Odd Lots - How A New Type Of Money Helped Cause The Great Financial Crisis

Episode Date: September 7, 2020

It's fun to talk about what money is, but often it's hard to connect the dots and make it actually relevant to the discussion of the economy and markets. But, in this episode, we do just that. Our guest is Jacob Goldstein, a co-host of Planet Money and the author of the new book, “Money: The True Story Of A Made-Up Thing”. He explains the story of money market mutual funds, how they constituted a new form of money, and how they contributed to the Great Financial Crisis. See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. Hello and welcome to another. episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, you know it's pretty dumb. You're going to have to narrow that down, I think. It's dumb that we haven't written a book at it. Like all this time and we kick around book ideas, but we never do it. Yeah. I mean, both of us are pretty busy with our day jobs, but yes, I would love to write a book.

And we have discussed some ideas. Yeah, we have. We talked. We talked. about maybe doing one on bubbles. They've talked about maybe one, doing one on this crisis, perhaps. And also one of our recurring themes on the podcast is the question of what is money. And we've even talked about maybe doing a book just about what money is from our perspective. Now, first of all, you're giving away all our good book ideas. And some people are going to rush out and do them before we get a chance. But yeah, I mean, we've done so many episodes at this point about the nature of money and how it works. I mean, stretching from sort of anthropological takes way back in prehistory and all the way up to cryptocurrency and digital money and things like that.

Anyway, you're right. I mean, the thing is at this point, though, there is no reason to worry about someone stealing our idea to write a book about money because it's actually, it's already been done. People are already way ahead of us. on this, including our guest today. So really, like, we at this point, we can just sort of, I think, kill that idea because other people have long moved us to the pot. Yeah. And I have to say, the guests that we are about to have on has written a very good book on the subject of money. So, you know, we don't want to go up against that kind of competition. Absolutely right. So we're just going to vacate the field to our current guest. And hopefully,

as people listen to the conversation, they'll see if the good work has already been done on this. but it is a really important topic. And so even if other people beat us to the book, we can still do the podcast. And so without further ado, I'd like to bring in our guest for the day. He is Jacob Goldstein. He is the author of a new book, Money, the true story of a made-up thing, which is a great title. And he is also the longtime co-host of Planet Money, Jacob Goldstein. Thank you very much for joining us.

I'm happy to do it. Thanks for having me. So Tracy and I have been doing this podcast for a few years and we were like, let's do a book about money and we never do. So you did you do your podcast for a long time. You actually did what Tracy and I only talk about. But what was it about that you were attracted to money as a subject in its own right? I mean, as a sort of set of history stories, it's amazing as a way of just understanding how people and society sort of get things. through the daily living.

It's amazing. You know, at Planet Money, I had done all of these kind of one-offs. Like, you know, I did a story about free banking in America when there was like 5,000 different kinds of paper money and merchants had to get special magazines to figure out what paper money was good and how much it was worth. And I'd done stories about the Depression and the gold standard. But like, I realized that if you sort of zoom out, there's a very long arc, this kind of series of origin stories of money being invented and reinvented and changing.

over time that makes what I think is a good book, what I hope is a good book. So one of the daunting things I think about approaching a subject like money is just where to begin. How did you go about starting? You know, like what was your jumping off point for the book? Well, we're looking for tips basically. Don't do it. That's my tip on writing a book. It was very lonely. I think writing a book together is a great idea. I mean, basically what I tried to do was make a series of origin stories, right? So there is, I mean, you guys have talked about, you know, or I know Joe, you've talked

about it on Twitter. I don't recall if you talked about it on the show, sort of the myth of barter, and there's kind of the early section. But the framework for me is like finding this series of origin stories, not trying to tell the whole story. You know, the book is less than 300 pages long. And so there's like these discrete moments when sort of. the world changes a lot in a short amount of time, basically, right?

It is not this long, continuous story. And one of the really interesting things to me about money is there is this kind of myopia that people get again and again where they think whatever sort of monetary regime they're living in, whatever moment they're living in, they think, oh, this is just the way money works and everything else is like chaos or craziness or some dumb idea somebody made up. I mean, maybe the most striking version from our contemporary point of view is the gold standard. You know, there's this famous paper by Ike and Green and Temen, where they talk about the gold standard mentality and part of what sort of screwed everybody over in the Great Depression was they just couldn't imagine a world not on the gold standard. And part of like Roosevelt's genius, frankly, was to be like, yeah, whatever, let's try it.

