Odd Lots - How The Coronavirus Crisis Pushed The Fed Into Truly Uncharted Territory

Episode Date: April 23, 2020

The fate of the economy remains extremely unclear. However there is little doubt that the Fed has taken dramatic steps to arrest the crisis. Not only has Jerome Powell’s Federal Reserve dusted off old tools that were designed during the last crisis, it’s engaged in unconventional actions, such as lending directly to municipal authorities, as well as becoming a player in the market for private sector corporate debt. Amid this crisis, Nathan Tankus, a researcher at the Modern Money Network, has emerged as one of the foremost experts on what the Fed has done, and what it’s capable of doing, through his widely read newsletter. He joined us on this episode to explain and contextualize the historic nature of the Fed’s actions so far.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So Tracy, this is obviously for the two of us in our careers. We've discussed numerous times already. I mean, this is the second big crisis that both of us have been involved in cover. Yeah, you know, I kind of always used to think that nothing would ever talk the 2008 financial crisis. And boy, was I wrong because I'm pretty sure this is going to be a much, much bigger economic crisis.

Maybe not as big a financial crisis in terms of what's happening to the banking system, but definitely bigger from a sort of macro perspective. Yeah, definitely bigger from a macro perspective. It's a more global crisis, even though 2008, 2009 was global. It's also just like, you know, from a societal perspective, like, obviously the last crisis, had huge ramifications for the financial system, but for the most part, like, it didn't really change how people lived. There wasn't really much ambiguity about, you know, that much about what the post-crisis landscape would look like, whereas in this case, I don't think anyone really

has any solid prediction. Yeah, for sure. This one is much wider in scale with the potential to affect not just the economy, but politics and society as a whole. And even back in 2008, in the worst of the crisis, you know, right after Lehman collapsed when people were really worried about the entire banking system, they were still going out to get sandwiches, you know, still going out getting haircuts, going about their sort of day-to-day business more or less. And all of that is very different right now. Yeah, that's exactly, that's exactly right. Well, there's never anything good by and large about crisis. And this one is particularly horrific from so many dimensions. But one of the things that's interesting to see and having seen the last one and this one is that in any new crisis,

sort of new voices are brought to the Ford, people with expertise that previously weren't being paid as much attention to, suddenly become a very widely read and widely followed people. in this case, of course, numerous epidemiology and health experts, but also people who really have a detailed understanding the financial system who can really explain all of these sort of new monetary interventions and innovations that central banks around the world are doing are in high demand. Right. I remember one of the, I guess you would say, the few good things about the 2008 financial crisis was that it sort of gave birth. or gave a boost to this really lively community almost of independent financial bloggers.

And I still remember some of them. Some of them have been on odd lots before. And also, again, I remember this because I was blocking at the time over at F.T. Alphaville, and it was my first job basically writing specifically about finance and markets. And the great thing about the situation was there was a really even playing field. because everything that was happening was so new, it basically meant that even if you'd been following finance for 10 years, you were sort of in the same position as a newcomer who was learning it all at once in real time. So it was really great to see that conversation happening. Yeah, novel crises have a nice way of, as you say, leveling the playing field and the sort of old incumbent pundits don't really have an edge, which is kind of nice to see. So today... The sad thing is we are old incumbent pundits now. I know. Yeah. I know. But at least we can talk to the new one. So today we are going to be talking to someone whose voice has really become extremely influential, really, just over the last several weeks.

Lots of people reading his writing as one of the sort of premier experts on this crisis, particularly from the actions of the Central Bank and particularly all of the extraordinary moves that we've seen from the federal. reserve really since late February through now. Yeah, so I know who we're about to speak to. And I have to say, I sort of don't know anything about his professional background. I just know him from reading his blog or substack. And also, I think we did karaoke once. So I'm really excited for this conversation. I want to learn more.

