Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy all the way, Tracy,
Speaker 1: you know it's pretty dumb. You're gonna have to narrow
Speaker 1: that down. I think it's done that we haven't written
Speaker 1: a book yet, like all this time, and we like
Speaker 1: kick her ound book ideas, but we never do it. Yeah,
Speaker 1: I mean both of us are pretty busy with our
Speaker 1: day jobs. But yes, I would love to write a book,
Speaker 1: and we have discussed some ideas. Yeah, we have. We
Speaker 1: talked about maybe doing one on bubbles, We've talked about
Speaker 1: maybe one, uh doing one on this crisis perhaps, And
Speaker 1: also one of our recurring themes on the podcast is
Speaker 1: the question of what is money? And we've even talked
Speaker 1: about maybe doing a book just like about what money
Speaker 1: is from our perspective. Now, first of all, you're you're
Speaker 1: giving away all our good book ideas, and some people
Speaker 1: are going to rush out and do them before we
Speaker 1: get a chance. But yeah, I mean we've done so
Speaker 1: many episodes at this point about the nature of money
Speaker 1: and how it works. I mean, stretching from sort of
Speaker 1: anthropological takes way back in prehistory and all the way
Speaker 1: up to cryptocurrency and digital money and things like that. Anyway,
Speaker 1: You're right, I mean, the thing is at this point though,
Speaker 1: there is no reason to worry about someone stealing our
Speaker 1: idea to write a book about money, because it's actually
Speaker 1: it's already been done people. Yeah, people are people are
Speaker 1: already way ahead of us on this, including our guests today.
Speaker 1: So really like we at this point we can just
Speaker 1: sort of, I think, kill that idea because other people
Speaker 1: have long us to the plot. Yeah, and I have
Speaker 1: to say, the guests that we are about to have
Speaker 1: on has written a very good book on the subject
Speaker 1: of money, so you know, we don't want to go
Speaker 1: up against that kind of competition, absolutely right, So we're
Speaker 1: just gonna vacate the field to our current guest, and
Speaker 1: hopefully as people listen to the conversation, they'll see the
Speaker 1: good work has already been done on this. But it
Speaker 1: is a really important topic and so even if other
Speaker 1: people beat us to the book, we can still do
Speaker 1: the podcast. And so without further ado, I'd like to
Speaker 1: bring in our guest for the day. He is Jacob Goldstein.
Speaker 1: He is the author of a new book, Money, The
Speaker 1: True Story of a Made Up Thing, which is a
Speaker 1: great title, and he is also the long time co
Speaker 1: host of Planet Money. Jacob Goldstein, thank you very much
Speaker 1: for joining us. I'm happy to do it. Thanks for
Speaker 1: having me. So. Tracy and I have been doing this
Speaker 1: podcast for a few years and we're like, let's do
Speaker 1: a book about money, and we never do. So you did?
Speaker 1: You do your podcast for a long time. You actually
Speaker 1: did what Tracy and I only talk about. But what
Speaker 1: was it about that you were attracted to money as
Speaker 1: a subject in its own right? I mean as a
Speaker 1: sort of set of history stories. It's amazing as a
Speaker 1: way of just under standing how people in society sort
Speaker 1: of get through the daily living. It's amazing. You know,
Speaker 1: at Planet Money, I had done all of these kind
Speaker 1: of one offs, Like you know, I did a story
Speaker 1: about free banking in America when there was like five
Speaker 1: thousand different kinds of paper money and merchants had to
Speaker 1: get special magazines to figure out what paper money was
Speaker 1: good and how much it was worth. And I've done
Speaker 1: stories about the Depression and the gold standard. But like
Speaker 1: I realized that if you sort of zoom out, there
Speaker 1: is a very long arc, this kind of series of
Speaker 1: origin stories of money being invented and reinvented and changing
Speaker 1: over time. That makes what I think is a good book,
Speaker 1: what I hope is a good book. So one of
Speaker 1: the daunting things I think about approaching a subject like
Speaker 1: money is just where to begin? How did you go
Speaker 1: about starting? You know, like, what was your jumping off
Speaker 1: point for the book? Well, we're looking for tips. Basically,
Speaker 1: don't do it. That's my tip on writing a book.
Speaker 1: It was much, it was very lonely. I think writing
Speaker 1: a book together is a great idea. Um. I mean
Speaker 1: basically what I tried to do was make a series
Speaker 1: of origin stories. Right, So there is I mean, you
Speaker 1: guys have talked about you know all right, I know, Joe,
Speaker 1: you've talked about on Twitter. I don't recall if you've
Speaker 1: talked about on the show sort of the myth of
Speaker 1: Barter And there's kind of the early section. But the
Speaker 1: framework for me is like finding this series of origin stories,
Speaker 1: not trying to tell the whole story. You know, the
Speaker 1: book is less than three pages long, and so there's
Speaker 1: like these discrete moments when sort of the world changes
Speaker 1: a lot in a short amount of time. Basically, right,
Speaker 1: it is not this long, continuous story and one of
Speaker 1: the really interesting things to me about money is there
Speaker 1: is this kind of myopia that people get again and
Speaker 1: again where they think whatever sort of monetary regime they're
Speaker 1: living in, whatever moment they're living in, they think, oh,
Speaker 1: this is just the way money works, and everything else
Speaker 1: is like chaos or craziness or some dumb idea somebody
Speaker 1: made up. I mean, maybe the most striking version from
Speaker 1: our contemporary point of view is the gold stard. You know,
Speaker 1: there's this famous paper by I Can Dream and Temn
Speaker 1: where they talk about the gold standard mentality, and part
Speaker 1: of what sort of screwed everybody over in the Great
Speaker 1: Depression was they just couldn't imagine a world not on
Speaker 1: the gold standard. And part of like Roosevelt's genius, frankly,
Speaker 1: was to be like, yeah, whatever, let's try it, let's
Speaker 1: devalue go, let's see what happens. So one of the
Speaker 1: interesting things about money, and I guess why it's worth
Speaker 1: a book, and of course other people have written books,
Speaker 1: and who knows, maybe we'll also write a book, is
Speaker 1: that it feels like one of these things. It's kind
Speaker 1: of in my mind, it's like love, and there's like
Speaker 1: a reason that like there's like a million songs that
Speaker 1: have been written or poems that have written written about love,
Speaker 1: but but it's never enough because no one actually has
Speaker 1: like a super clear definition and we just sort of
Speaker 1: get closer over time to our understanding. And so it
Speaker 1: feels like money is the same thing, where it's like
Speaker 1: people try to come up with some definition or a
Speaker 1: few like, um, a few uh character sticks that all
Speaker 1: money have. It's like, oh, it's a store of value
Speaker 1: or two medium of exchange, and some of these concepts
Speaker 1: are helpful, but it's like we never quite arrive at
Speaker 1: the definition of what it what it is, and a
Speaker 1: lot of the interesting cases are sort of at the
Speaker 1: edge case where something is sort of straddles the line
Speaker 1: between what is money and what is not money, and
Speaker 1: there's not some sort of bright line that distinguishes the two. Yeah,
Speaker 1: I mean you mentioned it being like love. I it
Speaker 1: seems to me like music also in that way, right,
Speaker 1: it is this thing that spontaneously arises in different contexts independently.