Let's devalue goal. Let's see what happens. So one of the interesting things about money, and I guess why it's worth a book and, of course, other people have written books. and who knows, maybe we'll also write a book, is that it feels like one of these things. It's kind of, in my mind, it's like love. And there's like a reason that, like, there's like a million songs that have been written

or poems that have been written about love. But it's never enough because no one actually has, like, a super clear definition. We just sort of get closer over time to our understanding. And so it feels like money is the same thing, where it's like people try to come up with some definition or if you, like, a few characteristics that all money have.

It's like, oh, it's a store of value or it's a medium of exchange. And some of these concepts are helpful, but it's like we never quite arrive at the definition of what it is. And a lot of the interesting cases are sort of at the edge case where something is sort of straddles the line between what is money and what is not money and there's not some sort of bright line that distinguishes the two. Yeah, I mean, you mentioned it being like love. It seems to me like music also in that way, right? It is this thing that spontaneously arises in different contexts independently. It's a thing that societies just seem to create on their own. And the sort of taxonomic questions, you know, in the way that, I don't know, I'm old enough to remember when hip hop was new, right? And there was this sort of question of like, but is it music, which, I mean, to me, it obviously is music. But more importantly, who cares, right? Like the taxonomy is not the interesting part.

The interesting part is sort of what happens. What are the stories? And then kind of how does power shift? Who gets what? Who gets screwed? Who gets to take risks? Who gets bailed out? So the what happens is really where it gets interesting to me.

So in your book, you describe how money is basically a social contract and a social construction. And it relies on trust between all the parties involved. But one of the things that I found most interesting was, this idea of how people get money and one chapter in particular. I can't remember exactly what the name of the chapter was, but something like how everyone can get lots more money. Could you maybe describe that dynamic? Because I thought that was really interesting. Yeah, yeah. I'm glad you liked that chapter. I was worried that that was like a weirdo chapter that didn't fit with the book,

but I liked it too. So first of all, thank you for liking that chapter. So, I mean, The kind of big idea of that chapter is, I think, I mean, there is this idea the pie can get bigger, right? Everybody can have more money. But I think on a fairly deep level, people don't believe that, right? I think on a fairly deep level, people have this very zero-sum mentality, which means if somebody else has more money, some other person is going to have less. And somebody's gain must be somebody's loss. And that's just wrong, right?

And I don't know where it comes out of, you know, the idea that money is scarce or like you're thinking of money is gold, there's only so much gold. But that's absolutely not correct, right? So the good news is everybody can have more money. Of course, that doesn't mean everybody will have more money. It doesn't mean there are not cases where somebody's gain. It's not somebody's loss. But what I did in that chapter to illustrate that is I looked at this story that was told by this economist Bill Nordhaus, who won the Nobel Prize for other work. But he did this great study when he was a young economist at Yale, where he looked at artificial light for thousands of years from like ancient Babylon when they used sesame oil to light up rooms

through the end of the 20th century, which was when he wrote the paper. And he asked this question, which you can basically phrase as, if a regular person works all day, how long can they light up a room for? And he standardized it, right? And he went all the way. Here, I should grab it, so I get the right numbers. Because what he found is like, you know, obviously ancient Babylon, very low productivity society. All the work they did was low productivity. Oil lamps, not a great, not a very efficient source of light. And he found, he found that if you work all day in ancient Babylon and you spend your entire day's wages to light up a room, you can light up room for 10 minutes, right? And then he follows this through time. And what you find is for a very long time after that,

it doesn't change much, right? Which is the story of economic history, right? Economic history is basically thousands of years, almost no productivity gains. People are doing the same kind of work, getting the same kind of results. And then the iPhone came, and then the iPhone came, and we all could just lie in bed and read your Twitter feed all day. And what should I do about the 60-40 portfolio? And then the Industrial Revolution comes, and it goes bananas, right? And there's multiple reasons.

