Odd Lots - Gillian Tett on Complex Derivatives and the Fifth Stage of Capitalism

Episode Date: June 19, 2025

After the GFC, there was a lot of angst over the fact that so much effort and brainpower went into designing complex derivatives, and other financial instruments. Not only was this seen as wasteful, the complexity was deemed to be the heart of the crisis, and therefore bad. But all these years later, looking back, how bad is financial complexity really? What do things look like from the perspective of 2025. On this episode we're joined by Gillian Tett, a columnist at the Financial Times, and also the author of several books including Fool's Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe. We talked about her reporting on the evolution of financial derivatives, their legacy, what she is concerned about now, and why she sees the world entering into a new, post-neoliberal, fifth stage of capitalism.Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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in SOTE SOTTERNUK-SENT KANDADAO. Bloomberg Audio Studios, Podcasts, Radio, News. Hello and welcome

to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe. Yes. In the recent

episode with Kaiser Quo, you dropped at the very end because you said you were hoping that no one was listening,

you dropped that you are coming round to complex financial products. You know, I did drop a little bomb there

at the very end of the episode, because it's something I've been thinking about more and more. And I'll just lay it out very quickly what I think about, which is that one of the most influential episodes we've done in a long time in my mind was episode we did with Ricardo Hausman, who were either recently talked to or about to talk to, depending on when this episode comes out, etc. About complexity is a good thing. That's a sign of when wealthy economies are capable of producing complex products. That's usually a sign they get wealthier.

that's mostly discussed in the manufacturing sense. And then lately I've been thinking, you know what? There are some wealthy countries that produce really complex stuff that aren't manufacturing, the UK, the U.S., etc. Mostly, much of it is sort of complex financial products. Maybe we need a rethink and maybe we need to sort of take a fresh light about why the market is willing to pay the creators of complex financial products so much. And maybe they're not as bad as sort of some of us thought.

Or maybe we should be more proud of our financial creations. Lean into them a little bit more. Lean in, you know. Justice for complex financial products. Yeah, because there was this other thing, too, like in like early 2010s where people were like, oh, all the great minds were working on, you know, building derivatives when they should have been doing something else. And then they went and built, like, social media and, like, products to, like, hack our attention to sell ads.

Was that so much better? Anyway, I don't know. Like, maybe it's, like, time to rethink the positives. of finance in the world. Great financial crisis. That was history. Let's remember the good at parts. Anyway, it's just been on my mind lately. I didn't know you were going to like say like, okay, now you have to do a whole episode defending this position. Well, I'm being nice. I brought you. No, I like this. I brought you the perfect guest to discuss all of this. And I mean really the perfect guest. So this is actually someone I've wanted to get on the podcast for a very, very long time.

I used to work with her at the financial times. I worked for her at the financial times for a while. We're going to be speaking with Jillian Tet. She is, of course, a columnist for the FT and head of King's College at Cambridge. Jillian, welcome to the show. Well, it's great to be on the show. And I think Tracy, I often felt like I was working for you at the financial time. You were so much smarter than the rest of us, and you really blazoned a trail in many of these discussions. Well, thank you so much for saying that. I hope my bosses at Bloomberg are listening. Yeah, give that bonus straight away. You, of course, basically wrote the book on derivatives, Fools Gold, which came out at a very fortuitous time, 2009, so right after the 2008 financial crisis, talked us about the genesis of that book. Because I think a couple years before when you started working on it, I don't think a lot of people were thinking, oh, we need to write an entire book on how we got these things called credit default swaps. No, well, most people aren't quite as weird as me, but the reality is I'm trained as a cultural

anthropologist, which might sound like it's got nothing to do with Wall Street. And in fact, my PhD was based on fieldwork looking at marriage rituals in Tajikistan. So that's not your obvious starting point. But one thing that cultural anthropology teaches you is as human beings, we all wrap ourselves up in assumptions and ideas we inherit from our cultural surroundings. And those often make us very blind to things that we ignore in our world. Social silence really matters. It's what we don't talk about that really matters. And starting back in about 2005, when I was running the Lex column at the Financial Times, I noticed that newspapers and politicians talked obsessively about equity markets and sometimes credit markets and bond markets. But actually, when you look to what