Speaker 1: It's a thing that society has just seemed to create
Speaker 1: on their own, and the sort of taxonomic questions, you know,
Speaker 1: in the way that I don't know I'm old enough
Speaker 1: to remember when hip hop was new, right, and there
Speaker 1: was this sort of question of like, but is it music,
Speaker 1: which I mean to me, it obviously is music, But
Speaker 1: more importantly, who cares? Right? Like the the taxonomy is
Speaker 1: not the interesting part. The interesting part is of what happens,
Speaker 1: what are the stories, and then kind of how does
Speaker 1: power shift, who gets what, who gets screwed, who gets
Speaker 1: to take risks, who gets bailed out? So what happens
Speaker 1: is really where it gets interesting to me. So in
Speaker 1: your book you describe how money is basically a social
Speaker 1: contract and a social construction, and it relies on trust
Speaker 1: between all the parties involved. But one of the things
Speaker 1: that I found most interesting was this idea of how
Speaker 1: people get money and one chapter in particular, I can't
Speaker 1: remember exactly what the name of the chapter was, but
Speaker 1: something like how everyone can get lots more money. Um,
Speaker 1: could you maybe describe that dynamic because I thought that
Speaker 1: was really interesting. Yeah, yeah, I'm glad you liked that chapter.
Speaker 1: I was worried that that was like a weirdo chapter
Speaker 1: that didn't fit with the book, but I liked it too.
Speaker 1: So first of all, thank you for liking that chapter.
Speaker 1: So so um, I mean the kind of big idea
Speaker 1: of that chapter is I think, I mean, there is
Speaker 1: this idea the pie can get bigger, right, everybody can
Speaker 1: have more money. But I think on a fairly deep
Speaker 1: level people don't believe that, right. I think on a
Speaker 1: fairly deep level, people have this very zero sum mentality,
Speaker 1: which which means if somebody else has more money, some
Speaker 1: other person is going to have less, and somebody's gain
Speaker 1: must be somebody's loss. And that's just wrong, right, And
Speaker 1: I don't know where it comes out of it, you know,
Speaker 1: the I do that money is scarcer, like you're thinking
Speaker 1: of money as gold. There's only so much gold. But
Speaker 1: that's absolutely not correct, right, So the good news is
Speaker 1: everybody can have more money. Of course, that doesn't mean
Speaker 1: everybody will have more money. It doesn't mean there are
Speaker 1: not cases where somebody's gaining it's not somebody's loss. But
Speaker 1: what I did in that chapter to to illustrate that
Speaker 1: is I looked at this story that was told by
Speaker 1: this economist Bill Nordhouse, who who won the Nobel Prize
Speaker 1: for other work. But he did this great study when
Speaker 1: he was a young economist at Yale, where he looked
Speaker 1: at artificial light for thousands of years from like ancient
Speaker 1: babble on when they used sesame oil to light up
Speaker 1: rooms through the end of the twentieth century, which was
Speaker 1: when he wrote the paper. And he asked this question,
Speaker 1: which you can basically phrase as if a regular person
Speaker 1: works all day, how long can they light up a
Speaker 1: room for? And he standardized it, right, and he went
Speaker 1: all the way here, I should I should grab it
Speaker 1: so I get the right numbers, because what he found is,
Speaker 1: like you know, obviously ancient Babylon very low productivity society.
Speaker 1: All the work they did was low productivity oil lamps
Speaker 1: not a great, not a very efficient source of light.
Speaker 1: And he found he found that if you work all
Speaker 1: day in ancient Babylon and you spend your entire day's
Speaker 1: wages to light up a room, you can light up
Speaker 1: room for ten minutes. Right. And then he follows this
Speaker 1: through time and what you find is for a very
Speaker 1: long time after that, it doesn't change much, right, which
Speaker 1: is the story of economic history. Right. Economic history is
Speaker 1: basically thousands of years almost no productivity. Games. People are
Speaker 1: doing the same kind of work, getting the same kind
Speaker 1: of results. And then and then the phone came and
Speaker 1: we all could just lie in bed and read your
Speaker 1: Twitter feed all day and what should I do about
Speaker 1: the sixty forty portfolio? Um? And then the industrial revolution
Speaker 1: comes and it goes bananas, right, And there's multiple reasons.
Speaker 1: There's like the industry revolution itself. There's science, and then
Speaker 1: you get of course Edison, and the Edison story is
Speaker 1: not just like science, but also finance is getting basically better.
Speaker 1: There's patents, which is what Edison really built his business on.
