable coin, let's say, that was backed by real assets, and it wasn't, it just evaporated. We actually just witnessed a bank run and all of these things. We know how terrible the user experience was.

Starting point is 00:21:19 So this meeting at Jekyll Island, I'm sure it is on the back of like probably years of this terrible user experience, and the bankers and senators all come together and like, well, we better solve this or somebody else will, and it'll be an uglier system that kind of cuts us out of the process. So let's come up with a solution. Is this capturing some of what was going on at the time? That is exactly what was going on at the time. And as you talk, I'm picturing like if you wrote a book, the chapter like bad user experience would talk about the bank panics, the deflation, the ruinous financial crises that have to. and that put farmers out of business and, you know, the 1890s, early 1900s.

Starting point is 00:22:04 Like, people were furious. It was chaos. And I've had a lot of pushback on this, but I really, I'm of the mind that if we could have done capitalism without a central bank, I feel like we would have. You know, the U.S. has been resistant to creating a central bank. But the alternative was rotten. I mean, the financial system really didn't work in the lady. 1800s and early 1900s.

Starting point is 00:22:32 Right. We've talked about on bank lists a few times the importance of, we call it, settlement assurances with the creation of business, right? Like businesses need to feel secure in the long term. Property rights is perhaps a better way to say it. Strong property rights, but also that necessitates like a strong unit of account that you can assume will exist in 5, 10, 15 years. And so like if there's just like overabundance of unit of accounts that are all fluctuated,

Starting point is 00:23:00 and colliding with each other and not allowing for people to think in long-term thinking, it makes sense that an entity needs to come in and apply a bunch of order in where there is a bunch of chaos. So it sounds like in this moment of history, Federal Reserve, good. Like, yes. Like, did its job as advertised and created a bunch of order instability and allowed probably just a flourishing of economic activity as a result of that. Would you agree with that kind of characterization of the first bit of the Fed? I totally would. There are a lot of people who felt the Fed did a bad job during the Depression. They kept the monetary supply too tight for too long.

Starting point is 00:23:39 There are people that argue that they did the opposite mistake in the 60s and kept money too cheap for too long and created inflation. But I mean, those aside, yes, the system was stable. The U.S. currency was stable for decades. So, Chris, was the Fed the entity. So Jekyll Island, you said there was kind of this meeting, right? the senators and the bankers decide what to do? And then was there some sort of legislation that was passed on the back of this to grant this new institution a new set of powers? So this was actually,

Starting point is 00:24:10 if so, this was actually passed through our nation state governance processes. It was passed, the legislation was passed democratically. Is that what happened? Exactly. So the senators involved in that had the job of codifying this thing, of making it through law. And so in 1913, the Fed was born through an act of Congress signed by the president, the 1913 Federal Reserve Act. And that's what, by the way, creates this institution. There's no clause in the Constitution for a central bank. There's no basis in that way. It is entirely an act of Congress. So the act in 1913 creates the Fed. And then in 1935 during the New Deal, there's kind of a rehash, an update of the Federal Reserve Act that did a lot of things and sharpened, like I said, centralized power in that committee. But yeah, Congress created. and governs the Fed. By the way, is this something that all countries have, like sort of, you know, modern, maybe democracies, a feature is like, I can't imagine a modern country existing without a central

Starting point is 00:25:21 bank. This just sort of becomes table stakes. Was it at the time or was the Fed sort of, you know, late on the scene, the U.S. getting its own central bank apparatus? Great question. The U.S. was a little bit late to the scene. The Bank of England's central bank was around before the Fed. And I am frankly not good on the history of other nations like advanced European nations or Russia in terms of when they sort of founded their own central banks.

Starting point is 00:25:48 But I will say that as we sit here today, every nation that has an advanced economy has a central bank. And they all look different, of course. But, you know, the European Union has a central bank. England has a central bank. Russia has a central bank. China has a central bank. it's a pretty core part of running an advanced economy. Well, it would be, it's hard for me to imagine that a advanced economy or a nation competing

Starting point is 00:26:15 internationally without some sort of currency, right? So at the time, of course, I'm not sure what the reigning, you know, 1913, the reigning reserve currency was probably the pound or something like this. It certainly was not the dollar. But in order to kind of gain legitimacy and compete against other currencies, of nation states for even reserve currency status, right? You know, the unit of account for trade, for example, or unit of account for storing, like, bonds on your balance sheet,

Starting point is 00:26:46 then a country really needs a central bank in order to participate in an international economy. Of course, now, the dollar has grown to be, I don't know, what is it, like 70% or something, you know, of trade. I mean, like, it is the unit of account, not only for the United States, but for the world, but they probably weren't thinking with those types of aspirations in 1913, were they?

Starting point is 00:27:09 It was just a matter of, let's make the U.S. banking system, the user experience for the economy a little bit better. And if we don't, things will fall apart. They weren't yet playing the World Reserve Currency game. That is absolutely correct. They created the Fed to manage our own domestic affairs. It was cleaning house internally. And again, we were an agricultural economy at this time.

Starting point is 00:27:34 I mean, something like 70% of Americans earned a living through agriculture or some just gigantic number during this time. And finance, lending, and currency was critical to that business. And we recognized that to have order, and I hate the word liquidity because it's so overuse, but to have a flexible money supply that was managed in a way to, you know, kind of uphold the economy. That was just critical to making an advanced economy work. So it was entirely to just manage domestic affairs essentially that we created the Fed. And this whole reserve currency thing did not happen until after World War II when the U.S.

Starting point is 00:28:22 kind of walked out of the ashes as the dominant economic and military force. And we literally wrote a deal called the Bretton Woods Compact or I don't know if it was a compact or a treaty, but that's what laid the foundation for us being a reserve currency. So that came much later. I don't want to say it was an accident in World War II, but it was a result of how we emerged from World War II. All right. So we've got some milestones here. So 1913, creation of the Fed. There were some, what critics would say, mismanagement of central banking policy during the 1920s, maybe it led to the Depression, that sort of thing, right? The central bank was all caught up in that in 1935. Some of the tools were sharpened, as you said, through some additional legislation.

