Peter Conti-Brown Discusses U.S. Financial History (Podcast)

really interesting um stuff. He he really has a in depth grasp on not just central bank operations, but on the history of finance and the history of Federal Reserve in a way that most people simply can't do more than scratch the surface. So if you are at all interested in modern banking regulations, the politics at the FED, what Greenspan and bernanke he did or should have done or didn't do, and how the history of the Fed squares up with the modern era, you're in for a treat.

So sit back with no further ado. My conversation with Peter Conti Brown. My guest this week is Peter Conty Brown. He is a professor at the Wharton School at University of Pennsylvania and he is the author of the Power and Independence of the Federal Reserve. He comes to us by Harvard, where he was undergraduate. He got his juris doctor degree at Stanford Law School, and then he earned a PhD at Princeton in am. I remembering this correctly

legal history is that it's a financial history. Financial history even better for our purposes. Peter Conti Brown, Welcome to Bloomberg's. Such a pleasure to be here. Thanks Barry So. I read one of your columns some time ago, and I kind of cracked up by a line within it which we're all somewhat guilty of to some degree or another. You note something remarkable in the shelves of an old

fashioned library which uses the Dewey decimal system. Go to h G section and you right, the shelves variably grown under the weight of the conspiratorial tomes about the Federal Reserve. Why why are we so conspiracy minded about America's Central Bank? In some sense, it's the founding crisis ideologically, right, militarily, certainly politically, and that is what is money? And who

gets to decide? Right? The British said money has to consist of such and such and so and so, with tariffs and stamps and this much silver associated with it while starving the colonies of the resources to deliver on that promise, or so asserts the Declaration of Independence. Right, Well, fast forward a few years, the Revolutionary War is over. But then we get the in the Washington administration Alexander Hamilton's one hand, Thomas Jefferson on the other, Lin Manuel

Miranda in the middle, right. Uh, And and the reason I think that Hamilton's musical has succeeded to spectacular lin Manuel Miranda is a genius um but his other musicals like In the Heights right, also fabulous. But hamilton musical gets to this question, what is money? Who gets to decide? We thought about that forever, and we fought about it

in ways where that become extremely technical very quickly. Alexander Hamilton's certainly very technical expert on these issues, but on like other areas of technical expertise, like you know, hey, how do you get a satellite into orbit? Right? You don't have a lot of ideology around that. You just say, well, either works or it doesn't. Either your trajectory is accurate or it's not, in which case, now, with all respect to the Flat Earth society, and you know, moon Landing

was staged and that sort of thing. They're conspiracy theorists there too. But the difference is is that you don't use satellites to buy groceries, right, You do use money to buy groceries. And so that intuition about what money should be and who gets to decide is shared by

a lot of different people. And so there's a gap between what experts who themselves don't agree say should be a proper financial system, a proper monetary system, and what we in all kinds of identitarian factions, whether they're religious or political, or or geographical or or whatever else, you say, well, no,

that's wrong. And so I think the FED is just this great collision of expertise, of ideology, of history, of politics, of economics, of law, and that just produces a really pungent potion that attracts conspiratorial thinkers and uh and experts alike. So let's talk about that explicitly because it comes so often. Um, the creature from jack All Islands, that book which is now decades old and it goes through a new edition every few years. That seems to be the source amongst

the people I see as the conspiracy theorists. Says, hey, this was doomed from the start. But you're a historian of of financial markets. We could go back to the first Federal Reserve or the second Federal Reserve. In each case, there was a tremendous fear and skepticism in the eighteen hundreds about those banks, and each of them were and I'll ask the question to you, each of those were imbued with a finite lifespan. So why did it take so long before America said, Hey, we can't be the

only major country that doesn't have a central man. You know, you asked you know, separately. One of the questions that you asked me was, you know, what are some un unnoted periods in financial histor three that people don't think about that matter a lot, And there's one of them. In NTE Congress passed a statue just on uh right before a Great Depression, look at the Federal Reserve Act and said, the Federal Reserve was created just like the first and second Banks the United States, with a twenty

year charter. And so let's do some quick math. Federals are BacT nineteen plus twenty ninety three nineteen thirty three in the midst of the Great Depression, right at a time when Franklin Roosevelt was not uh, you know, representing these uh, these what his cousin Theodore had called the malefactors of great wealth. Right, Um, would the FED have been renewed in nineteen thirty three, I think that's a

really fascinating question. We didn't have to ask it because seven uh slipped five years in advance, five years in advance, slipped in you know, uh slipped in two As a writer as a to a much more controversial banking bill, they said, you know what we're going to We're going to eliminate the need for a charter extension. This is

going to be in perpetuity. Um. What's so intriguing about that is in the Second Bank of the United States, that's exactly what the Second Bank's president, Nicholas Biddle, tried to do. His charter wasn't up until eighteen thirty six, and he slipped it in early because he thought, you know what, the bank is so popular that we can do this, and we should do it early, as opposed

to letting it be a big controversial thing. That was one of the best biggest miscalculations right in the nineteenth century because Andrew Jackson was able to harness his own popularity against the bank. But we sometimes forget when the Second Bank of the United States failed. It failed because the Congress came just short at overwriting Jackson's veto. It was still massively popular, just wasn't so popular that could

override a presidential vito. What were the politics of President Andrew Jackson that he was against renewing or turning that into a perpetual money machine. This is this is a great question and should remind our listeners a lot about our present political situation. There are two stories that one tells about Andrew Jackson. So one is as this fierce pugilistic populist right. He wanted to take power and tear it down and push it down into the states and

away from the federal government. That's certainly the vision that the Jacksonian Democrats carried with them through the rest of the nineteenth century and into the twentie At certainly, at some points what Andrew Jackson saw himself as is representing those who had been disenfranchised, disempowered by Wall Street and

the like. Um, I don't even that that far ago, even still the same conversation, same conversation very similar, and I think that that's, uh, that's a bit of of revisionism by Jackson and his descendants politically, who wanted to make a more coherent narrative than actually existed at the time. At the time, Jackson was much more like other politicians that we are probably going to come up in this conversation and just didn't like to have other power bases

that threatened his control. Right, So there were times when he would say, uh, Andrew Jackson would say two different things that were were together incoherent about his own monetary vision, sayings very he hated the idea of paper money, while simultaneously saying, let's uh send the economy a wash in paper money but issued by state banks, right, um, where you'd show real hostility to a gold backed currency, while simultaneously saying it's the only mechanism that he would approve of.