There's like the Industrial Revolution itself. There's science. And then you get, of course, Edison. And the Edison story is not just like science, but also finance is getting. basically better. There's patents, which is what Edison really built his business on. There's just capital formation, right? J.P. Morgan is the money behind Edison. And when Edison lights up lower Manhattan, which is the first time there's a power grid, he's actually with Morgan on Wall Street. And so you keep getting these efficiency gains through the 20th century then so that by the end of

the 20th century, a day's labor goes from, you know, having got you 10 minutes of light in Babylon, on to a few hours of light at, you know, 1800s. By the end of the 20th century, if you work all day and want to light up a room with your day's wages, you can light it up for thousands and thousands of hours, right? So that is effectively everybody getting much more money from the same amount of work. I love that. I mean, something I wonder if, like, people have this conception of finite money is just like, we think of money must correspond to something in the real world.

So it's like we have all these real assets, houses, computers, iPhones, cars. And I wonder if people think of that like the money is like there's just sort of like this one to one correspondence between money and the bank and the thing that's real with sort of the lack of appreciation of how they're just two different things. There are real things and money things. Yeah. I mean there's also like a I agree. I think there's like a stock flow confused. I think people think of the stock, maybe, which is what you're saying, right? People think, like, there's some amount of stuff in the world, and the only question is, how do we divide it up?

Right. But the flow is really what we care about. What we care about is people going to work every day and making stuff and providing services, right? And when we get productivity gains, that means we can do the same amount of work and get more stuff. I mean, I do think one other thing is because we have had this, you know, last several decades where the productivity gains have not been well distributed, or at least, have not been equally distributed. That makes it harder to believe that productivity gains make everybody better off, right? If productivity gains are not making everybody better off, it's harder to be excited about productivity gains.

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Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. There's another way that people can get money, sometimes get lots of money, and that's by creating new types of money, although that doesn't always go hand in hand with productivity gains. Could you maybe talk a little bit about shadow banking and the creation of a very specific type of money, which you go into in some detail in the book? Yeah. So that story basically starts in the 1970s. And this is a time, as you guys know, when banks, regular banks were very highly regulated. Basically, that came out of the Depression, right? In the Depression, the government, the U.S. government said, okay, we're going to insure deposits.

in regular banks. So at that moment was when they really made bank deposits just clearly, unambiguously government-backed money, right? But in exchange for insuring deposits in banks, we're going to regulate the hell out of banks, including we're going to say banks cannot pay interest on checking accounts. And they can only pay a limited amount of interest, a capped amount of interest on savings accounts, right? That's the setting.

So in the 70s, there's these two guys, one of whom passed away a few years ago, one of whom I spoke to working on the book. his name was Bruce Bent, who is just a very charming entrepreneur type of guy. Grew up working class in Long Island. His dad was a postman. As he told me, he said, I always had an attraction to money, you know, talked about hustling as a kid, collecting bottles and that kind of thing. Went to Wall Street, wound up working at an insurance company, and then went off and started

this firm with his partner, Harry Brown. And what they wanted to figure out was basically a way around those. regulations that limited interest that banks could pay, and especially the rule that said you couldn't get any interest on just a regular demand checking account. And they essentially invented the money market mutual fund to get around that. And what that was was a way that people could put money in this fund and get paid interest and take out their money whenever they wanted, right? So it was a lot like a checking account, but it paid more interest, which is great. if you are the person putting your money in the bank, right?

It's not FDIC insured. It's not government insured. So there is some amount of risk. But they set it up deliberately to seem as much like money in the bank as possible. And in particular, you know, it was a mutual fund. And typically the value of your money in a mutual fund fluctuates with the underlying assets. But they were investing in like super safe assets, just like big treasury bills and CDs, you know, big bank time deposits. And they said, we are going to set up.

the accounting. So every dollar you put in is essentially always worth a dollar, unless there is some huge catastrophe. But it's not going to float every day. It's not going to fluctuate. It's going to be like money in the bank. And this, of course, was like a killer idea. It took off. In fact, it took off so much that it started to change finance as a whole, right? Because more and more people are putting money in money market mutual funds. But now, and there's more funds springing up. And by the 80s, these funds need new assets, right? Brown and Bend and their first fund, they're still just buying these super safe, basically government guaranteed assets.

