Christopher Leonard - Author & Journalist

Welcome to The Puck, Venture Capital and Beyond, a show that explores the evolving landscape in the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Veer, the managing partner of Veer, Negron, and Troff, and the president of CMEG Advisors. This podcast brings change makers to the table to discover the inner workings behind their decision making strategies, and ultimately to how they got to where they are today. You can't have both at the same time.

You can't raise rates to fight inflation and have these risk assets stay at their same high price. To your question, does the Fed have the willpower to stomach the carnage in order to fight inflation? It's a huge question, and, obviously, nobody knows the answer right now. Welcome back to the POC. We have a very special episode for you today with journalist and author Christopher Leonard.

Chris is a business reporter whose work has appeared in The Washington Post, The Wall Street Journal, Fortune, and Bloomberg Businessweek. We sit down to discuss the inner workings of the Federal Reserve, the realities of quantitative easing, and his newly released book, The Lords of Easing Money, How the Federal Reserve Broke the American Economy. We had a lot to cover today, but before we jump into the substance of the book, you wanna share a little bit about your background? And maybe you can, in sharing your background, explain how that led to the idea for the book. Yeah.

You bet. So I'm a business reporter. I'm a print reporter. I got my start in the newspaper business back in 1999. So the end of the golden age, I guess, of newspapers.

And I've been kicking around the Midwest most of my career as a business reporter. I did a book about the meat industry and then a book about Koch Industries, the Koch Brothers company based in Wichita. And I lived out in DC for about ten years for work. And so as a business reporter, I take kind of the same position that you'd kind of think of as your typical government reporter covering whether it's city hall or the White House. I consider myself the outside auditor writing about powerful institutions on behalf of the public.

And I really feel like my main goal, my main job, is to kinda map out how the system works in a clear way and relate it to people so that they can make good decisions about how to live in this democracy. So that's my key job. This book really came about by accident, to be honest. I was working on my previous book about the Koch brothers, which, you know, one of the great privileges and joys of being a reporter is you get to meet all kinds of people. And so, I mean, I really was traveling all over the country, interviewing all kinds of people.

And one guy I interviewed was deeply involved in financial trading. Koch Industries actually has a pretty sophisticated, pretty large financial trading operation. And so this guy and I talked about Koch for a while, but then he really wanted to talk about what was going on in asset markets. And so this was back in June 2016. And this guy was telling me how he was seeing these elevated prices in assets from commercial real estate to stocks, to tech stocks, even corporate junk debt for fracking companies.

He started describing to me a mechanical way how the Federal Reserve Bank had engaged in this new kind of regime of managing our currency starting in about 2010 and how the Fed had really broken the graph of history. The headline that stuck with me from what this guy said was that between 2008 and 2014, the Fed printed three and a half times as much money as it had printed in its first century of existence. So that's like 300 years worth of money creation crammed into a few years. And I just thought this guy's gotta be off base or or I can't believe I don't understand this. And the minute I got home, I was ordering any books I could get, reading any articles I could get.

I started doing interviews, and that's I became obsessed with quantitative easing. This book came about because I wanted to describe what's happened over the last decade and what the Fed has done. As we get into the book, Chris, I know one of the components of the book was there was a gentleman on that Federal Reserve Board, this Thomas Honig. As your book evolved, how does Tom figure into the whole story? Yeah.

You know, that actually kinda happened pretty quick. So I started researching this decade of 2010 and now it's from 2010 to 2021, at least. Okay. This decade that was defined by extraordinary and experimental policies by the Fed. The first key component is that the Fed pinned interest rates at zero for about seven years.

Prior to this decade, interest rates had only kind of brushed up against zero for a very brief period. The Fed kept them pinned at zero for seven years, while at the same time doing that money printing I was talking about. And we'll get into it. Of course, they don't print money. The Mint runs the printing presses.

The Fed creates new dollars. So, Chris, when you say the Fed creates new dollars, I think I've heard you say that that's one of their or that is their superpower. Do you mind stopping for a second and just letting people know in broad terms what the Fed does? Yeah. That's key to this whole thing.

So the Fed has one superpower. It's the reason we created the central bank was we gave it the power to both create and manage our national currency. That thing we call a dollar is, in reality, a Federal Reserve note. And so the Fed's job is to create and manage the currency in a stable way so that it holds its value and it can be the lifeblood of a capitalist society. And the Fed creates money in a very specific way.

It creates it within the banking system. It creates the money on Wall Street. When the Fed creates a dollar, it doesn't just randomly create it in Chris Leonard's checking account or somewhere like that. There's a group of 24 specific institutions on Wall Street called primary dealers, and they literally have a license to be in this club of primary dealers. The Fed uses them as his vehicle to make money.

And here's how it works. The Fed will go to one of these primary dealers, let's say, JPMorgan. And the Fed says, hey. We would like to buy an asset from you, like treasury bills. Okay?

And so JPMorgan sells those bills to the Fed, and then the Fed says, hey. Look in your reserve account, your special banking account with the Fed. Look inside it. Boom. $8,000,000,000 just appears out of thin air.

