Danielle DiMartino Booth on What’s Wrong With the Fed

acquaintances who shall go nameless. And I brought her on the show this week to talk about her book fed Up, as well as to discuss and debate economic policy, the Fed, the markets, and honestly, I had way too much fun. If it sounds like we're arguing, it's because we just know each other too well and it's practically shorthand. So if you're at all interested in everything from the Federal Reserve to REPO markets to Alan Greenspan, you're gonna find

this to be an absolutely fascinating conversation. So, with no further ado, my discussion with Danielle de Mark, you know both. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Danielle Di Martino Booth. She is the CEO and chief strategist of Quill Intelligence, a research and analytics firms, where she authors commentary with

actually fairly rabid following. Previously, she served nine years at the Federal Reserve Bank of Dallas, where she was chief advisor and Wall Street liaison to President Richard Fisher. She is the author of fed Up, an insider's taken on why the Federal Reserve is bad for America. As well as somebody I've known for ten years in a decade, Danielle di Martino. Welcome to Bloomberg. It's awesome to be here.

So you and I have known each other for a long time, and it's weird asking you questions that I asked you a decade ago. But for the sake of the audience, I'm gonna pretend we hardly know each other and start with so, Danielle, how did you begin your career on Woolf Street. Well, it was something of a secuitous route. I was born to be a writer. I was accepted at the n y U scholars Program. I was going to travel, I was going to be an esteemed very poor journalist. And my covering what what sort

of things interested you? In your my forte when I was younger with sportswriting real things. People would never guess about me. Put that right up there at the top, the huge fan of sports and cars. But anyways, my parents ended up splitting up around then. My father told me that he hadn't paid his taxes for the better part of the last decade, and good luck with the financial scholarship financial aid that I needed for the other half that wasn't covered by this great big scholarship to

go to n Y You. So I found myself at San Antonio College. So I am the product of a community college where I started. I went off to the local University of Texas, moved my way up after a few years, became the collar business scholar. Just study, study, study. That was all that I could do to to figure out how to get back to where I thought I was starting when I was getting out of high school and my misremembering, didn't you get an NBA from the

University of Boston, got very very respected school. I've got my NBA and finance there the year that E. D. S actually opened up a trading floor. One of my great mentors, Dr Keith, He's the person I literally earmark money to the finance department, even though he made me. He made me pull apart the black shoals and then showed me how to put it on my calculator. It took me a few years really to forgive him for that.

But in any event, so so wait, when you say e d S, you're talking Russ Perro's electronic data system. That there was way back inside the business school. We had our own trading floor, and we had our own fund and it was fun, and I mean it was actual money. Oh god, what's more fun than being a trader in the eighties? Come on, well, when you're in your early twenties and coming sure, so how do you end up going from there to Credit Swiss and d LJ.

Some guy at Solomon Brothers came to one of these informational interview type things on campus, and what do you had to say was stand up? Pretty interesting to me, said come on up any time you like. I said, how's next week worked for you? So that's I looked out on the Solomon Brothers trading floor, which was two

stories tall, started at Sally No. No, that was the first time I've ever seen anything on Wall Street anything, And I looked out and there were probably like four guys and like three girls, and that was it, and I went to look at the ratio. That's really interesting for two reasons. One is I had a similar experience very very early in my career. You wanted to become interviewing at the Merrill Lynch trading floor, which was a football field, but it was the same ratio. All white dudes. Yeah,

oh yeah, absolutely. You know what, it's the first and last time in my entire life, I've had credit card debt, first and last time when you moved to the city, banging on doors on wall streets, Lehman Brothers, Goldman, Sachs, Morgan, Stanley, bear Sterns, you name it, dodge a few bullets in that list. Hey, look, Arthur Anderson wanted to keep me after business school and fast tracked me to becoming, you know, an auditor and and then become a strategist of some kind.

And they were working with this big company in Houston called I'm like, and my mom's like, you'd be staying in Texas, honey, And I'm like, i am so out of here. She's like, d l J d l J. What is that? Like? A transportation company? I'm like, no, mother, it's not DHL, it's d l J. And when that was your first gig out of business school, that was my first kid got out of business school. It was the best place to work. I mean, the entire firm

at first Christmas year fit in the rainbow room. Crazy stuff went on back, so that before all divisions, that was pre purchase right, oh way, prepurchase way way way. And when did they get bought? Tony James and his infinite wisdom saw the peak and sold the firm at the very top of the bubble. This was like, oh, I mean credit see just finished writing off a few billion extra dollars from the deal J purchase recently. Oh yeah, you know, No, No, I mean, I mean they wrote

off billions of dollars for years. So what did you do at d l J. I sold all kinds of things to all kinds of people, bonds, equities, contact, what I did. I did share buy backs. I did a lot of debt retirement, working with the former Drexel boys who dlj's junk bond desk had absorbed. They were so mischievous, that's the nicest word I can come up with. But I had mutual fund companies, I had some high net worth investors, but it was really the debt retirement, the

junk bond, the private equity. I mean, like I said, Tony James sold the firm and then obviously he went on too Blackstone in a great career. But Leon black walk the halls. I mean, DLJ had a beautiful merchant bank before private equity was a thing. So how do you do the transition from the bleeding edge of capitalism to I know, I'll go in the house of the

government and work for the Fed. Well, okay, so the Swiss were not near as much fun as d l J. By the way, overseas investors always to top tick the market or bottom ticket if they're sellers, so not a surprise. How long did you stay with Credit Swiss? For eighteen

whole long months? And so that gets us to around And by the way, I was getting my second masters at the time, because I you know, I'm Italian, I hold a grudge, so I but instead of n y U, I went to Columbia, the best journalism school at night and got my second degree in journalism. Finally finally got my lifetime dream. I never knew that about you, who was the dean while you were there. Gosh, now you

got me because it was only there. He was only there for one year and then he left, but it was now He's one of the most transformative moments of my life. Was I graduated in December of oh one. Was not being able to go to work on Wall Street after nine eleven, but having to report to campus the next day Wednesday. Well it's the other direction. So but being in journalism school on nine eleven, and I mean I was the oldest, you know, part time student

they'd ever seen. You were also on an institutional trading desk when the dot com moms were imploding. What was that experience? Like? Well, so you know it was really it was the Enron experience and the dyna gy and all of the You could tell that these were shady deals. It's like, why do you keep your end on price target at forty Stock hadn't done anything in forever. I mean, you know, one analyst is raking away. You know, a couple of million dollars per debt deals to be done,

So we're going to keep our price target high. Look that's where we are. Oh wait today, So but but the Enron and the dynages of the world kind of set us up for recognizing the Internet bubble when it was staring you in the face. So what led you to the move from the bleeding edge of capitalism to going in house at the Dallas Federal Reserve? So that was eleven. Nine eleven was a big turning point for

me personally. Uh, shortly thereafter a few weeks after nine eleven, I met my current husband and we started long distance dating between Dallas, Texas, and New York. And when the time came, I said, well, just move on up here to Manhattan. And he said, you go out six nights a week and think it's normal. So that was that. I ended up moving to Dallas. I signed a non compete and agreed to leave the industry. I called the publisher of the Dallas Morning News and I said, I'll

work for free. I'm retired. They just credit see wrote me a big check to leave, and basically the book went to the junk bond test um. So I, you know, I tootled away with a you know that's right. You were you know, did you have me Bill Diner over there? And I did, Yes. I was rarely in the newsroom per se because I kind of walked in and wrote my own rules because I could. You don't need a salary, you don't want to like, I'm working for free. Here

here's what I'm doing. But within within a few months, I actually was the first daily columnist that they've ever had in the history of the paper. So I was writing a daily about the markets. And I was just as happy as happy to impassibly be quite fascinating. So you finally have your dream job in journalism, working at what's the paper in Dallas? Dallas Morning News, Dallas Morning News? And what has you leave? A job you had always wanted to go into? This crazy semi government told the FED.