So I don't think you can put an economic ideology on Andrew Jackson. I think efforts to do so, uh failed to realize that Andrew Jackson, like Donald Trump, frankly UH say you know, I am the source of decision making the idea that there would be another power base that could threaten my control over the UH system that I can't abide, and so he went to war with Nicholas Biddle and UH. And I think that's the that's

the source of that conflict. Fascinating. Um, your your students, grad students or undergrads are both everything and executives and PC students, and so we really teach them all. So so much has been going on in the worlds of banks since the financial crisis. I have to ask you about Dodd frank and and the changes to that. But before we get there, we now live in an era of mega banks. All the banks are really relatively giant compared to before the Financial crisis, a number of pretty

substantial banks were either required or or moved over. You you have Washington Mutual and WA Kobe, and you know, look at all these different banks, Bank America and Merrill Lynch, um, all these giant conglomerations. How is the modern ear of banking different then the way it existed prior to the

financial crisis? You know, Um, we've seen after the financial crisis essentially an unrivaled concentration in the financial system, financial services, the you know, just looking at commercial deposits, for example, which include personal and commercial deposits about seventeen trillion dollars right in the American that's just checking and savings, checking

and saving accounts for individuals and businesses and organizations. Um. Megabanks which will call above two fifty billion dollars, right, So that's things like JP Morgan Chase, Bank America, will Fargo, and and much further down. It goes down to you know US Bank, and uh, you know PNC, and you know Fifth Third and other banks that you might think of as regional, but really, have you know a grown grown in into into great size, right, um, because JP

Morgan Chase isn't. It's balanced as trillions of dollars right well as far agoes above trillion dollars. So we're taking down almost a more order of magnitude smaller than that. But these are still very very large banks. And they controlled about thirteen trillion dollars, right, thirteen of the sixteen trillion dollars, and in these deposits. That's an extraordinary concentration, especially given that the number of institutions we're talking about

as a couple dozen. Right. This changes as banks balance, she exchange in size at the margin. But we are seeing financial services dominated by a handful of institutions. And and we have not seen that really ever before in our history, um, including the great mergery era of the late nineteenth century where you saw trusts around sugar oil, uh, corn harvesting machines, right and fill in the blank. There are these This is the great trust era. Have a

great consolidation era. But interestingly enough, because of the structure of the US political economy, banks were extremely decentralist by law, UM each bank that for a very very long time, a bank couldn't have more than one branch. And even after that was changed in the late nineteen twenties, they couldn't have branching across states. Uh. And that wasn't finally abolished where you would have a bank doing business as its own institution across state lines until after nineteen eighty.

What about the repeal of Glass de Eagle, What did that contribute towards banks bulking up? It's a contributed a lot so UM. I mean this is this is a point of some debate among economic historians. It's correlated right with banks uh bulking up in in in pretty breathtaking fashion. What some economic historians say, well, that's correlated, but it wasn't caused by this, and we were Glass Eagle was

essentially unrelated to this size. Now that's hard to swallow, at least in the short run after around Glass Eagle's final legislative demise, because of course City Group becomes city Group after exact issue of a city comes the first mega back. Uh. And so but then again, you know, a few years after that that was a pretty disastrous merger. They sold most of their insurance business because the synergies weren't present. And then what becomes really the shining example

of a mega bank, JP Morgan Chase. And if we were list all of the names of the banks that they acquired along the way, chemical absolutely you know the bank First Um, what was Jamie Diamonds Bank that in Chicago, First Nationals, that what it's called. And he I believe he was at Smith Barney before that. When he was at City, he was Sandy Wild's right hand man in designing the strata, the mega banking strategy. He loses in a power struggle, goes to manage his bank in Chicago,

comes back in UH. JP Morgan Chase's acquisition, which was essentially an employment contract acquisition, Jamie Diamond become CEO, and JP Morgan Chase, with help from the federal government, embarks on this strategy of just becoming as big as it can be. And so we are truly in an unprecedented era in terms of banking consolidation the United States. So everybody used to talk about too big to fail. I like to raise the question, have these banks become too

big to succeed? Are they even manageable? When you're running trillions of dollars in deposits? Can these things be managed? And that will segue right into our discussion of Wells Fargo. Such a great question, too big to manage, too big to jail to, too big to succeed, And that the way that you phrase that too big to succeed is so fascinating because it calls into question the time horizon and the short and medium term. I say that we're

on on leading into a medium term from the financial crisis. Man, has it been good to be Jamie Diamond? Right? That is that balance sheet is that has been an extremely successful? Right? Fortress Diamond is just it's it's an unassailable They were very fortunate. You're a financial historian, you'll appreciate this. Most people don't realize JP. Moore and Chase had their own derivatives crisis. But they were let's call it lucky enough, were smart enough to have it years before everybody else.

So they cleaned up their balance sheet while there was still a bid to hit. When it did everybody else, they had no way to go. Yeah, you know there is This is another occasion in financial history that a lot of people don't recognize. And I think this is Tim Geitner's signal contribution to h to finance in his career and happened before he was Secretary of the Treasury. Uh and that was in two thousand seven, noting on

a spectacular back up office problem in derivatives trading. Right, So these are all bespoke derivatives, right, even even though they're not very fancy, these are pretty plain vanilla, but they all are bespoke because there's no you know, there's no market place for them to trade on. It's no exchange age for them. And so you would think sophisticated folks in two thousand five we're not talking about, right,

So the I T Revolution has already taken pretty deep root. Um, you'd have some sort of oracle based software system where traders with two headsets on, you know, talking to two different people, or at least punging it into a computer that would clear it and would be universally access And you think that and you'd be wrong, right, And what they were doing instead is on scraps of paper with little golf pencils writing down the nature of the trade

as though they were signing. There were doctors signing a prescription, handing it back to a runner who would take that piece of paper and put it in a stack. Right. And what Tim Geitner realized, even though he that the New York had had no supervisory authority over these broker dealers, that's a very important point, realized that the back office

back log was about nine months. And so if there's a triggering event is a you know, the International Swaps and Drives Association master agreement, there's a default event within that nine months your trader said, hey, you owe me money? Like do I? They had to go literally back into nine months worth of scraps of paper to find where's this trade? Right? Huge mess. Tim Gotton realizes it, and he does a tremendous effort coordinating the banks to clean

up modernize their back office. He succeeded right before the crisis. Amazing, absolutely amazing. So let's jump into a fascinating topic that has been in the news for the past year or or more, and that's been this ongoing scandal at Will's Fargo. We we first learned about it when it was revealed the managements of Wills Fargo greatly incentivized the staff to open new accounts, creating new accounts, but they simultaneously penalized

people who didn't do it. They would literally fire people, and it turned out the levels at which they were subsequent and significant consequences were exorbitantly high. Any five or so of the staff, we're not meeting the targets. And so when you incentivize people, they do what you ask. And the staff started creating fake accounts. Not one or two here, but literally I think we're up to three and a half million, is that about right? So so tell us how this came about and who should have

been overseeing this. How does something as absurd as three million fake accounts come from a major bank like Wells Fargo? And where you framed this in a in a in a very particular way, and I come a little hostile and my two house. I completely agree with your framing. But John Stump, for the former CEO of Wells, would absolutely reject it. Right. So you flame framed it as a compensation structure and cultural problem and a supervisory one. Right.

And what Stump and Wells Fargo they initially said is, no, what you're seeing is less than two percent of our employees engaging in some bad practices. That would be that would happen in any organization of banking eployees. That's a bank that employees what was there at their peak a hundred someone godling them? So two is okay? So only three thousand of our employees are engaging in criminal for

can happen to anybody? Yeah? No, And that's what's hilarious about that is that that that statistic is just completely made up. Right? Who who cares about if your denominator includes janitors? Right? And what percentage of the personal bankers who are exposed to individuals were engaging in this kind of a legal activity. And what you you're framing where I completely agree with you, is that's not all we care about, but also aggressive behavior a right. So John

Stump built this model. Well's far Ago was with with JP Morgan Chase. These were the two banks that nailed it right. These were the ones. This is not City Group, this is certainly not Washington Mutual, and it's not Bank of America. All right, this is Wells Fargo built its brand on being a phenomenal consumer and commercial bank as opposed to investor hundreds of years old. The stage coach is not a coincidence that it's their corporate logo. They've

been around for centuries. They've been around for a very long time, and they've been very good at the work that they've that they've done, or so it was was reported. But that compensation structure and that culture, it's so massively important because it created not only the incentives to engage in bad behavior um, but engaged to engage in in practices that I think most people would say, that's zero sum and you're robbing your customers. You're not creating value here.