That's how the Fed creates money. Of course, it's tightly intertwined with the actual printing of paper currency, you know, but that's printed by the US Mint. And most money is not paper currency. It's on this sort of digital ledger, if you will, inside the accounts of the primary dealers. And it was really starting in 2010 that the Fed says, okay, we're gonna increase our role.

We're gonna kind of increase our footprint. We're gonna become a key driver of American economic growth, and we're gonna do it by creating more money than we've ever done before. So I'm gonna use the term printing money because I feel like people get it. People understand that you're creating new dollars out of thin air, but in fact, it's like a digital transaction. And with quantitative easing, which is a program at the core of what we're talking about over the last decade, quantitative easing is what the Fed did alongside keeping interest rates at zero.

And with quantitative easing, what you're doing is going out to the primary dealers on Wall Street and buying 600,000,000,000 worth of treasury bills, for example. So you're pumping $600,000,000,000 worth of new cash into the Wall Street banking system with the express goal of incentivizing the banks to lend that money or buy assets however they can in hopes that it'll increase economic growth. Now you asked how I came across Tom Hoenig. I started reporting and and researching on this stuff. And in 2016, I realized or really, I hate to say, there wasn't any great journalism around quantitative easing.

It had been mentioned once or twice in some books. And the first mention of it that I saw mentioned that the vote to do this, to really engage in quantitative easing, was taken on 11/03/2010, and the vote was 11 against one. One person voted against it. So as a reporter, you're thinking, well, who's the one? What's the story there?

Why would one person oppose this? It wasn't three to eight. It was 11 to one. That's what got me on to Tom Hoenig because he was the one guy inside the Fed who tried to stop this and who was voting against it and and, frankly, who wasn't remembered very kindly by history for trying to stop it. So before we talk about stopping it or why we should stop it, so far, it sounds fantastic.

We've printed all this money. Stocks are higher than they've ever been. Unemployment's low. We've dodged the COVID bullet. Yeah.

We got a little inflation coming now. But, I mean, Chris, this sounds like it's been fantastic, and why should we be worried about it? I am stumped. Where do I start? Clearly, the subtitle of my book is How the Fed Broke the American Economy.

I don't think this is good policy. And I came into this only knowing that it was a big deal, that it was a step change in history. Again, three hundred years worth of money in four years makes you go, What's going on there? That's different. It was in the course of reporting this that I came to see that there is an acute downside to driving economic growth through this kind of program of hyper easy money.

I mean, easy money might mean low interest rates. Forget that. Throw that out the window. We're talking 0% interest rates coupled with $3,500,000,000,000 pumped directly into the banking system. Hyper easy money.

So what's the problem? Why not just print our way out of the economic malaise in which we found ourselves in 2010? Why not just print our way out of the bind we're in right now where growth is a little bit weak and we're recovering from COVID? I guess I'll make three key points. There are three key weaknesses with this program.

And interestingly, Tom Honig, this guy inside the Fed who dissented, pointed out all three when he dissented. I mentioned earlier, you know, Tom Hoenig was, I say, misremembered by history, but he was kinda remembered as being this sort of hard money, right wing crank who wanted to have high interest rates because he was an ultra hawk. None of that turned out to be true. This was a guy who'd been on the Fed for thirty two years. He'd been at the Fed.

He'd been on the top policy committee, the so called FOMC or Federal Open Markets Committee. He'd been on that committee since 1991. He had barely ever dissented. He voted with the gang the whole time. He voted for every single extraordinary bailout during 08/2009.

He broke with the Fed's leadership of chairman Ben Bernanke in 2010 for a specific reason. Because what Hahnig said at the time is, you know, if you do this, if you decide to go down this path of 0% interest rates and quantitative easing, you're gonna create three problems. The first is that you're gonna widen income inequality. Okay. He called that the so called allocative effect.

And it makes sense very simply. The way quantitative easing boosts economic growth is by driving up asset prices. Okay? The quantitative easing isn't driving growth by building bridges or building schools or educating workers or even putting shovels in somebody's hand. What it's doing is supercharging the banking system to buy assets, to loan more money, and drive growth that way.

Well, one percent of our population owns 40% of our assets. The bottom half of the population owns only 7% of the assets. And the Fed knew that the key way QE was gonna work was by driving up asset prices. So driving up asset prices necessarily increases the gap between the very rich and everybody else, not even rich and poor, just the very rich and all wage earners in the country. So this program drives income inequality.

That's one downside. Another downside is that when you stoke asset prices, it can become unsustainable. We call it an asset bubble. We have seen this movie time and time again with the Federal Reserve, even going back to the inflation of the seventies. When you have too many dollars chasing too few assets, the prices of those assets rise.

And then as those prices rise, people buy more because they see the prices arising. They don't wanna be left out. It creates a self fulfilling cycle of asset inflation. The Fed helped stoke asset bubbles in the .com market back in the nineties. Alan Greenspan was very categorically straightforward about the fact that they were pumping up the stock market that crashed.