Starting point is 00:29:04 Then get through the Depression, there's a world war. The U.S. comes out of that with Bretton Woods, with reserve currency status, insight. So the dollar being now kind of the dominant currency for the world. That brings us to kind of the 1940s, 1950s. But there was another event that at least sticks out in my mind. I'm curious what the Fed's involvement, if any, is. And this is Nixon getting off the gold standard. So, you know, 1971, sort of, you know, someone say this is the birth of fiat money, no longer backed purely by gold. Did the Fed have anything to do with it? Or if so, what? And would you say that's another significant milestone? It's a hugely significant milestone. And the Fed's relationship to it, I've got to be totally honest. I have not gone super

Starting point is 00:29:50 deep on that. So I don't want to, my impression is that really was driven by the Nixon White House, and international economic conditions at the time, if the gold standard really worked well, I feel like we would still be on it. It is an inflexible system that was creating a lot of problems by 1971, and there's no question, okay, here's how I see it. And I think here's what's relevant to the idea of crypto, which is that, as you say, the dollar was backed by gold from 1913,

Starting point is 00:30:25 in 1971. And that imposed a kind of external discipline on the money supply. It had to be tied to gold at a certain level. And everybody recognized that that was really important because, you know, as you can imagine, the real primary temptation of managing currency is that when you run into a problem, you just print currency to get yourself out of it. You print more money to drive economic growth, but it ultimately leads to inflation and devalues the currency. When a currency is pegged to gold, it imposes discipline. There's a great book about this. I think it's called Three Days in September about Nixon's decision to go off the gold standard. And it's because they're facing this pinch and this tension in terms of the international currency values. But here's the point. When they flip off the gold standard,

Starting point is 00:31:18 that takes away the external discipline of gold. And in its place, it says, okay, this committee that runs the Fed is going to now be the disciplining force on the currency. Okay, these 12 voting members who run this committee called the Federal Open Markets Committee or FOMC, these people are going to be like gold. They're going to decide how much the monetary base should be expanded, how much it should be shrunk. So we're going to have the wisdom of a committee basically replace the disciplinary effect of tying it to gold. And so that's the path that we start down in 1971.

Starting point is 00:32:03 And obviously, there's like an entire literary genre of people saying that that was like the original wrong turn. Right. That the moment we switched to fiat currency is when buying power started. to diminish and dissolve, that in fact, the committee didn't have discipline. I, you know, and that's for listeners to kind of decide. I do think putting the power in the committee of the Fed does help give the monetary supply of flexibility it really needs. But again, the problem is you have this like seductive impulse to try to use money to

Starting point is 00:32:43 print your way out of problems. The bankless listeners, we often, talk about on bank lists, like one of the cool things about crypto is that it's regulation through code. And we take power out of the hands of people and we put it into code because, I mean, we've seen what just happened recently with FTX when we gave too much trust and power into one person and let them do whatever they want with that power and trust. And I think I really appreciate the resonance of the idea of just like gold did the same thing. It wasn't with code. It was with physics, though. It was with just like, you know, you can't print gold. And so that was the code that you

Starting point is 00:33:15 are not able to break, and now we are kind of doing the same thing with crypto, with our own bits of code. Well, it kind of strikes me that, like, in a system in a country built on the foundation of checks and balances, right? The major check on the Fed's power, let's say, or discipline, was actually some element of the gold standard, wasn't it? Because without that, how is the Fed really governed? And, you know, this rotating group of 12 individual FOMC members, they change. They're also susceptible to kind of the whims of the time. It seems to me that the Fed even still, it's like purported to be kind of an independent organization, but isn't it very clearly a tool of the state? You picture kind of a country and like what does it have in each of its hands. In one hand,

Starting point is 00:34:03 it's the sword, we have the military. The other hand, it's the coin, right? Sword and coin, treasury military. And so of course it's a tool of the state and it's a tool of politics. And it's not independent institution anymore. So you can start to see the, I guess, when you remove the governor, when you remove the check and balance on the thing, how it can just slowly get to the stage we're in now. Can you talk a little bit more about like how it's governed? Because there is still this pretense that the Fed is somehow independent of politics. Tell us about that. Is that true in any way, shape, or form? Yeah. And God, I'm just, my mind is racing as you're talking. I really agree with everything you just said, and I think it's a great way to look at it.

Starting point is 00:34:47 But, you know, not to be glib, but one of my responses is, no, this isn't just a tool of the government. It's also a tool of the biggest banks on Wall Street. Like, don't leave them out of the equation. They have a vote over this thing. And we can talk about why that is. But truly, the Fed is an odd entity in the sense it's a hybrid creation. It is a private bank owned by other banks. but it's governed by a government committee that's appointed by the president, the members of this committee, like the board of governors.

Starting point is 00:35:22 Oh, I'm sorry, it's kind of, you've got two stripes of leaders. Some of them are appointed by the president, approved by Senate. Others are approved by these local bankers. So it's a hybrid of a private public partnership, but there's no doubt. It is the tool of state authority. So let's back up a little bit and just talk about the governing structure. Like I said, when they created it, they modeled it on the federalist system where you had state power and federal power. So the Fed, it's a network of 12 regional banks, which are like states. And each regional bank has its own president, which are kind of like state governors. And those regional bank presidents are the ones I just mentioned who are appointed at the lower level, weirdly by like a board of directors at the local level that's made up of local

Starting point is 00:36:16 bankers. So a bunch of local bankers in San Francisco will help appoint the president of that Fed. Okay? So you've got 12 regional bank presidents. Then you've got this board of governors in Washington, D.C. And these are the people appointed by the president and approved by the Senate. And together, the board of governors and the regional bank presidents run this thing. Okay, and the FOMC, that committee I just mentioned, is interesting because it always has 12 voting members, seven of them are the governors, five are bank presidents that come through on a rotating basis. And I feel like... Wait, just five banks?

Starting point is 00:36:57 Okay. So which banks do they choose? A lot of banks? I mean, there's fewer now than, but they just pick the biggest banks or their favorite banks or what? By the way, it's like kind of telling how, like, confusing this gets so quickly. And I'm sorry about that. Like the governance structure is very complicated. The top committee, the FOMC, seven of the members are from the Board of Governors.

Starting point is 00:37:19 The other five are drawn from the regional banks, the Fed's own regional banks. I'm sorry if I kind of wasn't clear. The Fed's regional banks, not like a commercial bank. That's exactly. So like St. Louis Fed, for example, is a regional Fed bank. I don't even think about these things all that often. I know the St. Louis one. I know that's actually it.

Starting point is 00:37:40 I don't even know there were others. I know there's one in Richmond for Virginia. I know this. I've thought about this probably more than a person should because I've gone back and read through when this committee meets, they actually transcribe their debates and then release the transcription like five years later. And so it's really fascinating to watch these people debate these issues of what they're doing. That's quite a delay.

Starting point is 00:38:06 Five years later? So it's completely closed door. Totally closed door. Okay. But they do release it eventually after a five-year-old... What are the debates like? Fascinating. Totally fascinating. And let me, if I could, like, the debates I really looked at were the debates that started in 2010, right? Which were like, should we do these hugely experimental programs, like quantitative easing and zero percent interest rates or not?