But other funds start buying commercial paper and then become the biggest buyers, the most important buyers of commercial paper, which... This is short-term corporate debt. Short-term, safe, pretty safe corporate debt. And the banks don't like this. I found this bank trade publication from the 80s when this is happening that talked about banks seeing commercial paper as the enemy, right? Because this is basically taking away commercial lending from the banks. So the banks being, you know, good at their job of sort of getting in the

middle of vast flows of money, figure out how to get in on this. City sets up the first conduit and creates asset-backed commercial paper, this new kind of commercial paper, basically. So it's a way for companies to borrow. It's a way for money market mutual funds to lend. And it's a way for city to sort of get in the middle and collect fees without really having to put their whole bankness on the line. So this grows. Mutual funds are lending into this. As investment banks get bigger, mutual funds, money market mutual funds start becoming big lenders to investment banks, largely through the repo market.

And you see growing through these innovations, if you want to call them that, this parallel banking system. You mentioned that every share in this reserve fund was worth exactly one dollar. It's pegged to the dollar. And this strikes me as like an important point here and sort of understanding what money is, because it's like, okay, you have a dollar bill that's worth one dollar. You know it's worth a dollar. You have a dollar in a normal savings account. It's not the same thing. It's actually a liability of the bank, but it's pegged at one to one to the dollar. So we're basically can accept that it's roughly the same thing. Yeah, and you have a government guarantee.

And you have the government guarantee. And then you have this reserve fund, which is like super safe or in theory at this point, only invest in super safe things. Also one share is also worth a dollar. And so it seems to me that sort of like part of moneyness is just the idea of people accepting that different assets with very slightly different risk profiles. almost the same, but slightly different, are all, you know, pegged and worth the same amount, even if they're sort of fundamentally different things that you have in your possession.

Yeah. I mean, redeemable at par on demand, right? I think that that is a good definition. I think, I mean, they are slightly different risk profiles. I think people basically need to think of it as riskless for it to be money. They might be wrong about it being riskless. I mean, they did end up being wrong if we get to that. They did.

And that's when it stops being money. I would say, I mean, that's, like, I don't know if you guys have had Gary Gorton on the show, but, like, he is really good on this. And, like, my understanding, he's this Yale professor who also worked for AIG in the aughts, but who basically my understanding of this sort of arc and this way of thinking about money comes from him. So he's great on this. So, yes, redeemable ad par on demand. And I think you basically need to think of it as riskless to be money, right?

Because if it's not riskless, then it's like an asset or an investment or, like, Like, maybe I'll win, maybe I'll lose, but that's not money. So, okay, so you have this big system going. Money Market Mutual Funds are a huge lender into it. You know, other big institutions, sovereign wealth funds, corporate treasuries, also start lending into this universe of commercial paper, asset back commercial paper repo. And this lending ends up being, I feel like these still largely untold story of the financial crisis. I mean, you guys probably know this side of it.

A lot of the people who listen to this show probably know the side of it. But I will say as someone who covers finance for a more general audience, most people don't know this side of it, right? Most people still think of the financial crisis as just dumb subprime loans that blew up and then blew up the economy. And that part is true. It's just insufficient, right? And what this part of the story tells you is, where was the money coming from, right? The money that the subprime lenders were lending. It was coming from money market mutual fund deposits.

You know, it was coming from the shadow bank. banking system. And what happened was, basically, there was a bank run on the shadow banking system before anybody realized that this system had become a parallel banking system, that the, you know, people's deposits, which I suppose are not properly called deposits, but people think of them that way in money market mutual funds, were sort of lending into this system. By the time people realized that the run had already happened, right? There's this famous Paul McCulley, Paul McCulley of PIMCO speech in 2007, where I think that's where the term shadow banking was coined. It was at the Jackson Hole Conference in 2007.

That was when the run was basically starting. It started in the repo market. Gorton has this great paper where he's described bigger and bigger haircuts. They look at how big the haircuts are demanded for repo, and they start getting bigger around this time. This B&P Paribov fund failed, and you start to see this run on asset-back commercial papers. So in some ways, the crisis of 2008 really starts in 2007. But then, of course, you see it sort of stepping forward, you know, in spring of 2008 when Bear goes bust.