So I start writing about things that had bothered me on Wall Street, like the first c d O, for example, that was sold at Credit Sweets. I'm like, would buy that equity tronch? But this is a one oh two. Oh, that's a good equity tronch. Did you see the vig attached to that had some fat commissions? Yeah, exactly. But I started wondering about these things. I started writing about the national debt, got the attention of Warren Buffett, so he invited me out to oh Maha. Actually spent a

lot more time with Charlie Munger at azing. He basically said that the efficient Frontier is going to go the way the Dodo bird, the pension advisory industry doesn't change its ways, and the Federal Reserve continues to be overly intrusive. I just condensed the thirty minute conversation that I had with him. But he's right, and he's getting right er every day, and he might not live to see the change,

but he is right. I would push back and say, so far he's been completely wrong because all the bad things that people have predicted about that have yet to come true, well, they've definitely yet to come true. But what he said was it might not happen in my lifetime. So that's not saying exactly he's he's but but I don't think that he saw passive coming in the way that it's come. When Passive Investing and J Powell walk into a bar, it's a beautiful thing. You don't fight him,

You let them run hand in hand. I don't want to get off on something. We'll talk about that more because it's a fascinating topic. It is how did you end up at the Dallas fit? So I started working some with Jonas, and he was working on Goldman's Economist, but he was just a rookie back then, and he was doing a lot of great work on what Alan

Greenspan had been working on mortgage actively withdrawal. So I started writing intensely about the housing crisis, and at one point the publisher was like, do you know what systemic risk is? And I'm like, actually I do. He's like, you're saying that this is going to be global and systemic in nature. This is oh five, and he's like, you're nuts. And if you looked in the right place, there was an overwhelming amount of data, but if you looked in the usual place, everything was absent. Who knew

what a German lands bank was? I didn't know until Lateman blew up. In any event, I did get a call one day from Richard Fisher, and he took me to lunch and said, look, you're you're you're wasting your talent. You should beat the Wall Street Journal, the economists. What are you doing here in Dallas, Texas? And I'm like, if you couldn't tell him, I do have my shoes on, but I'm very pregnant. In any event, within a few months he asked me to come join and the FED

and what was your title? Oh gosh. I started off as like, you know, a dishwashers as a writer in the research not a research assistant. I came in as somebody to help with his speech writing. Okay, so you were an aide to the president of the Dallas FED. And it evolved into the more he got his sea legs and realized that the New York Fed markets intelligence, which you're kind of obligated to take if you're running a district. The New York Fed Markets Desk conducts intelligence

with the broker dealer community. It's actually an inc on their website. So, as jo Q president, whether it be Minneapolis or Cleveland or Dallas, Texas, you're sister, take all of your market intelligence from the New York Markets Desk, which kind of reads like cell side research, which Richard figured out really quickly because economics neither of mine. We're

both nbas and financial. So let's talk about something you sort of snuck in there, which is until he got his sea legs, because I was one of several people pretty critical of him in the early days, and I want to throw some stuff at you and have you either defend him or we're not. June two thousand and five, Richard Fisher told CNBC, we are clearly in the eighth inning of a tightening cycle, and we have the ninth inning coming up at the end of June. Lots of

people began calling him a thanning Fisher. I'll take a little uh blame for that as as well. Why did he think that we were so far along in the tightening cycle when it was clear green Span had a different agenda. Green Span did have a different agenda, There was nothing macro prudential going on. Green Span at the time said that because the FED only technically regulated of mortgage lending in America, that's the only thing that the

FED was responsible for policing. There were a few other people inside the institution who were of a different opinion, because in the event that there was a falling knife and something went wrong with this supreme explosion, the FED might be catching the entire falling knife before we even get to the subprime issue, which I think you and I are very much an agreement of oh five. We had already seen gold takeoff, we had seen inflation take off.

Oil was probably halfway on its way to one fifty milk, beef, food stuffs, everything was moving up. It was pretty clear that there was a lot of inflation in the system even as the dollar got weaker and weaker and weaker. So that's the question is was he just a little green and naive or did he simply not see what I described as rampant inflation everywhere except the statistics. I think he saw the inflation, but I think more importantly

what he saw too early on. And this is a lesson I think a lot of people who have been inside the FED and lived to tell learn it's that easy monetary policy can elongate any cycle, for sure, any cycle. And right now we're in the longest elongation. So even when the longest elongation and the longest elongation, it's been lower for longer than it ever has. That's going to

be my first tattoo. That's pretty That's pretty interesting. So was he just unaware of how they thought that because he had Wall Street contacts, and because he was speaking to hedge funds, and because he knew that there was a d LTV toxic garbage that was trading hands, that surely this had to give. Well, it had some more gas in the tank, before it a whole lot more.

So let me give you another question, another quote. We're going to fast forward to two thousand and eight, and bear in mind we didn't always agree with each other. I know that about you generally, but knowing your economic world forew and your politics, I could see you respectfully disagreeing with them and then getting to say I told you so afterwards in a very polite different verbiage. If you're listening, I'm still waiting for the opportunity. So two

thousand and eight, the crisis is expanding. There's an FOMC meeting in June and then another one in August. The Fed had left rates at two percent. At both meetings there was one dissenter one Richard Fish, president of the Dallas Fed. The sole dissentier was Richard Fisher, who had both meanings quote preferred an increase in the target for the federal funds rate unquote. This is in the middle

of two What was he smoking again? He is much more of an inflation boogeyman Wymar Republic, speaks fluent German, gives speeches in Germany and German. He's much more of that generation than I am. I've learned from Lacey Hunt that the more debt you create, as long as that debt is going to be absorbed by whatever the system is,

because you've got reserve currency status. The only thing that that incremental dollar of debt is going to potentially create a deflation because you're taking away money that you would otherwise spend on something else in order to service the debt. So there's always going to be a deflationary impetus if you're allowed to grow your debt two levels that Richard would have thought would have created hyper inflation. That makes sense.

You have a giant mon terry activity should be somewhat deflationary versus a giant fiscal activity which should be more inflationary. And I was also of the opinion at the time. Again, he and I were not, and you know we're an agreement on a two percent floor. I'll say that out right, yes, period, forever and ever. I think that we had we stopped at two percent, we would have a much different world today than we do. I wouldn't disagree with you at all.

It was it was liquidity. It was the alphabet soup of god knows what acronyms that I was involved in helped the New York Markets desk set up for the asset back securities market, and you name the market. It was liquidity that was frozen. The price of credit was meaningless at the time to any investment. That nobody was extending credit at any price it was. It was a function of everything being frozen and unavailable, not expensive. We did not have to go to the zero bound. So

so here's the here's the big question. Right, You've been a pretty big FED critic for a long time. I think you and I both agree the there's some overlap. I think the FEDS ultra low rates and I wrote this embail nation is one of many causes of the financial crisis. I think you put more weight on that. Uh and fed up you really say that is where it all begins and ends. Here's what we disagree, and

this is what I'm fascinated about. As much as I give them an F for all their actions leading up to the crisis, I give them a B plus following the crisis. What sort of ranking would you give them? By the way, that's just during an immediately after normalizing rates over the past decade. I think they're way behind

the curve. But we'll come back to that, how would you grade the FED for their response immediately to the crisis in let's call it oh eight oh nine, and even I would probably give them not an F but I would probably give them a C minus for adhering to the Bernanke doctrine which was agreed upon at Jackson Hole in two thousand seven with a very small group of f o MC members, by the way, which was kind of against the rules um but in that meeting

it was decided that a precondition to growing the balance sheet, if the time came right, this is August of oh seven, if the time markets still haven't even made their high, which doesn't show up till October seven exactly, so, if it came to pass that they needed to start growing the balance sheet, quantitative easing, heading to Japan, whatever you want to call it, the Bernanke doctrine dictated the interest

rates must go to the zero bound first. That's that's why I given the C minus as opposed to be as opposed to stopping at had they stopped at two, I would have given them a B plus because of all, because of the Pandora's box that was opened by going to the zero bound. In later years, So here's where I think you and I will find more common ounds post. Let's just call it eleven through. I've been waiting for

them to normalize rates. And I know some people think this is the quote greatest economy ever, But why if this is such a good economy, haven't rates returned to a more normal level instead of what's still incredibly accommodative. And I know we could blame where's the thirty year? The ten years? Like one five the day before we recorded this, So you could blame the bond market, but really, shouldn't the Fed have been further along the normalization process

and off emergency footing? Or am I just crazy? Look? Kiri two and Que three were outright mistakes in my opinion. Would we have suffered a mild and shallow recession? It's impossible to look in any rear view mirror, But we knew at the time that we were creating zombies. I wrote zombie banks to zombie people. No, No, well we and I mean I mean like politicians and others, the saving of zombie banks, that's different. I'm talking about giving

birth to zombie corporations. I did an entire briefing on what the potential ramifications would be in the future of cutting a default rate cycle in the high yield market in half. So I have to stop you here and go over each of those zombie banks and zombie corporations zombie banks. So let's do first, because I think that's the easy one. Zombie banks are banks that and again, tell me where we disagree. I think there's a lot

of daylight between us. Hey, if you're a city bank or a Bank of America or whoever, and you have all these really good assets and you have all these really bad debts, Well there's this lovely building downtown of Manhattan. It's got these beautiful columns, and it's called the Federal Bankruptcy Cord. And if you are bankrupt, for lack of a better term, you go down there and you do a Chapter eleven reorg and you take the good parts of the bank and you spin it out, and you

take the debt. There's no such thing as toxic debt. There's just toxic prices. This junk at at a dollar or nine eighty is fabulous at fifteen or twenty or dollar. John Thane, there you go. So you turn around, and now you're ripping the band aid off, and maybe we end up at Dow five thousand. But now you have a clean, healthy Bank America's my favorite example. Here's Bank of him. Here's Mary Lynch spinning out. Here's Bank of

America's spinning out. Here's who else did they acquire in the last couple of years before the year's countryroid mortgage? So you end up with all these good So am I and I'm talking way too much, but um, I'm literally talking my book. But is that how you avoid zombie banks? The how you would have avoided zombie banks and you wouldn't have institutionalized too big to be failed with stupid legislation. I was trying to find a polite word.