Starting point is 00:38:37 And so you saw this heated debate inside this committee. The contents of the debate, like you said, they were not released for five years. And so going, it's just shocking to look at this committee in 2010 where you've got four out of 12 members saying, you know, what we're doing is incredibly risky. We don't know what the long term effect of this is going to be. the short-term gains we're going to get are tiny, we're barely going to reduce unemployment. And then you've got the chairman of the Fed, Ben Bernanke, saying, let's do it anyway, basically.

Starting point is 00:39:14 You know, there's risks in not acting. But I want to solidify the point, though, before we move on, that the governance structure is these 12 people, five of them are from the regional banks, seven of them are the D.C. appointed governors. They meet in secret. They debate for two days, and then they make these decisions that we hear about, like, you know, the Fed raised interest rates today or cut interest rates.

Starting point is 00:39:41 And, you know, a month or two later, they'll release a really general overview of the debates in the minutes. But then the transcripts come out five years later. That's insane. That's an insane thing. What is this world? It is. And they meet monthly? Every six weeks.

Starting point is 00:39:59 They meet every six weeks. Okay. So what kind of press? are these individuals under, like, what is kind of guiding? What are the inputs? Yeah, guiding their, you know, for a politician. We have a, I think listeners have a mental model for a politician. What does the politician care about?

Starting point is 00:40:16 Votes? Who's going to vote for me? And fundraising. So it's kind of votes and money, right? These are the pressures that bend a politician to, you know, say one particular thing or do anything. Maybe there's a moral character there, hopefully. But these are the main external pressures. what are the pressures facing the average FOMC appointee?

Starting point is 00:40:39 And then by the way, how does it, is it majority rule? Or how does it work? Like when they vote on something, is it, you know, has to have some kind of quorum? Okay. So these are great questions. When the FOMC meets and makes these decisions, it's a majority rule. Okay. So with 12 members, it has to be seven to five to pass something.

Starting point is 00:41:00 I don't think there's ever been a seven to five vote in the history of the FOMC. I don't think ever, maybe once or twice. The votes are always 12 to zero, 11 to 1, 10 to 2. What? That's odd. Yeah. What does that tell us? Is there some group thing going on?

Starting point is 00:41:22 Or is there just some dominant personalities that sway the rest? Or are they just generally agreeable people? So this is just like what's at the question? core of the book talking about what they did since 2010. And now I feel like the subtitle of the book should have been, that's odd. So much of this falls into that. So, okay, so you've got this committee. And right now today, they're deciding, you know, do we hike interest rates really, really high, really fast? Do we risk tanking the economy? Do we not do it? Interestingly, this really matters that out of the 12, seven of them are these so-called Board of Governors in D.C. So you notice,

Starting point is 00:42:02 seven out of 12, they have a veto. However they decide to vote is what will happen. And I interviewed a lot of these governors, but, you know, one of the most telling statements was from a former governor named Betsy Duke, who really just described in detail what's been substantiated elsewhere, which is that the governors, before the vote even happens, they know how they're all going to vote. If you tell me that a lot of these votes are as unanimous as they are, it makes me think that, well, one person's really calling the shots and everyone else is just giving the thumbs up. Because what group of people meets every six weeks and votes 111, 111, 12, 10, 2, no human. I mean, that's not a real debate. And this gets into the politics and the history of the institution.

Starting point is 00:42:52 really changed under Alan Greenspan, but there's this really intense pressure toward consensus. Because as you know, like, fiat currency is based entirely on faith. And also, the world needs to have faith that the committee that runs the Fed knows what they're doing and will be consistent in what they do. So if you saw these votes of like seven to five, Wall Street would be like, yeah, are they going to flip at the next meeting? Like that might not make sense. It's chaotic. Chaotic.

Starting point is 00:43:27 Right. Especially when the Fed was supposed to come in to produce stability, I guess as a user of dollars, I would be concerned if I saw the manager of the U.S. dollar having a bunch of contentious debates. I guess that makes sense. I think that checks out for sure. Yeah. And again, I can't overstate that the other part is that they want to look like they

Starting point is 00:43:50 know what they're doing, that. You know, these are technocrat, PhD economists who are basically just solving math equations. And so, therefore, you always come out to a correct answer, 12 to 0 or 11 to 1, as opposed to really the reality, which is that this is a bunch of human beings making policy choices every six weeks. That's the reality. And I guess I would like to go back to that year 2010 because it's at the core of what I wrote about. And so that's when the Fed went down this experimental path. And, you know, I talked about them increasing the size of their balance sheet. But really, between 2010 and 2020, they did two extraordinary things.

Starting point is 00:44:35 They printed all that money, you know, the $3.5 trillion I talked about. They did that through this program you'll hear about called quantitative easing, which is basically just a maneuver to inject newly created dollars into the Wall Street Banking. system. That's what QE is. But then secondly, very, very importantly, you mentioned this. The Fed kept interest rates pegged at zero for seven years between 2008 and the very end of 2015. That's extraordinary. I mean, rates had floated between three and four percent for decades. They had brushed up against zero really briefly in the late 60s, but had never really gotten there. The Fed decided to keep rates at zero for seven years. That like reorganizes the global financial system around a zero percent rate.

Starting point is 00:45:26 It was a remarkable and experimental thing to do. And in 2010, the Fed was having these debates as to whether they should do it or not. And there was tremendous dissension. I mean, that's the word within this committee. You had multiple people, again, saying, we can't do quantitative easing. you know, that's going to pile up risks in the financial system. We're not going to get that much gain for it in the short term. Critically, once you start doing this, it's going to be impossible to stop, basically without creating a crash. But the chairman Ben Bernanke, who was kind of the author of these ideas, pushed that

Starting point is 00:46:07 committee to do this in a political way. He talks about this very candidly in his autobiography, that he was lobbying members. He had one-on-one meetings with members who were disagreeing with him, and he got them to break it down to an 11 against one vote to do quantitative easing. And actually, you know, the main character for my book is the guy who voted no. He was that one no vote. And it's a really fascinating story as to how he stood up against this culture of groupthink and conformity to do it. But I guess the point is, here's to me the headline. this committee is making policy decisions.

Starting point is 00:46:46 When you read through the debates, you see that they're wrestling with this stuff and they don't have certainty at all. And frankly, they're making big mistakes in terms of their forecasts and all the rest of it. They're human. And yet the vote that the public sees consistently again and again is a sort of misleading consensus. Sequence is the all-in-one developer platform you need to build Web3 games and applications. For your users, Sequence is a smart wallet and it's the easiest, most intuitive onboarding your users will ever experience, and comes with all the features users need to feel empowered in the Web3 world. Multi-chain support, NFT display, and users can buy SFTs, NFTs, and QtO, directly with a credit or debit card.