was driving revenues in the city of London, where I was based at the time, it was actually things like derivatives and credit derivatives, which no one talked about because they seemed to be geeky and technical and incredibly dull. But the reality is that things that look dull and boring to a point we don't discuss them are often the most important things in the world. So I became kind of fascinated by this underbelly of the city of London and Wall Street. I used to say that they looked like icebergs in that you had a bit poking above the surface that people talked about, which was the equity markets and a shadowy chunk than everyone ignored. So I dived in really starting in 2005 into the world of credit derivatives initially to try

and almost do a tourist guide to what was happening there for the wider financial times readership. This was a few years after the dot-com boom. And in the same way that my colleagues had gone around explaining the internet, I thought I could explain financial innovation and see what was really going on. but of course it turned out to be considerably more deceptive and challenging and ultimately more dramatic than I ever imagined. It really is extraordinary vindication on your part because the book came out in May 2009. So at that point, like people were just getting up to speed and this was all anyone's talking about. And here you were years ahead.

And you already are like, here's the book that you all have to read now, which is just, I mean, extraordinary vindication of your choice to like, begin down this path of looking into them. Tracy and I were both in London in April, and I loved it. It wasn't my first time there. I loved it. Extraordinary wealthy society. I know there's all this anxiety in the UK. It's like, oh, you can't like build steel anymore economically all this. I get it. There are some issues, et cetera. But people are willing to pay a lot of money for the services that the city provides all around the world and make it one of the richest, richest societies ever to exist on earth. Well, I have to be honest and say that I did not originally expect to be writing a disaster book. What actually happened was I spent the summer of 2007 writing the book and finished it in

September 2007, went back to work, thought the whole thing was done and dusted. And at that point, it was simply an account of how this tribal group at J.P. Morgan had dreamt up the idea of credit derivatives and taken it to extremes. And literally the day after I came back to work, Lima Brothers collapsed and the book had to be dramatically rewritten very fast. Because by then, of course, it was clear that credit derivatives had the potential to destabilize very wide swathes of the financial markets. And they weren't the source of the crisis. That was the subprime mortgage lending, but they amplified the crisis dramatically. And of course, for the city of London, a lot of lot of its growth in the preceding years had been due to its activities in the financial sector,

and particularly the fact that London was a home of much of this creativity. And once the crisis hit, London not only became an epicenter of the things that were going wrong, but of course, ultimately saw some of its own financial fortune suffer as a result. First of all, the fact that you didn't go into the book, expecting to write a disaster book, still did my mind vindicates the choice, because there was obviously, so much interest in the depth. I should say, by the way, actually, you know, I was predicting back in 2005 that credit derivatives were a house of cards.

Yeah. It's going to some point. You wrote a lot about it in the FT repeatedly. But I want to press further on this point that people are clearly willing to pay a lot of money for these financial services, for the service of creating these derivatives. They're not many places. They're not, you know, there's Shenzhen for manufacturing electronics. There's a few places, I don't know, for manufacturing, whatever else.

And then there's like London and New York for manufacturing complex derivatives, and they're worth a lot of money and people are willing to pay a lot of money for them. Like you mentioned that their house of cards, etc. Yet around the world clearly don't customers think there's a value in all these services? Well, credit derivatives and other derivatives and complex financial products exist for a reason, which is that people want to use them and buy them. and they want to use them and buy them because essentially they offer a way of expressing ideas in finance, taking bets, making investments that are dramatically more flexible, more subtle,

more multifaceted, and sometimes cheaper than using other financial instruments. And the image I sometimes use to explain what they do is a bit like, you know, photoshopping a picture. You know, you can have a picture of something. You can have the actual something. Or you can take a photograph and then Photoshop it according to your own desires. And that in a sense is a bit like what a derivative does. Or to use another analogy, if you want to invest in the equity market, you can either go and buy an ETF, which is like a box of chocolates, it's pre-selected. Or you can go to an expensive equivalent of a chocolatier where you pick a mix or whatever chocolates you want, but that takes more money.