That is basically a run, right? Bear was solvent. And you see, actually, the money market mutual funds there. You see that week when everybody stopped lending to Bear, like Fidelity alone, which is, I think by that point was the biggest mutual fund company. They stopped lending Bear $10 billion, you know, and this was money that Bear had just been rolling and rolling and rolling, right? It was basically a deposit. And then the same thing with Lehman. And the amazing thing about Lehman is it gets us back to Bruce Bent, the inventor of the

reserve fund, the first money market mutual fund. Bruce Bent, this whole time, as money market mutual funds are getting bigger and starting to lend, starting to get these assets that are riskier, the whole time he has been complaining about the change in money market mutual funds. He keeps saying, you know, through the 90s into the aught, he keeps saying, you know, money market mutual funds should not be buying commercial paper. The whole point is to bore you into a sound night's sleep, he loved to say. But in September of 2008, when Lehman went bankrupt, low and behold, Bruce Bent's reserve fund,

first money market mutual fund ever was holding Lehman paper. Amazing. Too perfect of a narrative, right? Too good to be true. Just going back. So Bruce Bend started this thing. The reserve fund is super boring. the name, the reserve fund.

Yes, he actually wanted to call it the savings fund, and they wouldn't let him, so they picked another boring name. So you hear something called the reserve fund. You might even think it's like some sort of like quasi official government. Exactly. It's so boring. A box full of gold guarded by a soldier. For years, he just invested the absolute save-as asset short-term government bonds that are free

from default risk. The industry explodes because everybody likes being able to pick up these few extra pennies. that they couldn't get in a typical checking account. Then other people realized that they could get a little more spread by buying slightly riskier assets. And that puts pressure on everyone to buy riskier assets. And then by 2008, even Bruce Bent owns Lehman Paper. Yes. Very well.

Very well done. A plus. So that's not good. And then the next day, the reserve fund breaks the buck. They say, oh, sorry, your money that was $1.00. your dollar that was a dollar? It's actually not quite a dollar. So I remember that day when reserve primary broke the buck. That was such a massive, massive event in financial markets. And it sort of speaks to exactly what you were saying, which is this thing that everyone thought was safe and a place to store money suddenly is no longer safe in a place to store money. And it actually led to a bunch of

emergency steps from various authorities to try to calm everything that was going to. on. Yeah. And I mean, Joe, to your earlier point about, you know, when does the thing become money, when the reserve fund breaks the buck, suddenly a deposit in a money market mutual fund becomes much like money, right? Even though it didn't go down much. You know, it was like, I don't know, 1% or something of their assets were leam and paper, right? So if it's like a normal mutual fund, your mutual fund goes down by 1% in a day, that's just like Tuesday. That's just a normal day, right. But the moneyness of it is what made the breaking the buck so catastrophic. I mean, there was this thing that happened hundreds of years before in England when they first had

paper money. It was these goldsmith notes. And there's this moment when there's like the first bank run on these fractional reserve goldsmiths. And some guy at the British treasury is like, these notes we had taken is now not money, right? Which is like exactly what's happening when Bruce Bent's fund breaks the buck. And afterwards, It's a few days later, President Bush at the time gives this speech at the White House where he talks about money market mutual funds and the government insures right then money market funds. So what the government is rushing to do at that moment is turn them back into money, right? There's this chaotic few days, Tracy, that you're describing when it's like, oh my God, this thing that I thought was money is not money. The government's like, okay, okay, tell you what, we are going to put this inside the fence of stuff we call money.

we are going to, in short, the U.S. government is promising that if you already put in a dollar in here, you're going to get a dollar back. I really think, you know, there's like, there's like an alchemy involved here, right? Because no one, like, if someone just lended to a subprime homeowner directly and you held the note or you held that loan, no one would think of that as money, right? You'd think, okay, this is a risky asset. There's some risk that I'm not going to get paid back, et cetera. it's an asset, it's worth something, but who knows what it's really worth, I wouldn't really think of that as the money that I have. So it characterized the sort of pre-crisis period, I guess, was this alchemy where risky assets

got turned into something backed by what people thought was money, assets that were pegged one to one against the dollar and that sort of assumed to have the same risk profile of the dollar, which is nothing. And so that moment, when the reserve fund broke the buck, was essentially that realization that it was not really money that they had. That's right. I mean, that alchemy that you're talking about is like the most basic form of banking, right? I mean, you know, that's the whole sort of thing banks are doing is turning relatively risky assets into riskless on-demand money.