You're just transferring it from your customers to yourself to yourself, and you're doing it in a way that's trying to deceive your customers as to what the value proposition is here. So let me give you the example, right, This was the Mantra eight is great, right, And the idea here is that cross selling it's distinct from up selling. Up Selling is you know, you go in you want to buy a Toyota Corolla and you walk out with alexis. That's that's upselling. Cross Selling is do you want fries

with that? Right? So you come in you want something and they say you want that thing, but you also want all this other stuff too. So that was auto insurance, checking accounts, credit cards. Let's count to eight and I'd invite our listeners do the same thing. What are the eight products or services that you need to have in the same financial institution? All right, let me see if I could guess. So we'll start with saving and checking

his account to mortgage. Yeah, so again we're gonna reexamine a why you would want your mortgage to be in the same place you have a checking in staving account. But yes, mortgage certainly count credit cards, credit card counts, bank loans, bank loans, personal loans. There we're up to five. Um insurance. They were doing some insurance products. They had some insurance products, including gap insurance, including auto insurance on

your insurance. So meaning if you homeowners insurances, motors insurance as well. So now up to seven and uh, the only other thing I could guess is four o one K retirement accounts. That absolutely would be one. So that would be you would be a very good Wells far Ago banker and being able to say, all right, I got to eight. Now I gotta go sell these right now,

let me give you an example. Now, let me tell you the story of a of a company that engages in massive cross selling to my utter delight as a customer, and that's Amazon, right, I have if you like X, you will love why I buy in the same day.

I've purchased books and chainsaws from Amazon dot com, right, and I've seen myself going to this thing, and they say, oh, if you want that, then you're gonna need this other thing too, And I'll think about and say yes, please and thank you Jeff Bezos, I will want that thing. But they offer that to you, they don't send it to your house and say, by the way, we sent to you, whether you ask for it or not. Right,

So there's no fraud here. My point is that, well, this problem is so much worse than the fraud, right, because what Amazon is offering to me is sometimes these other things that I already wanted less for less money, or even if it's more money than I would get it lows or somewhere else. Uh, the sheer convenience of

having it all in a single citys them is extremely high. Now, let me ask you and our listeners, if you are shopping for financial services, whether we're talking about a credit card, a savings account, or a mortgage, what do you care about? Care about the best cost and the highest level of service, highest quality of service. So the best cost first, right, that's an interest rate phenomenon. What service do you need for your mortgage? Well, I I want to know that

I could set up an auto pay. I want to know that I'll get credited on a timely basis, and that things like insurance isn't going to be forced down my throat, and that I could prepay my real estate taxes, add that to the monthly little things like that to just make our financial life a little easier. Absolutely, and almost all of that is standardized across the industry, almost everything. Then you're talking costs, so you just you're talking cost

interest rates. So credit card absolutely, if you carry consumer debt, absolutely, they're going to be issues of service. For most people, what they want is the lowest in trust rate and the most benefits of a credit card for a savings account. What people are looking for are you know, a suite of bells and whistles? Can I deposit a check using my phone? Can I do this? Sort? Can I do that? But again, t a T M S location. All of this ends up mattering, but by far the most important

thing is going to be the price point. And that's where Wells Fargo, I think, stepped into an extremely aggressive territory, well short of fraudulently manufacturing services that you never wanted, never asked for, right, that's the fake account scandal. And

my point is how do we get here? We got here from a rotten culture that decided we're going to make price point, which is the only thing that most consumers really care about, to be a secondary consideration, and we're going to try and convince them that while they are economies of scale to be had for Wells Fargo and consolidating customers, those economies are not really shared with

the customers themselves. That's what makes me uncomfortable about Wells Fargo, and that's why I think I feel a little bit more encouraged. And the post Wells era, there not only Wells, but other banks too are dialing way back on this kind of aggressive marketing because I think that it's pretty hard to justify when the thing that people want is are you going to beat this by a few basis points, Because we're talking about a thirty year mortgage. A few

basis points matters a lot of huge, huge difference. So it'sen we're in the middle of the summer. Has Wells Fargo cleaned up their acts because we still see these little eruptions every now and then of more things leaking out that all date back to the same era, but we hadn't previously heard about this to those who are in PR crisis management driven the financial institutions itself, I mean, Wells Fargo has literally become the textbook case. I teach it to my MBA's not to do, What not to do?

It was death by a thousand cuts. So they didn't get out in front of it. You want to disclose stuff yourself, so you're beating everybody else from revealing it, and then it would there is never really a believable apology. And then on top of that, at a certain so I've never had a Wells Fargo account. They could be great,

they could be terrible. I've never experienced it personally, but seeing the run of news at a certain point, I was saying to a friend, Hey, at this point, if you have a Wells Fargo account, still, you've tacitly given them permission to do whatever the hell they want. Because if they haven't scared you, what what do they have to do to chase your way? And it doesn't look like that many people hit the eject button with them, so they did. Yeah, That's that's what's been so interesting

to me. I mean, I am not I'm not an active investor UM for a lot of different reasons, not least because I comment on these things and I want conflicts of interest. Well, if you're talking about cost, I'm gonna assume you're like many other financial professors and your low cost index, Vanguard, et cetera. That's right, that's exactly right. Not that I'm UM. I don't take that as an absolute dogma like some of my colleagues do. UM. There have been time somewhere I've been tempted into markets UM,

and one of them was to short Wells Fargo. I didn't do it, but been in two thousand fourteen or some things. It's about a year. The l A Times broke the story in two thousand thirteen. We didn't get the settlement with a CFPB and the control of the currency until two thousand fifteen. So in these two years, that's another very important question about supervisors. What was taking So along with the journalists, knew this right, but it

was not. Uh, we didn't get a good sense of it, not just by two fifteen, but we're still getting the news later. But if I had shorted Wells Fargo stock, I would have lost money. Right, Their stock has done well. This has been a boom time. Right. I might have been able to hedge it and still short of the stock relative to places like JP morgan Um or Goldman,

and maybe I would have made some money then. But it's been extraordinary how much of their brand, equity and their business has not been compromised by what has been a stunning turn of headlines week after week. The old joke is news as old. By the time it's in the papers, lots of people already figured out and probably made their bets based on that. I think that tells us a few different things. Number One, there's a good version and bad version of what we can how we

can interpret those events. The good version for Wells is that it does have an extremely robust balance sheet and business such that this scandal, although lots of people are reading about and talking about it, ends up not mattering that much for the overall value of the franchise. You know, she just keeps people where they are. It's listen, I got everything on auto pay to move my account as a big pan in the butt. I'm not gonna bother.