in time. Or you can just take a photograph of all the chocolates you like in the world and just photoshop it to whichever ones you want. And that essentially is a derivative. I'm not sure how much I personally would value a photo of a bunch of chocolates. But point taken. Okay. So maybe just as an example, let's use CDS and the invention of credit default swaps. And then how, I guess, they transformed during the financial crisis or running up until the financial crisis. Because as you pointed out, you made the point that CDS is not necessarily the proximate cause of the crisis, but definitely amplified it. So talk us through what CDS were originally intended to do and what they ended up doing. Well, at the most basic, credit default swaths were a way of

taking out a bet on whether or not you thought a loan or a bond would go into default. and they were originally created for corporate bonds, and essentially people who thought that a company looked a bit dodgy could take out a credit default swap as a form of insurance or as a way to bet the company would actually default, depending on which side of the trade they were on. And that was a much more flexible way of trading that risk than actually buying the bond, because, of course, corporate bonds are often pretty illiquid. They may not exist in the size you want. And if you think a company is going to default, historically,

the only way to express that belief in an investment trade was simply not to buy the bond. But the credit default swap, but you can actually be much more active in betting that it will default. Now, these were initially single instruments, usually attached to single companies. And they were created partly as a way of running rules of. around regulations and in particular banking regulations. And it was also created as a way for banks to lessen the risk on their own books of having exposure to any particular corporate name. However, the initial group that created these instruments, which in many ways were very,

very clever and really clever innovation, saw the business grow, and they began to bundle different credit default swaps together. and then the idea got transplanted into the mortgage market. And then what happened was that masses of mortgages from different parts of America were bundled together and then credit defaults were written onto the actual bundles of mortgages. And on top of that, the original credit default swaths linked to those mortgages were sometimes pulled together, chopped up into new pieces and sometimes used to reissue entirely brand new instruments all over again. And the problem that happened at that point was that although when the original idea popped up,

people could look at a company like IBM and say, yeah, you know what, I think it's got quite a high default risk or not a high default risk. And they kind of knew what they were betting on. By the time you're dealing with mortgages from gazillions of different homeowners all over the country, and by the time they've been chopped up and then repackaged and then repackaged again, it's very hard indeed to actually look through to what the underlying risks are except by taking it on trust either from the issuer or from a credit rating agency. And at the core of what happened in 2008 was that all of that complexity and opacity meant that you had the equivalent of a world where people were buying these things,

instruments on trust, and yet that trust wasn't justified because some of them were turning bad. And when some of the underlying mortgages started to turn bad, what happened was the equivalent of a food poisoning scare. And I promise you, Tracy, I'm not going to just talk about food. But the best another I know is a food poisoning scare where essentially you had some of the bits of underlying loans and debts in the mortgage bundles went badly wrong. They basically defaulted. The problem was that as with, say, sausages in a supermarket, if you hear that one or two cows in the food chain have got toxic problems and they're creating food poisoning problems, if you don't know which sausages that meat's gone into, you're probably going to refuse to

buy any sausages. And if your parents at a school where kids are being fed sausage stew, you're probably going to tell your kids to stop eating school lunches, period. And what happened in 2007 and 2008 was the financial equivalent of that because it became clear that some of the mortgages had gone bad. Nobody knew which bundles of default swaps and derivatives they'd gone into. And so essentially consumers, aka investors, fled the market completely and it froze up. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, Let's be real.

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delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you in mind. informed. Yes, there are other products like this from a variety of news organizations,

but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes, so you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. I love the analogy of a food poisoning scare.

I had never really thought of it in that particular terms before, but I think it sounds very apt. But it also seems like when something like a food poisoning scare happens in financial markets, you know, we just call it a bank run, right? And bank runs happen every, you know, several decades. or, you know, big one maybe happen once a century and they usually take a different form, et cetera. But going back to the metaphor of the food poisoning scare, in retrospect, and I'm curious your take on this now in 2025 or maybe 2015 or 2009 when the book came out, like, how much food was actually gone bad and how much was that a little bit had gone bad and yet

people were afraid that everything had gone bad? Well, even to this day, the actually, the actually numbers are still contested. Yeah, it's interesting, isn't it? Yes, whether it was $25 billion, whether it was $250 billion. We still don't know exactly how many mortgages defaulted. And, of course, one of the difficulties about trying to measure that in America, like any other financial crisis, is that when you have an initial property market bust, prices collapsed dramatically. And for a period of time, it looks like everything has gone bad.