All right, me too. So I don't know anything really about his background either. And I even know that. So let's bring him in. Today we're going to be talking with Nathan Tankis. He's the research director of the Modern Money Network. And he also in the last month has launched a must-read newsletter that everyone in the world is subscribing to understand the actions of the Federal Reserve. Everyone should subscribe to it.

Nathan, thank you so much for joining us. Thank you so much for having me. What a generous introduction. Lots of people reading your newsletter on Substack, but who are you? I'm serious. Who are you? Like, I know Nathan. I know you in real life. I've got sandwiches and drinks with you in the past before this crisis. But I don't know anything about you. Like, who are you? Then, like, how do you know so much about how the Fed worked? I like how we booked Nathan to come on all thoughts with that without actually knowing this crucial information. Yeah, I have no idea. Hey, the Substack speaks for itself.

my kind of originatory in terms of finance is the last financial crisis. I was in high school at the time, and the financial crisis was extremely fascinating immediately. And I was at a high school that was kind of alternative weird in New York City and Manhattan that had two teachers who had discretion over the curriculum and basically just said in January 2009, let's just do a class on the financial crisis, where you'd read the newspaper each week and you'd argue over nationalization, over the AIG bonuses, over the stimulus, and just sort of like argue out what everyone else was arguing out on a week-to-week basis. And from that, I was completely hooked and fascinated by crisis, you know, trying to figure. What was so interesting was it felt like something that

no one really quite understood, but it was obviously the most important thing happening. and so ever since then was just fascinated by crisis, wanted to learn about it, discovered writing by Minsky, and that sort of just set me on a trajectory to be very, very interested in crisis, financial market design, fiscal policy, and over the years have kind of moved into working and writing on policy. So Nathan, if you don't mind me asking, what do you do now and does it overlap with your interest in policy. As Joe introduced me, I'm research director of the Modern Money Network. Before all this happened, and with the pandemic, which has obviously become the top of everyone's

attention, and I was working on a report on monetary policy for a green new deal. It kind of been doing some more policy-ish things in the background, kind of pushing alternative frameworks to implement these sort of broad policy goals that people have been interested in. So we should get to what you've been writing about and sort of how we can understand the Fed's extraordinary actions in a moment. But you mentioned, you know, after high school, you sort of got interested in finance. But one of the things that really stands out in your writing is not just that you're sort of interest in this altogether, but the sort of extreme granularity with which you understand monetary operations.

Because I think a lot of people have this idea. It's like, okay, the Fed is buying junk bonds or the Fed is going to intervene in some new market. But the way you write about it is far more granular and detailed than that. So between, you know, over the last two years, how did you, or sorry, over the last, say, 10 years, how did you really educate yourself on like the sort of finer points of topics? even a lot of like so-called experts in the field actually don't have a ton of understanding. Well, I think one of the most basic levels is just understanding monetary operations and the details of monetary operations is really just about learning a language.

There's this language, this language of accounting, of T accounts, of drawing balance sheets, of drawing, you know, saying this entity has assets and liabilities and what set of transactions balance these balance sheets throughout the economy, that is, it's not so much like, oh, getting like a very detailed understanding, although you also have to know the operations and the names of the facilities and the type of financial assets and their legal structure,

but becoming more conversational in terms of monetary operations becomes just like a rote, like doing examples of monetary operations over and over and over again, and drawing the T accounts. I mean, this is, you know, one of the best things about Perry Merling's, a past guest in the shows. Of course, there, of course, is that drawing of balance sheets.

And I think that really is that core of that class. And I think that's generally applicable that the best money and banking and understanding of monetary operations comes from just doing it. It's just the language that you have to learn like any other language. And once you have it, once you can speak it, quote unquote, it's very easy to get a handle on new situations and new things going on. So I have a pre-existing framework and pre-existing understanding of law before I look at all these different facilities

and just balance sheet it out and figure out, okay, what exactly is going on behind these facilities. And once you do the operations, it becomes clear what they mean, especially when you're used to seeing similar monetary operations in past examples. I think that language point is really important. And I guess cynics would say that maybe central bankers sort of make the language as difficult as possible in order to sort of keep the riffraff out, I guess, or make it less understandable for outsiders. But just to press on the point of how you learned about monetary policy, were there any particular resources that you depended on?