And you wouldn't have let them go downtown to the other place downtown, the other fed on Liberty Street, and instead just go knock, knock, knock. I need to see somebody. I've got a problem. So the second question is zombie corporations. What is a zombie corporation? So a zombie corporation is a corporation. Our mutual friend Jim Bianco, who started fishing the same year we did, He's written a lot of great things. I think about fourteen percent of the US

stock markets are considered to be zombie corporations. They couldn't last like one or two if the coronavirus doesn't go away, we're going to have a handful of companies that go poof into the night because they can't handle one or even two quarters of operating themselves because they're so in debt. It meaning, so, now, what is the normal zombie corporation overly leveraged, too much debt ratio? Typically if it's fourteen percent, Now, what was it in the eighties, what wasn't in the nineties?

It's of of of stocks in America are zombies. So four is it? When you say fourteen cent stocks? Is it of the companies in America the publicly traded? Okay, so so what has that been historically? Well, if you look at it over time, it's it's been in the single digits. We've always wounded. So it's double what it usually is. And and ultra low rates goes to the

argument allows them to refinance cheaply. And so companies that should again, other companies that should find that pretty building with the dead rock, take out the yucky capacity, make room for new entrance to put in efficient capacity, you get innovation, and uh so this is about double what it historically has been. If if I'm reading you correctly, if I'm if I'm quoting Jim correctly, Yes, all right, Jim, we'll get you on the show to follow up and

do another version and continue this conversation. My special guest is Danielle di Martino Booth. She is the author of fed Up, an insider's take on why the Federal Reserve is Bad for America. So I gotta call you out on the title right away, The Federal Reserve is bad for America. I mean, they've made some mistakes. Are they

really all that bad for America? Well, when when J. Powell first gave his first congressional testimony when he said it's not the Fed's job to backstop the stock market, I went, you know what, we might have to go back and fix that subtitle because it looks like we

have an adult in the room right now. A lot of this could be described as Alan Greenspan, an acolyte of Iron Rand who believed in as little government intervention into the economy in the marketplace as possible, was constantly changing rates and doing what Wall Street wanted him to do. Aren't you really complaining that Greenspan was not a great FED chief? It for me at least, and you can

talk to people about the era in between. Way, McChesney Martin my absolute favorite FED chair of all time, and the only other one I liked er my second to favorite one. They're they're my two favorites because they were really the only two who they had to go to hell button. They just hit it. Go to hell, go to hell, go to hell, and they did what they

needed to do for the country. In his biography, I mean, there was somebody like living with him for two years practically to write this big Alan Greenspan biography, the guy admits that he enjoyed being popular for the first time did He was like, Wow, I'm like really really popular with these politicians. They're paying attention to everything I say. All they want for the stock market to keep going up. Surely I can figure that out. And so he had

a briefing on his desk every single morning. Some shmow had to wake up and write it at five thirty in the morning, and he had his stock market briefing every single day. I think he is the first FED chief with a Bloomberg terminal on his desk would not surprise me. It would not surprise me. Look, I always tell people they're like, when did your anger starting. I'm like, October, So go back to that, because that's kind of fascinating. He came in in the summer, and following the crash,

which was really as much plumbing and other issues. Following a huge recovery from AD two to eighty seven, he cuts rates and basically my pet theory has been the audience applause just washed over him and it felt so good. He wanted another hit of that. Absolutely. On October, instead of presenting in Dallas, Texas, he got on an airplane flew back to Washington. D C released a statement that said, the Federal Reserve and my new popular life is now

going to backstop the banking and financial systems. Okay, the middle part I put in there, but the banking and financial systems were part of a very short statement that the Fed released the day after the stock market crash, which is quite shocking. This was the hardest thing to get past the lawyers for the books in the days

and the weeks and the months that followed. He's got the guys on the New York Markets desk, calling bond desks all across the street and saying, we're about to inject liquidity just so you know, wink wink, get out of the way. So their front running the Fed. They've been taught since the weeks and the months that followed that they can front run the fetist. So here's the pushback. Hey, isn't it easier if the Fed gets Wall Street traders to do their business and now they could be a

little less interventionists. They don't have to make the injection is big because the bond traders are doing their work for them. Yeah, good luck with that. People have said that many many times. I hear all the best on what basis. I mean, look what happened with this repo thing recently. Yeah, that's a few huge banks basically throwing

their weight around the financial system. And by the way, when I was researching my book, I was shocked to learn that the FED chief had the power to raise your lower rates on his own the phone see clipped his wings because he was doing it way too much. So how much of nothing corrupts like power. That's exactly where it's going to go. How much of the current criticism of the FED traces back to Alan Greenspan as

a deeply flawed chairman. Well, it wasn't so much Alan Greenspan the deeply flawed chairman, had he not had two successors in his wake who adopted identical philosophies. It's just each iteration of successor was even more afraid of their shadow than the prior. How do you describe what should be the proper role of a central bank in a

country like the United States? I would think that the best role for the FED to play is making sure that the dollar you pull out of your wallet, Ay, you can still pull out of your wallet, Sorry, Ken Rogolf, but b is worth the same amount of money tomorrow that it is today. The dollar is very strong lately. We're the cleanest shirt in the hamper relative to the end, the Euro, the pound, sterling. Wherever you look in the world, the dollar is. But even the one isn't really doing

a whole lot of much. So after a decade of quei one to three plus twist and all this other stuff, you still have a very robust US currency. Doesn't that suggest the FED hasn't damaged that purchasing power? Well, there is that second mandate that has caused the FED to completely go off the rails, and that is minimizing the unemployment rate or maximizing employment that was given to them in by Congress in the middle of a huge yemment. Yes, yes, yes,

misery index was through the roof, I get it. But nevertheless, that was a crucial error made on the part of Congress. And people are like, you know, you'll never be able to get Congress to say that the FED can do negative interest rates or by corporate bonds or by stocks. And I'm like, when push comes to show, have Congress a vote for anything, especially in a panic, there are no actually in a panic, there are no atheists and foxholes, and there are no hard dollar monitus at the FED

in the middle of a panic. But that second employment mandate is what has caused the fed's mission creep and the lower for longer. They're trying to pull that one last employee in off the sidelines. Really at the expense of going, Oh, that financial stability thing, we don't know that until it hits us in the head. So so let me push back a little bit of it. I find it hard to believe that the FED is really concerns very concerned about unemployment, with unemployment levels at sixty

year lows. At the same time, this third mandate of back stopping the markets seems to be their biggest priorities. Or so some people say, what what are your thoughts on that? So, look, I think that there's there's a little bit of confusion here. Look when you are when you are, when you're facilitating Uncle Sam to quietly blow up debt and and debt throughout the Obama administration grew quickly. A lot of this was in order to fund fiscal spending.

But if you're if you're teaching the lesson to your to the to the powerful politicians that run the country that there are absolutely no ramifications for you can run up as much debt as you please because it's going to be just about free. Okay, then you're going to cause a sclerosis an atrophying in the labor force. So it doesn't matter how hard the Fed tries to pull somebody off the sidelines, if they're not qualified to fill the position, it's not going to be field. So what

does one thing have to do with the other. Why does debt cause Well, you have this massive expansion of the social safety net such that in this country or you talking about Obamacare. No, I'm talking about in this country in a more in a more general sense, there's been some good I don't know if I call that massive. I mean, you've seen you've seen creep. There's been a big uptick in people claiming disability on Medicaid and social Security.