Right. And then subsequently, some of those loans actually recover because property prices go back up again. So it's very hard indeed to measure what the actual losses were. But what we do know was that in the run up to 2008, not only had vast amounts of derivatives been written linked to the mortgage market that was going bad, but a lot of those products had been built with a huge amount of leverage, which meant that even a small loss made them extremely problematic. You had a problem of tranching, which was very, very complicated in many of these products. The credit rating agencies were for a long time the only way of actually judging whether or not a product was good or bad, and it turned out their ratings were completely wrong. And you also had a lot of these products held by investors who had no tolerance for these kind of risks.

So you put that all together, and frankly, you had the makings of a perfect storm. and, you know, it was very, very painful indeed. And what made it doubly painful was that in the course of slicing and dicing all of these different mortgages and using derivatives, many of the products had been labelled AAA. And so people thought they were ultra safe and had paid them no attention if they sat on their balance sheet. And the other problem was that people ironically had bought these products because they said they wanted to diversify and hedge their risks. And the theory was that in the old days, a bank had a bunch of loans to, say, a mortgage company or a bunch of properties. And that was very concentrated on their books.

So that if they then repackaged them as derivatives and sold them to everyone else, then you basically had a problem shared. And a problem shared, the problem halved. So people thought, right, right, this stuff has been scattered across the markets. If something defaults, it might hit a lot of people to a tiny amount, but it won't wipe anybody out because it's divering. The critical misunderstanding people made was that because the system was so opaque and complex, no one saw that all the risks were actually reconcentrating themselves back on a couple of big institutions books because the same institution was writing credit default swaps to everybody. And in particular, AIG financial products was at the center of most of these trades.

So instead of diversifying and spreading risk, credit defaults, we're doing the very opposite and reconcentrating it. Tracy, the idea that it's really even still impossible to know, like, how much of these assets had properly gone bad, this has always been my frustration with Badgett's dictum of lending against good collateral. Yeah. But I've never, I've always hated there because, like, what's good collateral? It's like, it's good collateral contingent upon a reflation of the economy. Anyway, but that's always bothered me.

This impossibility of knowing what's good or bad collateral even years after. Anyway, keep going. I enjoy your Badget Rants, for sure. Okay, well, actually, this feeds into what I was going to ask. So the solution to the crisis proposed eventually by regulators was more transparency of derivatives and complex financial instruments. So people would have to report their positions to the DTCC. And also central clearing for derivatives. Do you get any sense, Jillian, of how big a difference that's made? Because when I look at the CDS market, parts of it, still seem very, very opaque to me. I mean, things like CDX index options, swapsions, I don't think those get reported. Well, I think it's basically, as so often been, okay, so two steps forward, one back. So the progress is that when I started covering this in 2008, I couldn't get the price for a CDS on anything without calling up the brokers individually

one by one and getting a quote. I couldn't work out how big the market was. And it was so opaque that at one stage officials at the BIS, a Bank for International Settlements, that was one of the few institutions that was trying to monitor this and raise the alarm, they called me up and said, do I have any data? And I went, well, hang, you're supposed to have the data. This is the wrong way around. And they said, yeah, the problem was, we just don't know. Now, the good news is today, one, you can get CDS prices for most instruments

that are traded, you know, even slightly, you know, in the markets. you can get CDS prices relatively easily. Two, we do have macro figures about what's going on. And three, the very fact that you can get those prices in the chart form changes how people look at the financial sector. I mean, I remember very clearly the first time that I actually pushed for the FT to publish something called the ABX Index, which was showing mortgage defaults. It was transformational because suddenly people could actually see it and imagine it. and that changed how people imagined finance. Same thing happened when Axel Weber, not Axel Weber, one of the other analysts coined the phrase shadow banking for the first time. And suddenly everyone realized that what they thought was the financial system dominated by banks was dead wrong.

In fact, the shadow banking world was huge and swelling. So in some ways, there's a lot more transparency than there was 15 years ago, and that's a very good thing. What is troubling is that, firstly, the transparency doesn't extend to all instruments. Secondly, the level of leverage and above all embedded leverage isn't apparent, and that really matters particularly right now. And thirdly, I'm a strong believer that to have effective financial markets, you need to have markets where assets can actually be traded properly and people can have easy access to that quickly.