Speaker 1: There's just capital formation, right. JP Morgan is the money
Speaker 1: behind Edison. And when Edison lights up Lower Manhattan, which
Speaker 1: is the first time there's a power grade, he's actually
Speaker 1: with Morrigan on Wall Street. And so you keep getting
Speaker 1: these efficiency gains through the twentieth century then, so that
Speaker 1: by the end of the twentieth century, a day's labor
Speaker 1: goes from you know, having got you ten minutes of
Speaker 1: light in Babylon to a few hours of light at
Speaker 1: you know, eighteen hundreds by the end of the twentieth century.
Speaker 1: If you work all day, I want to light up
Speaker 1: a room with your day's wages, you can light it
Speaker 1: up for thousands and thou sense of hours. Right, So
Speaker 1: that is effectively everybody getting much more money from the
Speaker 1: same amount of work. I love that. I mean, I
Speaker 1: wonder something. I wonder if like people have this conception
Speaker 1: of finite money. It's just like we think of money
Speaker 1: must correspond to something in the real world or so
Speaker 1: it's like we have all these real assets houses, computers, iPhones, cars,
Speaker 1: and I wonder if people think of that, like the
Speaker 1: money is like there's just sort of like this one
Speaker 1: to one correspondent between money in the bank and the
Speaker 1: thing that's real. Sort of the lack of appreciation of
Speaker 1: how they're just two different things they are real things
Speaker 1: and money things. Yeah, I mean there's also like I agree,
Speaker 1: I think there's like a stock flow confusion, right. I
Speaker 1: think people think of the stock maybe, which is what
Speaker 1: you're saying, right, People think like there's some amount of
Speaker 1: stuff in the world and the only question is how
Speaker 1: do we divide it out? But the flow is really
Speaker 1: what we care about. What we care about is people
Speaker 1: going to work every day and making stuff and providing services, right,
Speaker 1: and when we get productivity gains, that means we can
Speaker 1: do the same amount of work and get more stuff.
Speaker 1: I mean, I do think one other thing is because
Speaker 1: we have had this, you know, last several decades where
Speaker 1: the productivity gains have not been well distributed, or at
Speaker 1: least have not been equally distributed. That makes it harder
Speaker 1: to believe that productivity gains make everybody better off. Right,
Speaker 1: If productivity gains are not making everybody better off, it's
Speaker 1: harder to be excited about productivity gains. There's another way
Speaker 1: that people can get money, uh, sometimes get lots of money,
Speaker 1: and that's by creating new types of money, although that
Speaker 1: doesn't always go hand in hand with productivity gains. Could
Speaker 1: you maybe talk a little bit about shadow banking and
Speaker 1: the creation of a very specific type of money, which
Speaker 1: you go into in some detail in the book. Yeah,
Speaker 1: So that's very basically starts in the nineteen seventies, and
Speaker 1: this is the times, as you guys know, when banks,
Speaker 1: regular banks were very highly regulated. Basically that came out
Speaker 1: of the depression, right, and the depression the government, the
Speaker 1: US government said okay, we're going to ensure deposits in
Speaker 1: regular banks. So at that moment was when they really
Speaker 1: made bank deposits just clearly unambiguously government backed money. Right.
Speaker 1: But in exchange for ensuring deposits and banks, we're going
Speaker 1: to regulate the hell out of banks. Including we're going
Speaker 1: to say banks cannot pay interest on checking accounts, and
Speaker 1: they can only pay a limited amount of interest, a
Speaker 1: capt amount of interest on savings accounts. Right, that's the setting.
Speaker 1: So in the seventies, there's these two guys, one of
Speaker 1: whom passed away fe years ago, one of whom I
Speaker 1: spoke to working on the book. His name was Bruce Bent,
Speaker 1: who was like just a very like charming entrepreneur type
Speaker 1: of guy. Grew up working class in Long Island. His
Speaker 1: dad was a postman. As he told me, he said,
Speaker 1: I always had an attraction to money, you know, talked
Speaker 1: about hustling as a kid, collecting bottles and that kind
Speaker 1: of thing. Went to Wall Street, wound up working at
Speaker 1: an insurance company and then went off and started this
Speaker 1: firm with his partner, Harry Brown. And what they wanted
Speaker 1: to figure out was basically a way around those regulations
Speaker 1: that limited interest that banks could pay, and especially the
Speaker 1: rule that said you couldn't get any interest on just
Speaker 1: a regular demand checking account. And they essentially invented the
Speaker 1: Money Market Mutual Fund to to get around that. And
Speaker 1: what that was was a way that people could put
Speaker 1: money in this fund and get paid interest and take
Speaker 1: out their money whenever they wanted, right, So it was
Speaker 1: a lot like a checking account, but it paid more interest,
Speaker 1: which is great. Uh, if you are the person putting
Speaker 1: your money in the bank, right, it's not FDIC insure,
Speaker 1: it's not government insured, so there is some amount of risk.
Speaker 1: But they set it up deliberately to seem as much
Speaker 1: like money in the bank as possible. And in particular,
Speaker 1: you know, it was a mutual fund, and typically the
Speaker 1: value of your money in a mutual fund fluctuates with
Speaker 1: the underlying assets. But they were investing in like super
Speaker 1: safe assets, just like a big treasury bills and CDs,
Speaker 1: you know, big bank time deposits. And they said, we're
Speaker 1: going to set up the accounting so every dollar you
Speaker 1: put in is essentially always worth a dollar unless there's
Speaker 1: some huge capacitrophy. But it's not gonna float every day,
Speaker 1: it's not gonna fluctuate. It's gonna be like money in
Speaker 1: the bank. And this of course was like a killer idea.
Speaker 1: It took off. In fact, it took off so much
Speaker 1: that it started to change finance as a whole, right,
Speaker 1: because more and more people are putting money in money
Speaker 1: market mutual funds. But now and there's more funds springing up,
Speaker 1: and by the eighties, these funds need new assets, right
Speaker 1: Brown and Bent. In their first fund they're still just
Speaker 1: buying these super safe basically government guaranteed assets. But other
Speaker 1: funds start buying commercial paper and then become the biggest buyers,
Speaker 1: the most important buyers of commercial paper, which this is
Speaker 1: short term corporate debt, short term safe, pretty safe corporate debt.