I'm not gonna bother. Right. The bad version, in other words, saying that the size and diversification of their businesses and on whatever parameters you want to choose, geography, business lines, other things, has protected them from scandal. That's the version that's good for Wells. The version is bad for Wells is that the sheer complexity and size of these financials two tions make them totally unaccountable even when the facts

are breathtaking. Lee damning right. You will never see a clearer cut example of abject criminality in consumer banking that is as widespread as this. Right, this was absolute fraud. I think You're not cynical enough if you think nothing is going to be worse than this, Because every time I've said that throughout my professional career, what could ever be worse than fill in the blank? Where go from

Enron's world? Calm too? You pick it there, seeing every time I I think I'm become too cynical, the rejoinder comes back at me. Just wait, that's pretty great, um, you know to for me to find another example, it would have to be city Groups predecessor National City during the run up to the Great Depression, which which motivated the original passage of Glass Stiegel, where you would get these salesman coming from the banking so or sorry, from

the capital market side, looking at bank customers. You see, Okay, I've got a retired couple and their nest ex ten dollars. I've got it in a savings account. Go to their house, swindle them out of it, and make them invest in Latin American mining operations. That's a that's a really exact that's a perfect thing for a young couple's retirement. Yeah right there in there, they're they're gonna live another ten years. And now you're speculating, and of course that goes bust,

all their money is gone, right, um. And there's there are these letters that you can read in uh, in the Library of Congress where people just writing to their members of Congress during the Glass Eagle hearings, the Pecora hearings that proceeded Glass Seagull saying please ask Charlie Mitchell why he would target us my I'm sitting now next to my wife's coffin. She died early because of the stress of realizing our nest egg was gone. So that was a big scandal. I see, wells Fargo is being

pretty similar in scope. But now compare the difference in the reactions to them, right. I think we've become inured to these sort of things. That was the takeaway from the Great Financial Crisis. My cynicism is whatever you think, it's much worse. Let's talk a little bit about the Federal Reserve and central bankers. And I'm gonna begin with something from Lombard Street, a description of the money market. Uh. A very famous quote is lend freely at a penalty

rate against good collateral. That that comes supposedly been called Badget's dictum. The first question is, by the way, the whole purpose of that is an articulation of how central banks should respond to a panic to avoid a full blown crisis. First, who is really the author of that rule? You suggest that it wasn't Badget. No, it's it's it's not Walter Badget. You can read the entire book, uh, you know, because many times you'd like Hill never find

Badget's Dictum. He hints around it. He talks about lending freely in liquefying. Yeah, he's got two chapters that are basically about lending freely. Um. He does talk a little bit about what was good collateral, but mostly as a set of shared assumptions that everyone would have about what constituted good collateral, um, which were essentially, you know, uh, good collateral was going to be on these commerce bills, which is basically, here, we've got a contract already set

up that refers to real business that's been done. It's not speculative. Right, that's good collateral, and that is not our definition of good collateral. Good collateral can be securities, right good uh today, And that would not have been

his definition. He mentioned that just in passing penalty rate, there's a sentence about the idea that you're like, well, you want to you want to make it hurt a little Georgia premium above what you could get if there wasn't a panic, in order to discourage this behavior in

the future. But interestingly enough, the rest of the book is about not doing that very thing right because if you make it, if you stigmatize the lending um by a central bank, which a penalty rate would do um, then you've created the very scenario that Badget saying you shouldn't do. So there's no Badget's didictive. He never said that.

His book is not about that, and indeed it's ironic because you know, one of the things that he writes in that book is that there are people are so eager for you to say, all right, well, our central banks good things are bad things, and if you say, well it's complicated, they're like, well, I don't care, right, Welcome to the modern world of politics. And he's writing this, you know, in the late eighteen sixties. This is published in eighteen seventy three. And then he also said, you know,

people just don't have appetite for long books. They want short sentences. And what's hilarious to me about this is the thing that Badget's book is remembered for is a short sentence that he never wrote. So who did write that? You know, it's it's hard that I would be interested if our if our listeners can track this down. I haven't succeeded. I can tell you to people who have popularized it. Um. One is Paul Tucker, who is a great scholar and practitioner of central banking. He's got a

new book, let's just come out. Somebody might consider for for your own, for your podcast, and and uh and for this radio show. He was the Deputy governor at the Bank of England during the crisis, and he has has written a lot about this idea. And he's the one who quoted most often for Badget's victim. It's never Badge being quoted, it's always somebody else quoting Paul Tucker creating Badget's sictam. But again he did Paul didn't create this, right,

He's referring to something that came before. Um. Ben Bernanke is the other one who's really popularized that's but only two thirds of Badgett's victim rent free when freely uh, well, maybe one and a half of it when freely against So so so collateral, but don't do a penalty rate. Right. Uh. But you know Brankie's book, his memoir of the crisis,

he talks courage to accourage to act. Yeah, right, And he notes when he game FED chair in two thousand six, and the chair has a personal library and uh in his office, and he said, I brought Badget's Lombard Street and put it there. Now. Now, ben BURNANKI is a very sophisticated financial historian. I assume he's read Lombard Street, but I have his book. Would not give you evidence that at the end, did you overlap with Bernanke When you were a princeton, he was the head of the

economics department. No, No, I have met him a couple of times before. Um, and you know, we've exchanged views on a variety of topics. I think that he's a remarkable public servant, a terrific scholar. Um. And I always leave reading any paper or even blog post. He's written feelings smarter Um. But we've also had our differences. We've got into an argument about an assertion that he makes that I think is false, which is that the reason that FED didn't bail out Lehman Brothers. Is that it

lacked the legal authority to do so. That's been the claim. I have a pet theory on that. I'm curious as to what yours is. Well, it's legally it's false. That's not correct. They did have a legal authority to do it, to bail out a dealer. Oh absolutely. I mean the statute is unusual and exigent circumstances, a term which is sounds very heavy, but it is not defined. Unusual and

exigent is Tuesday? Okay, yeah, it could. It could be so long as five members of the Board of Governor's vote in favor, which he had, and the Federal Reserve Bank who's in whose district? Uh? The institution exists in New York is that the loan is secured to the satisfaction of the Federal Reserve Bank. Secured to the satisfaction Does that mean, well, it's not defined. Although quite bluntly, we know there was a ton of fraudulent uh shenanigans going on at Leman Brothers with the famous REPO one

oh five and all of that. So you might say, well, then we're not satisfied by that. But that's a discretionary determination. Say we lack legal authority to do so as false. It says we were not satisfied by the collateral presented a different, different, serferent thing, which of course raised the question, then why did they really let it hit the pavement? Well,

then why is a I G. Different? Their answer is, well, because they had a good insurance business going, had all kinds of profitable businesses within their twenty thousand corporations under their uh their parent company. So again, was that the right decision or the wrong decision? As a separate set of questions, was it politically motivated or not? Should it have been? Step set of questions. Did they have a legal authority to do so? Well, yes, of course they did.