That wasn't the case before 2008 because people who were creating CDOs were doing so ironically in the name of creating perfectly liquid markets. And the great buzzword back then was liquefification. We're going to use financial innovation to liquefify everything and then we'll have the perfect nirvana where all risks are priced properly and risks end up in the hands of people who are best suited to hold them. That was a justification for this innovation. And what people felt to notice was that the complex instruments they were creating were so darn complicated. In fact, they were barely being traded at all. I mean, the bundles of so-called CDOs, collateral default obligations, which were essentially created often through synthetic derivatives, were so difficult to trade that most institutions

just bought them and stuck them on the balance sheet and ended up valuing them not with market prices because they didn't really exist. There wasn't enough trading. But they ended up valuing them in the so-called market system using implied prices from often rating agency models. And if you have that situation, all the red lights on the dashboard should be flashing. Because that shows that even if you have a so-called

marked-to-market accounting system, you don't have enough markets to get proper market prices, and you don't really know what the value is of things. You know, you mentioned that suddenly, you know, someone coins the term shadow banking and then you sort of rethink all these different elements of how you see the financial system. We talk a lot on the podcast.

podcast about these days about non-bank financial institutions in two forms primarily. We talk a lot about private credit. So the post-Dodd-Frank emergence of these non-bank entities that do a lot of lending and the emergence of multi-strategy hedge funds that the post-Dodd-Frank emergence of a lot of these funds that do a lot of what used to be called prop trading. And of course, banks still have their role in the ecosystem. And so then the question of all, do these risks ultimately redound back to the banks who, as these outside entities pursue leverage. But I'm curious putting back on the hat of the sort of anthropologist perspective, how would you go about like, you know, try to see if there are real risks here in the new model? Because I don't know, like I've said on the podcast

before, some of the post-Dod-Frank changes of separating this risk taking from deposit taking. Seems like it maybe was a good idea. But like, where might you explore in terms of like trying to figure out where these new risks emerge? Well, I think one of the constant themes from financial history is that new risks never emerge where the last risks were. So I think the chance of another crisis with mortgage derivatives right now is about zero. How does the crises tend to emerge as a result of three things? One is an overreaction last time round by a bunch of regulators that end up introducing changes

to try and contain the last crisis that distort the financial system. much they create the next crisis. Because one of the reasons why credit derivatives popped up was partly because, in reaction to what had happened during the savings and loans crisis in the 1980s, when there was too much concentration of lending exposures on banks' books. So one justification for credit derivatives was, well, let's create a tool that spreads that exposure around and the problem will be solved, which it did, but then it created new problems. So first point is look for where excessively ham-fisted regulation last time around has created new distortions. Second key thing is look for what people aren't talking about.

So social silence is always critical in any field. Third point is look for activity that's occurring outside silos or between silos. And by that I mean that one of the constant problems in finance is, is that institutions and regulators create structures set up to monitor and handle the world that existed a couple of years ago. And then the outside world moves on, and the institutions are left with structures, which have hardened into bureaucratic organizations. So to give you an example of what I mean, UBS, which I wrote about in my second to last book

called The Cino Effect, had a massive risk management department. and it spent a huge amount of time back in 2005-67 looking at the risks that had blown up finance in the past, which were basically hedge funds and leverage loans. And its massive risk management department spent a huge amount of time examining every single possible danger to UBS that might come from that. What they did not do was look at this new class of activity, credit derivatives and mortgage-backed securities because they were labelled as AAA ultra-safe inside the bank's accounting system, so they were ignored.

But also, they cut across different areas of activities inside the bank. So a mortgage-back default swap was basically both a tradable security and something linked to credit and also something linked to the operational risk inside the bank as well. And UBS risk management department was split into three separate silos. credit, trading and liquidity or logistical risk, and they didn't talk to each other. And so on top of the fact you had geographical splits in UBS between the New York desk and the Zurich desk and the London desk, you had this completely fragmented system. And the new products fell between the cracks and UBS ended up running enormous risks

that almost blew it up, even though it had a massive risk management department. So I would say look for silos, look for what's happening between the silos, And then also look for new hidden concentrations of risk. And if I extrapolate that to the current world today, you know, one area where you have a lot of activity falling between regulatory silos and institutional silos is in fintech and in digital finance because the skills you need to understand cyberspace

are very different from the skills you've historically needed to understand the world of money. And you've also got all kinds of activity happening on the edge of regulatory perimeters, which are often not properly policed or understood at all. So a classic example of this is the fact that the big banks all use cloud computing a lot. They all use the same two, three, four cloud computing providers. There's massive reconstruction of risks there. But groups like the Bank for International Settlements and other banking regulators can't really track that

because it's outside their regulatory perimeter. The tech regulators don't track it either. And so you have a classic example of a potential risk for the future falling between the cracks. You have the desire to help to make a real difference? The College, the City, you offer the program Dependence and Scenta Mental. Acquare the competences essential for accompanying