Speaker 1: And and the banks don't like this. I found this
Speaker 1: bank trade publication from the eighties when this is happening
Speaker 1: that talked about banks seeing commercial paper as the enemy, right,
Speaker 1: because this is basically taking away commercial lending from the banks.
Speaker 1: So the banks, being you know, good at their job
Speaker 1: of sort of getting in the middle of vast flows
Speaker 1: of money, figure out how to get in on this.
Speaker 1: City sets up the first conduit and creates asset back
Speaker 1: to commercial paper, this new kind of commercial paper basically,
Speaker 1: so it's a way for companies to borrow, it's a
Speaker 1: way for money market mutual funds to lend, and it's
Speaker 1: way for city to sort of get in the middle
Speaker 1: and collect fees without really having to put their whole
Speaker 1: bank nous on the line. So this grows. Mutual funds
Speaker 1: are lending into this. As investment banks get bigger, mutual
Speaker 1: funds money market mutual funds start becoming big lenders to
Speaker 1: investment banks, largely through the repo market, and you see
Speaker 1: growing through these innovations, if you want to call them,
Speaker 1: that this parallel banking system. You mentioned that every share
Speaker 1: in this reserve fund was worth exactly one dollar. It
Speaker 1: is pegged to the dollar, and this strikes me as
Speaker 1: like an important point here and sort of understanding what
Speaker 1: money is, because it's like, Okay, you have a dollar bill,
Speaker 1: it's worth one dollar, you know it towards the dollar.
Speaker 1: You have a dollar in a normal savings account. It's
Speaker 1: not the same thing. It's actually a liability of the bank.
Speaker 1: But it's pegged at one to one to the dollar.
Speaker 1: So we're basically can accept that it's roughly the same thing. Yeah,
Speaker 1: and you have a government, you have the government guarantee,
Speaker 1: and then you have this reserve fund, which is like
Speaker 1: super safe or in theory at this point, only invest
Speaker 1: in super safe things. Also, one share is also worth
Speaker 1: a dollar, and so it seems to me that's sort
Speaker 1: of like part of money nous. It's just the idea
Speaker 1: of people accepting the different assets with very slightly different
Speaker 1: risk profiles almost the same but slightly different. Are all,
Speaker 1: you know, pegged in worth the same amount, even if
Speaker 1: they're sort of fundamentally different things that you have in
Speaker 1: your in your possession. Yeah, I mean redeemable at par
Speaker 1: on demand, right, I think that that is a good definition.
Speaker 1: I think, I mean they are slightly different risk profiles.
Speaker 1: I think people basically need to think of it as
Speaker 1: riskless for it to be money. That they might be
Speaker 1: wrong about it being riskless, and they did end up
Speaker 1: being wrong if we get they did, and and that's
Speaker 1: when it stops being money, I would say, I mean
Speaker 1: that's like I don't know if you guys have had
Speaker 1: Gary Gorton on the show, but like he is really
Speaker 1: good on this, and like my understanding, he's this Yale
Speaker 1: professor who also worked for a I. G. In the aughts,
Speaker 1: but who who basically my understanding of this sort of
Speaker 1: arc and this way of thinking about money comes from him.
Speaker 1: So he's he's great on this. So yes, redeemable at
Speaker 1: par on demand. And I think you basically need to
Speaker 1: think of it as riskless to be money, right, because
Speaker 1: if it's not riskless. Then it's like an asset or
Speaker 1: an investment or like maybe I'll win, maybe I'll lose,
Speaker 1: but that's not money, so okay. So you have this
Speaker 1: big system going. Money market mutual funds are a huge
Speaker 1: lender into it. You know, other big institutions, sovereign wealth funds,
Speaker 1: corporate treasuries also start lending into this universe of commercial paper,
Speaker 1: asset back, commercial paper repo, and this lending ends up
Speaker 1: being I feel like the still largely untold story of
Speaker 1: the financial crisis. I mean, you guys probably know the
Speaker 1: side of it. A lot of people who listen to
Speaker 1: this show probably know the side of it. But I
Speaker 1: will say, as someone who covers finance for a more
Speaker 1: general audience, most people don't know the side of it. Right.
Speaker 1: Most people still think of the financial crisis as just
Speaker 1: dumb subprime loans that blew and then blew up the economy.
Speaker 1: And that part is true. It's just insufficient, right. And
Speaker 1: what this part of the story tells you is where
Speaker 1: was the money coming from? Right? The money that the
Speaker 1: subplot prime lenders were lending it was coming from money
Speaker 1: market mutual fund deposits. You know, it was coming from
Speaker 1: the shadow banking system, And what happened was basically there
Speaker 1: was a bank run on the shadow banking system before
Speaker 1: anybody realized that this system had become a parallel banking system.
Speaker 1: That the you know, people's UH deposits, which I suppose
Speaker 1: are not properly called deposits, but people think of them
Speaker 1: that way, and money market mutual funds were sort of
Speaker 1: lending into this system by the time people realized that
Speaker 1: the run had already happened. Right. There's this famous Paul
Speaker 1: McCulley Paul McCulley of PIMCO speech in two thousand seven
Speaker 1: where I think that's where the coin where the term
Speaker 1: shadow banking was coined. It was at the Jackson Hole
Speaker 1: conference in two thousand seven. That was when the run
Speaker 1: was basically starting. It started in the repo market. Gorton
Speaker 1: has this great paper where he's described bigger and bigger haircuts.
Speaker 1: They look at how big the haircuts are demanded for
Speaker 1: repo and they start getting bigger. Around this time, UH,
Speaker 1: this BNP PARVA fund failed and you start to see
Speaker 1: this run on asset back commercial papers. So in some ways,
Speaker 1: the crisis of two thousand eight really starts in two
Speaker 1: thousand seven. But then, of course you see it sort
Speaker 1: of stepping forward. You know, in spring of two thousand eight,
Speaker 1: when Bear goes bust, that is basically a run, right,
Speaker 1: Bear was solvent, and you see, actually the money market
Speaker 1: mutual funds there. You see that week when everybody stopped
Speaker 1: lending to Bear, like Fidelity alone, which is I think
Speaker 1: by that point was the biggest mutual fund company. They
Speaker 1: stopped lending Bear ten billion dollars, you know, and this
Speaker 1: was money that Bear had just been rolling and rolling
Speaker 1: and rolling, right, It was basically a deposit. And then
Speaker 1: the same thing with Lehman. And the amazing thing about
Speaker 1: Lehman is it gets us back to Bruce Bent, the
Speaker 1: inventor of the Reserve Fund, the first money market mutual fund.