You asked the average one of these people who are basically living off the government, how much would you have to have an entry position job pay you in order for you to come off the sidelines and work. And it's a heck of a lot more money than they would be getting as a starting salary. Well, it's entry because that pays very little. It's but again, so if you get thirty thousand dollars without working with thirty thousand

dollars worth working economic incentives, say why would you work? Exactly? But how does as long as you keep government debt super super super cheap, then you can keep these programs alive and well. As opposed to removing you and making it a job of the private sector. I mean, it is time to make vocational training great again in this country. I don't think anybody's going to disagree with you about that.

But where they will disagree with you about is that the FED has enabled federal debt because you've seen federal debt go in one direction for World War two forward. You have, but you've also seen the duration of the treasury holdings of the United States until this twenty year bond issuance that was recently announced. You've seen the duration of treasuries come way in while the United Kingdom has

gone the absolute opposite way. Because if we were to be borrowing money at the maturities where we should be borrowing, you name it, if we'd been borrowing way out there, then our interest expense would be a hell of a lot higher um. And nobody wants that anything. I don't know if it would be them, of course it would be higher. Listen, the thirty year and the ten year of spitting distance apart. I think you do the fifty

year and and and this is this is it. This has been a fifteen year trend of reducing the maturity profile of treasuries. So this is this changing the shape of the duration and borrowing much shorter, shorter to fund. Yes, but it's a good way to kind of hide the evils of having tri whatever the debt clock says, downtown trillion accounting of national debt. All right, so now let me push back to you on that. So let's what's rounded up to trillion. Okay, we can forgive all student debt.

Well before we even do that, here's what a lot of people, here's what some analysts and economists and strategists have brought forth as a counter argument. Hey, we have our own printing press, and we have a standing army, and we have the reserve currency. We can print all the debt we want, and we aren't going to have the same problem that Japan had. Oh and ps, Japan's credit rating is fine and the their tenure bond is you know when it's not negative, it's you know, fraction.

Why does should we think that our debt isn't going to be any different than Japan's debt? Well, we are beholden to foreign ownership of our treasuries. Why why do we care about that? We care about it because we don't. We don't have the same latitude that Japan has because Japan's um sovereigns are mostly owned by the Japanese internally inside the country. Right, So what Japan did is printed up a whole bunch of bonds and put it in their right pocket and then have their left pocket by it.

They completely created money out of thin air. Why can't we do that? There's a theory that we can do that, but again we all we are. Don't make me say them M I prefer modern meritocracy theory. I call it Bernie's theory MMT. But the thing about mm T is he again go back to the fact that we do have reserve currency status, but we can't piss all over it because we are have been. We have been, but that does not mean that foreign buyers of our debt

have completely stepped back. Now, now I will say that China has methodically and for years been reducing the maturity of US treasuries with no negative impact on rates or anything, no negative impact. Despite the warnings of a lot of crazy it doesn't matter. If China is in a preparation mode to do anything they've they're they're doing it actively, right, And they play a much longer game than us, and they think in terms of decades. They do, and they

have ten year plans. And I wish we were as savvy when it came to industrial power, industrial um policy and long term planning is them. We just kind of wing it, we do. And trillion you're throwing out there has nothing to do with modern monetary theory at all. That's what we're going to have, like an eighteen months for God's sake, as quickly as the deficit is growing. But what they're talking about is something more that's that's upwards, up closer to fifty. Is Trump a modern monetary trillion?

Oh gosh, I think he doesn't seem to care about the debt at all. He doesn't, and Mitch McConnell doesn't care about it, and Paul Ryan tended to care about it. So we're the responsible adults when it comes to managing debt outside the belt Way anywhere anywhere there. I I still care about the debt. I think there are some

Americans who still care about the debt. Oh no, there are a lot of people do, but none within who can actually do something about it within the powers of But again, to look out at a crowd, as President Trump did recently, and to say to Kevin worsh you know, if you were there right now, at least I'd have negative interest rates just like Germany, and I'd be getting paid for my debt. I mean, these are the things. These a billion economic theorist. You've got to give him that. Okay,

my hair was on fire when he said that. But other than that, it was great. I mean that the whole rest of the play, it was fine. Negative interest rates come, negative interest rates come to America. And aside from that, what did you think of the plays? But again, if you're talking about universal basic income, if you're talking about health care for all, if you're talking about student loan forgiveness, forget the pony part. You're still talking about

doubling the debt quickly. Alright, So so let's be so here's because, by the way, social Security and Medicare are no longer actuarial theories. Their cash flow issues over the next few years. So let's discuss that because I find that fascinating. So social Security we could we it's capped at about a hundred and ten thousand dollars salaries where your FICA tops out. I think if you raise it to something like two three four thousand, you buy another

in your forty years. So I'm not worried about Social Security, Medicare and Medicaid. You have runaway prices of prescriptions. You have medical tourism because you go to Tiajuana and for two thousand dollars get three thousand dollars worth of surgery. The United States is quite literally the only industrialized developed nation without some form of a universal health care which

allows a cap on many prescription and procedure costs. And if we do that, you'll have this very lovely too tier system where here's basic coverage for everybody, here's high end coverage for anyone who can afford to buy insurance, and the entire cost structure comes way way down, or so goes the theory. What's what's wrong with that before? And forget forgiving school dad, and forget basic income for now, let's just get of the US economy wrestled into submission

by fixing the healthcare system. I'm not opposed to what you just described, and there's certain rationale as long as we can keep the quality up. But you did at some point asked me why I wrote this book. Yes, well, that actually takes us right back to Medicare and Medicaid. The Federal Reserve uses the PC as its inflate consumer price equivalent for lack of a better yes, it's it's a substitute for the for the CPI, for the consumer Price Index, and which has it's. Both of them have them.

Both of them have their problems, but one has a lot bigger worth than the other because they both understate housing. Both of them, well, the owner's equivalent rent is very problematic because when home prices are going up, paradoxically, the the residency, the shelter portion of inflation paradoxically goes down. It's totally backwards. And right now rents are going at such a fast pace and we haven't captured that in the CPI, and we could talk about that all day now.

The pushback to that is, well, that's because we have this nimby restriction on building UM denser multi family units and apartment buildings and areas that open that up see much more competitive prices for renters UM. And as long as we have this NIMBYism, places like New York and San Francisco are going to be really problematic when it comes to renters. Hashtag acinine, But why did I write the book? Is that a real hashtag? Can I? Can I go to Twitter and function that in UM? So

why did you write the book. Well, so Stanley Fisher was vice chairman of the FED for a while, UM Jim Bianco one afternoon we spent an entire afternoon fishing trying to debate why on earth the godfather or Central Banking, who Ben BERNANKEI had on speed dial in case he had an existential crisis, why this legend of central banking would come out of retirement to be vice chairman. So very first f MC meeting, Fisher says, I only have one question, why on earth do you use this convoluted

PC in my life? At least it's a minimum headline CP I. Why don't we have something more realistic and reasonable that we're following. So some trepidacious FED staffer in the back of the room in the Echoes Building raised his hand and said, well, if we don't use it, our models are going to break. So you gotta fix your models. So at which point Jim Bollard, who knew he had a sense of humor, raises his hand and says, let me get this straight. This is how we make

monetary policy in America. Crap in, crap out. That's the gist of it. Because the PC uses as an input in Medicare and Medicaid reimbursement rates, which is an absolute insult to every American who's actually paying for real over priced healthcare. So it's it's it's it's the shield that the FED hides behind. I'm almost finished. So in two thousand nine, internal debate occurs. Everybody inside the FED is like, we might not have you know, we might not have

the right inflation metric. We might have seen this crisis coming had we incorporated something like, oh, I don't know, real estate and financial asset prices into some inflation metric. So it was decided that something had to be done because it was broken. And then they did nothing, And then I got really piste off and wrote fed up. So here's the pushback. I've heard the PC and the CPI arguments, and and let let me just disclose my bonefit ese um. In the two thousand's, I was screaming

about inflation. I used to mock what I called inflation X inflation. We're going to report inflation, but we're gonna take out food and energy. Oh so you're only going to report the things that aren't going up in price. Fantastic. However, the pushback that I find persuasive is uh M I T has this project called the Billion Price Projects where they use the Internet to track literally millions and millions

of product prices. And when you overlay the Billion Price Project on top of cp I, they're not perfect, but they're pretty close. I mean, when the Billion Price Project says inflation is ticking higher, you see it in cp I, and when it flattens out, you see it in c p I. It's not perfect, but what it says is there is modest inflation out there. You have a lot of inflation and things like healthcare and education UM, both of which one is a free market disaster, the other