During the February, the Fed pumped up an asset bubble in the housing market that crashed. And so then during the February, the Fed has pumped up more asset bubbles, and we're dealing with those effects today. That makes our economic system extremely fragile. And then the third and final problem with this kind of policy is it just creates massive, massive amounts of new debt. And again, debt can create economic fragility.

You don't totally avoid debt, but we've seen a record high run up in debt for households, corporations in particular, corporate debt and our government. So the problem with these easy money policies is that there are side effects and consequences of aggressive money printing. And I haven't even brought up price inflation, which inevitably, at the end of the day, you're gonna see price inflation, which creates a lot of economic volatility. We never saw price inflation over the last decade, which is really interesting, but we're seeing it now. Chris, let me see if I can follow this.

We all have been living in a world where commentators all over the place are talking about things like income inequality. Elizabeth Warren, Thomas Piketty from France, the nightly news. We know that large levels of debt is scary. We look at what's going on in China today. We know there's a lot of debt.

We know that in the history of bubbles, in terms of recorded history going back sixty years, when the gap between asset prices and income is over 500 or 550 to one, we have a major correction. I believe at the time of the housing crisis, it was, like, six fifty to one. It's now seven ninety five to one according to certain commentaries. So we're talking about the everything bubble right now. And, again, we refer to the huge levels of debt.

As you said, when you go out and try to study quantitative easing, there's not a lot about that. But now Thomas Honick, who was an expert on it, said these things could and would happen. It sounds like they now have happened. This sounds like the Pentagon Papers. This sounds like Watergate.

This sounds like the Gulf Of Tonkin. The whole world is in polarization. The whole world knows there's something that's not quite right. Haven't you essentially tied together many of the issues that keep us up at night, and said, here's what caused it? Okay.

Yeah. In a key way, of course, my previous book really looked at growing income inequality, and I looked at all these different factors, the death of labor unions in The United States, the power of corporate lobbyists to get tax loopholes, and all the rest of this stuff. I realized there is a key hole in that story, and it is the central bank. It's so interesting because this institution is just a conspiracy theorist's dream. You've got to love the Fed if you're into conspiracy theories for two reasons.

First of all, it's insulated from voters that operates in secret. Yes. The top policy committee transcribes their meetings. They release the transcripts after five years, but there's also a lot of one on one conversations between the chairman and the various governors. A lot of this stuff happens in secret.

And secondly, the power is simply overwhelming. You use that phrase, the everything bubble. It kind of drives you nuts when you really look at this and see how far reaching and sweeping the effects of policies like this can be. They really do affect the entire economy. And could I kinda get in the weeds for a second and describe one reason why we have an everything bubble?

I think this helps describe why this thing is so far reaching. Quantitative easing is specific in the mechanism of how that money goes into Wall Street. The Fed, for decades, has been buying very short term bonds. They used to do that to control the short term interest rates. It would buy, like, a two year Treasury bond or something.

But with quantitative easing, the Fed is very strategically targeting that long term government debt, the ten year treasury bond. That's what they're buying. Now, why? Well, the way I put it, and this is based on what the Fed talks about, that long term debt is like Wall Street's savings account. If you can earn 3 to 4 percent on a ten year treasury bill that's ultra safe, you'll keep money in there or securities tied to that.

It gives you a place to save. The Fed was intentionally pulling down those long term yield rates or compressing the yield curve, as they say, to induce more risky lending. I'd say it's kind of like squeezing the toothpaste out of the back of the tube. They're squeezing money from the future into the present. That's important because that money, which is desperately searching for yield, as they say on Wall Street.

Okay. It's looking for a place to live. The dollars want to live somewhere where they can earn a good return. And so when your long term yields drop, you're willing to look at a lot of different investments. Right?

If I can safely save my money for 4%, that changes how I look at these different things I could invest at. If I'm way down at like 1%, well, shoot, I'll invest in a lot of stuff to get yield. And so the money squeezes out into the economy to fund all of these assets that don't make sense in a world where you've got 4% rates. So that's why the money has pumped up asset prices just across industries, hence the everything nature of this everything bubble. So commercial mortgage backed security bonds, CMBS pumped up leveraged loans extended to wildly optimistic oil frackers in North Dakota and Texas.

The price of those goes up because people will pump their money into anything. When you do this for ten years, yes, you start to see these huge distortions across the economic landscape, and it can just seem gigantic. And, yes, to get back to your question, it really helps explain so much about what's going on in our economy. The homelessness problem in San Francisco, let's just look at that for one second. Housing prices are rising nationally by 18.8% right now.

There's no question that is directly 100% straight line tied to what the Fed is doing by keeping rates low and pumping money directly into the mortgage bond market. This thing, it can seem kind of wild eyed to talk about it in terms of the everything bubble. But what I hope I just illustrated is that when you're injecting money at this profound level of the economic system, by buying the long term treasury bills, by pushing 3,000,000,000,000 into the reserve accounts on Wall Street, you really do affect everything across the board. So as we're sitting here today, some people are saying the Fed is in a little bit of a vice because they're saying that we've got inflation, as you say, that's affecting the middle class now in terms of gas and food and other things. Not to say we haven't had inflation for health care, housing, and education, which is one reason I think there's all this crying out for forgiveness of student debt, which to me is treating the symptom and not the cause.