Speaker 1: Bruce Bent, this whole time, as money mark mutual funds
Speaker 1: are getting bigger and starting to a lend, starting to
Speaker 1: get these assets that are risk here, the whole time
Speaker 1: he has been complaining about the change in money market
Speaker 1: mutual funds. He keeps saying, you know, through the nineties
Speaker 1: into the odds, he keeps saying, money market mutual funds
Speaker 1: should not be buying commercial paper. The whole point is
Speaker 1: to bore you into a sound night's sleep, he loved
Speaker 1: to say. But in September of two thousand eight, when
Speaker 1: Lehman went bankrupt, low and behold Bruce Bence Reserve Fund,
Speaker 1: first money market mutual fund ever was holding Lehman paper amazing, too,
Speaker 1: too perfect of a narrative, right, too good to be true?
Speaker 1: Just going back, So Bruce band started this thing, the
Speaker 1: Reserve Fund. It's super boring the name, the reserve Fund. Yes,
Speaker 1: he actually wanted to call it the savings fund, and
Speaker 1: they wouldn't let him, so they picked another boring name.
Speaker 1: So you hear something called the Reserve Fund, you might
Speaker 1: even think it's like some sort of like Lasi official
Speaker 1: government and from a box full of gold guarded by
Speaker 1: US soldier for years, he just invested the absolute saves asset,
Speaker 1: short term government bonds that are free from default risk.
Speaker 1: The industry explodes because everybody likes being able to pick
Speaker 1: up these two extra pennies that they couldn't get in
Speaker 1: a typical checking account. Then other people realized that they
Speaker 1: could get a little more spread by buying slightly risk
Speaker 1: your assets, and that puts pressure on everyone to buy
Speaker 1: risk your assets. And then by two eight even Bruce
Speaker 1: bent owns Lehman paper. Yes, very well, very well done,
Speaker 1: A plus. So that's not good. And then uh, the
Speaker 1: next day the reserve fund breaks the buck. They say, oh, sorry,
Speaker 1: your money. That was a dollar. Your dollar, that was
Speaker 1: a dollar. It's actually not quite a dollar. So I
Speaker 1: remember that day, um, when reserved primary broke the book.
Speaker 1: That was such a massive, massive event in financial markets.
Speaker 1: And it sort of speaks to exactly what you were saying,
Speaker 1: which is this thing that everyone thought was safe in
Speaker 1: a place to store money suddenly is no longer safe
Speaker 1: in a place to store money. And it actually led
Speaker 1: to a bunch of um emergency steps from various authorities
Speaker 1: to try to to try to calm everything that was
Speaker 1: going on. Yeah, and I mean, Joe to your earlier
Speaker 1: point about you know, when does the thing become money
Speaker 1: when the reserve fund breaks the buck. Suddenly a deposit
Speaker 1: in a money market mutual fund becomes much less like money, right,
Speaker 1: even though it didn't go down much, you know, it
Speaker 1: was like, I don't know one percent or something of
Speaker 1: their assets. We're Lehman paper, right, So if it's like
Speaker 1: a normal mutual fund, your mutual fund goes down by
Speaker 1: one percent in a day. That's just like Tuesday, that's
Speaker 1: just a normal day, right. But the money nous of
Speaker 1: it is what made the breaking the bucks so catastrophic.
Speaker 1: I mean, there's there was this thing that happened hundreds
Speaker 1: of years before in England when they first had paper money.
Speaker 1: It was these goldsmith notes. And there's this moment when
Speaker 1: there's like the first bank run on these fractional reserve goldsmiths,
Speaker 1: and some guy at the British Treasury is like, these
Speaker 1: notes we had taken is now not money, right, which
Speaker 1: is like exactly what's happening when Bruce Bence Fund breaks
Speaker 1: the buck. And and afterwards a few days later, President
Speaker 1: Bush at the time gives this gives this speech at
Speaker 1: the White House where he talks about money market mutual
Speaker 1: funds and the government insures right then money market funds.
Speaker 1: So what the government is rushing to do at that
Speaker 1: moment is turn them back into money. Right. There's this
Speaker 1: chaotic few days Tracy that you're describing when it's like,
Speaker 1: oh my god, this thing that I thought was money
Speaker 1: is not money. The Government's like, okay, okay, tell you
Speaker 1: what we are going to put this inside the fence
Speaker 1: of stuff we call money. We are going to ensure.
Speaker 1: The U. S. Government is promising that if you already
Speaker 1: put in a dollar in her, you're going to get
Speaker 1: a dollar back. I really think, you know, there's like
Speaker 1: there's like an alchemy involved here, right, because no one,
Speaker 1: like if someone just lended to a subprime homeowner directly
Speaker 1: and you held the note or you held that loan,
Speaker 1: no one would think of that as money. Right. You think, Okay,
Speaker 1: this is a risky asset, there's some risk that I'm
Speaker 1: not going to get paid back, etcetera. Um, it's an asset.
Speaker 1: It's worth something, but who knows what it's really worth.
Speaker 1: I wouldn't really think of that as the money that
Speaker 1: I have. It characterized the sort of pre crisis period,
Speaker 1: I guess, was this alchemy where risky assets got turned
Speaker 1: into something backed by what people thought was money. Assets
Speaker 1: that were pegged one to one against the dollar, and
Speaker 1: that sort of assumed to have the same risk profile
Speaker 1: of the dollar, which is nothing. And so that moment
Speaker 1: when the Reserve fund broke the buck was essentially that
Speaker 1: realization that it was not really money that they had.