Starting point is 00:47:29 For developers, Sequence is the plug-and-play platform for Web3 games and apps. Their APIs let you bring NFTs, SFTs, and tokens into your game or application. and a Sequence relayer enables gaseous transactions for your users. Sequence already power some of the best Web3 games like Skyweaver, NFT projects like Cool Cats, and marketplaces like NiftySwap. And Sequence is compatible with all the EVM chains, including Ethereum, Polygon, Binance Smart Chain, Arbitrum, Optimism, and Avalanche. So go to Sequence.com.

Starting point is 00:47:58 To get started unlocking the full potential of your application today. Arbitrum 1 is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web 3 landscape. Hundreds of projects have already deployed on Arbitrum 1, producing flourishing defy and NFT ecosystems. With the recent addition of Arbitrum Nova, gaming and social daps like Reddit are also now calling Arbitrum home. Both Arbitrum 1 and Nova leverage the security and decentralization of Ethereum

Starting point is 00:48:26 and provide a builder experience that's intuitive, familiar, and fully EVM-compatible. On Arbitrum, both builders and users will experience faster transaction speeds with significantly lower gas fees. With Arbitrum's recent migration to Arbitram Nitro, it's also now 10 times faster than before. Visit Arbitrum.io, where you can join the community, dive into the developer docs,

Starting point is 00:48:46 bridge your assets, and start building your first app. With Arbitrum, experience Web3 development the way it was meant to be. Secure, fast, cheap, and friction-free. The Brave wallet is your secure, multi-train on-ramp into Web3,

Starting point is 00:48:59 and it's built directly into the Brave Privacy Browser. Gone are the days of managing multiple wallet extensions that put you at risk of fishing, spoofs, and tracking. With the Brave wallet, you can securely manage your crypto assets across more than 100 different chains, including Ethereum, layer twos, salana, and more,

Starting point is 00:49:15 all without downloading risky extensions. The Brave wallet is easy to set up and removes the headache of jumping between wallets and extensions. It's lightweight, but packed with great features, like built-in token swaps, buying and holding NFTs with a gallery view and support for hardware wallets. But also much more than that,

Starting point is 00:49:30 because Brave is shipping new features every single month, with a mission to make Web3 easier to navigate for its over 55 million users. Wall extensions are a thing in the past. So get started with Brave's Web3 Ready browser today and experience a decentralized web seamlessly without all the clutter. You can download the browser at brave.com slash banklist and click the wall icon to get started. It's interesting that it seemed like the people that were arguing against Ben Bernacki,

Starting point is 00:49:54 the way that you described it seems like, man, they were really prescient. Like they saw it all coming because that seems to be what happened. maybe like you have the benefit of being able to see what happened after 2008. So maybe that's the words that you've decided to choose. But if you're telling me that people that were arguing with Ben Bernacki were worried about risk build up in the system, unable to go backwards after inducing a 0% rate. If all of these people saw this coming in 2008 to 2010, that's like, wow, and we did it anyways.

Starting point is 00:50:22 That's kind of crazy. Why did Ben Bernanke have so much motivation to go forward with this path? What was his inputs into this decision? Well, I do want to clarify that the dissenters on this thing did have different points of view. Okay. The guy I profiled, I mean, I was drawn to his story. His name is Tom Honeg, and he's the regional bank president in Kansas City. And he did end up being, I think, totally correct on his warnings at the time, that it was going to stoke asset bubbles to do this, that it was going to be a quagmire that we weren't going to really be able to pull out of.

Starting point is 00:50:58 Did he mention wealth inequality? Wealth inequality was a huge part of it. He's like, basically, this program is going to stoke stock and bond prices, which is going to benefit the richest 1% of Americans that own all these assets, but it's not going to do much for the middle, you know, paycheck earning class of America. And on that front, he was without question, totally correct by the Fed's own metrics. But your question, why did we do this anyway? And then, you know, Ryan, that kind of goes back to your earlier question, which I think is a fantastic one.

Starting point is 00:51:33 What are the incentives here? Like, what is driving these people? They're not trying to, you know, raise money for the next election. And listen, I don't have a pat answer for that. It's complicated. There are a lot of institutional pressures on this central bank. that led to what they did, that led to the zero percent interest rates and quantitative easing. The first big pressure is that it got it so interesting.

Starting point is 00:52:10 Like I said, the Fed was created to manage our currency and stop bank runs. But then it started to evolve over time that they were seen as sort of the stewards of the economy. And this really, really happened under Alan Greenspan. He was called the Maestro. He was seen as this genius. He was helping stoke economic growth without inflation. And so by the time Ben Bernanke came along, there was kind of this view that the Fed,

Starting point is 00:52:37 I mean, I hate to use the Wizard of Oz analogy, but they were like the wizard behind the curtain. They were the people that would manage the economy and that would keep growth happening in a smooth way. And at the same time, while the Fed is gaining all this, like, prestige and recognition, our democratic institutions are kind of, of falling apart and just becoming increasingly like dysfunctional and unable to act. And that's what led to in 2010, the Fed saying, you know, we're going to drive economic growth.

Starting point is 00:53:07 Unemployment is still really high after the great crash is over. This is 2010. Unemployment's at 9%. We're going to drive down the unemployment rate. By contrast, in the 30s, it was the federal government that did that, the fiscal government, Congress, like built dams, you know, put shovels. in people's hands, you know, broke up the monopolies, regulated Wall Street, all this stuff. In 2010, we're like, okay, we're not going to do any of that. We're just going to print money through the Fed. And I think that's a huge pressure on the Fed to act and to be seen as like

Starting point is 00:53:42 the driver of economic growth. You can't overstate the pressure. I mean, you see it right now today on the Fed and it's Chairman Jay Powell, like, how are you going to keep the economy growing? when really that's a question for our elected leaders, in my opinion. I do want to double click on that because I think it's in maybe listener, you have this in your mind, but I think it's a completely unfair caricature to just paint like the FOMC and Powell and company as just like evil bankers, right? Like just trying to kind of like just being completely irresponsible

Starting point is 00:54:18 and wrecking the economy and being completely reckless without the context of institutional pressure that they are faced with. Because to your point, Chris, in the absence of our government actually working and Congress actually working, look at all of the stuff we throw at these Fed chairs. So it's like, yeah, Powell, fix the economy. Powell, it's COVID. You got to, how are you going to fix that? Make sure that we don't have a recession. Oh, and by the way, like, we want to decrease unemployment too. We want full employment. And oh, by the way, like, And Powell's like, all I got is a money printer. Yeah.