And this isn't just me being an obnoxious lawyer saying, well look at this. The idea that they lacked the legal authority to do so was the single defining idea that motivated the passage of Dodd Frank. That's fascinated And so I think that that ends up mattering a huge amount. It just isn't isn't correct. So I wish I was a fly in the wall when they were having this internal debate. But my pet thesis is simply um at

one point. Early in the spiral of Lehman Brothers, Warren Buffett of Berkshire Hathaway had the conversation with Dick Fuld made a low ball offer because he's a value investor, and to everybody who was an employee of Lahman Brothers lasting regret, Dick Folds said, this guy's trying to steal the company for three billion dollars. It was only a

small percentage ownership, and he rejected Buffett. And I can't help but think from a moral hazard perspective the debate going on with Bernankee and Guthner, and hey, how could we bail out this guy when he turns down Warren Buffett, who, by the way, later made a much more advantageous um loan to a much better bank, Golden So Folds folly turned out to uh benefit Goldman and and Buffett. Here's

my friendly amendment to your your theory. I would call it Folds follies because Buffett was one in a series of suitors who came knocking, and Dick Fold was trying to value the company as though it were two thousand five, not two thousand seven or eight, And so I think it was just spectacle ular Hubris that I think the regulators,

including Tim Geitner and Hank Paulson couldn't fathom. So one of the one of the conspiracy theories that a lot of people I think are pretty sophisticated people, and back it was paid payback. It's the Goldman versus Lehman thing. I just don't buy it. I think to the extent that that mattered at all. And by the way, remember that if anybody was payback, there was Bear Stearns go back to long Term Capital Management. They didn't want to. They didn't want to be part of the consortium that

rescued who they were the prime broker for. So when when Bear hit the deck earlier than Lehman, the deal that was actually Jamie Diamond stole it right out from under. I think it was with Covia was looking at it, then Um and then to get the Fed to say we'll commit to backstop if this goes over billion dollars worth of junk. You saw some great dealmakers in the crisis and some terrible. Dick was spectacularly not one of UM, and so I think that that ends up having a

lot to do with it. But I think the biggest explanation of all does come from Hank Paulson. He's the source for a Wall Street Journal editorial. This is after conservatorships, is after the first weekend September for Fanily Freddie, Senior administration officials assures us, huh, and it's finding quote, there will be no political solution for Lehman, meaning there's going

to be no public money for Lehman, all right. And I think at that point, given the bipartisan furor over bear Sterns and Fannie and Freddie, that they had to find someone to say no to and they just didn't recognize that this was going to be the financial cataclysm uh that that ended up happening. See uh, let me let me push back a little bit from fail Out Nation, and I look at Lehman Brothers as merely the first trailer in the trailer park when the tornado came through.

Everybody who was leveraged up with bad paper that was relying on either sub prime or alt A mortgages and drivetives. Now they were one of the worst. Bear Stearns was pretty bad, ai g was terrible. Lehman was one of the worst. But whether Lehman was rescued or not that tornado was going through. You had home prices run up so much and now we're collapsing. That that whole derivative

unwined was going to take place. Even if, now, if you want to argue Lehman Brothers precipitated the conflagration spreading faster, well you know who knows. It's hard to argue against that. So let me ask you to put you put you on the hot seat. Then, even though I'm the guests and you're the host. Good decision, bad decision on Lehman Brothers, assume they had authority to do so, which I'm telling you they did. I'm the wrong person to ask that.

I'll give you the answer. But the reason I'm the wrong person is I believe that see that sort of doric building with the columns over there, called the bankruptcy Court, that's there for a reason. Now, if you want to say, we're gonna take all these banks and have Uncle Sam be dead or in possession. So my favorite example was Bank America, all lynch that whole countrywide. Let's go over there, we take all the debts sticking in to sell it. Um.

There's no such thing as toxic assets. There's only toxic prices. So this at a dollar a hundred cents on the dollar as a disaster, but twenty cents on the dollar for something worth thirty seven is is a winner. So you sell that stuff off, you clean up Marylanch, you spin them out, you clean up Bank American, spin it out, you clean up country wide, just spin. You go through

this whole process. You do it one after another. Now, maybe the doubt doesn't stop at six thousand, maybe it goes to four thousand, Maybe unemployment gets worse, but you end up on the other end with a much healthier financial system. So I'm in favor of following the law having people suffer the consequences of their actions. By the way, I would claw back all the stock options that all these executives would get, but tear the band aid off. It's really painful in oh seven, oh eight, oh nine,

but in you have a healthy economy. Even though what we did ended up saving the system, we're still dealing with ramifications of that. And so my answer is you the reason nobody would come in and buy Lehman Brothers is I think their liabilities vastly out outweighed um their death. The fact that I'm drawing a blank on his name. The guy came in and took over A I G. He did a wonderful job, passed away from cancer. Not A I G had a real business. It had a

real cash flow. The four people on the A I G. Financial Product Group were a debacle, but you could have carved that out, and they ultimately did, and that's why I G is now a functional business. Yeah, I mean

that's interesting. I mean, the the counterfactual you're you're at you're telling us about, I think is pretty persuasive on the following assumption, and that is that the depths that we would have reached in two thousands of any and nine cleansing would have been cleansing, yes, ra than fatal, right, because we've seen national systems that collapse not to stand

up again. Right. Argentina is a great example. If you and I were having this conversation in eighteen ninety, we were in Buenos Aires, right, and we said, hey, let's make a bet America or Argentina hundred years from now, I think both of us would have said, we can't find a counterparty, right, We would have both bet on Argentina as just on much more secure some republic go down the list of whenever there's a crisis, and that was if you like the book The Lords of Finance,

that was imposed from the outside, but still it's a great, great example. So my the question really for us in evaluating these counterfactuals is where is that threshold where under which the US doesn't recover ever right where it recovers in something that we don't recognize. That is the four trillion dollar question? Can you stick around a bit? I have a bunch of more questions. We've been speaking with Professor Peter Brown of Wharton. If you enjoy this conversation,

we'll be sure come back for the podcast extras. Will we keep the tape rolling and continue to walk out over all things Central Banks. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column on Bloomberg dot com. Follow me on Twitter at rid Holts. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Peter, Thank you so

much for doing this. I'm I'm really enjoying walking out on FED stuff and I have a ton of a ton of questions for you that we didn't get to. The Wells Fargo stuff is just fascinating, I mean, and we barely scratching the service. I mean, that's just astonishing to here's here's the thing. The one thing I'll say about What's Fargo, I think that our listeners might want to know is that they made a choice in hiring a new chairman of the board, a chairwoman of the board,

Betsy Duke, former governor of the Federal Reserve Board. And this news was the first thing out of Wells Fargo, including their independent directors report about what had happened that made me think this entire thing isn't just a smoldering pile. They finally on top of it. They finally done something. They finally done something real. And so I have high hopes for for Duke. And I think that she's a really first rate banker intellect She understands the government, so

I act, she understands crisis. So i'm i'm I think that they might have turned a corner. But again, grab your popcorn. The story is not ever So we we really didn't talk about any of your books. The book that's out, um that came out last year, the power and independence of the Federal Reserve. What motivated you to write that? How much of that is you pushing back at all the crazy conspiracy stuff that we see about

the Federals. You know, it's it's me trying to stand in the middle of the conspiracists and the FED apologists who see the FEDS this great temple of reason. Right, that is just doing the same thing NASA does when it sends, you know, the voyager out to Mars. By the way, I call that um economists all have physics penis envy. Yeah, that's this, It's exactly that. And and the problem is that we're talking about an uncertain present with a past that we've not fully understood, making projections

about an unknowable future. Right. We're not talking about physics, right, We're talking about something else. And it's not that there's no technical content in what the FED does. And that's where the conspiracists are wrong, right, It's not being taken over by different ideologues. There is technical There is a technical apparatus. It's just that inside the FED that technical apparatus isn't enough and can never be enough to answer some of these big questions, should Lehman live or die?