is a government disaster. Uh and you don't have a lot of inflation and things like UM technology and software and uh and and we're as real estate and rents have gone up a lot. A big chunk of that is driven by ultralow mortgage rates because you can buy that much more. So you could lay that at the feet of the Fed. But overall, we've had modest inflation for the past ten years, nothing like what we saw

in the two thousands or the nineteen seventies. I would agree with that, but what we've we've had twenty three months. Of course, cp I north of the two percent target. If you were to make one tweak to the PC, the FED would have long since started to normalize rates. They're literally hiding behind a metric that they know and recognize is broken. I'm fine. I'm fine with it because we would have been normalizing a long time ago. I don't think they would have even if, even if they

would have shown more inflation. Well, I think they're too afraid to. But that's a whole another That is a whole another story. And that's what happened with KI two, and that's what happened with QUI three, is that it was time to begin normalizing and the fear factor kicked in. Quite fascinating. I want to throw a quote at you and have you discuss it. Quote. The FED is injecting billions of dollars into this market and that's why everything

is going up. Discuss the FED is about a hundred billion dollars a month run rate as things stand right now. Commercial industrial lending is at the largest banks is negative on a year over year basis, which is shocking. Well, it is kind of shocking because so is global trade. There are several other metrics that have never coexisted without being in recession. So something is intervening to make everything

better right now. If the money that's being pumped into the system is not going into any kind of lending of any sort, because it's not, then it's it's has to find a home. So let me stop there first. Say what you will about the economy. It's fairly robust. We have lots of economic activity. It's not three or four percent, it's two percent. You have unemployments at three and change. Well told, this is not a terrible economy.

We don't see a whole lot of R and D. We don't see a whole lot of capex spening to We're not seeing that. And industrial is already in a recession. Manufacturing is already in recession. But still it's not a terrible economy. It's not a terrible economy yet. So given that, why aren't we seeing more lending? Because I think banks, especially the large banks, can see the writing on the wall.

So you think this is a conscious decision. We're not going to do more loans because we think looker of CFOs in America came into saying we're in a cost cutting mode. We saw that also late in ten, they had were thraveling. We don't expect to increase capex mending, and and that was right into a market correction. The surprising thing is that CFO survey, I think that's the

Duke survey, continued straight through twenty nine. There was even as the market started moving higher and recovering that loss, there was no change in sentiments. So you think these CFOs are genuinely concerned about an impending recession, Well, I think that you have seen some very strange things happen. So we we follow at quill not seasonally adjust it, continuing unemployment claims, because just because you apply for unemployment

insurance doesn't mean you're going to get it right. So we follow a not seasonally adjusted number because it's just raw data. Are you looking at year over year numbers? Is that what you know bother the seasonal adjustments, So we're looking at a year over year so beginning in Octo. By the way, I love that, and that I found that enormously helpful in the financial crisis to look at you over year existing home sales and it told the whole story. So I love that methodology as opposed to

all the seasonal adjustments and everything else. But hold that aside. We look at that number, we follow it very closely, and it is off of the lowest base you can imagine because plus percent of people who qualify for unemployment insurance. Now some states have made it a lot harder and

more expensive, and they've up the premiums on these. So Moody's has done some good work showing that you don't even have the same percentage of Americans on unemployment insurance right now, which is why you know they came to the lusion that jobless claims are inherently understated because in the aftermath of the crisis, a lot of states made it harder and or shortened the time that you could be on unemployment insurance as part of the I forgot

the acronym. The modest fiscal response to the crisis was really broken into three parts. I think it was about seven billion dollars. A third of it went to infrastructure, which is really nothing. A third of it went to a temporary tax break, and a third of it went to temporarily extending unemployment. And that ended a long time ago.

So your your position is, but some states, like North Carolina, they're they're they're a handful of states that permanently shortened the length of time that you can collect unemployment insurance. Some states made up for the extra expense by raising the premiums that employers had to pay for unemployment insurance within their states. So so you're saying the looking at the unemployment roles today is a little leading, It is

a little misleading. Set that aside. Set that aside, We've still seen starting in October, four consecutive months of year over year increases in non seasonally adjusted continuing claims. That is, the number of Americans collecting unemployment insurance on a year over year clean basis has been increasing since October. What does that mean historically if you see that increase in

the first time that we've seen this since O nine. Alright, well O nine, clearly a different situation go previous to that. Is this a recession indicator or is this a softening of GDP indicators should be a recession indicator. But you're saying the Fed is preventing that from spiraling out of control. You've never seen global debt right now, We've seen year over year. There's a Netherlands global debt monitor. The next one for its very lag The next one's coming out

in December. But you've seen that going down on a year over year basis since I believe May of twenty nine, meaning less dead or low equality of debt, when world trade, world trade, world trade volumes have been declining on a year over year basis. And my friend, now, how much of that is coronavirus and how much of that is all corona? Really this is made through November. We only have a small snapshot because it's extremely lag data. Forget coronavirus.

This thing is going to fall off a cliff. But my buddy Lacy Hunt taught me that you had go back to your recession starting in eight. If a US recession is accompanied by contracting world trade, it's a nasty recession. It's a global recession. No contrasts in world trade. Was that even a real recession or was that just a mild real estate something going on there? And then two

well you had f y I, we had seven. You had the crash, the Fed responded to it, You had a temporary blip in housing, and and then it fell pretty much off a cliff. If you bought a co opera condo in New York following the eighties seven crash and a drop in rates. You ended up not getting back to break even for like six or eight years, which is New York on the East. In New York specifically, that was a terrible real estate recession because driven in some part by Green Spans panic. So that's a good

title for a book. There you go. I want to bring this back to the market. Two one, No global trade contraction, not a bad recession, right, that was too O one was a short what was that March to November with September eleven right in the middle of it. By the time eleven hit, we were much closer to the end than the beginning of the two thousand nine

ugly contraction in world trade, ugly recession. And here we are with this phenomena we're staring at so have rising continuing jobless claims and contracting world trade and buck kiss going on in the economy. So I would argue the O nine to ten, or really the oh seven to oh nine in recession was driven by the market, not the economy itself. Contracting the market caused a disaster and then that led into a whole bunch of systematic problems.

But let's talk about today you've discussed and I'm paraphrasing, the FED has gone into the market. They've exchanged short dated government bonds for reserves already held at the FED. Government bonds are the most liquid asset in the world. How does that end up impacting equities? Because I think that's where the debate about the FED sort of schisms into two camps. So I'll tell a really quick story because it's not the stock market you have to be

directly concerned with. It's keeping the bond market open. That's what's most important. And Jardine has done some good work. Over half of share by backs are financed with debt, even more than that. Okay, so um, I'm going based off that. What happened on Halloween two thousand and eighteen when Moody's downgrade at General Electrics debt was what was the game changer for j Pal. J Pal still doesn't give a damn about the stock market, but he cannot

not care about the bond market, which is whatever. It is almost ten trillion dollars GDP non financial debt, all time record high in this country. So Halloween g E debt gets downgraded. And remember the fourteenth, two thousand eighteen, the highyeld bond market shuts down. Goodbye, goodnight, Irene for forty one record days. You've got redemptions on high yield E t F. You have the I m F, the B I S, all these global entities are like J. J. Pale,