Because I remember back in 2008 in the financial crisis then, most of what I was reading, for instance, to get up to speed. It all came from blogs and maybe some of the sell side notes. But is there anything in particular that you found useful? Yeah, I read blogs as well. I mean, I still have an old reader of my Google reader from the time. And still technically subscribe to all those different sets of blogs. things like naked capitalism even just the whole ecosystem

and blahs beyond like one specific blog with the exception of maybe naked capitalism it was more reading the different arguments that would go through different sets of blogs things that would bounce from Krugman to to DeLong to all over the place seeing people

when they're actually arguing with each other is kind of when you get the clearest sense of what's on unclear what's good to learn about. But I would say combination of that plus reading Minsky, which definitely was revelatory, and then just sort of getting obsessed and reading all sorts of alternative heterodox literature, post-Kentian literature, until like, you know, felt like I really had a handle on things. Let's talk about Minsky, because I'm sure I think a lot of our listeners maybe have some idea who he is.

They have some idea that the financial instability hypothesis that systems tend towards instability, probably some of our guests would find him, would cite him as being influential. What was it about his work specifically that influenced you and sort of set you on the path? Like what is the sort of main idea that really set you a life behind of his? First, that, you know, that you have to be able to speak in balance sheets. that balance sheets is how you keep yourself coherent, but then that the instability and the innovation in finance is one and the same thing, the idea that you're going to expand balance sheets,

but with a unique financial instrument, you know, what I would say today, a unique legal structure to those financial instruments, and that there's this social process by which new legal and financial innovations to convince people that a financial structure that in many respects is similar to an unstable one in the past is going to be stable this time. And then, you know, watching him discuss it through examples, examples that I think are like obscure now. Like, you know, he has a whole large sections in stabilizing an unstable economy on real estate investment trusts in the 70s. And these sort of more obscure things where you see how the financial structure evolves. and its relationship to instability.

And then also just things like, you know, Minski, you know, at the time when securitization seemed like this newfangled thing that no one paid attention to, reading Minsky discussed securitization and its benefits to profit-seeking bans, but also its potential for instability was like rebels. You know, it felt like at the time, maybe a little less so now, but in 2009, it felt like reading a profit when you read about,

when you read Minsky discussed securitization in the 80s. Well, let's talk about the evolution that is arguably happening now and what we're sort of seeing from the Federal Reserve. You and I have, I think we've tweeted at each other a little bit about the sort of mingling of monetary policy with fiscal policy or the potential for that to happen. And it does kind of feel like even if it's not happening explicitly central banks, are certainly talking about it more, and there's this idea of monetary financing as well. Could you sort of give us a broad outline of what you're seeing on that front? I mean, what we're seeing is basically like a charged up version of quantitative easing the large-scale asset purchases over 2009 to 2012, roughly.

But this time, rather than being, you know, this indirect attempt to increase demand by, say, you know, you buy a bond off of hedge fund and they reinvest in somewhere else and credit availability expands or whatever other theory you have for why quantitative easing would work. At the most basic level, the sort of supercharged quantitative easing now has been about making sure that the treasury market function, making sure that, you know, at this time when you have a huge collapse of income across, across, business sectors that they're able to access liquid assets they need to make payments.

And the normal financial players who would usually accommodate that demand for whatever reason weren't able to. And thus the Fed became essentially a buyer of Treasury securities of last resort or maybe even a first resort. And so in this case, the large-scale asset purchases have been about fixing the financial plumbing and making sure people have access to Treasury security liquidity. rather than the other sort of justifications for large-scale asset purchases that happened a decade ago. Right. So a decade ago, arguably, or in retrospect, obviously the Fed did a lot of treasury buying, but it was limited.