You've gone right in with Tom and found the cause. So we know what the cause is to these distortions. We know it's exacerbated, if I'm understanding this, income inequality, not the only thing that's caused it, but a contributing factor. Some people are predicting that the air of these bubbles is gonna start to come out. And if that's the case, the Fed would normally, right, print a lot of money.

What do you think is gonna happen with these bubbles right now, and what does Tom recommend we do at this point? That's such a great question. And, you know, you're reminding me, I started interviewing Tom in 2016. And interestingly, he had left the Federal Reserve at that point and gone to work at the FDIC, the top bank regulator in DC. And I was interviewing him.

He was vice chairman in the FDIC. And I remember sitting in his office at the FDIC. And again, this was 2016. He described it really well. He said, you've kept interest rates at zero for about seven years.

An entire global economic ecosystem has built up oriented around that zero rate. Okay? And it's become established. You can't move that rate back off of zero without creating ripple effects and frankly, some wrenching adjustments in the market. It's not gonna be easy.

It cannot be painless. It cannot be costless. And this was in 2016, mind you. Now that points back to the arguments Haneg was making in 2010, which is that, hey, the economic recovery is fragile. It's anemic.

Everybody knew it was gonna be because we just had a huge financial crisis. Let's let this economy slowly grow and keep the money cheap, but not hyper cheap. He was arguing that they ought to raise interest rates to maybe a half a percent and then point 75% and kind of gradually keep it that way because the longer you stoke these bubbles, the harder they fall. One of the most interesting time periods to me in the book was from 2016 to 2019 when the Fed itself, under Jay Powell and his predecessor Janet Yellen, they were trying to stop doing this stuff. They were trying to do the so called normalization where you get rates back to something close to a normal rate, and you stop doing quantitative easing, and you try to pull that excess cash out of the banking system that you put in.

Every time the Fed tried to normalize between 2016 and 2019, the markets began to react. You know, I described the toothpaste coming out of the tube. When you start allowing yields to rise again or when yields rise even outside of your control, it changes the risk calculus and everybody says, okay, I'm gonna pull my money as much as I can out of these risk assets. I'm gonna put them back into a safe high yield thing, and markets adjust downward. But every time that started to happen, there's no other way to put this than the Fed lost its nerve.

Particularly in January 2019. The Fed had tightened to the point where interest rates were at two and a half percent, still very low historically. The balance sheet was down a little bit under 4,000,000,000,000. Now mind you, it wasn't even 1,000,000,000,000 before the crash of o eight zero nine. So the Fed was starting to tighten a little bit.

And in in December 2018, we saw this scary synchronized downturn in all these markets, and Jay Powell said, no. We're done. We're not tightening anymore. I say all this to kinda get at your question of, is the Fed and the Vice? What do we do now?

Where are we? Well, we're at this point where you've got extraordinarily fragile, overpriced. I'll just say overpriced. Okay? Priced to perfection assets that are gonna have to face a downward adjustment in price if the Fed raises rates.

Okay. Now it's too bad we don't have ten years to sort of gradually raise these rates and normalize. This price inflation from COVID is changing the entire equation and it's forcing the Fed very quickly to tighten or normalize. And so we're finding ourselves in a terrible place, a terrible place. There's no easy way out of this.

I'm sorry to say. That's not like a an enticing sentiment, but we are not in a great place right now. I wanna go back and talk about a little bit what Tom warned about in 2010, but I do wanna, I think, make an observation, see if you agree with this. We, for all the best intentions in 2008, tried to dodge a depression by printing a bunch of money. And I think what you talked about in your book is that Tom Hoenig said, I'm going along with that till two thousand ten, but now there's a risk reward ratio, and there's much more risk of these asset bubbles coming about if we continue to do this.

But there was genuine concern in Europe and otherwise that if we stopped the easy money in 2010, we could fall back into a recession, and the Fed, because of the Tea Party and because of the political grid block, decided to on the side of doing something as opposed to doing nothing. What I hear you saying, Chris, is that ten years later, we're now in a situation where there is a price to be paid. There may be a recession. The recession could be longer and deeper than it otherwise had to be. It's finally taken price inflation to wake everybody up, but it sounds like one of the fires that you uncovered and that Tom was warning about is that insidiously, our system was gonna be continually undermined by the fact that the wealth gap was gonna continue to get greater and greater, that there has been inflation over the last ten years with college and health care and housing.

And even if we don't report that as measured inflation, it has affected the middle class in a material way, and then a lot of the anger and resentment and political polarization at least has been exacerbated by this cancer that no one seems to understand, and that you have uncovered. Is that an accurate assessment of where we are? Yes. And there's a lot to unpack there. But, you know, the first thing you make me think about is the middle part of the book is important, and I'm describing what I call the age of zerp.

And as you know, zerp is zero interest rate policy. It's kind of shorthand for these easy money policies of 0% interest plus quantitative easing. When you look at that decade, it was not an economically healthy decade. Yes. Asset prices broke new records.