You've got a problem on your hands. The collateral backing these fixed income uh E t F s was trading by appointment only. Spreads were gapping out, yields were going through the roof. And you have this quiet at first, and it got really loud chorus of CFOs on Wall Street saying we're gonna behave and stop buying back our stock because we're gonna have to pay attention to our

balance sheets. They were lying, they were lying, but they didn't have to lie for long because the meltdown in the market, catalyzed by the shutdown in the credit markets, shut down shared by backs, people got afraid enough. In Q four of Scared J. Powell, J. Powell knows one thing, October two thou twelve, f O m C transcript, q E is blowing a fixed income duration bubble across the entire credit spectrum. That's a quote, so so here's the pushback I've read and heard, and some of which resonates,

some of which doesn't. It goes something like this, First, junk bonds are supposed to default. That's what junk bonds do not in America, they're called junk for a reason. And when the spread between quality corporates and junk gets too small, that's how you know you're in a frothy

at best, bubble at worst situation. Seconds. Yeah, there's been some problems in the repo market, and there's been some problems in the credit market, but it's mostly plumbing, just like seven was a plumbing problem, and the equity market hadn't caught up technologically, they was still doing paper. Hey, these are relatively young markets, these repo markets, and they're certainly not you know, like Japanese rice markets and around for centuries, and so this is just a plumbing problem

and we'll figure it out. What's your what's your response to that pushback? I would like to see the markets figure it out without having the pacifier than being being the federal We only had a two percent portfolio insurance position against the stock market capitalization. That was just two The risk parity trades only about ten percent. So let's just let's just throw it up against the wall. Let's see what happens. Let's let credit credit volatility come unhinged

and see what happens. So I'm one of these crazy free market people who think if something goes belly up like long term capital um, well maybe that's a bad example because the FED actually greenspan road to the rescue. No, because that's the one where gold Green Smid didn't wass bang a bunch of heads together and said, hey, you private banks, you go work this out yourself without the FED being very involved, because if we get involved where you're not gonna be happy. So so the question one

gentleman from bear Stearns told him where to fly. So here's the that's right. Who was who was? By the way, one of the biggest counterparties to LTCM. But hold that and by the way, the whole rescue was a dry run for a decade later for what we ended up doing. But hold that aside. What would happen if the FED wasn't intervening in the repo market or wasn't providing liquidity when there were frictions and and some freezes in some of these smaller backwater credit markets with short from interest

rates pushing double digits? What would have happened? No, No, what would happen today? If the FED says, all right, you know, we're done intervening here. You guys figure it out. The free market can work this out. What's the net result of that? I don't think we know, Verry. I think that we would see rates be a lot higher than they are. It's a little problematic when you're running trillion dollar deficits. So when you say a lot higher four or five, six or n I don't I do.

I don't know that the market would end up at nine or ten percent, But I know that if the market was to end up at four or five percent, given that the FED wants to put a new replacement for libor out there, it would be the worst possible development. Alright, So, given all that, and the fed's about to cut rates again because of the coronavirus, that was my next question. You you beat me to the question. Given that, what do you think the FED is going to do over

the next four meetings? Real? And by the way, does the castors don't fight the FED? But there's one cohort out there that doesn't fight the FED harder than the who don't fight the FED. And that's the FED itself. The FED never fights itself. It never fights the market, It never fights w I R P. New type it into your Bloomberg. It never fights expectations of rate cuts,

and it never even fights expectations of FED moves. When it came to Ben Bernanky was completely guided in terms of the size of the tapering of quantitative easing way back when by what the survey from the New York Fed was saying. The FED is guided by the financial markets, and it will do what they tell it to do. Can you stick around a bit? I got a bunch more questions for you. Of course, we have been speaking

with Danielle di Martino Booth. She is the founder and chief strategist of Quill Intelligence and author of fed Up, an insider's take on why the Federal Reserve is bad for America. If you enjoy this conversation, well, be sure and check out the podcast extras, where we keep the tape rolling and continue discussing all things FED related. You can find that at iTunes, Spotify, Google podcast, overcast, stitchers,

wherever your final podcasts are sold. We love your comments, feedback in suggestions right to us at m IB podcast at bloomberg dot net. Check out my weekly column on Bloomberg dot com. Follow me on Twitter at rit Halts. I'm Barry Ri Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Danielle. Thank you

so much for doing this. I'm afraid that people are gonna hear us on the radio and not here this part of the discussion, and the gonna say, hey, man, what are you giving her such a hard time for I'm like, no, no, you understand. We kind of know each other. For we've been doing this for a decade, right, is it that long? It is? The day I'm at you is the day I met Jim Bianco, walked into the fishing lodge. There you were. This is up in Maine,

up in Maine. Always the first person there at the lodge so you can suck up all the band with and turn your Bloomberg on. That's early in the morning. I do my morning reads and I found well, now you actually right, actually now there is some bandwidth in each of the room, each of the cabins, but the best band with is in the dining hall and I get listen, I'm an early riser. Uh, the early bird gets the worm and the early blogger gets the band

with that's the that's the thesis up there. Um, and we've we've had a number of fascinating debates and discussions and experiences and Maine is really a blast. Camp Ko talk is always delightful. I can't wait. It wasn't last year, it was the previous year. Someone said how long you've been coming here? And I've been saying, I know, five six years for a few years. And someone said, well, when was your first year? And I had to figure it out and I'm like, oh, it's been a decade.

Oh my god, it's crazy. I think this. I don't know if this year is eleven or twelve years ten for me. So you skipped a year. I've have a sreek. I haven't missed one. I skipped here. I was in the middle of writing a book. But yes, um, yeah, but it's a weekend. Come on, you could you could take a weekend off from book. It's okay. It's Dallas, Texas to to nowhere in Maine versus New York to nowhere in Maine. It's a little bit different calculus. So it's like an hour flight up to Bangor and then

you drive about two and a half hours. Like the from the time I leave my house till the time I get in the car, and Bangor is more time than the time I leave Bangor and get to get Lean's Lodge, unless I stopped for a lobster roll at the Eagles Nest. I must stack on a four hour flight in from Dallas usually am and change changing terminals and getting to that damn bang Or flight, but I get there. There are lots of places I would consider living outside of New York. Dallas happens to be pretty nice.

And Austin is just such a party town when you went to school there. When you're to grad school like today, Austin is a full blown hipster. Someone described it as the blueberry in the middle of the raspberry pie that is Texas, which I find hilarious. But what was Austin like when you went to school? There was it a big party town? It was. It's always been a big party town. It's always been huge for live music, I mean institutional level of music. Uh, you know, Sixth Street

was around then. But the age, the aging of of Austin. And now you have Fifth Street, which is where people my age go because they don't want to go on Sixth Street because germs are no longer for sharing at our age. So you know, there are more roof bars in Austin today than I think any city I've ever been in. And they've they've really just opened some very nice hotels. There's plenty of room for the tourists. But go downtown. Stay downtown for heaven's sake. Don't get stuck

in that traffic, to say the least. So there's a ton of questions I didn't get to that. I want to circle back, and I don't have you here all day. But we've been talking long enough. Um, So here's here's the the really interesting discussion, which all this comes right from your book. What do you mean by the FED is bad for America? That seems like a pretty harsh statement there. They've made mistakes, they're certainly an important entity. I don't think either of us are in the ron

pole in the FED. No, you know, like that's like unilateral nuclear disarmament. But plus, I mean, look at what the Chinese have done for everybody who always says, God, you've got to end the FED. Just get rid of I'm like, look at what the Chinese can do with our intellectual property, right, okay, now put it on steroids and see what they can do to our financial system. Just leave the thing, please, it's it's it's ridiculous. Pole

was out of his mind with that nonsense. It is and some of that's hyperbolic just for him to make a point, But I think he truly believe that, and his son believes it also. Look, it's just it's not practical, not in the world we live in. It. We can deglobalize all we want, but we're never going to un globalize. There's there's a difference between the two. So so that raises the question, how should the FED set interest rates? The FED should set interest rates more a the FED

needs to let these markets somehow, some way normalize. If you talk to people who say that the FED is going to blow up the balance sheet to ten trillion dollars, it's going to ease into the next recession, ease even more through the next re session, and eventually we'll have a debt jubilee and sing Kumbaya and walk off into the side. I have a lot of cars I want to buy that are beyond my budget, I'll just borrow

against it. And if we do student loan forgiveness, maybe we could do Biblical times before you had a banking system to just say, oh, it's gonna be really easy. Let's just debt jubilee. Somebody say private debt markets, Oh god, what are we going to do with those? It's more complicated than than what it's made out to be. And I think somebody at the Fed, somebody has got to deal with having the beginning and the end of a recession. Right.

So in other words, if we want to stick with the biblical theme, seven fat years, seven lean years, things are cyclical. Not just you mentioned this is ten year expansion, the elongated expansion um Australia went what twenty seven years and they still haven't had a recession twenty seven years? And how far can this has been twenty years incounting, but we have not had a benefactor named China. I had a speech in Australia. I was there for twelve days.