Starting point is 00:54:55 And so he uses the tool that he has. But, you know, I mean, look at where we are now with kind of this runaway. It almost seems like inflation where we've used these tools in the wrong way. We're clearly not going. But I guess just putting your path into it. Like, these are human beings that have been thrown into an institution. And they're almost like subject to the wheel of history. Like if you're Jerome Powell, what do you do in this situation?

Starting point is 00:55:19 You're kind of just dealing with the cards that you have. Maybe it's more of a problem with the institution and the process and that we are in kind of the latter stages of this institution actually working and we need some fundamental changes and less a problem with the individual people at the helm. What's your take on this, Chris, as you've studied it? Well, I think the take-home headline is exactly that, which is that for a decade we've been relying on the Fed to, print our way out of some serious problems. And it's really easy. It's really easy to let the Fed do this, because it just creates money out of thin air. It doesn't have to tax anybody. There's not like some brutal democratic contest happening. But driving economic growth is not the reason we created a central bank. It's not the reason at all. We created it to manage the currency in a stable way. It was

Starting point is 00:56:21 not a jobs program per se. You know, and it's complicated because if you mess up the currency, you have unemployment. But Congress was the one that was supposed to do the job of figuring out how to do economic growth and support people in the middle class and all that. So yes, we really are at a terminal stage of relying on the central bank to try to solve these problems through money printing. And I think that is the most important point of the book. Or my view of this thing, which is, of course, like I expressed in the book and driven by it. But yeah, that's my view of it. But I do want to, I don't want to let these guys off the hook and women, men and women, not just guys.

Starting point is 00:57:04 But, like, you know, when I started this thing, I felt, I think a lot of what you just expressed, which is like, I wouldn't have wanted to be the Fed chair in 2009. I mean, that was scary, crazy, brutal. You know, depressions lead to terrible. consequences. I mean, terrible, terrible consequences. So how can you fault somebody for doing everything they can to try to avoid that? Okay? Like, I get that. But I turned against this institution, frankly, when I was reporting on what they did in 2012, which was the third round of quantitative easing. And this is, I called that chapter Quantitative Quagmire, because it's like they're in this thing. They've been doing quantitative easing for two years. It's really not

Starting point is 00:57:55 working. And what's so interesting is Jay Powell, the current Fed chair, joined the institution at this time in 2012. And Jay Powell comes in saying, basically, honestly, he's saying what you guys are doing is crazy. Because Jay Powell came in from the world of investment banking. So he really knew how economics and finance worked. And when you read his comments in these meetings in the beginning, he's saying, you folks are stoking an asset bubble and it's going to crash and you need to stop doing quantitative easing. You're talking about the same guy, right? Jay Powell. Same guy. Wow. Wow. What changed? A trillion dollar question. Trillion dollar question. He's saying all this stuff in 2012. And at that time, the leadership of the Fed is saying, we need to

Starting point is 00:58:46 to do this anyway. And they're basing their decision to do more quantitative easing on these forecasts that turn out to be totally erroneous and false. And the point I want to make before I talk about Powell is the leadership of the Fed didn't shoot straight with the American public. They were not open and honest about the fact that, hey, what we're doing is experimental. We really don't know what the long-term consequences are going to be. We're piling up a lot of risk, but we feel like we got to do something anyway. And to me, that kind of turned me against the leadership of this institution. And they continue to have that lack of candor, which does bring us right back to your question about Jay Powell.

Starting point is 00:59:26 How did he go from being a vehement opponent of this stuff in 2012 and 2013 to being a huge public supporter of it? I interviewed him in 2012 and he told me, quote, my view. Views evolve with the evidence, which is probably what you'd want to hear from a Fed chair. It also doesn't tell me a whole lot. No. Okay. And like I interviewed his colleague, a former Dallas regional bank president, Richard Fisher, who worked really closely with Jay Powell for years. And Fisher said on the record, which is pretty extraordinary, he said there was no new evidence.

Starting point is 01:00:07 Like there was no study that came out when Powell switched to support this stuff. No new study said, oh, quantitative. using does not stoke asset bubbles and increase wealth inequality and really Fisher's conclusion, I think is very rational, which is that Jay Powell accommodated himself to the leadership culture of the Fed. I mean, the group think. He stepped into a circle of people that had engaged in practice in group think and stepped into the, stepped into the group think. But doesn't it just like select for that? Like if his goal was to actually be the chair at some point, you have to conform.

Starting point is 01:00:44 There's no way you're going to make it to the chair. Is that also true, Chris? So does the executive branch appoints the actual Fed chair? Correct. The president appoints the Fed chair, and then they're approved by the Senate. Okay, so, like, they're not going to pick someone who is quantitative tightening.

Starting point is 01:01:07 We've got to take the hard medicine to swallow. they're not going to, are they going to pick someone that are bad for their political outcomes? Right. So, I mean, if you're trying to get elected, you're trying to have an economy that is, you know, going up and to the right, then you don't want a Fed chair coming in and spoiling the party, do you? So doesn't the political machine just sort of select for people like Powell? And if they're not, you know, on board with that, then they have to get on board

Starting point is 01:01:40 they never rise to that position. Yes. Let me say a couple things. First is that when President Biden reappointed Jay Powell to be the Fed chairperson, there was this sort of mini competition between Jay Powell and another governor named Lael Brainerd. And it was like, oh, who's Biden going to appoint? The difference between Lael Brainerd and Jay Powell on monetary policy was non-existent.

Starting point is 01:02:06 They believed the exact same thing and followed the exact same ideology. were huge supporters of quantitative easing and 0% interest rates. They did differ on bank regulation to a degree, okay, that's real. But I think your point is accurate. And the second thing that's been in the back of my mind that I haven't brought to the front yet, but it's the institutional pressures. We talked about the institutional pressure to be seen as like doing something and driving economic growth and sort of being the monetary policy hero.

Starting point is 01:02:40 But listen, we need to talk about Wall Street. And you said it's unfair to cast these people as evil bankers. And you're accurate. That's true. But during the COVID crisis, when the fire alarms were going off and everything was burning down in 2020, Fed Chairman Jay Powell was on the phone with the CEO of BlackRock, Larry Fink. He was on the phone with this guy 17 times a day or something in that ballpark. when the Fed did quantitative easing, you know, the one group of people who were not going to complain were the biggest banks. J.P. Morgan, Goldman, Sachs, Wells Fargo, the private equity firms, the hedge funds, they all benefited from this because you hinted at income inequality earlier, wealth inequality.