I think the standard and poor's doubled in value during that decade. The corporate debt market rose from 6,000,000,000,000 and change to 10,000,000,000,000. Of course, those corporate debts and corporate bonds and leveraged loans were packaged into collateralized loans obligations. Fees generated on Wall Street hit a record high. Okay.

So hypercharged asset markets contrast that against general economic growth was very weak. It was very weak over the last decade, ballpark 2%, you know, depending on the year. Productivity growth was extremely weak during that decade. Wage growth was at best flat, depending on how you want to slice it with inflation. Wage growth was flat, following upon decades of flat wage growth.

So, what you've got here is a society where the rich are getting richer faster than they can handle it, which really is true what happened. There was more money than people knew what to do with in certain segments of the economy. But then you had this very, very large group of people, wage earners, who were falling behind, not even just standing still, but falling behind because wages were stagnating. Saving money in this era was a losing proposition because those interest rates were held so low. So pensions were punished.

Pension plans faced the search for yield and had to put their money into riskier investments, etcetera. Then alongside of the wage stagnation and the punishment for saving money is exactly what you described, which is this inflation in these markets that were inflated, even though we were told there's no such thing as inflation. The price of college, the price of health care, the price of a house. When you live in a society where you personally are working extremely hard, and if you're married to a spouse, both of you are working, you're finding it harder and harder and harder to afford the life your parents afforded, let alone moving past them. It creates a great deal of stress and tension and resentment in society that bubbles up in different ways.

And so I tried to do a quick portrait of the February, And I did it by profiling this corporation in the Midwest called Rexnord, which was making more money selling its junk debt and doing stock buybacks in the zerp environment than it was from making his products. And I show how, you know, they were taking on debt and selling junk debt and then laying off workers and closing a plant in Indiana and moving the production to Mexico. So, yes, this decade was very unhealthy economically, and I think that this is a key part of why it was. Barbara Tuchman wrote a book called The Guns of August, where she said that World War two was essentially just a continuation of World War one, and that because, again, people listen to Champlin, and they didn't listen to Churchill. It sounds like on one level that the two thousand and eight recession never really got fixed, meaning we didn't really fix the financial system.

We doubled down in terms of putting the economy on steroids. It sounds like you and Tom are a little Churchillian here. You're saying, hey, guys. There is a storm coming. It sounds like Tom knew about it back in 2010.

It's ironic because it sounds like the minutes are kept confidential for five years. You start uncovering this. You've now figured this story out. But if the storm is coming, how do we prepare for it? And what would Tom say we really need to do now?

So we can talk about this too. Again, one reason Tom was voting against this in 2010 is he had seen what happened in the seventies when he had rampant asset inflation coupled with price inflation. And so the storm, so to speak, that you mentioned, I would argue it has been here for a decade. This is the problem. The final chapter of the book is called The Long Crash.

And what I'm trying to say here is that first of all, the crash of eight, nine never ended. And you're exactly right. Let's say you're an extremely conservative person and you think that our government needs to slash regulations and slash taxes and heal the economy that way. Or let's say you're a hyper liberal person, and you feel like the government ought to increase regulation, break up monopolies, and support labor unions. Either one, we can all agree the government didn't do any of that after 08/2009.

Okay? Our democratic institutions are defined by paralysis and dysfunction. They can't move either direction, and that's a huge complicated issue that I can't explain. A good contrast is after the crash of twenty nine and the depression that continued through the early thirties, there was political consensus in the country, say what you will, that the Democrats controlled both houses of Congress and the White House, and they pushed through the New Deal. There was this coordinated response.

After 08/2009, we had dispute, lack of consensus, bitter fighting, and paralysis in our Democratic institutions. So, yeah, we did not address the core causes at all of the crash of o eight zero nine. And one key thing I'd like to say we never addressed was the structure of the banking system. Too big to fail got pushed into the lexicon by the crash of o eight zero nine. Those institutions are now bigger and less able to fail.

We didn't do a thing about it except pass this wildly complex set of rules called Dodd Frank that basically didn't do much except antagonize the bankers. I interviewed this guy, Robert Hetu, senior vice president at Credit Suisse, really smart guy. And God, he just hates Dodd Frank so much. But these rules didn't stop the massive increases in debt and push toward risk that we saw over the last decade. So the Democratic institution stepped back.

The Federal Reserve stepped forward, and it tried to drive growth by printing money, which never makes anybody too angry. You don't have to tax anybody to do it. It doesn't antagonize the big banks when you print money. It's the path of least resistance and very easy to do. No one really complains when the Fed chairman gets up there and says, hey, we're bringing interest rates back to zero.

It's a very popular thing to do. But the costs, the side effects, and the consequences have been building up for a decade. Simply no question about it. The current chairman of the Fed, Jay Powell, doesn't dispute it. He argued vehemently against this stuff when he first joined the Fed in 2012.

I mean, this all important question of like, okay, fine. What do we do now? Is a huge question. You know, the one thing is the path forward, the price tag is now extremely high. Again, if we were given seven to ten years to slowly, gradually wind down this extraordinary intervention.