Speaker 1: That's right. I mean that alchemy that you're talking about
Speaker 1: is is like the most basic form of banking, right,
Speaker 1: you know, that's that's the whole sort of thing banks
Speaker 1: are doing, is turning relatively risky assets into riskless on
Speaker 1: demand money, and like that is fundamentally problematic at times, right,
Speaker 1: That's why we have financial crises. And you know, deposit
Speaker 1: insurance stabilized that alchemy inside the banking system. But then
Speaker 1: what happened sort of without anybody knowing it, or certainly
Speaker 1: without regulators knowing it, was that alchemy started happening outside
Speaker 1: that regulated stabilized fence and created the same instability we've
Speaker 1: seen for ever with banks. So everyone talks about the
Speaker 1: credit crunch sort of sparking the two financial crisis, but
Speaker 1: actually the argument here is that it was a collateral
Speaker 1: crunch within the shadow banking system, where everyone stopped trust
Speaker 1: sting the things that were underpinning all these loans or
Speaker 1: all these um different um alchemy transactions, and suddenly the
Speaker 1: thing that was supposed to be ultra safe wasn't thought
Speaker 1: of as safe anymore. The weird thing about all of this,
Speaker 1: and something that continues to amaze me, is that even
Speaker 1: though this has now been on regulators radar um for
Speaker 1: many many years, basically in all the time since the
Speaker 1: two thousands of financial crisis, everything is still kind of
Speaker 1: works the same, or I mean there happened. There have
Speaker 1: been some big changes, but there's still work to be
Speaker 1: done in this quarter of the market. Yeah, I mean,
Speaker 1: so after the crisis, some rules changed about some money
Speaker 1: market mutual funds. Prime money market mutual funds for institutional
Speaker 1: investors no longer have that fixed one dollar NAV. They
Speaker 1: float to the I don't know to many decimals now,
Speaker 1: So that's on, and there are certain rules about dating
Speaker 1: and liquidity fees like, but it is still the case
Speaker 1: that regular retail prime money market funds have that fixed
Speaker 1: one dollar NAV. You can still write checks on them.
Speaker 1: So yeah, I mean, I'm curious what you guys make
Speaker 1: of that. Frankly, I feel like, you know, I studied
Speaker 1: the history a lot. You guys probably follow the kind
Speaker 1: of contemporary regulatory industry discussions more than I do. Like,
Speaker 1: what do you think of this sort of state of
Speaker 1: play in terms of shadow banking and regulation? This is
Speaker 1: where I just like Tracy talk. I don't know, I
Speaker 1: feel really behind on the latest, But like in the
Speaker 1: repo market, I know they tried for so many years
Speaker 1: to do a massive reform of tri party repo specifically,
Speaker 1: and I just feel like it never really got um
Speaker 1: to a point where it made a significant difference, and
Speaker 1: we're still seeing the industry sort of ump to shipt
Speaker 1: on its own. So I don't know if you saw this,
Speaker 1: but last week UM Vanguard uh it's prime money market
Speaker 1: funds said it was going to transform into all government collateral. Basically, well,
Speaker 1: I guess if you're getting zero on if you're getting
Speaker 1: zero on everything else, right, zero backed by the government
Speaker 1: is better than zero not backed by the government. Yeah, exactly. Um,
Speaker 1: but it is interesting to see a lot of MMFs
Speaker 1: money market funds ought to do this on their own,
Speaker 1: and they're doing it basically because of market constraints rather
Speaker 1: than any regulation. But then the one sorry I'm going
Speaker 1: on a slight um rambling tangent here, but the one
Speaker 1: thing I wonder about is if if we strengthen the
Speaker 1: repo market and money market funds by having them all
Speaker 1: hold government collateral, then like obviously, anything that happens in
Speaker 1: the treasury market is going to be a big, big
Speaker 1: deal for the entire financial system, even more so than
Speaker 1: it would have been before. And we saw some shades
Speaker 1: of that in March with the COVID sparked crisis. You know,
Speaker 1: we did have a season up in the repo market.
Speaker 1: We have these leverage treasury trades that all blew up.
Speaker 1: So I just wonder, and we saw the FED react
Speaker 1: very very quickly because they know that this is a
Speaker 1: pain point or a pressure point or a vulnerability in
Speaker 1: the financial system. I just wonder if by building the
Speaker 1: entire system on collateral that's deemed ultra safe, if we're
Speaker 1: sort of setting ourselves up for another sudden experience where
Speaker 1: that collateral suddenly is no longer considered safe. But on
Speaker 1: the other hand, I cannot think of anything that that's
Speaker 1: safer than US treasury. So I don't know what the
Speaker 1: alternative would be. Yeah, it's hard. I mean, there's also
Speaker 1: the idea. There's the idea of a safe asset shortage, right,
Speaker 1: there's the idea that everybody wants safe assets. And you know,
Speaker 1: part of part of the sort of odds story is
Speaker 1: that the production of all this triple A rated debt
Speaker 1: that later we all were like, oh, why was the
Speaker 1: triple a? That there was a demand side, right, And
Speaker 1: part of the demand side was coming from what you're
Speaker 1: describing from people who wanted a very safe asset, and
Speaker 1: like there was so much demand for treasuries that people
Speaker 1: were like, Okay, I'll tell you what, here's a triple
Speaker 1: A bond basically as good as a treasury. So that's
Speaker 1: one problem that I just don't know what the answer
Speaker 1: to is. All there may be more deficit spending weirdly, right,
Speaker 1: I mean, the other thing I will say, they're interesting,
Speaker 1: like very big ideas here, right. I Mean, one of
Speaker 1: the fun things to me in writing the book is
Speaker 1: realizing that there are massive changes in you know, what
Speaker 1: money is in monetary regimes, and so presumably we're not
Speaker 1: at the end of that, right, things aren't going to
Speaker 1: stop changing, and so you know pretty clearly now the
Speaker 1: one like big money idea of people talk about is
Speaker 1: m M T, which is sort of in a different
Speaker 1: universe from this conversation. But there are lots of interesting, weird,
Speaker 1: big ideas that are more German here, right, Like there's
Speaker 1: this old idea that doesn't really, Tracy frankly solve the
Speaker 1: problem you're talking about. But there's this old idea, uh,
Speaker 1: the Chicago Plan that you guys probably know, which is
Speaker 1: basically I mean that is basically and even like you
Speaker 1: know Martin Wolf of the f T who was like
Speaker 1: super establishment, like very smart, but not at all like
Speaker 1: a radical, like he wrote this book a few years ago.