Starting point is 01:03:27 When the Fed pumps this money into the banking system, the biggest banks benefit. And so there's an institutional pressure. You know, when Ben Bernanke is talking about doing these experiments in 2010, and when Jay Powell sort of replicated this whole thing later, the big banks benefit. And that's why the Fed keeps stepping in to also stop stock market declines, is that it's bailing out large institutions and getting credit for it and being hailed as a hero all day on CNBC.

Starting point is 01:03:58 So there's really no incentive to stand against those interests. Well, why should this institutional pressure from banks be there, though? That part's not clear to me is like, is it just because there's some just friendship or like nepotism or like in the industry? It's very clear to me that there'd be this political pressure on the Fed as an institution because they want votes, of course, and they can't get votes unless things are going well with the economy. But why is there this banking pressure? And how significant is it? How severe is it from the very wealthy and the largest banks? how much do they actually influence the policy?

Starting point is 01:04:34 It's not clear to me why that pressure would even be there to begin with. Yes. Let's go back to the very beginning. I kind of skipped past this. But when the bankers and senators started this thing, the Fed, at Jekyll Island, they said, we are not going to displace Wall Street. We're going to create our central bank to essentially stand behind Wall Street. And let's talk about this in a concrete way.

Starting point is 01:04:56 When the Federal Reserve creates new money, it does not. create new dollars by making them appear in the checking account of people like Chris Leonard or anything like that. The Fed creates new dollars under a system created by Congress, whereby it creates dollars inside the bank accounts of 24 licensed banks called primary dealers. These banks are J.P. Morgan, Wells Fargo, Goldman Sachs, go down the list. It's all the big banks. They're so-called primary dealers. So that means that, you know, structurally, the Fed can only intervene in the economy through Wall Street. We talked about quantitative easing.

Starting point is 01:05:44 The Fed printed $3.5 trillion. The Fed created that money by purchasing assets from the primary dealers, okay, from like J.P. Morgan. I toured the trading floor at the New York Federal Reserve where this happens. So a trader from the Fed will call up J.P. Morgan. and say, hey, I want to buy $8 billion of assets from you, like treasury bonds. And J.P. Morgan says, okay, here you go. There's $8 billion in treasury bills. The Fed trader clicks on the keyboard, and boom, $8 billion just appeared inside J.P.

Starting point is 01:06:16 Morgan's reserve account. That's how the money gets created. And so when the Fed did QE, it was flooding, literally flooding the Wall Street reserve accounts with new cash. that drives up the price of assets, stocks, bonds, commercial mortgage bonds, all those new dollars are chasing these assets, which drives up the price of the assets. Who benefits from that, you know? The primary dealers, the big banks, the private equity firms, they all benefit tremendously.

Starting point is 01:06:53 Now, when the Fed tightens, as it's doing right now, that can create a cost. tremendous crash, downward correction and asset prices. Needless to say, the big banks don't like that. They hate that, in fact. And so there's a lot of pressure not to do that. There's a tremendous amount of pressure not to do that. I think just the summary of why does the Fed make its decisions in support of some people versus others, right? Is like, well, the bigger banks, they're probably already lobbying in D.C. anyways. So, like, they already engage in this behavior. If they're they can lobby the Federal Reserve, then they will, either, like, explicitly or implicitly. Same thing with politics. Like, if the president wants something done and he can, they can exert

Starting point is 01:07:42 some influence on the Federal Reserve, then they will do that. And while this institution is supposed to be independent, you know, humans are folly. And so, you know, who can't lobby the Federal Reserve, like the 99%, right, the people who are living in their homes, right? Like, they can't be bothered because they have to go to work. And so it ends up being just like, all right, who are the large institutions that are proximate to the Fed the most that have things at stake? And that probably is politics and the biggest banks. And so, like, I think not to think like, yeah, the Federal Reserve, it's designed to be this neutral system, but, you know, we bump shoulders with our neighbors and who are the Fed's neighbors? Politics and Wall Street. So, I have you. Have you. I have to be. You

Starting point is 01:08:28 like that. Maybe, well, there's no clear route of influence over the Fed, but I don't think there needs to be a clear one to make the claim that the Fed is a political institution. And if I could follow up on that, I think you're exactly right. You know, Jay Powell is a very talented political actor, politician type guy. And, you know, in 2019, Jay Powell's going on these listening tours and speaking with, like, middle class people about what do you want out of your central bank? And I think, like, literally like talking to homeless people and stuff like this. But let's hypothesize. What did they say? Yeah. What do we want out of our central bank? What can the central bank do for you? Like it's just like reasonable inflation. Let's keep wealth inequality like measured. I don't know that I'm looking for a lot

Starting point is 01:09:12 more. But like what did people say to that? Well, the Fed's supposed to be invisible, right? So if the Fed is working, it's not supposed to be in people's brains. Right. Like if we're thinking about the Fed, it means something is going wrong. Correct. But you know, what's fascinating is, This dynamic we talked about about the Fed taking on more and more responsibility is like Congress falls further and further into a kind of morass, which has changed a little bit. But the demands put upon the Fed are actually getting larger in the sense that during these listening tours, people were saying, like, we want you to tackle climate change. No way. Absolutely accurate. Google Fed climate change.

Starting point is 01:09:50 You know, and it's true. And I want to get to do. David's point about who can lobby the Fed and who has influence, but like, yes, it's true. The Fed's actions pump money into a banking system that supports fossil fuels. And so people who care about climate change are like, stop doing that. Right. You know, we need to fight climate change through the Fed. Stop. Like, but go back to the core thing of what the Fed does. It creates money by pumping it into Wall Street. And so this is my thing, David,

Starting point is 01:10:28 like if let's say the Fed really, really wanted to go in and like renew the dilapidated neighborhoods of Chicago or Cleveland, it can only do that by creating money inside the reserve accounts on Wall Street. That's the only mechanism the Fed has. Like, that's how they influence the world. And so by its nature, is, it benefits, it works. We're just using the wrong tool for the job here.

Starting point is 01:10:56 Yeah. I mean, it seems pretty clear. Totally. Yeah. Totally. Chris, does the Fed have like an arc to it? And what I mean by that is like a story arc, right? And if you ask my opinion, it kind of feels like we're towards the end of this story,

Starting point is 01:11:10 but I am a very biased crypto person who's skeptical of banks on a podcast called bankless. But just like, if you're telling me that the Federal Reserve has absorbed a lot of responsibility that was previously expressed by Congress. And they're not going to be able to fulfill that responsibility because, again, like, all they can do is print money or raise interest rates. And, like, since COVID, I feel like the Fed has been kind of delegitimized a little bit. Like, we've started to make fun of the Fed with a whole money printer go bur thing. So I'm wondering, like, what's the rest of the legacy of the Fed? Like, where's this arc going? Okay. So in 2010 to 2012 you know, the Fed was praised as this heroic, saved the economy institution.