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So I want to bring us up to speed even more, I guess, and talk about current events. You've been writing a lot about geonomics, which I guess is this idea that, I guess economic policy is becoming more intermingled with statecraft and the idea that you're going to have more activist measures from governments when it comes to solving particular choke points in the economy. So obviously we have Trump and the tariffs as one example, but we also had industrial policy on the rise in the U.S. under the Biden administration even before that. And I guess I'm curious what the rise of geonomics or maybe the progress of protectionism or the slow retreat from globalization. That's a big assumption that it's all happening, but I'm curious what it means

for a financial industry, which, as we've discussed on previous episodes, has very much grown in concert with globalization and liberalized financial flows and things like that. Well, in some ways, geonomics is just a posh word for political science or political economy, or if you like, life beyond the balance sheet. And by that I mean that, I mean that, most of your listeners grew up in the late 20th century in the West in an era or if they didn't grow up in the West, they might have grown up if they're listening to Bloomberg podcast in parts of the world which were subject to the missionary zeal of the CFA exams. And that essentially implied a certain mindset. And the mindset arose from a combination of three factors. One was the growth of neoliberal free market ideas after the 1970s and 80s. The second was the explosion in computing power. And the third was the explosion in the financial industry. And those three things came together to create a voracious demand to use the new digital tools in computing to model finance

and free markets, supposedly free markets, to create a set of instruments that the fast-expanding ranks of financial professionals could use to price security. predict the future, place trading bets, etc., etc., around the world, backed by groups like the CFA, which were a bit like the American financial equivalent of the Catholic Church, in that they went around the world evangelising and spreading the creed right around the world. Now, that mindset, which we all grew up with, and as an anthropologist would say, were all creatures of our own cultural environment, seems to us to be normal, natural and inevitable. and it doesn't just use computing power to predict the future.

It's also marked by a certain amount of tunnel vision, because it assumes that if you put the right inputs into an economic model or put the information that matters onto a balance sheet of a company, you've basically got the key to model and forecast what's going to happen next. And in some ways, that worked really well. But the problem is that there are always things that you leave out of your economic model. there are always things that you leave out of your balance sheet or just footnotes. And those things tend to be things like politics, social conflict, tech change, environmental risk,

medical risk, or what groups like the World Economic Forum coily call interstate conflict, better known as war. And the story of the last two decades is that everything that wasn't on the balance sheet or in the model is what's really blown up everyone's forecasts. and become increasingly important. So what we're seeing now, in my view, is really the fifth big swing in the intellectual zeitgeist since 1900.

And by that I mean that up until 1914, you really had imperialist free market capitalism in the world. Then between the wars, you had protectionist, populist, nationalist visions of the economy. Then after World War II, you essentially had Keynesianism, took root, the idea the state could jump in and direct things for the good of all.

And that was really sort of international Keynesianism. Then you had the neoliberal age, really starting the 1980s. And now you've got a swing of the pendulum back towards effectively geo-economics, where the world's woken up and discovered what they always knew back in the 1920s. And they also sort of knew back in the Keynesian period, which is that power matters, politics matters. It's not all about free markets, and free markets are often something of a canard or a falsehood. And that actually, when you want to make sense of the world, you have to combine economics and political analysis, social analysis, tech analysis, look at a much wider range of things, get lateral vision, not tunnel vision.

And I'm not saying in any way, shape, or form that that means economic doesn't work anymore. but what I say is you have to look at your economic models and all the lovely tools that the financial industry has developed as being a bit like a compass. And if you're stuck in the dark wood at night, you don't want to throw away your compass because it's incredibly useful. But if you only stare down at the face of that compass

and walk through that wood at night, you're probably going to walk into a tree or trip over a tree route because you have to look up and around beyond your compass to see what's actually happening. And that's really what geo-economics is trying to do. I love that. I love the Compass Forest analogy.