Speaker 1: I mean, their ideas are like, just just give up
Speaker 1: on banking, give up on fraction reserve banking, whether it's
Speaker 1: regular banks or shadow banks. Right, but even like John
Speaker 1: Cochrane of the Hoover Institution, who is very like, you know,
Speaker 1: these are not lefty ideas. John Cochrane is a very
Speaker 1: pro free market idea guy, but his his thing is like, look,
Speaker 1: there's just this fundamental problem with with Joe, what you
Speaker 1: referred to as alchemy, right with with you know, the
Speaker 1: creation of these safe assets that don't end up being
Speaker 1: safe with liquidity transformation, maturity transformation, and like we don't
Speaker 1: have to structure the world this way, right, I mean
Speaker 1: you could have uh bond funds essentially, like if you
Speaker 1: have money that you want to grow over time, you
Speaker 1: could invest in a bond fund and if the bonds
Speaker 1: pay off, you make money, and if they don't, you
Speaker 1: lose money. And then you could have just like a
Speaker 1: money warehouse that like where your paycheck gets deposited and
Speaker 1: where you do your payments and you would pay a
Speaker 1: little fee for that because it's a useful service, Like
Speaker 1: they don't have to go together, right, Like that's the
Speaker 1: fundamental thing, both in regular banking and shadow banking, and
Speaker 1: so lots of problems would come with that. But it's
Speaker 1: interesting to me to think that, like this whole universe
Speaker 1: we're in is just one option. Just going back to
Speaker 1: the Reserve Fund for a second, and you mentioned like
Speaker 1: basically the solution they came up with is do whatever
Speaker 1: you want, but don't peg the the share holders. It's
Speaker 1: not do whatever you want, it's I mean, there there
Speaker 1: are lots of rules about that. Don't treat it okay,
Speaker 1: right they they're there are rules, but stop stop pegging
Speaker 1: it to the dollar. And so it's essentially it's like
Speaker 1: you know, at the beginning, it's like the reserve Fund
Speaker 1: is a mutual fund that pretended to be a checking account,
Speaker 1: so to speak, and the solution was keep it as
Speaker 1: a mutual fund. Would just acknowledge that it's a mutual fund. Yeah,
Speaker 1: I think if you could really do that, incredibly, Uh,
Speaker 1: it would solve the problem. I don't believe that you can.
Speaker 1: I guess, like the question is if there's another financial
Speaker 1: crisis and another run on money market mutual funds? Will
Speaker 1: the government ensure them again? And I would bet yes, right,
Speaker 1: I would bet yes. Uh. You know, if the stock
Speaker 1: market drops, the government doesn't say, okay, we'll buy all
Speaker 1: your stock at a fixed price, like there's no everybody
Speaker 1: knows you can lose money in the stock market. I
Speaker 1: mean this spring, the FED immediately in March created facility
Speaker 1: for money market mutual funds, and you know appropriately, so
Speaker 1: to be clear, like the FED is the lender of
Speaker 1: last resort. But there again right, Like traditionally lender of
Speaker 1: last resort was what you get for being a bank, right,
Speaker 1: It's part of the trade off of like being super
Speaker 1: regulated and whatever, and one of the little goodies you
Speaker 1: get is lender of last resort. But now these shadow
Speaker 1: banks that are that don't have to put up with
Speaker 1: everything a regulated bank has to put up with also
Speaker 1: get lender of last resort. Although, to be fair, everybody
Speaker 1: gets it now, right, corporations, just industrial corporations get it.
Speaker 1: So whatever, should we leave it there or whatever? Yeah,
Speaker 1: it's actually the last word of my book, is it?
Speaker 1: Is it really the last word of your book? No?
Speaker 1: No it is not. But I do think that's a
Speaker 1: good I think I feel like with many kind of
Speaker 1: questions about finance and finance regulation, just like, so whatever
Speaker 1: is that actually a pretty good place end it there? So, Jacob,
Speaker 1: thank you so much for joining us. It was really fun. Cheerance, Jacob.
Speaker 1: That was great, Tracy, I really uh enjoyed Jacob's book.
Speaker 1: You know, it's weird, um, you know, in addition to
Speaker 1: him having beaten us at the punch on the Money Book,
Speaker 1: it's funny talking to a fellow podcast post because I
Speaker 1: kind of got intimidated because he's just like super smooth
Speaker 1: and very comfortable at this and I'm used to being
Speaker 1: the more comfortable talking one on that. I'm used to
Speaker 1: us being the more talking one, you know, to us
Speaker 1: being the more talkie ones on the podcast where we
Speaker 1: interview guests. Well, No, I just feel like he's like
Speaker 1: he's so sharp, you know, and he's so like he's
Speaker 1: so like it's like a difference of talking to someone
Speaker 1: who is a also does this for a living versus
Speaker 1: someone like in finance who's like not not typically a
Speaker 1: media person. I think he frames everything very very nicely.