Starting point is 01:11:57 And there was the head of the European Central Bank was that guy Mario Draghi, who later became Prime Minister of Italy. And Draghi was famous for this quote in 2012, I think, where he said, we're going to do whatever it takes to drive economic growth. It was- Newspaper headline, whatever it takes. Whatever it takes. I think they called it like the bazooka quote, like, we're going to take a bazooka to

Starting point is 01:12:18 this fight. Much less noticed was in 2019, Mario Draghi publicly said, we can't have central banks do this anymore. We've reached the end. Yeah, it's true. It's in the New York Times. It's in my book. Draghi is like, we've reached the terminal points of central banks being able to drive economic growth. Like, this has to stop. And you would think that that would be the end, but COVID hits shortly after that, And the Fed responds by more than doubling the size of its balance sheet during COVID. The Fed printed 300 years worth of money in a few months in 2020. And so we live in this very, very strange landscape where in a critical way, the Fed is at the terminal point, I think, of this theory that, you know, it can drive economic growth. It could save the day, prosperity through money printing.

Starting point is 01:13:17 But, you know, there's this old saying like never bet against the Fed. I mean, who's to say right now the balance sheet is $9 trillion? Will the balance sheet be $30 trillion in three years? Because we experience another financial crisis because of inflation. So the Fed decides to just respond by massive amounts of money printing. I mean, it could happen. And so it's really hard to predict when this. this thing hits a wall.

Starting point is 01:13:50 And, you know, it's so interesting where we are right now is it is hitting a wall. Price inflation rising so quickly has forced the Fed to tighten money conditions, really for the first time since like 2006. And that has started to create massive volatility and crashes in financial markets. but you see Wall Street is betting that the Fed's not going to really tighten even right now.

Starting point is 01:14:21 Like the minute you get an inflation reading that's slightly promising or that inflation is not rising that quickly, everybody just assumes the Fed's going to go back to printing money and making everything okay. That's what's happening right now in markets. So it's just, it's very, very difficult to predict the future on this thing.

Starting point is 01:14:41 The macro folks that we've talked to and had on bank lists, like when they look at kind of like the longer term perspective, they talk about the next, you know, set of years, number of years in the U.S. having to be kind of a de-leveraging sort of episode where real inflation rates are far higher than kind of like actual interest rates and bond prices. So essentially the way we get all of that excess debt off the balance sheet is maybe it goes from $9 trillion to maybe it goes to $20 trillion, but the money is worth a lot less in real terms at the end of the day, less purchasing power. So maybe seeing prolonged periods of higher than we're used to inflation, particularly in kind of the real rates. I don't know if that's what you see if you

Starting point is 01:15:26 have a forecast, but yeah, what do you think Powell's going to do from here? I mean, he was very wrong about that whole transitory inflation thing. And as David was saying earlier, confidence the Fed is pretty shot. What does he do at this point in time, given the character of the man that you studied? like honest answer totally unknowable and first of all if anybody had an inkling of where this guy's going to go that is the multi-trillion dollar question it really is in august at this symposium in jackson hole wyoming jay powell got up and said we are going to tighten we're not going to allow inflation to you know push down the value of money and buying power we're going to actually do what we have to do. We're going to tighten. We're going to let this deal leveraging happen, even though it's

Starting point is 01:16:13 going to be really painful. But we're going to do it because that's what's necessary to keep the currency strong. And after he said that, markets fell dramatically. You started to see problems, even in the markets for U.S. treasuries. The corporate debt markets and the corporate junk debt markets right now are just like this teetering, teetering structure that everybody is just waiting to fall. And if interest rates stay high for long, that structure will fall. And I can explain that. But, okay, that happened in August. And everybody's like, okay, oh, my God, this dude's going to tighten. This is serious. This is going to happen. And then in October, there's a story in the Wall Street journal that kind of indicates some of the Fed people are talking about maybe not tightening so much.

Starting point is 01:16:59 And boom, markets rise, you know, 3%. Everybody's like, okay, this isn't going to happen. And what I'm trying to say is nobody knows which path Jay Powell's going to take. I certainly don't. The picture I have of this guy is of a wildly competent fixer kind of guy. I mean, he's rotated his entire career between Wall Street and Washington, you know, Department of Treasury, private equity. He knows how to handle powerful people. He knows how to handle the intersection of big government, big money.

Starting point is 01:17:34 He can try to make things go forward smoothly, but he's just in this impossible situation where he either accepts higher inflation, which could be really volatile and damaging, or is sort of wrenching downturn in asset prices. So, Chris, because you studied this for so long and, you know, you've given us such a great lens into the Fed. I want to ask this maybe last question for you and just putting the big picture hat on here, what do we do with this institution, right, the Fed? What do we do with it? It's a public institution. Feels like it's no longer working for the people. At least huge elements of it aren't. It's failing. We can see that in a number of ways. Maybe most perniciously, the massive wealth inequality that we've seen that I know we studied in bankless is reverberating across a society right now and across our politics causing a tremendous amount of division, no longer working for the people. In the sense you've given a sense you've got to, us today, it's kind of reinforced my view that elements of it have become corrupted.

Starting point is 01:18:36 You're corrupted by Groupthink, maybe corrupted by the politics, maybe corrupted by Wall Street as well, a combination of all of the above. So what do we do with this institution? Do we reform it? Do we try to reestablish the boundaries? Do we have Congress and legislators actually do their job and step in and take some burden off of this institution? Do we abolish it altogether? I recall a libertarian who ran out a campaign of that, probably a decade or more ago, abolished the Fed. So what do we do with the Fed right now? So that's the question.