Should we take into straits into negative territory? Right? And all these other kinds of questions, the unknown unknowns nobody can answer because humans are involved, and who knows what we're gonna do. So I saw my role, you know, as a lawyer and as a financial historian, not an economist, although conversant in in monetary economics and finance, to be the guy who says it's I'm going to draw the

curtain back. Right, We're gonna look at the man, not the wizard, and it's gonna be okay, Alright, we're gonna do and we're gonna see that this extremely interesting, fascinating, important, powerful central bank is not held hostage by a bunch of greedy bankers. Right, But it's not the wizard. So let's talk about the wizard. Um. I think some people um blame Bernanke for the financial crisis, which I think

is sort of um really misunderstanding the timeline. But the question I'll ask you is how responsible do you think Alan Greenspan is for the great financial crisis? That's great, Um, there's a there's Alan Greenspan has the unfortunate status of being pilloried on the left and the right for totally different things. So left sees him as giving away the store from a regulatory and supervisory perspective. Right, well, he said a couple of things where, um, hey, you know,

the banks will take care of themselves. They have their reputation to worry about. Or um. In California, where the Democratic Congress Democratic State Assembly purposefully did not regulate any of the private lenders, Greenspan said, hey, these are the innovators. Why do we want to get in their way? So

it absolutely is consistent with his ideology. Greenspan also had the misfortune of publishing an extremely candid memoir where he admits completely that yeah, I had no appetite for regulation, and he said that he took care of it by saying, well, I'm as and recuse myself because I ideologically I'm opposed to this. What happens in any organization where the boss says, look, you can do what you want. Here's my vision, but

you make your decision. Do people say, okay, great, well I disagree with your vision, so I'm gonna do mine. Or do they say, oh, well, let's guess what his vision isn't implement it? And of course it's the latter, and that's what happens at the FED. So the left sees the FED as the only governmental institution with both the credibility and the perspective on the economy to do anything about the underwriting crisis fair enough, and then does

nothing about it. And the right what's the rights criticism? The rights criticism is that he played God and he rather than having a monetary policy rule that would have increased interest rates much more rapidly after nine eleven and the tech bubble implosion, he didn't. He felt like that he knew what was better than uh than monetary policy rules, and as results, he started blowing bubbles. So the thing I love about that, I totally agree with your observation.

But there's something deliciously ironic about an iron rand libertarian who says we should not have government intervention in anything unless I have my hands on the wheel, and then hey, watch the whole my beer. Watch this. It's an amazing contradiction, and in real time very few people pointed it out. Milton Friedman was one who did right. So he was as consistent libertarian as you ever find um, with only a couple of exceptions. In his youth wing he helped

create the payroll deduction system, for example. It was something that he regretted the rest of his life. Thought taxes should be voluntarily given. Um. That's adorable. Yeah, right, that's that's the libertarian fervor right there. But but Milton Freed was a very smart guy, and he was asked in the ninety nineties, I mean, Greenspan made a decision that is credited um, that is credited with adding you know, a trillion dollars of wealth and countless jobs to the economy.

And that is by saying in the nineteen nineties, we should not raise interest rates too early because what we're seeing, in part because the technology, uh, in part because of other factors in the economy, dramatic expansion in productivity, rather than an overheating inflationary economy. And so he convinced the other members of the Federal Open Market Committee in nineteen

nineties to hold tight. And one of the hawks on the other side of that was Janet Yellen, right, not the dove on the other side of his funnishness, but the opposite and uh. And he was right in the sense that the economy continued to expand even after him, you know, the stock as stock, the tech stocks fell apart. Where they bottomed out was substantially higher, and of course they went right up again than where others were calling

the Um the top of the market. And so that idea was that he's the wizard, right, he's the maestro um. And I think that that ends up be feeding this idea. When it's good, it's great, right, But when it's bad, you have a villain. And again it's a bipartisan villainy there. I think that's a fair assessment, right, he when as long as everything's going well, hey listen, when the party

is in full swing, everybody loves an easy bartender. But the next morning, when you hungover in sick to your stomach, it's can't believe what sort of jumped this guy was pouring into my glasses. And I think from the perspective, I mean, there's a lot to say in favor and against both of those narratives on the left and the right. So some of those who critique the critique on the left say, um, there's there was no appetite in America

for taking a hard line on bankers. And if Greenspan had done it, he would have been pilloried just as anyone else was. What what about either the tale of rule or any other assessment that, when you play it out to the last steps, says, hey, we should have rates a little higher than these. You know, that's where the Greenspan put more or less can exactly right. And and Taylor himself, although not at the time very much.

You know, John has made a big career since the crisis, and uh and really raking the Fed over the coals, but he wasn't doing it at the time. And even the original papers that created the Tailor rule were much more tentative than his certainty today, which makes me uh much less sure about the Taylor rule. I'm opposed to

writing the Tailor rule into into legislation. Um. But that is the critique the Taylor rule would have said in two thousand four interest rate should have been higher by same same situation, right, they should have been higher by not just twenty five basins points, but by two hundred basis points, right, um or more. And so the problem with that narrative, though Ben murnike um has pointed this out, is that the real estate bubble started. It predated you know,

the initial departure. It predated the monetary policy phenomenon. I disagree with um Bernankee on this. Years ago, when he was leaving the FED, there was a lunch a luncheon that I got to intend, and the conference table was, you know, three miles long. He's in the middle of it. I'm in the opposite corner. So I had to scream my question too, and that came up. And the pushback I gave, and I'll repeat it now, was go back

to right. You have the crash, Greenspan comes in like many new bankers, they're tested immediately, and you pretty much had the peak in real estate, at least in New York and other metropolitan areas in that seven to eighty nine air If you bought a condo in eighty nine in Manhattan or a co op, you didn't get back to break even until like the whole concept that real estate never goes down. That's before we're not even talking

about the Great Depression. But if you look at a chart, you'll see we peaked, took a while to get back over, and my personal experience has been that in the mid to late nineties. Remember the bullmarket really began in eighty two in the mid to late nineties, a lot of people and this is an anecdote, it's not data, but I saw so much of it that I can't believe

there isn't a good data source on this. A lot of people said, Hey, I'm gonna roll out a little bit of my equities and trade up in real estate. I'm in a three bedroom, I want to be a four bedroom on an acre. I'm I'm on an acre. I want to be waterfront, I'm waterfront. I want to

be at a bigger house. Whatever it was, And that's what it was, a combination of all this wealth that was created in the eighties and nineties, rates were still relatively attractive, and it it just was the demographic cycle that people started to to roll up and out and then what could have sort of faded in most most cycles,

the economy drives real estate. Following the nomination of the dot com crash and nine eleven, when rates dropped, I want to say they were below two percent for about three years, and they were about one percent for a year. That's what started that giant spiral. And following there was no refractory period post uh dot com collapse. You had real estate then driving the economy for the next well five six seven years, and that's when everything kind of

went vertical. And then add to that, you start running out of people to buy houses, and you moved to sub prime and all day and you bring in another ten or twenty million potential homebuyers. You know, A buddy of mine used to call that um renters with an option to default, people who really My favorite scene in The Big Short is Steve Correll is talking to the stripper who owns a rental property she's renting out. He goes, you own a house that you rent out? She goes, no,