Speaker 1: But you know what else I was thinking when he
Speaker 1: was basically, Basically, I'm saying that Jacob is like everything
Speaker 1: that we do that we should aspire. Yes, I agree
Speaker 1: with that, But I was thinking, you know, towards the end,
Speaker 1: when we were talking about how things can suddenly become
Speaker 1: money or can be considered money because of a sort
Speaker 1: of shift, I was thinking, and how the Federal Reserve
Speaker 1: doesn't guarantee stocks. Do you think, like everyone talks about
Speaker 1: the Central Bank put and the notion that if stocks
Speaker 1: go down enough and financial conditions tighten, that the Fed's
Speaker 1: going to come in and do something about it. I
Speaker 1: just I wonder. I wonder if stocks could ever be
Speaker 1: treated as pure money. Probably not, But I don't think
Speaker 1: they could ever be treated as like pure money. But
Speaker 1: I do think you're onto something important, which is that
Speaker 1: over time and as the bowl market continues, and as
Speaker 1: every dip turns out to be a buying opportunity, more
Speaker 1: and more people will look at their stock portfolios and
Speaker 1: think of that, you know, as money or as something
Speaker 1: that they can depend upon and not is an asset
Speaker 1: that is extremely historically risky, that could go to zero.
Speaker 1: And I do think it raises implications for all kinds
Speaker 1: of things about how fast the government can intervene how
Speaker 1: quickly uh sell Off will create a policy response, so well,
Speaker 1: it's never going to be like you know, the reserve fund,
Speaker 1: where the government steps in and literally guarantees a price.
Speaker 1: I don't think like the premise of the question is
Speaker 1: totally off the market in terms of people thinking of
Speaker 1: the stock market itself as kind of a you know,
Speaker 1: a policy asset, so to speak. Yeah, and making decisions
Speaker 1: based on the soundness of the money and the stock accounts. Yeah,
Speaker 1: that makes sense. And then I guess the other thing
Speaker 1: I was thinking about, and the reason we sort of
Speaker 1: dwelled on shadow banking and shadow money quite a lot,
Speaker 1: was that this did come up just a few months ago,
Speaker 1: and we did sort of see the ghosts of two
Speaker 1: thousand and eight resurrect themselves in March with trouble at
Speaker 1: money market funds, trouble in the repo market, and once
Speaker 1: again we saw the regulators come in very very quickly
Speaker 1: to solve those problems, knowing that they're huge, huge vulnerability
Speaker 1: in the system. And I guess I just wonder, it's
Speaker 1: been twelve years since two thousand eight, we didn't really
Speaker 1: get the massive repot reform that we were promised. I
Speaker 1: wonder if is going to give that Like I wonder
Speaker 1: will be enough to revive that that effort and maybe
Speaker 1: people will look at it again, or maybe everyone's so
Speaker 1: distracted by everything that's going on that don't just forget it. Yeah. Yeah.
Speaker 1: A few months ago, I was like, this crisis is
Speaker 1: really going to prompt from seriously thinking about X, Y,
Speaker 1: and Z, And now it's like everyone's distracted by a
Speaker 1: million other things, so I'm more skeptical about that. Well,
Speaker 1: one thing else I really liked about this episode, and
Speaker 1: I'm really glad we drilled down into shadow banking and
Speaker 1: it's connection to money is that over times this conversation
Speaker 1: about money can be a little abstract and disconnected or
Speaker 1: you really have to strain, I think, to see the relevance.
Speaker 1: But this is an area that a I mean, look,
Speaker 1: it's been part of like two recent blow ups, so
Speaker 1: to speak. But it also kind of like provides a
Speaker 1: roadmap for thinking about future crises and whether they're part
Speaker 1: of the shadow banking system or not. It's like, and
Speaker 1: you said you nailed it with your characterization of the
Speaker 1: stock market, It's like, what are the things that we
Speaker 1: think of as money now that may in a certain
Speaker 1: scenario may not be money or may not be worth
Speaker 1: you know, a dollar here is not actually a dollar,
Speaker 1: and starting to think about like what are where else?
Speaker 1: Is that that sort of sort of mental thing happening
Speaker 1: might be like a good general framework for thinking about
Speaker 1: where other vulnerabilities will eventually emerge. Yeah, I think that's
Speaker 1: exactly right. Okay, Um, shall we leave it there. Well,
Speaker 1: I was just gonna say one more thing related to that.
Speaker 1: And I remember like a few years ago, like what
Speaker 1: was it like end of when there was like a
Speaker 1: bunch of like energy debt that was blowing up and
Speaker 1: stuff like that and energy et. Yeah, there was a
Speaker 1: there's a smaller credit crisis or stress in the credit market,
Speaker 1: and I just remember thinking of the time it was like, yeah,
Speaker 1: it's bad. A lot of people are gonna lose a
Speaker 1: lot of money. But nobody thinks of like junk energy
Speaker 1: debt is money, Like it's a risky asset and it's understood.
Speaker 1: And I do think that that like framework is like
Speaker 1: do people think that the thing they're holding is money
Speaker 1: or do they sort of recognize like this is a
Speaker 1: very volatile asset. And that's sort of in my mental portfolio.
Speaker 1: Part of the risky stuff I hold sort of a again,
Speaker 1: like a useful indicator of like is this going to
Speaker 1: be a crisis or not? Yeah, Well, I don't know
Speaker 1: if people treated energy debt or you know, junk created
Speaker 1: debt like money, but there were certain there were certainly
Speaker 1: people who treated it more like money than others. And
Speaker 1: there's I think it was. It was Third Avenue, wasn't it.
Speaker 1: It was David Bars's fund that blew up, partially because
Speaker 1: they treated it as a more liquid asset than than
Speaker 1: it actually turned out, and it turned out. So yeah,
Speaker 1: now that's a good all right. This has been another
Speaker 1: episode of the All Thoughts Podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway. And I'm
Speaker 1: Joe Wisenthal. You can follow me at The Stalwart. You
Speaker 1: can follow our guest on Twitter, Jacob Goldstein. He's at
Speaker 1: Jacob Goldstein, also the co host of Planet Money, so
Speaker 1: check that out and check out his new book Money,
Speaker 1: The True Story of a Made Up Thing, And be
Speaker 1: sure to follow our producer on Twitter, Laura Carlston. She's
Speaker 1: at Laura M. Carlton. Follow the Bloomberg head of podcast,
Speaker 1: Francesca levi at Francesca Today and check out all of
Speaker 1: our podcasts under the handle at podcast. Thanks for listening
Speaker 1: to