Maybe it could happen smoothly. Unfortunately, with price inflation running at the hottest level since 1982, the Fed is going to be forced to act. Incidentally, I do need to quickly say what happened during the last decade is only half of it. These asset bubbles were increased. The Fed printed extraordinary amounts of money, and then the COVID crash was about to demolish that entire system.

The Fed responded by printing $3,000,000,000,000 right away, three hundred years worth of new money in about four months or so. Now the Fed balance sheet is, I think, at 9,000,000,000,000. We're very close and still growing every month. The intervention has only grown larger. The price tag of unwinding it has only grown larger.

And so there's no simple way forward. There's no simple way out of this. I mean, that's for sure. You know, what would Tom Honig say to do? He's a big fan of this idea that it is much smarter to try to move gradually because there are so called long and variable lags to Fed policy.

You know, you raise interest rates and don't really bleed out through the economy for a long time. But, again, with inflation being as high as it is, the Fed's gonna need to act. And you've been watching the markets the past couple days. Right? Absolutely.

Down 1,100, closes up a 100. I haven't looked to see what it did today. It was down 500, and then it was almost back to normal. People were trying to figure this all out. That period of 2016 to 2019 is so interesting because I said there's always a short term headline to describe these movements in the markets.

And when the fed was starting to normalize in 2018 particularly, they were pulling back the easy money. They were drawing down the excess cash on Wall Street, which incidentally, quick note, I said that the Fed creates money in these reserve accounts. Before the crash of two thousand eight, two thousand nine, there were no excess reserves on Wall Street. Excess reserve is every dollar you hold above your required level of reserve. Every bank has to have this required amount of money on hand in case things go south.

Excess reserves swelled from essentially 0 to $2,000,000,000,000 Tens of thousands of percent increase in this excess cash on Wall Street. And I really picture it in my brain as like nitroglycerin. It is like high powered money sitting there that the banks are literally paid not to use through interest that the Fed pays them. But, you know, when they want to, that money can go out into the economy and drive inflation even more. Anyway, I'm digressing.

In 2018, the Fed was trying to pull down those levels of excess reserves. It was trying to pull that cash out of the system. It was trying to raise interest rates, and the system was reacting negatively. Markets would start to fall. People would start to take their investments out of the risk investments, meaning like Chinese real estate companies, like ever grand that had been issuing dollar bonds.

That just make no sense. And it's a risky company and there's basically no rule of law around the stock. People start to pull their money out of stuff like that, and there's always a headline of the day to describe it. I remember, frankly, feeling kinda crazy in 2018 because the headline would be tech stocks drop today because Zuckerberg went up in front of Congress and had bad testimony. When you look at the tectonic factors driving this stuff, I think Zuckerberg's testimony was a tiny part of it.

It was the money shifting away from the risk assets. So today, when the Dow Jones falls a thousand and then jumps a thousand and a 100, you're the market guy. Isn't that like a 2,000 swing, or do you call that an 1,100 swing? Great question. I think it's an 1,100 swing.

Regardless, it's an amazing swing. Right. It's historic. It's historic, and I call it a 2,000 because the market walked 2,000 steps that day. Right.

To me, I'm not a market guy. I'm not a stock analyst. But as a guy sitting here watching, it seems pretty clear that a lot of investors said, oh, no, the Fed has to be serious. The Fed is going to hike rates and pull this money back. We need to react.

And then it falls. And then there's this secondary bet of saying, I bet the Fed's not gonna do it. I bet that they're gonna see this and do what they've always done, which is pivot away. And so then you've got this rush of people buying the dip. It's so fascinating to watch this tug of war happen in markets right now.

And I don't mean to short sell, so to speak. The tension in in Ukraine is serious and real. But to me, the obvious much larger factor is what the Fed is doing and what it's gonna mean for the risk equation. One of the reasons I do think your story in this book is so important to get out there in the current political climate is that we don't know what the Fed's gonna do. Right?

We know they really wanna get price inflation down from the middle class, but we also know they've lived with inflation for a lot of other things because there hasn't been the political will to really do this because we do know it's gonna be painful. And we're gonna have to put in our big boy pants and basically live through a correction. And whether or not they have to raise rates or not, or whether or not the air coming out of these bubbles is enough to cool inflation, none of us know. But it seems to me that if we don't get this story out there, if you don't get this story out there, what's gonna happen is they will continue to print money because the first trillion is always the hardest, but it will continue to exacerbate the income inequality and the levels of debt, and eventually, the American people will say enough. At some point, the Fed will lose the ability to do anything.

Is that of concern? Well, yeah. It's a deep concern. And one of the most interesting things to write about was the great inflation of the nineteen seventies, which I don't think we talk about enough. I was fascinated to read about it.

And, you know, we remember the long lines of the cars at the gas station, and people having to update the price tags on meat at the grocery store literally daily or within the day. A key thing going on there in the seventies was that the Fed had kept interest rates too low for too long in the late sixties. And that's what created what they call demand pull. And I'm basing a lot of this on the Fed's own studies looking back. It's so interesting.