I owned six. And the light goes off. Oh this is a disaster. This is going to collapse. So when I look at when bernanke says that, you know, yeah, you were cut. You had a huge booming economy for a decade plus and you still a good chunk of that real estate was upside down for a while. Once you crossed I want to say nine seven, Yeah, real estate started to move. But you look at O two oh three or four or five or six oh seven,

it's exclusion. It went vertical. So it's kind of I find he's the same thing with the excess cash looking for a home. I always thought that argument was a little You tell me how disingenuous is is the there's too much savings, that's our problem around the world gets to um my own ideology, which is that I am

a radical uncertain tist. So I love that I don't have a strong view on these questions, but I love doing and structuring those arguments and understanding what would I have to know in order to horse one or another?

And so here's what I would have to know. I would have to know more about the relative availability of credit, right that securitization, the explosion of securitization, and then demand that securitization I'm talking about second third generated into c d O s and beyond that downward interest rate pressure was putting on the system. Uh, And how we would look at that if the federal funds rate was higher, because one view, uh that Taylor and others assert is

that these move an absolute lockstep. Right, So federal funds in two thousand and one to two thousand four, if it had been raised two d basis points or three hundred basis points, and then we would have seen such a dramatic break on the expansion of the housing system. I think there's some truth to that, and I want

to know why, how did you reach that conclusion. I don't have a view on that, So I'll give you short against the counter factual that interstates were higher and we still had that breathtaking enthusiasm that you can make this back on capital gains alone, and it will be swift and swifter than stock markets right under other equities or other asset classes. So so here's the mechanism for that specific thing. And I'm literally talking my book again.

So if you're running a pension fund and foundation, anything that a charitable trust, um, anything that has a five percent bogu, We're gonna give away five percent of our corpus each year in order to maintain our tax exempt status. I think if you're a public pension fund, that's not a technical issue. But any of the giant foundations and charities and what have you have to do that when when rates go to and it's easy to do that.

You expected returns for equities or six percent you're expect to return for bonds a three five percent a blended portfolio, Hey, five percent is a no brainer. How hard is that? Now? You take rates down you have a dot com crash, so oops, there's that. Then you take rates down to one percent. Now my bond aren't giving me anything. I think a lot of bond a lot of fund managers went to their bonds, either traders or salespeople whatever, say listen,

I can't live on two percent. I have to get me something that will generate a better return, or I have to find somebody who will and so out. At the same time, we have a small bit of securitized sub prime and suddenly, hey, just as safe as treasuries. I remember being pitched in oh three, but look at yields a hundred fifty two fifty basis points. Mare, there's

your five percent but bogey. And then all of a sudden, these mushrooms start to pop sprout after rain that the business model was not lends in order to get a yield on a mortgage, but lend in order to sell the papers to securitizers. And now that's what's feeding the beast and that process. Now I'm taking some liberties with the timelines, and I'm sure skipping some steps, but I think that is what led to that massive upswing in the I think, and again, I think it's a coherent view.

This isn't This isn't something i'd call incoherent or or, and it's not a place where I've resolved these uncertainties for myself. And here's one of the reasons why I'm not walking out saying Barry, You're right, bernanke is wrong. I buy in the to the Taylor critique. I think it's exactly right, and part of it is all right. So we've got the soup of factors that contribute the

financial crisis. Easy money is certainly one, right, and now let's talk about the five or six others that are contributing to and explain to me why the FEDS easy money is the factor that we call causal as opposed to just simply part of the soup. Is I agree, it is part of the soup. It's that take the Commodity Futures Modernization Act that said derivatives don't have to be regulated like other insurance products. Absolutely, that's a big part of the global The global savings glut is a

massive factor. Right, So we've got things that unless convinced to that, you're like, you don't, you're not convinced that there's a massive amount of money flowing unless convinced that that is a factor causing a great financial crisis. It might have money yield. Yeah, well money seeking return not necessarily yield. So in in coming up so with the

structure of collateralized that obligations. Right, the financial innovation, which I still think is a pretty breath taking piece of financial engineering in the sense right, being able And it's not financial alchemy to say we can actually traditional mortgage backed securities are already tranched, but they're trenched in a way that isn't about diversification risk, right, it's just about pooling rice on geography. How much risk do you want

to take for how much reward? Yeah, and now cd as are saying, well, we're gonna make this in first in, uh, first out, and we're just going to If you had drawn the lines of c d O S differently, right, so that the equity tranch was much larger and the trip lay transferable smaller, right, that's one option. The other option is is garbage and garbage out? If what was going so when again I'm talking to my book, One of my most stunning things I discovered on the standardized

documents for purchases of mortgages to be securitized. There is a nine day warranty a toaster. By a toast, you get warranty if the thirty day mortgages that go into these c d O s, if they default within ninety day, you can put it back to it. Now, stop and think about that. This is a thirty year obligation, right, how many months is that that's that's sixty months. If it defaults in the first three months, you can put

it back now. If that would have been a twenty four month put which is hey, after two years, we've done our due diligence, it's on you, that would have been a big difference. But because of this was so complicated in real time, nobody understood the details. You could say night by the way, even that put. I think there was a great website called mortgage implode dot com that tracked all of the mortgage ender waters who went

belly up, and it was four hundred of them. Because even with that short ninety day there were people who who they were doing the piggyback loans, they were doing the underlying mortgage and the whole equity at the same time. So you're lending a d and they never made a payment, They lived rent free for five years before they were eventually evicted. How could that ever go this? Let me take a giant step back and tell you why our conversation right now, oh will prove out this truth about

which I don't have uncertainty. The two thousand eight crisis is going to continue to be a master class in financial history for decades to come, just as the Great Depression has. You and I could have an identically structured conversation about what caused the Great Depression, and we'd have so many factors to discuss, and you would say, well, this thing mattered more than that thing, And I said, well, I think that thing is Lewis. It's more complicated than that.

And the reason why for some people that's just massively frustrating. Give me an answer, give me the to identify the problem, give me an answer that identifize the solution. Let's move on. So I will admit I'm ignorantous to what was the Great Depression? Was it was it tariffs and trade? Was it was it Herbert Hoover? Was it income in equality? I have no idea, and I think that those conversations which we can have if you'd like tell us a

huge amount. And why they call that a master classes rather than you know, uh, just a circular track where we just chase each other endlessly, is because by really digging deep, isolating the mechanisms, ask yourself what you don't know, what you'd need to know in order to answer that question. That's how we learn about the mechanics of finance. And I think that's much. It's not not to dismiss my finance colleagues, but I would take that approach to things.