It was arguably primarily a signaling vehicle about raids, or maybe it was something to do with the portfolio channel to encourage people to riskier assets to stimulate the economy. But in this case, it was literally about making sure people could get liquid. for treasuries. The one thing that seems like very different or sort of like an innovation beyond what we saw in the last crisis is the degree to which the Fed is intervening in the market for risky assets on the credit side, having clearly stepped into the market for investment-grade bonds, but even high-yield bonds, entities which carry credit risk and could in theory default. talk to us about what they've done and how innovative it is in terms of a break from its previous actions it represents for the Fed to get involved in these markets.

I think it's hugely innovative. I think we can't underestimate. Of course, there's been in Europe by the ECB, in Japan, there have been purchases of corporate debt. So it's not a completely brand new innovation in terms of central banking, even recent central banking globally. For the Federal Reserve, it's very unique because the Federal Reserve has had more than any other central bank has had this commitment to our policy is neutral. We don't pick winners and losers. We're just here to provide general credit support to manage general economic conditions. We're not about these specific entities.

And the innovation today is that that is clearly not the case. They, by circumstance, they feel forced to make sure that corporate America as a whole has access to liquidity, but that, you know, the mechanism for doing that launching these primary corporate credit facility and the secondary market corporate credit facility. That launch of these facilities, they are intervening, they're making specific choices. They're choosing investment grade bonds and investment grade bonds that were investment grade below before a certain point. I think the current one is the current caught off is March 22nd. And as well, they're buying extreme traded funds. And this is specifically, you know, this is them saying, you know, this set of corporate America, we need to prevent the spread between their borrowing rates and the risk-free borrowing

rate from exploding. They need to be able to access credit in this difficult time when there's this, you know, big drop in revenue across the board. they're putting this out there, and I think it's going to change the Federal Reserve from now on. There's always going to be bought corporate credit corporate securities before. You can, you know, first of all, shouldn't we give you normal, give this to you as a normal tool of monetary policy? There's going to be talk about specific sectors that they should be supporting, especially around energy, I think, is going to be a huge one in terms of the future of monetary policy debates. And that combined with the municipal liquidity facility, which is state and local purchases,

now I think there's going to be this like debate between, okay, if you're at the zero lower band and you can't really have anywhere else to go, what should you be doing to try to support the economy? Should you be loosening the financial constraints of non-financial corporations, or should you be loosening the financial constraints of municipalities, especially the most disadvantaged municipalities who experience a lot? of austerity, especially over the last decade. And so I think that is the future of debates over monetary policy. And it's a very different world. And it's a world that the Federal Reserve is uncomfortable with above everything else. Post 2008, I remember we saw people up in arms over,

you know, well, people were up in arms over quantitative easing and talking about moral hazard and stuff like that. And of course, now we see the Fed taking on credit risk on an entirely different scale. From your perspective, and this is kind of a tough question, but do you think they should be assuming that credit risk? And what kind of moral hazard debates would you expect this to open up? I think the corporate credit facilities are necessary. I do think that you can't, like, you can let specific companies go down, but you can't let there to basically be a run on corporate America as a whole. What I would say is, I think the fact that the safety net is revealed that not just that specific banks are too big to fail, but corporate America as a whole is too big to fail

and will always get some sort of generalized support, and now especially in the finance side, through the Federal Reserve, opens up questions about what responsibilities do they have to the public, as we're essentially treating them as part of public infrastructure. There are essential workers, but now there are also essential corporations. And I think that opens up a question to how firms operate and to the extent to which that they're going to be truly, especially big multinational corporations, are going to operate truly as these purely private entities

or whether there's going to be a transition to seeing them as sites of governance that involve a series of stakeholder who all have rights. And I think that that is going to be a heap piece. And, of course, I think it's going to be, I think the municipality stuff is very critical as well. And in fact, it should be expanded a lot. I think, you know, it hasn't been anywhere near enough what they've been doing. I want to get a little bit, you know, soon into what more the Fed could be doing. But before we do, I mean, Tracy asked about the sort of moral hazard, entanglement questions, governance.