Just about everything is not made in China but owned by China were exported to China, to China or imported from China. I would argue we have had a benefactor named China because they make all our crap cheap and there where we make every manufacture everything. But they don't own our biggest port. They don't have a tick a year lease on our biggest port in Melbourne. They don't own an island. I went on on the own the

island on the Great Barrier Reef. They haven't put up all of these skyscrapers that, by the way, are wrapped with something that is extremely flammable. Um so it's oh

something something that is literally extremely flammable. So now there's certain high rise buildings in Melbourne and in Sydney that you kind of know not to buy at some guy dropped a cigarette and the whole three floors going up before Anyways, anyways, all I'm saying is that that that Australia is an aberration, but in a good sense of the word. They never went to the zero bound, and that was our fatal flaw. The Bernankee doctrine was the fatal flaw, the idea that we absolutely had to go

to the zero bound. I think that J. Powell is so correct in pushing back against negative interest rates. I even hope he stops at one. So now let me throw out an alternative um scenario, a counter factual, but it's really based on reality. It's not a counter factual. Normally we have a regular playbook, and whenever there is a financial crisis. You learn this from long Keen Lord Kanes way long ago. What you end up doing is

you cut taxes, you increase fiscal spending. You temporarily replace the collapse and demands from businesses and households with government. Then the economy begins to recover. You start to take

that back and you normalize things. And if there's a little bit of monetary policy assistance, great, But in twenty eight and two thousand eight and two thousand nine, there was almost no real I mean, I mean it seems weird to say, yes, seven eight five billion dollars is nothing, but given the size of the financial crisis, that should have been a three four five trillion dollar multi year stimulus.

Bernanke looked out at Congress and he had of meetings and he said, you guys have to do fiscal stimulus or we're going to hell. And they said, look, we'll give you carte blanche to do whatever you want, but sorry, it's not coming from us, right. What should the FED have done in response to that? Should Their response should have been, Hey, you guys are on your own. I'm

gonna let the whole thing go to hell. You'll all get voted out of office because you will have screwed up, and then when the next crop comes in, I'll work with them, but this is on you, guys. M Jesse Martin or Paul Vulker would have told them to do

just that jump jump in act. That would have been that, right, either you save the economy or it's the world's greatest recession and every one of you is unemployed and living in For me, first, first, I've written a weekly every single week since I left the FED in June of two thou fifteen. The very first thing that I wrote was how Congress abdicated to its authority to the Federal reserve,

time for fiscal authorities to do their damn job. So what should the now Here we are in the elongated pansion and nine ten years following the eight or nine debacle, we get a giant tax cut, we get a giant fiscal stimulus. Is that just pro cyclical instead of countercyclical? Should that is that what we trillion dollars, what we should have done in oh nine or oh ten. Well,

it was a little after the fact. What so what should be taking place on a basis that was that was blatantly political, and of course, of course it was as is the one that was just right just floated. Um, I have no idea what the hell that was? As is the one that was just floated for the summer. Oh, let's find a way to get more money into the stock market, and let's do a middle class tax cut. Obviously August July of a of an election year, that's political,

and obviously politics is that's never gonna get. I don't even know hows get on the island because there are some potholes here in New York that are big enough that they could swallow a small car. I mean, you want to spend money infrastruction, sake, spend it on infrastructure. Everybody, everybody agrees. Why can't we do that? And by the way, it puts a lot of blue collar workers to our years stastic for years at a time. This is great.

This is what we've been seeing. What we saw in the automobile sector worldwide as China urbanized, which was just a huge boom to the current recovery. That's what we saw with fracking, is it put blue collar people to work. Let me push back at you on that, well, at least in the state of Texas. I mean, you're making

a hundred thousand dollars a year and fast. Read Saudi America by Bethany McClain, who basically says the entire low rate regime of the Federal Reserve is the only thing that's made fracking competitive with everything else because it's so capital intensive and it's all borrowed money. Oh gosh, it's all borrowed money. No, no, no no. I just wrote a recent paper on this, the the the growth of the Fed's balance. She literally moves in blockstep in block

step with the growth of the energy industry. I didn't say it was free to build. I said it employed. It employed people who don't have college degrees. So it infrastructure, so does automobile. So here's a debate that I know you love to engage in on Twitter, and I just kinda watch from Afar. I engage in much dumber debates on Twitter. The repo market is what's driving the FED activity to inject more liquidly and that's spilling over to the equity markets, and that's why stocks are going higher.

We look, we've discussed this again. You can try and see what happens if rates rise, if you step back, don't go to ten percent on overnight, go to four or five and see what happens. See how I don't even think that that would fly given the sensitivity, given the wall. Look, every time there's been a wall of refinancing, you would blow up what's left of the shale patch right now because there's so much paper that has to be refinanced this year and God help us next year.

For the next five years, it's like seventy one billion sixties or four percent of shail debt has to be refinanced in the next five years. I was gonna say, isn't there like a wildly disproportionate amount of corporate debts associated with fracking? Like just so far it was invaded by you know, living in Texas, I'm like, what is this Greenwich private equity firm doing down here? Well, they

got in the rain, had some money. I mean, they were going to build the tallest skyscraper in Midland, O Desk that was gonna be the tallest thing between Dallas and Los Angeles. But I mean thank that that funding was pulled. We would have ended up just about as good as the late nineteen eighties Rolls Royce Dealership in Midland O Desk. Do you remember in the eighties the sea through buildings in Dallas? They put up all these in Houston, they put up all these office buildings and

they were unoccupied. You literally could see straight through from one of them. Today, every time I here a central banker talk about how much that the sanctity of the financial system and how much stronger our banks are, I'm like, you might want to reference your own data Federal Reserve on commercial real estate loans, on bank balance sheets, see and see that they've gone through the roof because of

regulatory costs that we were associated with. Dodd Frank. Small and mid sized banks in this country are not in good shape. Small and mid sized banks are not in good shape. And why is there are there still small and midsized banks? Biball not know. Well, there's been a hell of a lot of consolidation. Asking the question, non bank, if you look at the holdings of both assets and loans of the top let's call it ten banks. It's like one and two and a half times what it

was twenty years ago. It's it's really become wildly top heavy. So now we've had is impossibly big defense. So so now that we've had all this consolidation, what does that mean for the small and midsize It means it's not good. It means that. And this was something that was again internally debated at the FED. If you want to impose these capital requirements, if you want to impose these compliance requirements, do it for the big banks. But for god's sake,

don't do it for small and midsized lenders. If you do, they're gonna go away out on the risk spectrum and make the crazy commercial real estate loans that they've got that they've got right now. And to be fair, they have set up different tiers of requirements for but this, I mean this, this happened long after the loans were made. All right, am I left? Before I get to my favorite questions, I have one question I have to ask you, what would it take to make you bullish on stocks?

I'm not embarrished on stocks, alright, So your clients are very often investors and not just corporate entities and others. I say, as long as the as long as the FED is printing, they cannot be fought. So that's my biggest mistake in my entire career was that I knew when I left the FED with PTSD in a bad way. I knew in my guts that as long as they printed enough that they were going to hold up risky asset prices, it didn't matter what valuations were. That hasn't changed.

I had to learn it the hard way. So as long as the FED is accommodative, and as long as they are not either reversing quee doing, unless there's a glaive tightening, unless there's a global calamity that is big enough to put the world in recession, I'm not. I'm not. I'm not somebody who thinks that we can completely decouple the entire Canadian yield curve is inverted, all of it, all the way at to thirty years. Mexico, where I'm presenting at the Bank of Mexico Bonxico next week. They're

in recession. They're not getting out of recession anytime soon. We've never not been in recession. If Canada goes Germany for sure is in recession, has been for a good year,

and they have flat whatever. Germany's in recession, and you just saw some really ugly employment data post pre coronavirus come out of Germany, so that industrial slowdowns and China is for sure whatever on a paper basis, at the very least, that's showing a giant drop in GDP, right, even if it's temporary, and even if they make up some of it. I mean, it's like all of a sudden and yelling because the favorite buzzword on Wall Street

now is transitory. It's all transitory. It's all transitory. Hey, everything on this planet is transitory, including the planet. Well, and I get asked by people all the time, well, even if we go into recession, the FED can just keep printing. And even if we're going to recession, the stock market's going to stay up. And that's happened on rare occasions in the past. I'm not of the opinion, given where we are in the cycle, that that happens.