And, like, that is fundamentally problematic at times, right? That's why we have financial crises. And, you know, deposit insurance stabilized that alchemy inside the banking system. But then what happened sort of without anybody knowing it or certainly without regulators knowing it was that alchemy started happening outside that regulated, stabilized fence and created the same instability we've seen forever with banks. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories.

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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. So everyone talks about the credit crunch, sort of sparking the 2008 financial crisis. But actually, the argument here is that it was a collateral crunch within the shadow banking system where everyone stopped trusting the things that were underpinning all these loans or all these different alchemy transactions. And suddenly the thing that was supposed to be ultra-safe

wasn't thought of as safe anymore. The weird thing about all of this and something that continues to amaze me is that even though this has now been on regulators' radar for many, many years, basically in all the time since the 2008 financial crisis, everything still kind of works the same? Or, I mean, there have been, there have been some big changes, but there's still work to be done in this quarter of the market. Yeah. I mean, so after the crisis, some rules changed about some money market mutual funds. Prime money market mutual funds for institutional investors no longer have that fixed $1.

Nav. They float to the, I don't know, to many decimals now. So that's one. And there are certain rules about gating and liquidity fees. But it is still the case that regular retail prime money market funds have that fixed $1. Nav. You can still write checks on them.

So, yeah, I mean, I'm curious what you guys make of that. Frankly, I feel like, you know, I study the history a lot. You guys probably follow the kind of contemporary regulatory industry discussions more than I do. Like, what do you think of the sort of state of play in terms of shadow banking and regulation? This is where I just let Tracy talk. I don't know. I feel really behind on the latest. But, like, in the repo market, I know they tried for so many years to do a massive

reform of tri-party repo specifically. And I just feel like it never really got to a point where it made a significant difference. And we're still seeing the industry sort of opt to shift on its own. So I don't know if you saw this, but last week, Vanguard, its prime money market funds said it was going to transform into all government collateral, basically. Well, I guess if you're getting zero on, if you're getting zero on everything else, right? Zero backed by the government is better than zero not backed by the government. Yeah, exactly. But it is interesting to see a lot of MMFs money market funds ought to do this on their own. And they're doing it basically because of market constraints rather than any regulation. But then the one, sorry, I'm going on a slight rambling tangent here. But the one thing I wonder about is if we strengthen the repo market and money market funds by having them all hold government collateral, then like obviously anything that happens in the treasury market is going to be a big, big deal for the entire financial system even more so than it would have been before. And we saw some shades of that in March with the COVID sparked crisis.

You know, we did have a seizing up in the repo market. we had these leveraged treasury trades that all blew up. So I just wonder, and we saw the Fed react very, very quickly because they know that this is a pain point or a pressure point or a vulnerability in the financial system. I just wonder if by building the entire system on collateral that's deemed ultra safe, if we're sort of setting ourselves up for another sudden experience where that collateral suddenly is no longer considered safe. But on the other hand, I cannot think of anything that's safer than, you.

U.S. Treasury. So I don't know what the alternative would be. Yeah, it's hard. I mean, there's also the idea, there's the idea of a safe asset shortage, right? There's the idea that everybody wants safe assets. And, you know, part of part of the sort of oughts story is that the production of all this AAA rated debt that later we all were like, oh, why was the AAA? That there was a demand side, right? And part of the demand side was coming from what you're describing from people who wanted a very safe asset. And like there was so much demand for treasuries that people were like, okay, I'll tell you what, here's a AAA bond, basically as good as a treasury. So that's one problem that I just don't know what the answer to is, although maybe

more deficit spending, weirdly right? I mean, the other thing, I will say very interesting, like very big ideas here, right? I mean, one of the fun things to me in writing the book is realizing that there are massive changes in, you know, what money is, in monetary regimes. And so presumably we're not at the end of that, right? Things aren't going to stop changing. And so, you know, pretty clearly now the one like big money idea people talk about is MMT, which is sort of in a different universe from this conversation. But there are lots of interesting, weird, big ideas that are more germane here, right?