What about the pure legality question of what they've done? There are people who say, oh, this is blatantly illegal. And then they cite some line of the law regarding the Federal Reserve Act. And they say they can't be taking on credit risk like that. Just from a sort of purely within the bounds of what they're allowed to do, in your view, are they sort of still unambiguously within the letter of the law? I don't think it's unambiguous. I think it's definitely stretching the law some, but it's stretching the law in the way, the exact way that happened in 2008. And what's so, I mean, to back up, the key legal innovation that was employed in 2008 and employed today was, okay, we don't have the legal authority to do sets of purchases directly. So we'll wander these purchases through essentially this straw purchaser that we'll create, which is a special purpose vehicle. At the time, they were named, Made in Lane 1, Made in Lane 2, Made in Lane 3.

As far as I know, there isn't any really names today for them or if they're just named after the facility or whatever. But they're setting up these set of special purpose vehicles where there is a injection of equity from the Treasury, where they'll buy, you know, $10 billion equity stake or $30 billion equity state, whatever it is, into the special purpose vehicle. And then that special purpose vehicle will conduct all the purchases that we're talking about. So the corporate credit facilities, these are technically special purpose vehicles. And the idea behind that is that the equity stake from the treasury makes this sort of like a partnership between the Treasury and the Federal Reserve rather than the Federal Reserve

purely acting on its own authority. and thus, you know, it's legal. I think the case for these special purpose vehicles being legal is pretty strong, you know, and also who would have standing in a court to challenge them. But I think that they open up big questions of like why, if we think that this is an appropriate emergency tool, then the use of these facilities should be legislated. Like there's no reason why we can't legislate that there are a facility exists

that is, you know, a special emergency treasury federal reserve facility, which, by the way, could have a permanent staff that is studying crises and, you know, tail risks all the time, that could get up and running when it needs to and it's running scenarios and so on and so forth. And then specifically specify what sort of powers that that joint treasury federal reserve facility has in extraordinary times. So I think in broadstarchs, I think these facilities are legal, the defense of them being legal is very strong, but I think it's a huge policy failure that we are leaning in special purpose vehicles. And I don't think it was at all clear to anyone, including experts and the public at large, that recourse to special purpose vehicles to do whatever you want was still on the board after, on the table after Dodd-Frank. And I think, you know, there's a big question of democratic accountability in terms of having this sort of state of exception where you can set up a special purpose vehicle to whatever you want. Right. The Fed is sort of, I guess, cobbling together these various facilities under immense time pressure or maybe they're sort of MacGyvering it, right?

Like putting it together in any way they can. But as you say, if they had the explicit ability to do that, then we would save a little bit of time. And maybe we shouldn't be coming up with new policies or new ways of doing things in the middle of an emergency in this way. You've written thousands and thousands of words at this point about what the Fed has been doing. What else could they do at this point? What's sort of top of the list or number one if you had a wish list from the Fed? Number one is definitely just expanding the municipal liquidity facility. I mean, I think it should just be like an unlimited swap line to state and local governments for the duration of the crisis. You know, we provide unlimited swap lines to foreign governments.

I don't see any reason why we can't provide unlimited swap lines now, especially, you know, a pandemic is an especially unique circumstance where you need public spending on the ground. And that spending literally saves lives, you know, in a very immediate direct way when you provide those financial support. So I think massive expansion at the state and local level is kind of biggest thing for me. I think second is, I think not only is weird that we're doing special purpose vehicles, but the way that they have structured it legally with the CARES Act, and essentially their legal argument where the Fed's purchases and taking on a credit risk is somehow in proportion to the equity stakes that the Treasury is putting up, through the Exchange Stabilization Fund.