You know, it's easy, and I've engaged in it myself. But it's easy to, like, look back at the 90s and the sort of the end of history, optimism, you know, and some of the predictions of the mid-90s, which is kind of where the story, much of it starts in your book, Fool's Gold, with some of the early iterations on this stuff. And it's easy to look back and it's like to talk about the naivete. But I get it. I mean, like, the West had just won the Cold War in, like, really decisive fashion. And this is something you talk about in your book, and you just mention it now. It's like, we really did suddenly also have this emergence of really powerful tools to price risk and price various events in the future. So at the same time that, like, everyone sort of said, okay, liberalism and capitalism and democracy are vindicated.

And suddenly, like, we have these incredible calculators or computers that can do a reasonably good job pricing, risk outside of the emergence of some of these trees that you run into. Like, I have a lot of sympathy for the characters of that time thinking like, oh, this is, things are going to be really good. I completely have sympathy. And the reality is that humans basically move in pendulum swings. Yeah. And whenever it's a new innovation, we're all dazzled by it until we see the downside.

And just as we learned about the upside of derivatives and then learned about the downside, we've all learned about the upside of economic models, and there are huge economic advantages to using them, and now we see the downsides. And I should say the other thing that makes it dangerous to use this kind of neoliberal mindset is that you've got governments in the world moving away from a neoliberal mindset themselves. And Donald Trump epitomizes that, but he's as much a symptom as a cause of this, in that for the Trump administration, economics doesn't sit in a separate. box, which is distinct from tech, trade, policy, military stuff anymore. As far as the Donald Trump administration is concerned, and you can see this in the way

they approached negotiations other countries, tech issues, military issues, cultural issues, finance issues, trade issues are all jumbled up together as part of a whole. And it's horrifying to most governments reared in that neoliberal mindset, but I suspect it's probably going to be the trend for quite a while. Yeah. I joked on Twitter the other day that in every foreign election, I was just like, just telling me which one is the Trump and which one is the liberal. Then I figured there's, I don't really see the world that flatly, but kind of. But you know, going back to anthropology and back to the 90s and back to these new tools and the internet and computers, etc. You say in your book that the incoming cohort of bankers who were really like,

you know, native to this new technology, did they say? near, did they look down to some extent at the older generation that might have been more inclined towards conservatism about banking because they didn't have the sort of skills or the natural inclination to sort of use the wonders of technology? Well, almost every big innovation that we've seen in the last 150 years has been driven by a bunch of kids. And since I'm sitting in King's College in Cambridge, anyone under the age of, you know, 30 looks like a kid to me. but a bunch of young kids coming in, having mastery of knowledge of a new technology that often the older generation doesn't understand,

full of excitement about how they can innovate and break all the rules, and they essentially usually get together and do exactly that very rapidly and bring about great benefits, but often end up bringing about great harm too. And they often have a messianic zeal and belief, or they tell themselves that they are somehow saving the world or bringing good for humanity. We've seen that happen in life science. We've seen that happening computing in AI, in social media when that was first created. The same thing happened with finance.

And a generation of kids who I profiled in my book at J.P. Morgan, but not just J.B. Morgan, who stumbled on the idea of creating credit derivatives, did so very fast, did so in a way that their bosses often didn't understand. stand and let rip. And that's a pattern we've seen over and over again. And the reality is that every single innovation in history has a good side and a bad side. And the older generation can often see the bad side. The younger generation can see the good side. Without the enthusiasm of the younger generation, nothing will change. But they still need the older generation, oldies like me now, to basically point out the previous risks. So since we're on the topic of financials, financial products and very big changes in the financial system and the way people are thinking of

trade and things like that. There was something that caught my eye and certainly caught your eye recently, and that is something called Section 899 that basically opens the door to the U.S. taxing foreign holders of treasuries, which would be an enormous, enormous change to how they previously been treated. How big a deal is that? Well, one of the other hallmarks of the neoliberal economic mindset that we all grew up with and assumed it was normal and inevitable and unchanging, is this idea that capital should move freely. And that was seen in the prescriptions of the IMF.

It was seen in the way that Wall Street worked and operated and in pronouncements of politicians. And so Section 899 refers to the idea that there might be taxes, new taxes imposed, on non-American holders of American assets. Now, some people might say, well, that's kind of fair enough, because guess what? Americans pay taxes on capital gains. Why should non-Americans be any different?