I wouldn't disagree with you, So I'm curious if when people listen to this, how much they think you and I actually agree on and how much they think you and I disagree on because I'm asking questions very often playing a role and not necessarily. My job isn't to debate you. My job is to bring some of the questions other people have raised about some of the subjects you've talked about all people on planet Earth. You know, the person who wrote the expose A I had to

learn after the fact, don't fight the Fed. Don't fight the Fed. So you're pretty constructive, and uh, what do you like leveraged on a long long how you're invested? I own a ton of municipal bonds on I own a ton of gold, and I'm not unhappy. Well, gold is approaching s I did well with gold in the two thousand's and once it, you know, peaked and reversed, I tapped out and said, I think you have to be bold, bold, bold in your asset allocations. I really

really do. When there's as much global uncertainty as there is, central banks are the only game in town. Hell. I did well in Puerto Rico, but you have to be bold in your alleys. Gold should be no no no, no, no no no. Also, how much gold do you own relative to your portfolio? You should have, you should have in precious metals at a real time like this. Again, at a time like this, I tiptoed in about nine

months ago. Wow, that is a bold And my Muni bonds have never I mean, throughout ups downs in betweens. Right now they're they're fat and there we've been, haven't we been in a forty year bond bull market. So whatever you own that's not junk has done pretty well. I wouldn't own a lot of corporate bonds in America to day. Huh, that's interesting. See, I break corporates into the you know, the B B plus and up, and then everything under that, even not the junk, even like

the near junk, like I want. I don't want to own anything below B minus. I don't want to know. And a buddy of mine who used to work one of the big three credit rating agencies, the stories that I've heard right out of her mouth, the management is twisting arms to maintain investment grade ratings. I'm like, no, no, thank you, not in my portfolio. Does does anyone still really pay attention to the credit ratings after the debacle of A I G. And Lehman and I think, I think,

and the whole financial crisis was the one lesson. There are many lessons, but the one lesson is, hey, credit agencies. They are like stock analysts whose job is to generate more syndicate business. They're not here for you, the bond buyer. There there for the bonds underwriter. We know that, but but shouldn't bond buyers know that Ianco has some insane numbers that he can trail out about the thousand firms and the fo thousand different registered investment advisors, and then

millions of accounts that exist. They're all basically look like the same damn pie. One of the slices of that pie is an investment grade bondy TF that investment grade that makes mom and Dad sleep at night because they know it's money. Good. Well, guess what I would known half of whatever is in there? All right? So now I only have you here for another ten minutes. I have to get to my favorite questions because I know, um,

there's some of your favorite questions. So let's uh on that happy note, let's jump right into these what what some people call our speed round. Um, and I'm gonna add a question. I'm gonna mix it up a little bit because I have to ask what was your first car. My first car was an Accura. It was a hatchback, but I can't remember the name of it. What year was it? Integra. Yeah, they had the little Integral car that you could get that with a five speed and

toss it around. It was really based on a with with a transmission and tips. You just it's been tried a few times. Yeah, yeah, I mean, And don't get me wrong, like like I said recently, a bit of a car guy. Right to my first F one race, didn't want to leave. I'm like, no, no, you surely you can go a few more laps. I've been to the Daytona twenty four hours of Daytona. I left for two hours, came back. That's a tough race, you know what.

But watching Italians cry in the rain when their engine blocks crack, there's something magical about That's if you you'll see more of that. Um what are you streaming? Listening to? Downloading? These days? So I'm not a big podcaster that? Um what about video? Amazon? Prime? Netflix? What are you watching? Um? So, I did just watch The Kaminsky Method, which I found so good, larious and perfectly It's like a two minute slice, right, It's great it's amazingly quick. Look serious radio. For me,

I'm dating myself. It's just so awesome. If I'm in a particular mood, Hell, I can tell you eight on eighties or seventy on seventies or what are you listening? Sometimes I'm listening to Bruce for hours the Street Channel. Yeah, occasionally I'll even turn on Elvis. But I'm an alternative rock kind of a person. I'm I'm Channel thirty three. Uh So do you listen to Deep Cuts? Is that what that is? Or Vinyl Rewind? I don't know. Sometimes I do Vinyl Dot Classic rewind? And do you ever

listened to comedy grades? No that I don't like nine and ninety seven? Check the note it's actually but I could, you know, but laughter is good for the soul, and I laugh very much being this huge FED critics. So I'm I'm going to find who are some of your early mentors who guided your career? So I would say that, um, the most important mentor was was Charlie excuse me, was Harvey Rosenblum. And Harvey took me under his wing. He was the director of research at the Dallas Fed. He

was the right hand to Richard Fisher and um. He taught me how to be more accepting of of the school of economics and be less resentful. Even though my father may rest in peace. He taught economics and finance, and I said, never will I ever go there, But he here I am. He gave me a great respect for the school of economics, and I gave him a great respect for the financial markets. And it's been one of the loveliest collab collaborations of my career. Tell us

about some of your favorite books. What are you reading? What sort of books do you like to read? So I like to read books that are almost off in their brilliance. The book that's had the greatest impact on my career is The Lords of Finance, hands down, lie Quad and I believe that one the Politzer Prize. I'm

pretty sure it did. Yeah, it's wonderful, wonderful books about the four fed chiefs from the US, Germany, and France, and the parallels between pre crisis and pre World War One are just They're stunning, and it's well written, really well written, really really and I had no idea who he was until that book came out. You know, if it's for pleasure, you know, the last year's a quirky book that had history and it off of a Greek

island called The Destroyers. That was fun. The Destroyers who wrote that, Oh gosh, I have no idea, The Destroyers, that's really interesting. And then and then Goldfinch. Thank god I didn't watch the movie. That's all I have to say, Goldfinch. Goldfinch is probably one of the best written books out there period endow. So if you've not read either of those who wrote Goldfinch, and I have no idea, I don't do authors. The Destroyers a novel by Christopher Boland, yep,

that's it. Wow. And then let's see what Goldfinch has. Who wrote that? I think it's Goldfinch that when the pullets are actually uh The Goldfinch by Donna Tart and David Donna Tart. Wow. Alright, so that's three books. That's great. Lords of Finance, Gold Finch, and The Destroyers tell us about a time you failed and what you learned from the experience. Well, I learned not to fight the FED, even though I did it internally for nine years. But after I left the FED, I have learned how important

liquidity is to the financial markets. I'm going to quote current Dallas uh FED president Robert Kaplan and say, let's see what happens if you take the liquidity away. So I've learned to not fight the FED. Quite interesting. What do you do for fun? What do you do when you're not UH in the office writing? I travel? I travel. I travel. I travel for fun almost as much as

I travel for UM for work. And I'd always try when I'm traveling for work to have a little bit of fun in there, whether it's one of my favorite restaurants in New York or if I'm in London seeing something that I would never see when I when I had this big speech in Australia, Wow, it was life changing to see that beautiful country. Unfortunately, you know, before the big wildfires and um. Alright, so I don't know

whether SS about the FED or general. I'll give you the option, what are you most optimistic about today and what are you most pessimistic about? So I'm clearly most pessimistic about the printing press running twin four seven, making us even more reliant on the largesse of the FED. Optimistic.

I am optimistic because I'm close enough to my children and watching them get an education and learning about charter schools to begin thinking that there's some kind of grassroots desire to begin education reform, which I think is so much more important than anything else in this country. Is reforming education interesting? Uh? Speaking of education, a recent college grad came to you and said, I'm interested in a career in either filling the blank, journalism, economics, Wall Street.

What sort of advice would you give them? So I'm going to switch it to being a recent high school graduate. I would tell them to go to college, fight the bullet and get an engineering degree. And after the engineering degree they can get a higher advanced degree in whatever they want. But to get an engine engineering to agree, there's many different forms of engineering in this world, many

different stripes, but get that as your base. When I was in business school, when I got my NBA and finance, it was always those damn engineers who threw the curve, but they were there their raging successes later on in life. Huh. I don't care if it's law school or to become a doctor. After start with an engineering degree. I gotta say, Uh,

I think that's pretty good advice. And our final question, what do you know about the world of monetary policy, Federal Reserve crisis management today that you wish you knew twenty years ago. I wish I would have known about the Group of thirty prior to joining the FED, meaning the nation Group of thirty. It is a group of thirty of the world's most powerful central bankers and financiers.

I wish I would have known that that that existed, because it took me too long to figure out that all central bankers appear to be cut from the same stripe. And the reason that it is so difficult to extricate ourselves, it's because everybody around the world is using the same guide book. It's the same playbook. Quite fascinating. We have been speaking to Danielle de Martino Booth. She is the author of fed Up, an insider's take on why the

Federal Reserve is bad for America. If you enjoy this conversation, be sure and look up an Inch or down an Inch on Apple iTunes and you could see any of the previous three or so such conversations we've had over the past five years. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. Go to Apple iTunes and please give us a review. Be sure and check out my weekly column on Bloomberg dot com. Follow me on Twitter at rit Holtz.

Sign up for the Daily Reads at rid Holtz dot com. I would be remiss if I did not thank the Crack staff helps me put this little conversation together each week. Mark Siniscalchi is my audio engineer. Sam Chivraj is my producer. Michael Batnick is my head of research. I'm Barry Ritolts. You've been listening to Master's in Business on Bloomberg Radio