Like there's this old idea that doesn't really, Tracy frankly, solve the problem you're talking about. But there's this old idea, the Chicago plan that you guys probably know, which is basically, I mean, that is basically, and even like, you know, Martin Wolf of the FT, who was like super establishment, like very smart, but not at all like a radical. Like he wrote this book a few years ago. I mean, their ideas are like, just, just give up on banking, give up on fraction reserve banking, whether it's regular banks or shadow banks, right? But even like John Cochran of the Hoover Institution who is very like, you know, these are not left. ideas. John Cochran is a very pro-free market idea, a guy. But his thing is like, look, there is just this fundamental problem with Joe, what you referred to as alchemy, right? With, with, you know, the creation of these safe assets that don't end up being safe with liquidity

transformation, maturity transformation. And like, we don't have to structure the world this way, right? I mean, you could have bond funds, essentially. Like, if you have money that you want to grow over time, you could invest in a bond fund. And if the bonds pay off, you make money. And if if they don't you lose money. And then you could have just like a money warehouse that like where your paycheck gets deposited and where you do your payments. And you would pay a little fee for that because it's a useful service. Like they don't have to go together, right?

Like that's the fundamental thing, both in regular banking and shadow banking. And so lots of problems would come with that. But it's interesting to me to think that like this whole universe we're in is just one option. Just going back to the reserve fund for a second. And you mentioned like basically the solution they came up with is, do whatever you want, but don't peg the shareholders of the phone. Well, it's not do whatever you want. I mean, there are lots of rules about the-

Don't treat it like money. Okay, right. There are rules, but stop pegging it to the dollar. And so it's essentially, it's like, you know, at the beginning, it's like the reserve fund is a mutual fund that pretended to be a checking account, so to speak. And the solution was keep it as a mutual fund, but just acknowledge. that it's a mutual fund. Yeah, I think if you could really do that credibly, it would solve the problem.

I don't believe that you can, I guess. Like, the question is, if there's another financial crisis and another run on money market mutual funds, will the government insure them again? And I would bet yes, right? I would bet yes. You know, if the stock market drops, the government doesn't say, okay, we'll buy all your stock at a fixed price. Like, there's no, everybody knows you can lose money in the stock market. I mean, this spring, the Fed immediately in March, created a facility for money market

mutual funds. And, you know, appropriately so, to be clear, like the Fed is the lender of last resort. But there again, right, like traditionally, lender of last resort was what you get for being a bank, right? It's part of the tradeoff of like being super regulated and whatever. And one of the little goodies you get is lender of last resort. But now these shadow banks that are, that don't have to put up with everything, a regulated bank has to put up with, also get lender of last resort. Although, to be fair, everybody gets it now, right? Corporations, just industrial corporations get it. So, whatever.

Should we leave it there, whatever? Yeah. It's actually the last word of my book. Is it really the last word of your book? No, no, it is not. Okay. But I do think that's a good, I feel like with many questions about finance and finance regulation.

Just like, so whatever. Is actually a pretty good place to end it there? So Jacob, thank you so much for joining us. Oh, it was really fun. Cheers, Jacob. That was great. Tracy, I really enjoyed Jacob's book.

You know, it's weird, you know, in addition to him having beaten us to the punch on a money book, it's funny talking to a fellow podcast post because I kind of got intimidated because it's just like super smooth and very comfortable at this. And I'm used to being the more comfortable talking one on that. I'm used to us being the more talky one, you know? You're used to us being the more talky ones on the podcast where we interview guests? Well, no, I just feel like he's like, he's so sharp, you know?