There was a study in 2004 in which the Fed essentially took a Fed economist at least pinned the blame on the Fed. He called it monetary policy neglect. And what he meant by that was that in the sixties, the Fed saw that its low rates were causing inflation. So it would start to raise rates, but then markets would fall. They would lose their nerve, pull rates back down.

And that tango went on for a few years until then price inflation raged out of control. It became a self fulfilling cycle. And as Paul Volcker later said, price inflation is cousins with asset inflation. They go hand in hand. You know, we had this dual inflation of asset markets being superheated and prices being superheated, and nothing ended it until Paul Volcker doubled interest rates to about 20% and killed it and created massive damage to the economy.

Terrible, terrible time. You don't wanna let things get that out of control. The reason I'm bringing that up is today, it's this huge question. Can the Fed stomach a drop in asset prices and carnage in certain asset markets that will be big. A stock market crash back in 2020 in March, the credit the the corporate debt market began to collapse in a housing market style collapse.

It was on the front page of The New York Times. These collateralized loan obligations were about to fall like a house of cards, and the Fed stopped it by not just pumping money into the banking system, but directly purchasing corporate junk debt for the first time ever, for directly purchasing securitized forms of corporate junk debt, the so called CLO. The Fed stepped in and stopped the collapse. But you can't have both at the same time. You can't raise rates to fight inflation and have these risk assets stay stay at their same high price.

To your question, does the Fed have the willpower to stomach the carnage in order to fight inflation? It's a huge question, and obviously, nobody knows the answer right now. That's why in my mind, you see the seesaw tug of war whiplash in the markets. Everybody's trying to figure out if the Fed has the nerve to do it. And to be totally clear, I'm not a guy who would be a proponent of raising rates on some, like, moral concern.

The thought of another financial market crash makes me nauseous with anxiety for the reason you just point out. The American population cannot keep taking these massive economic shocks. They can't take it sitting down. I describe it as like having these hundred year floods of increasing, you know, once every ten years, once every five years now. We had o eight.

We had twenty twenty. We have what's going on now. It's a great concern. And, again, this is one of the big problems with this kind of easy money program is it it makes our financial systems much more fragile and volatile, and that's just not good. We see where the world has gone because of this, quote, easy money, and we know that there is a crossroads coming.

The Fed could double down again. When these bubbles go down, they could wanna throw more money at it. It seems to me if that happens, inflation will only get worse, not better. And I think one of the things that's important in terms of informing the American people is that they really do need to watch true inflation. It's not just whether or not cars go up in the short run.

Because of globalization, we have been able to keep a lot of things down in cost because we've outsourced that labor or because of automation. But the reality is we're not building twice as many new colleges. We're not building twice as many new houses. We don't have twice as many doctors coming out. MMT says, hey, modern economic theory, we can just keep printing money.

Well, the money's gotta go somewhere. You're gonna have winners and losers. And sure, if you could balance it perfectly and give the middle class the money and take it away from the upper class, that's one way to do it. I think people need to understand that all this easy money has gone somewhere. If you stop it, there's gonna be consequences.

And then the question is, how do you fix the banking system? What kind of laws do you actually pass that should have been passed in 2008 that weren't? And how do we, as adults, face this together? Yeah. That's key.

And again, as a reporter, I was really wanting to put between two covers in a quick, easy way to read this sort of body of fact so that there can be this recognition of, okay, this is why we're seeing this crazy volatility and a stock market crash right now. So we can deal with it, hope against hope in, like, a sober and rational way instead of this red versus blue who's in charge. It really frustrates me that, okay, the problems we're talking about now are tectonic is how I describe them. This Fed policy has been going at least I mean, I would argue it was happening under George w Bush. So George w Bush, Barack Obama, Donald Trump, Joe Biden.

This thing is going on beneath all of them, but we only see the eruptions. I think we don't interpret it that well. And so, yeah, I would like to describe in a concrete clear way why the price tag has risen so high from these policies and why it's going to cost so much to get out of them and why we need to get out of them. You know, life would be great if you could just print money endlessly with no consequence. First of all, everybody would be doing it if it was the way to get prosperity.

And you could argue, well, okay, we understand a nation can't just print money to boost prosperity that leads to inflation and negative consequences. But The United States is different because we're the global reserve currency and we are immune from gravity and we can do whatever we want. That's testing a very dangerous theory because there is a red line that you cross when the appetite for United States debt kinda hits a limit, and you have to pay more interest to entice people to loan you money. And that means interest rates start to climb on our debt, which would not be good. And then there can be a point where people lose faith in the currency, and you have runaway inflation, which is also just not good.

Now where's that red line? Is it five years away, forty years away, five months away? We don't know where that red line is of how far can you drive this system of just printing money and taking on debt, but we don't wanna find that red line. We wanna stay very far away from it. So it's better to be prudent sooner rather than later.

Chris, I think I have one final question. I could do this all day, but in terms of for our listeners, first of all, they've gotta read your book, number one. But I wanna also not throw the baby out with the bathwater. When I look back to 2008 and what the Fed did, you know that Bernanke was a student of history and worried about a depression. Germany had crazy inflation in the twenties, thirties.