I think that is a limited structure that hits the problem with quantitative easing where you can't simply set rates. You just have to announce specific quantities and hope that they have the interest rate and credit availability effects that you want. I think an alternative accounting gimmick essentially to that accounting gimmick would have given the ability to set interest rates across the board. And it's unfortunately set up a special account of crisis. facility account where losses are booked to that gets booked as a negative

equity, a negative liability of the Treasury and isolated from all the other remittance, a negative liability of the Federal Reserve that gets booked as that gets, you know, separated from remittances would have, you know, given the much broader scope to, would have let congressional appropriations actually go to ransom spending and, you know, would make their emergency monetary policy much more effective. So I think, you know, those two big things really expanding on the municipal front and then an alternative accounting gimmick so they could really expand purchases of lending, I think, would really the way to go. One of the weird things about the recovery effort and, you know,

the payroll protection component of the CARES Act is that it's all run through the banking system. So even though it's just, it's treasury backstopping all of these dischargeable loans to companies, companies that want to keep workers on their payroll have to go to their bank and fill out paperwork and they're a different issue. Every bank has their different issues. What, in your view, we've been talking a lot about asset purchases and so forth. What could the Fed do on the regulatory side so that the banks are in a better position themselves to provide money or provide credit to keep the economy going? Yeah, just generally speaking, is there something that they could be doing to the banks directly that would help the economy overall?

I don't think that there is anything. You know, one thing we forgot to talk about was the mainstream, or I forgot to mention was the Mainstream Lending Program, that they're doing direct lending to small, or launching a program to do direct lending to small and medium-sized businesses, again, through banks in a similar way to the PPP. and I think that banks are, you know, as there's a, the economist is running about it recently. I'm linking on her name.

Someone who comes from the Money View was writing about recently about how banks are actually very unused to being credit intermediaries. Their payment intermediaries, they make payments all the times, but they're not used to being credit intermediaries despite, you know, the sort of textbook. Examples saying that that's how things work. And so they're very uncomfortable in being these pass-through mechanisms for the Federal Reserve or the Small Business Association from operating. And so I think one thing is to sort of kind of be tighter on regulatory pressure to make sure that loans are going out the door as fast as possible. But also that consolidating these programs into one program makes a lot of sense.

Like they've launched, the Federal Reserve has actually lost a facility to provide liquidity to PPP loans, where they're providing term financing and the loans get pledged as collateral on a no recourse basis, which means that the bank could just walk away and the Fed takes the collateral and nothing else has said, which is kind of like effectively a purchase with an upside to the seller. And, you know, if we're going to do that, if essentially, you know, the Federal Reserve's balance sheet is going to be backstopping deals and loans, just like the Main Street lending program. And all the, the quote, government guarantee does is improve the Federal Reserve's net worth after the fact. Then it seems, you know, in retrospect, it feels like these facilities could have been consolidated.

You could have booked losses, like I was saying, to a special, you know, crisis facility account. And, you know, segregated that from the rest of the Federal Reserve's balance sheet. and these programs would have run on a much simpler, smoother basis with one bureaucracy and, you know, dealing with the Fed, which I'm more used to dealing with on these banking sides. But it's a, it's a tough problem. Regulators can loosen things. They can lower capital requirements. They can lower liquidity requirements. They can incurred banks. They can threaten banks. But at the end of the day, banks are in the business of lending. And the problem, right now is income. You know, they're doing a small bit through the mainstream lending program of deferring principal and interest payments for a year, and that's nice and that's better than what they would have been doing otherwise. But, you know, the Fed is very unused and does not like being a fiscal authority with a good reason. And we really need to be doing this through

glance. And, you know, of course, the PPP program is an attempt to do that through a kind of a kind of sort of grant structure, but I think there probably was an alternative way to do it that was simpler, especially one that wasn't rely on that specific appropriations. You just had, you qualify if you're this type of small business, and you get this amount of forgivable loans or grants or whatever it is. And I think that would have been a smoother process that would have been easier to administer, more just like, you know, a basic income but for businesses than, the sort of almost means tested, almost loan, almost grant structure that they've been going with.