Starting point is 01:19:11 I'm really glad you brought up wealth inequality because that is, honestly, at the core of why I wrote the book. It cannot be overstated how much they have driven the wedge between the richest of the rich and everybody else. It's been stunning. And that is one of the most decent. stabilizing factors in American life today. Just full stop. Totally destabilizing. So what do we do with this institution? I do think it's been corrupted. And it's not corruption

Starting point is 01:19:43 in this kind of like easy to understand way of like Goldman Sachs bringing a suitcase full of cash to dinner with Jay Powell. It's this much broader institutional framework of who's, the Fed's actions are benefiting and why it keeps taking these actions again and again in spite of the negative side effects. So I really do see, first of all, you know, my job in the system is to be a reporter to read through those internal debates, to report what they said, who made the decisions, why they made the decisions, and really to try to just like explain how quantitative easing works, to drive home the message to average readers of like, hey, they have totally changed the landscape through these experiments. And so in that way, my job is kind of done. Like, that's what I do. But I don't

Starting point is 01:20:42 want to dodge the question, what comes next? I am not in the school of abolishing the Fed. I have a very hard time seeing how we manage things without a strong central bank to create and manage a national currency for which there's a lot writing on the U.S. dollar. Reform is critical. Democratic oversight and democratic reform are totally critical. And, you know, there are, I hate to say this, there are a lot of smart people in Washington, D.C. And there are a lot of smart people around this country who care about this. And so I'm sure that there's like a wellspring of good ideas about reform. You know, the initial vision of the Fed to be a decentralized body with checks and balances that had this sort of regional character. So, you know, you had a committee member who lived in

Starting point is 01:21:38 San Francisco, a committee member who lived in Ohio. That's a pretty smart way to build a system. I support federalism. But it's become highly, highly concentrated. Powers become concentrated with the chair and with this like culture of consensus and group think and you know 12 to zero votes so what i would say broadly is absolutely reform and democratic oversight are needed and at the very end of the day the responsibility for this sounds so cheesy but like the responsibility for governing america is in the citizenry that's how we created this whole system like literally that's what our whole system of government is based on And we can't just keep avoiding that obligation.

Starting point is 01:22:24 The fiscal powers, the democratic institutions, controlled by voters, need to take on the, like, truly gnarly burden of figuring out how to drive long-term prosperity. And we can't rely on the central bank to print money anymore to do it. I think you'll agree with me, Chris, if I say that it seems to be the current trajectory of the Fed, its legacy is going to be wealth inequality. When we look back upon the Fed, like, what did the Fed? Fed do? You know, back in 1913, it stabilized the currency. And then after that, it slowly went from stability and order into wealth inequality. And I think the only way, and I'm curious, like,

Starting point is 01:23:02 if you think the members of the Fed will actually admit to that truth or not, but I think if we are talking about moving forward with the Fed and, like, what is the next step for this institution, a lot of it comes down. If we're going to be like, well, the citizenry needs to take ownership over this, well, if that's going to be true, it's got to be education. Because I think if you go down to like the average person, average Joe in America, and you ask them like, hey, do you understand the relationship between the Federal Reserve and wealth inequality? They're going to be like, what the hell are you talking about? Yeah, I mean, we're asking him for climate change help. And really, we should be asking him for wealth inequality help, right? Yeah, right. But also like the Fed seems to

Starting point is 01:23:43 kind of intentionally create like this super weird jargon that is just so esoteric. That doesn't need to be like that. And it seems to be kind of like if they use these crazy words like quantitative easing, it's not accessible to the 99% because like what do you mean quantitative easing? Well, oh, you're just meaning putting money in more bank accounts. Like, well, put money in my bank account. Like if we can start to use words that more people can understand, we might actually be able to enable a greater part of the populace to do the democratic thing that we want them to partake in when it comes to ownership over the Fed. I wonder if you have any thoughts on this.

Starting point is 01:24:21 Huge, huge, huge. First of all, before the Fed was created, this stuff was debated in the public square. Monetary policy was a retail issue. One of the most famous quotes about monetary policy was made by, my God, you guys are catching me on a bad day. I'm forgetting his name, but he said, you shall not crucify mankind upon a cross of gold. William Jennings Bryan said that. I think it was 1906. That was about monetary policy and tightening the money supply. This stuff

Starting point is 01:24:53 resonated on the ground level. And we've got to make it a political issue again in the sense of average people debating the issues that really affect them. Yes, quantitative easing is a term intentionally invented. Well, I guess I can't say intentionally, but certainly it makes it seem like it's this hyper-technical, obscure realm that normal people without a PhD cannot understand. When you talk about printing money inside the bank accounts on Wall Street, people understand that. And in terms of the wealth inequality, I don't think most of them will admit it, but by their own studies and metrics, it's undeniable. I mean, these folks knew that when they kept interest rates at zero and when they pumped all this money to the banking system through quantitative easing,

Starting point is 01:25:43 it was going to create economic growth by boosting asset prices. The richest 1% of Americans own 40% of all the assets, whereas the bottom half of Americans own only 7% of the assets in this country. So they intentionally knew that their program was going to drive up the wealth of the richest 1% in hopes that it was going to reduce the unemployment rate by like 0.3%. So they knew what they were doing. doing. And yes, wealth inequality is the legacy of the modern Fed along with ruinous financial bubbles and asset bubbles and financial volatility. I love that statement. Monetary policy is a retail

Starting point is 01:26:27 issue. It should be a voter issue. And one thing about being in this crypto space is if you're in crypto, you're certainly getting a monetary policy education. In fact, for me, learning crypto has been the single biggest way. I've actually learned how money works. Previously, didn't think about it. Why do you need to think about it? It just kind of works. But it is so key. It is actually a voter issue. And of course, in one way,

Starting point is 01:26:49 crypto is a way to cast a vote. You're opting out of the existing financial system. That's an interesting movement in and of itself. Chris, we're going to have to end it here. I think we could have talked about this for another hour or more at least. But I just want to thank you for providing some real journalism in this space. I think a lot of media can become almost like a mouthpiece of the Fed and sort of like just be another way that the Fed propagates its policy.

Starting point is 01:27:18 But you've really dug in here, and you've done the hard journalistic work of interviewing folks and looking at the meeting notes and really shedding some light here. And you've been a crucial part in that education process, and your book is absolutely fantastic. We're going to tell you guys where to get it in the show notes. But Chris, thank you so much for coming on bankless.

Starting point is 01:27:35 We appreciate your time. Yeah, thanks for the time and the great questions. I really appreciate it. Action items for you, Bankless Nation. there is a book you need to read if you want to learn more about the Fed. This is an easy-to-read narrative style by Christopher Leonard.

Starting point is 01:27:49 It's called The Lords of Easy Money. We'll include a link in the show notes. She's an incredible read. If this, hopefully this conversation, gave you a taste for understanding the Fed. I'm going to end it here. Of course, you know, David and I are doing a debrief after the episode.

Starting point is 01:28:04 So if you can't get enough, we'll talk about the episode after the episode, become a premium subscriber. We get that debrief. Now, risk and disclaimers. Crypto is risky. You could lose what you put in. So is the Fed. But we're headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - 145 - Is the Fed Corrupt? with Christopher Leonard

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.