We had a depression. And I think Bernanke was really worried about a depression. Keynesian economics, baby. Let's step into the void, not do what Mellon did with Hoover. Let let's do this right.

And I think that the Fed shouldn't be criticized for that. I understand it wasn't necessarily something that everyone thought. But then in 2010, something switched. My final question to you is, where did the Fed go wrong? Because we need these institutions as a country.

We need our Supreme Court. We need our Congress. We need our federal reserve. So I don't wanna just leave our audience thinking the federal reserve screwed up everything and they can't be trusted. They made a bad decision in 2010.

Can you explain what did they do right, and then kind of where did they make a wrong turn? Such a great question. And I agree with you a thousand percent. My argument is not end the Fed, which, boy, that argument is raging on Twitter right now. That's not the camp I'm in respectfully.

A central bank is a good idea. It needs to be managed well. I wanna draw a very clear distinction between the crisis of two thousand eight, two thousand nine. Of course, the Fed should have stepped in. The Fed was built to be the lender of last resort.

You don't let a panic like that burn itself out because that creates so much damage and can extend the downturn. There's simply no question that the Fed needed to step in and solve problems during the emergency and lend to the banks as the lender of last resort. But that's o eight zero nine. As you point out, this book starts 11/03/2010, when the economy is slowly, unsatisfactorily climbing out of the hole. Weak growth, but growth.

And when you look at the debates inside the FOMC at that time, it's clear they did not think the economy was heading back into a recession. They didn't think that's what was happening. It was just that growth wasn't strong enough. And frankly, I think Bernanke wanted to be seen as doing something. To give him the benefit of the doubt, he also had real concerns that if we allowed the weak growth to continue, it might fall off, but we weren't there yet.

And then you have to consider, if we feel the need to act heroically, what shall we do is a question. And I would kind of argue that quantitative easing and 0% interest rates isn't necessarily Keynesian. Now there's a guy named Zack Carter who wrote the biography of Keynes. He's extremely bright guy. He'd probably disagree with me.

He knows Keynes better than I do. But the theory of Keynes is that the federal government can step in and provide demand when the private sector doesn't. That's different. The federal government borrowing money to hire people to build camps and dig ditches and build dams and bridges is extremely different from printing $3,000,000,000,000 in the reserve accounts on Wall Street and pushing them to buy collateralized loan obligations. These are two different models of economic growth.

And I argue it was a wrong turn that they knew they were taking in 2010. In other words, they knew that that was the path that it was gonna be was stoking asset prices. And so your question is, if you don't wanna throw the baby out with the bathwater, an analogy I draw, and I don't wanna overstate it, but, you know, we just had a disastrous military campaign in Afghanistan. Nobody argues we should get rid of the United States army or military. It's not a thing.

And yet it is worthwhile to kinda do an autopsy and look back and say, where did we go wrong? And it's so interesting to me, and this makes a terrible bumper sticker politically. But when you look at whether it's the quagmire in Afghanistan or this money printing regime of the Fed, what was required at the beginning was a sense of restraint. The Fed could have taken a beat and shown some restraint. It kept interest rates very close to zero and maybe gradually hiked them to point two five or point five extraordinarily low rates and let the economy catch up to that and adjust.

Instead of saying, well, we're gonna take center stage and be heroic and do this literally unprecedented experiment in money printing. I had a change of heart on this whole thing when I looked at the argument to do quantitative easing three or QE infinity in 2012. I call the chapter about that quantitative quagmire. In my opinion, as a reporter, I don't think these are, you know, people who just had their back up against the wall and made a terrible choice. They knew that these programs weren't working well.

They knew that they were gonna get very small short term gains, and they were piling up long term risks. But they did it anyway. And I think it was to have the appearance of action and then point to what we can do. I got to say that effort was defined by hubris in in a lot of ways and short term thinking. So, you know, of course, we should not throw the Fed out.

You've gotta have a central bank and a national currency is my personal opinion. The unfortunately, we've created a system where we don't have the gold standard to restrain us. We don't have the algorithm of Bitcoin. It's human wisdom in the committee, and that's what we have to impose restraint on this system. Well, Chris, again, I thank you so so much for your time today and your wisdom.

I do hope everyone reads the book. And I will also say as an optimist, but also as a realist, I think just like we've seen that in trying to stop nine eleven, we realized that the institutions needed to talk to each other. Yes. And I think what you're shedding a light on here is it our government is a team sport. We have checks and balances.

We have different parts of the government. But when they're all blaming each other and they're not working in a coordinated fashion, I love what you said about gains in economics. We know we have challenges. If the congress would play their fair share, if the fed would play their fair share, and if the American people would get to the point where not ask what your country can do for you, but ask what you can do for your country. If we all could somehow use your book as a way to realize that we all have to start playing better and working together.

I think we can solve these issues, but we have to do it as a team sport. Oh, I mean, I agree with you, and I also would throw down that it's like a necessity. Yep. Because there's no other way to get there. I I think you've stumbled on something that's historic.

Yeah. Thank you, Chris, very, very much. Yeah. You bet. The Puck Venture Capital Beyond is produced by CMEG Advisors.

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