I have taken that approach to things as a financial historian, as a lawyer. Then you know, learning the basics of black shouls or a cap emma or whatever else. Well, that works. So let's jump into our speed round our favorite questions. Let's uh, let's let's run right through these. Tell us the most important thing that people don't know about you. I'm I'm a poor, scrappy kid from More, Oklahoma, and I'm the I'm the sixth of seven kids to

a single mom. My dad died when I was nine, but most of my life, most of his life, uh, he just wasn't good at life, wasn't good at being a human. Um, So, how do you go from a poor kid in Oklahoma to Harvard, Stanford Princeton, and so Um. The first was my brother, who is nine years older than me. Um was approached. He did well on the s A t S. And he was approached by an alum of Harvard saying, hey, kid like you shouldn't go to the local state school, should go to Harvard, which

just didn't compute for anyone in my family. And so he applied, he got in, he went, and then nine years later, none of my other siblings did right well. Everybody else went to UH, to the state schools UM. And then night years later, I was just like, you know what I'm gonna I'm gonna be like my big brother. And so I did well in the s A t S. And I just from the time I was a kid, I was like, I saw what happened to Sam right the way that people reacted to him. Whatever Harvard meant,

it meant something big. And so I applied, I got in, and I went, And then I would love to say that from there it was just all UH sunshine and buttercups, but the but it wasn't the cultural misfit between more Oklahomagetitus is so massive. It was harder for me than some my friends were from you know, gone to lead pipe private schools in Singapore or London, or or Johannesburger, Jennie or whatever else. So let me your brother is clearly a mentor. Who were some of your other early mentors.

One of my very favorite mentors is a professor sociology professor named Mary Waters. I ended up not studying really anything close to what she does. She does studies immigration, natural asters, things like that, but she at Harvard University was the only professor I ever had that just took a keen personal interest in me. And as a as a teacher, so not you know, as as a scholar, I've gone in a different direction, but as a as a teacher, Mary has had a huge influence on me.

Another one is and not ed Maddi. If you know the banker's new clothes, that's her. Um. She had a big has and still has a huge impact on me as a scholar, because how fearless she is? All right, son, this poor kid from Oklahoma, What business do I have talking about trillions of dollars? When you say fearless? In what way she'll say something? Whether it's popular or not well man, she just goes to war against people whose resources vastly outstripped her own on something that seems as

our kane as bank balance sheets. Right, but banks should have much more equity, much less debt and uh and she's just tireless. We don't agree on everything. Sometimes we'll bicker and argue, but she has been just a profound Mentor's let's talk about books, because we we just mentioned the Banker's New Clothes. What are some of your favorite books.

When I was a kid, the only book that ever made me physically weep was Victor Hugo's Lay miserab Um, and I remember reading the unabridged version and just feeling like I had been. It was the first time I thought I don't have to actually have these experiences to experience them. So that was that had a big impact. More more recently and perhaps less uh less Sacraine than that.

Sebastian Malaby is probably my favorite financial journalists. I've read everything he's written, so more Money than God and what was the one on central banks? He wrote? The Man Who Knew, which is the biography of Alan Greenspan. I disagree with a lot of it in terms of the overall framing. Um, but it's it's just a superb product of exposition and research and you know the framing he puts,

the policy questions where he intervenes. Uh, you can agree or disagree, but that's not the main country from the book. It's just terrific history. So if you like biography, Alan Green's fans biot it should have won a Pulitzer Prize in my view. Really, Oh it's so good. Wow, that's impressive. UM, tell us about a time you failed and what you

learned from the experience. So UM, I when I started as an undergraduate at Harvard, UM, I was the president of the math club in my little Oklahoma high school and I just could not do the math in economics. And that's so funny you say that because in high school I was a mathlete and I then I go to Stony Brook for applied mathematics and physics, thinking that I'm the sh isnt and I know the stuff, like I didn't have to study for cow classes and I

would get a's. And then you show up with people who are really serious and suddenly it's like, oh, I'm not as good at this as I thought. These guys who actually put in the heavy lefting do the work. They're running circles, and that was the barry. You and I had exactly the same circumstance. And so what I did in the face of that difficulty is I sprinted in the other direction and way from economics, away from

things that were challenging. At least initially, I was like, I have to do something that immediately validates my natural strengths. I tell my students, I tell my children that that is just one of the worst sins that you can commit against yourself. Um And so it took me. I was in graduate school for ten years, during which I I paid for all of my sins and neglect. I took a lot of economics classes. Now I'm no brilliant mathematician, but there's nothing in in basic economics that's outside of

my Again, I'm not an economist. I paid for that. I'm glad I did. But that failure, that failure was so signal, and that is I ran away from what was hard, and I wish I'd run in the other direction. And I eventually did run in that other direction, but took a long time for me to make up for that tell us what you do for fun. I love racquetball and squash. Um. I love my children. I have three children and have a wonderful marriage with their with

my wife, their mother, Nikki Um. I think he was just traveling this week, and so it was daddy owns the owns, the solo parenting thing and we had a terrific time. But my two year old is h he's an angel ninety at the time a terrorist the other time. Percent. I was very happy to see Nicky come home last night. That was the nine. That's a good So you deal with a lot of millennials and kids in college. Any of them come up to you and say, I'm interested

in a career in finance. What sort of advice would you give that? Yeah? They I do that all the time. I teach a financial regulation financial history course, and I always as I say, the same thing. Right, So fintech is not a creature of post two thousand eight. Fintech is as old as finance. Look for ways in which rules have clumped when that should have been more evenly distributed. Right,

So that's that treats like things unlike. So maybe it's that there's a phyco At score that treats people very differently, and you see a big difference in interest rates and do an arbitrage. So that would be things like so far right, that would be things like, um, you know, looking at underwriting standards that might be different. Um. So that's one thing. So it's where law has clumped people, where the margins are basically identical. Build a bridge, right.

I think that's a really effective business strategy. Second is we're all going to be terrible at at calling uh bubbles at their at their peak and at their trough. But take the Wells Fargo model, nineteenth century version, which is, yeah, we're not going to be in the gold mining business. We're going to sell stuff to people or in the

gold mining business. So whether whatever your view a bitcoin or cryptocurrency, if you can design system that provides services that are portable but that could cater to that, that's a good business to be in, just so long as it's not so catered that you can't that it's not not portable. And our final question, what is it that you know about the world of central banks and Federal Reserve today that you wish you knew twenty years ago?

That that's there's no wizard that there are women and men behind that curtain of substantial and intellect, talent, technique, ideology, judgment values to their people and the humanized Central Banks is not to disparage them. Has to say the people, and I am too, and I can engage in that debate, and I can do it intelligently or I can do it stupidly. Um, so let's do it intelligently, and let's not just say all right, I'll just trust the wizards

know what they're doing. Fascinating. We have been speaking with Peter Conti Brown. He is an assistant professor at Wharton School of Business, both grad and undergrad at the University of Pennsylvania. If you enjoy this conversation, then be sure and look up an Inch or down an inch on Apple, iTunes, Bloomberg, Stitcher, Overcast, wherever finer podcasts are sold, and you can see any of the other two hundred or so such podcasts that

we've had. We love your ammens, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the crack staff that helps us put together these conversations each week. Uh, Medina Parwana is my audio engineer. Producer Taylor Riggs is our booker. Michael Batnick is our head of research. I'm Barry Retults. You've been listening to Masters in Business on Bloomberg Radio.