All right. I want to get back to something you said earlier, or you touched on it, the idea of, I guess, how expanded powers for the Federal Reserve would interact with democracy. So the Fed is an unelected body. And whenever we start talking about the Fed actually doing stuff and maybe how. having expanded responsibilities or expanded powers, this inevitably comes up. But how do you view that debate? Should the Fed be basically enacting, well, almost fiscal policy in some senses of the word, without having been voted into office? From a legal perspective, which a lot of my organization is filled with lawyers, having some sort of administrative agency, which what the Federal Reserve Board is, conduct some, have some discretion over fiscal policy isn't totally out there from our point of view. You can have, you can have, you know, administrative agencies conducting fiscal policy.

The issue is designing a legal structure which defines the bounds of that conduct of fiscal policy and integrates it into a larger macroeconomic framework that the government is operating it. And, you know, the problem, you know, with our government, probably most governments, is there isn't really a macroeconomic framework that's being operated in. There's, you know, a congressional budgeting process, and then there is the central bank in its powers, and, you know, there's some fiscal automatic stabilizers, some programs like Social Security,

but basically, you know, the Fed is the macroeconomic policymaker of the federal government. And as a result, it gets leaned on more and more as we encounter macroeconomic instability, whether it's pandemic caused or financial crisis caused. And so I think that does strain democratic norms in the sense that we have this administrative basis that's very difficult to understand, for the public to understand and understand what's going. It's not clear what their emergency powers are. I think if you take in 100 answers to a layman of what the Fed's emergency powers are for Dodd-Frank before this latest crisis, you know, probably 90 of the answers would have been wrong, not more.

given what has happened now. And I think, you know, that is extremely corrosive. You know, I think that, you know, our macroeconomic policy framework is an essential component of civics. It's what, you know, defines what, whether you're going to have a job, what the quality of your job is, what the quality of your retirement security is, what the quality of your health care is. And it needs to be an understandable part of being a resident of, of, of, of, of, of, a

of a country. And centering so much more things in the Fed, where the Fed by nature has to come up with complicated innovations to do what it's being asked is very corrosive and, you know, erodes people's ability to understand what's going on and what our policy intervention is. And Congress is essentially asked Federal Reserve to take on that role when it devoted $454 billion of the CARES Act to capitalize these Federal Reserve facilities. And I think that that is extremely corrosive. And we need a math. It's not the Fed's fault for the most part.

And we need Congress and the rest of the federal government to take on much more of the burden of macroeconomic policymaking. It becomes competent in macroeconomic policymaking. That expertise is far to concentrate in the Fed Reserve, but not what you would decide ex ante to, you know, in terms of your relative decision making. Right. I think, you know, Nathan, we could have a whole other episode on just what Congress should be doing now. But like I said, that would be a whole different episode. But this was really great to chat with you. And hopefully you enjoyed it.

And thanks for coming on Nautlo. Thank you very much for having me. Thanks, Nathan. That was great. And now we know who you are and what you do. Yeah, that was awesome. Well, obviously, Tracy, I really like that episode. And I thought his last point actually at the end was sort of the key to understanding the whole thing, which is, you know, people get angry about the Federal Reserve or they feel like that Federal Reserve is overstepping its mandate or engaging in activities that really shouldn't be engaging in.

But the fact of the matter is our entire system is basically designed to that only the Federal Reserve is in a position to conduct robust in time. macroeconomic policy. Yeah, and there have been a few people who have said in the current crisis that the central bank has basically acted in the role of, I guess, the grown-up in the room. Like, they have been probably the most responsive, not only domestically for the United States, but we have also seen them taking on this growing international role when it comes to providing dollar liquidity through the swap lines. There seems to be some recognition that the Fed is, well, it's a needed entity, isn't it?

Could you imagine, like, Congress voting on things like swap lines? On dollar swaps? Yeah, like, I just imagine if that were something that our system were premised on Congress voting each time to open up dollar swap lines with foreign government. Or to raise or lower interest rates. I can only imagine how hellish that would be. But I also think, like, it sort of speaks to NRAs. He talked about, like, essentially, all of these things are on some level accounting gimmicks,

whether it's the fact that the Treasury has to invest in a special purpose vehicle, which is then levered up by the Fed, which then remits its profits back to the Treasury. They're all accounting gimmicks, but they're accounting gimmicks because on some level, that's the only way that you shoehorn these actions into our existing legal and institutional structure. Right. And I think the point is that you don't want the Fed to be spending its time thinking of accounting gimmicks or trying to structure these things. In an emergency, you want them to be thinking about the actual policy and what makes the most sense for the current situation instead of poring over, you know, reams and reams of legal documents to figure out how they can kind of create a thing in order to enable them to do something similar to what they would like to do. It's sort of a waste of resources, as Nathan pointed out. I do think it's interesting also. It's like after the last crisis, like when the sort of smoke cleared a little bit, then we got Dodd-Frank because there was this sort of realization that it's like, all right, well, if the infrastructure of government is going to sort of, or the infrastructure of the Fed is going to backstop all these central banks, or backstop all these banks, then we need to apply some new rules so this doesn't happen again. And Nathan sort of alluded to this, but it's like, okay, well, in this crisis, we've decided that the entire policy.

the entire corporate sector is a de facto public infrastructure that's worried, that's deserving of a Fed backstop. And maybe that's true. But are we really going to let the corporate sector then return to normal after this? Or will there be some version of Dodd-Frank for all corporations, or should there be, once that we've sort of crossed this Rubicon where we've decided that they're all kind of banks to with access to Federal Reserve? Right. Like imagine if corporations had to start holding on to liquid assets, for instance. Or I guess the most political thing out there at the moment is the notion of curbing dividends or buybacks or something like that. Yeah.

And in fact, it's funny because Nathan actually has one of the posts he's written in his newsletter is about should we have arguing for a liquidity coverage ratio for non-bank public entities. Basically, this idea is like, okay, if you're an airline or if you're a restaurant chain or whatever it is, how much cash on hand should you have to be able to cover expenses? I mean, we do it for banks. So plausibly in this case, where we've seen now that all business for some normally operating companies can come to de facto halt overnight. Is it that crazy to start thinking about similar regs for non-bank entities? All these things are now sort of open to question. Yeah, it's sort of overwhelming to think just how much this crisis has the potential to change. I mean, after the 2008 financial crisis, we did see all these new banking rules put in place,

new Basel rules, Dodd-Frank, as you pointed out already. But this time around, we could get, whoa, we could get new financial rules, we could get new rules for the way the Fed operates, new rules for the way the government potentially operates, and of course new rules for the way companies operate as well. Everything. And people, too. Society, yeah. Yeah.

No, it feels like that's what really separates this, just that everything is on some level. It's on the table. Okay, well, instead of talking about everything, shall we call it a night or day for you? Sounds good.

All right, this is big. Yes, this is the point where, by the way, we recorded this on April 20th, 2020. So if you're, depending on when you're listening to this, and depending on what has happened since then, just for a point of reference, it's April 20. Yeah, if the Federal Reserve started issuing its own securities already, it's April 20th. Okay, this has been another episode of the Odd Lots Podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should follow our guest on Twitter. Nathan Tinkis. He's at Nathan Tinkis. Be sure to subscribe to his newsletter, Nathan Tinkus.

substack.com. Also, you should be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts on Twitter, Francesca Levy. She's at Francesca today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.