But the reality is there's been quite a few tax breaks in the past for non-Americans to encourage them to bring their money to America. And there's been such a desire to unleash that flood of money for uncapital that back in 1984, the American government actually removed a pre-existing tax on Chinese investors, say, that bought treasuries securities. And so one of the reasons why you've seen China pile in such big time into the American treasuries market is because of those kind of incentives. Now, we've all got used to this idea that there should be encouragement of foreigners to come and invest in countries. We take it as normal. The reality is, though, the Trump

administration has a very different perspective on this. And so not only are they thinking reversing the 1984 ruling, which means that in fact Chinese and others would face taxes if they bought treasuries, but they're also thinking of using this so-called Section 899 to impose taxes on non-American holders of American assets. And they're doing that partly because they want to get lots of revenue. There's a think tank allied with JD Vance that suggests you could get $2 trillion worth of revenue from this. But there's also a desire to slow the amount of money flooding into America to weaken the dollar and to ensure that American industry can become more competitive.

So it's quite a different mindset again that I think most people are not prepared for. Yeah, a very big change. Jillian, we're going to have to leave it there. Honestly, we could talk to you for hours about many, many different things. But that was so much fun to catch up on derivatives and talk about maybe where risks are lurking in the financial system. now really appreciate you coming on all thoughts for the first time. We have to have you back. Well, thank you. I really enjoy chatting to you. And the last thought I'll leave you with is that the period of time that we all grew up with when free market ideals were taken for granted

is actually a historical aberration. And if you look across societies and most points of history, it's not the case that the world we're moving to now. It's weird. We were the weird ones for the last 40 years. I love that. Okay, Gillian, thank you so much. Thank you. Thanks. Bye. Joe, we were the weird ones. Yeah. I think about this all the time. Actually, so many, so many things in that conversation I think about all the time, actually. But one thing I think about, like, we are the weird ones, which is probably true.

But the idea that we would have any conception of what normal is or, like, you know, things are getting weird. Like, it's so weird in its premise because, like, in some sense, I think that the modern economy or the modern world has roughly existed since the end of World War. And so basically 80 years or a little more. And so like literally like the entire like one person's lifetime. Like that's nothing. Yeah. That's literally nothing. We're barely getting, it's day one around here in terms of what the modern.

So when we think about all these changes, AI, et cetera, like we have no normal to index against really because we're just getting started. Yeah. Timelines are very, very long. The other thing I was thinking is just on the sort of geonomics revival of industrial policy point. I wonder if we will get. financial products that are like tailored at targeting those particular risks. So for instance,

could you come up with like a tariff hedge of some sort just in case Trump is going to announce something one day and then maybe take it back the next day? I wonder if that's a risk that companies could offload in some way. It would be really interesting to think about like very specific measurable risks and what you could build on them in this new society. But I'm glad you asked that question also about the sort of geonomics and what that means for financial institutions because, you know, I really started thinking about this after a recent episode with Scott Bach, and I've thought about this in the derivative sense. So much of the growth of finance is very specifically about solving not just modern problems of complexity, but problems of cross-border

complexity. Absolutely. And, you know, even the fact, and Gillian talks about this in her book, the fact London emerging as a source of this in part due to U.S. regulations and pre-Glass-Degel repeal stuff like that. Lots of interesting themes right there. Right. And if you have something like Section 899 that is calculated to disincentivize investors from holding U.S. Treasuries, then that would decrease demand for a bunch of financial products such as Treasury futures and things like that. I still like want to push forward on my project to vindicate the existence of high finance. And I suspect that there's a reason that, and, you know, like, as Julian said, like, you know, there's still derivatives, but the next crisis is probably not

going to be in the derivatives that were sort of vilified or people were anxious about 15 years ago, right? It's going to be something different. It always changes. But, you know, people still get paid a lot of money to create and trade these instruments. And I still have this intuition is because they're providing a valuable service. And so I want to, you know, do more episodes on vindicating the status of finance and society. We got to get Dahlia back on to do a deep dive into hedging the chicken McNugget. Totally. That's it.

There's going to be all kinds of these things that we will discover. All right. Shall we leave it there for now? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthall.

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