And he's so like, that's like a difference of talking to someone who is a also does this for a living versus someone like in finance who's like not a not typically a media person. I think he frames everything very, very nicely. But you know what else I was thinking when he was. Basically, I'm saying that Jacob is like everything that we do that we should aspire to be. Yes, I agree with that. But I was thinking, you know, towards the end when we were talking about how things can suddenly become money or can be considered money because of a sort of shift. I was thinking and how the Federal Reserve doesn't guarantee stocks. Do you think, like everyone talks about the central bank put and the notion that if stocks go down enough and financial conditions,

conditions tighten that the Fed's going to come in and do something about it. I just, I wonder. I wonder if stocks could ever be treated as pure money. Probably not, but. I don't think they could ever be treated as like pure money, but I do think you're on to something important, which is that overtime and as the bull market continues and as every dip turns out to be a buying opportunity, more and more people will look at their stock portfolios and think of that. And think of, that, you know, as money or as something that they can depend upon and not as an asset that is extremely historically risky that could go to zero. And I do think it raises implications for all kinds of things about how fast the government can intervene, how quickly a sell-off

will create a policy response. So while it's never going to be like, you know, the reserve fund where the government steps in and literally guarantees a price, I don't think like the premise of the question is totally off the mark in terms of people thinking of the stock market itself as kind of a, you know, a policy asset, so to speak. Yeah. And making decisions based on the soundness of the money in their stock accounts. Yeah, that makes sense. Yeah. And then I guess the other thing I was thinking about and the reason we sort of dwelled on shadow banking and shadow money quite a lot was that this did come up just a few months ago. And we did sort of see the ghosts of 2008 resurrect themselves in March with trouble at money market funds, trouble in the repo market.

And once again, we saw the regulators come in very, very quickly to solve those problems, knowing that they're a huge vulnerability in the system. And I guess I just wonder, it's been 12 years since 2008. We didn't really get the massive repo reform. that we were promised. I wonder if 2020 is going to give that like a, I wonder if 2020 will be enough to revive that, that effort. Maybe people will look at it again, or maybe everyone's so distracted by everything that's going on that they'll just forget it. Yeah. Yeah, a few months ago, I was like, oh, this crisis is really going to prompt some serious rethinking about X, Y, Z. And now it's like, everyone's distracted by a million other things.

so I'm more skeptical about that. Well, one thing also I really liked about this episode, and I'm really glad we drilled down into shadow banking and its connection to money is that oftentimes this conversation about money can be a little abstract and disconnected or you really have to strain, I think, to see the relevance. But this is an area that, hey, I mean, look, it's been part of like two recent blowups, so to speak.

But it also kind of like provides a roadmap for thinking about future crises and whether they're part of the shadow banking system or not. It's like, and you said it, you nailed it with your characterization of the stock market. It's like, what are the things that we think of as money now that may in a certain scenario may not be money or may not be worth, you know, a dollar here is not actually a dollar? And starting to think about like what are, where else is that sort of sort of mental thing happening might be like a good general framework for thinking about where other vulnerabilities will eventually emerge. Yeah, I think that's exactly right.

Okay. Shall we leave it there? Well, I was just going to say one more thing related to that. And I remember like a few years ago, like what was it like end of 2015 when there was like a bunch of like energy debt that was blowing up and stuff like that and energy ETF? Yeah, there was a smaller credit crisis or stress in the credit market. And I just remember thinking of the time, it's like, yeah, it's bad.

a lot of people are going to lose a lot of money. But nobody thinks of like junk energy debt is money. Like it's a risky asset and it's understood. And I do think that that like framework is like, do people think that the thing they're holding is money or do they sort of recognize like this is a very volatile asset and that's sort of in my mental portfolio part of the risky stuff I hold sort of a, again, like a useful indicator of like is this going to be a crisis or not? Yeah.

Well, I don't know if people treated energy debt or, you know, junk. debt like money, but there were certainly people who treated it more like money than others. And there's, I think it was, it was Third Avenue, wasn't it? It was David Barses fund that blew up, partially because they treated it as a more liquid asset than it actually turned out to be in late 2015. So, yeah. No, that's a good point. All right. This has been another episode of the All right. I'm Tracy Allaway. You can follow me on Twitter at Tracy Halloway. And I'm Joe Wisenthall. You can follow me at The Stallwart. You can follow our guest on Twitter, Jacob Goldstein. He's at Jacob Goldstein. He's also the co-host of Planet Money, so check that out. And check out

his new book, Money, The True Story of a Made Up Thing. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy at Francesca Today. And check out all of our podcasts under the handle at podcast. Thanks for listening. I'm Francine Lacquhar, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment.

But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts.