A lot of the foals of woe.
And an individual loss.
This is the show, all right, everybody, welcome to your one book show on this Monday, July fourteenth. Have an exciting interview for you today. I'm really looking forward to this. We're be talking to Nobot Michelle, who is at the is the vice president and director of the Cato Institute Center for Monitoring Financial Alternatives. I think I first met you, I don't know, on a bus at montpello In, you at the Cato institutent you at Heritage in those days.
I think it was a plane, but it could be a plane. It could have been of us.
But yeah, something like that. I think Mont Parlamin was related, something like that. But but this is great, I mean, following following your work for years. You know, I'm interested in finance and and you've you've written a lot of really really important stuff on financial regulations over the last long time. Yeah.
I don't know about how important it's been, but it's been a lot of years.
No, it's important. I don't know how, let's let's put it this way, how much impact it's had, sadly, but but yes, it's it's important. Uh, And it should have a lot more impact. So you've got a new book out and it's uh, Marching capitalism. Yeah, why do I have the wrong book?
Up? Can you buy you?
It's got financing Opportunity.
That's the other one.
Okay, I didn't I didn't realize you had that one as well. All right, So to books financing opportunities. The financial markets have fueled American prosperity for more than two centuries. Okay, that one I have to get. I've got the other one already. I need to get this because I love this topic. That'd be great. I'll just download it on Kindle because you know, the fewer books I have, the
better in terms of bookshelf space. But the other one is rushing capitalism, how populist policies are threatening the American dream, which is very very relevant right now, and we're constantly discussing it on our show. I had Scott Lindsey him on the show last week. So this is this is the whole Trump administration, MAGA populism left and right really is a big issue. So tell us what motivated you to write this book? Because you have been doing mostly financed stuff, So so why why this?
Yeah, it's a little bit of a change for me. Yeah. Uh. I Actually the motivation for this actually started when I was still at Heritage, you know. I at some point I went from being just research fellow to being put in charge of our center for Data analysis over there, Okay, data for data. So I was sort of in charge of the empirical economics piece, and we started getting asked to defend or to discuss this idea about income stagnation.
And that was the first time. This is way before Trump. Yeah, and I started thinking, well, what stagnation?
What well this and this was a story that came out of the left, because I remember debating this during the financial crisis. People would say, economy, you know, people are stagnation in the seventies, and it was all leftist economists would talk about that.
That's right, that's right. And then the rights started picking it up as the sort of premise for yeah, we need to do more to colm that free trade and whatever China and and you know, all these things. So it was sort of in the background though, and and then as Trump won, really after Trump won, it became much more prominent and I I sort of started putting all this stuff together and I really didn't have a book.
I had just this giant pile of stuff, you know, and then long story short, that just kept going in terms of that that that thing, that theme on the left. You started seeing it more and more and more and more, and you know, I just I got really tired of it. And the motivation for me was that's that's not true, that that stagnation story is just wrong, and that free market paradise story is also wrong. And I don't really like people using data to lie about things. So you know,
that was kind of that. That was my motivation for it. And I was lucky enough that a Cato, you know, it was sort of like, yeah, okay, we could do it, and so I was able to do it along with my other stuff, but still got that one out that just went out.
So it's part of the motivation for leaving heritage, the fact that they went the populist route and away from kind of a defensive markets.
I mean, I had a great, great opportunity to come to Cato, and I wouldn't change my decision for a million years, but but yeah, that certainly was on my mind. I'm glad that I'm here now because I really that that would have just clashed. You know that that whole thing clashes with my worldview, my philosophy what I like to think of as what I've studied for a very long time, you know, And and it gets to the core of what is capitalism, what is free enterprise, what
is socialism? How much government involvement should we have? And that whole thing is just not lined up with my way of thinking at all. So I'm very lucky to be here and stick to my principles.
Yeah, maybe talk a little bit about this mythology and what the truth is. You know, how do they come up with it? And then you know, how do they make such a big mistake if you will?
Sure, well, it's sort of dependent on you know, who's saying it and when. So Orn Cass is a great example. He came out with that book, The Once in Future Worker, and that's when it really picked up at Heritage, and you know, if you go in there, you'll find a very very specific claim of income stagnation and it's from nineteen seventy five to twenty fifteen, and it's the wages of non supervisory workers and has adjusted with the consumer
price end. And basically, if you take that exact same data series, and even if you just adjust it the way he adjusted it for inflation, it turns out that nineteen seventy five is the problem. In other words, if you pick nineteen seventy five's that gives you the lowest possible growth rate that you could have picked between nineteen
sixty four and I think the year two thousand. So it whether they did it on purpose or whether it's a coincidence, you know, I'll let people decide, But that is my definition of some sort of cherry picking, even if it's by accident. In other words, what you have to do to get a stagnant line is you have to either have biased the dates, the inflation adjustment, or
the income measure itself in some way. Because if you don't do that, if you just pick, you know, basically, ninety nine out of one hundred ways show a lot of income growth between nineteen seventy and now, and even before COVID, you know, just if you could want to cut it off before COVID. Yeah, and there's like one way that you can find, you know, that shows stagnant income, and that's the one that they pick, you know, But
I mean, you can look at household income. You can look at median personal income, you can look at total compensation indexes, you can look at consumption measures. You can do this twenty different ways of the Sunday, and you know you're only going to find one way that shows that it's stagnant. And what that means is that the bulk of the evidence does support an enormous amount of growth, not just a little, you know, a lot.
So we're a lot richer than we used to be.
Incredibly so if you look at households and say, like households that earn more than one hundred thousand dollars, that number more than more than tripled from nineteen seventy on up to twenty nineteen. And if you look at the share of households earning less than thirty five thousand dollars, that share went down. So it's not that people drop down, it's that everybody, a lot of people dropped up. You know.
So the middle class is shrinking, but the shrinking because they're getting rich rich.
That's right, We're going to have to readjust the definition of middle class if we're not careful. Yea, because because so many people have done so much.
Better, and of course a lot of the story, particularly coming out of Piquette and the whole inequality literature, is that, yeah, the top of the distribution has done phenomenally well, but put people that you know, put people, they're the ones who have really taken a hit since the nineteen seventies, right.
And that's not true either. You know, we we do see a lot of that with the picketty stuff, and then you we would see that coming out of the left for a while there, and then the rights started picking that up as well. But if you look at the data sets that follow the same individuals over time, again, you see a lot of growth. You see a lot
of phenomenal things. For example, about three fourths a little more than three fourths over the last five decades, a little more than three fourths of all the households spent at least one year in the top twenty percent at least one and less than ten percent spent more than one year in the bottom ten percent. This is a really small share. So it's just not true that we
have these polar classes. You know, there's an enormous amount of income ability across those groups, a lot of people moving up, and if you stay away from that and you just look at the census data, so you're not following the same people. Again, outside of the two thousand and eight recession, you see most of the income growth for the groups that were in the lower end of
the income distribution. You saw a lot of growth in the bottom ten, twenty, and thirty and forty percent, in many cases more than you saw at the top bend.
So what do you think motivates? Because because the data is I mean, I agree with you. The data is pretty clear, and you can spice it and dice it in lots of different ways. And the left had a particular agenda that they were pushing, and this was consistent with that agenda. So I get it they bused everything towards that agenda. But what happened on the right that made this It made them kind of kind of switched. They used to defend, No, things are going pretty well.
I don't know, Okay, I don't know.
So like so there's there's a there's a wide swath of people on the right. Right in my experience, especially at Heritage, you know, or in CA was somebody that nobody ever talked about, and then he was there. So I don't know what motivates him.
You know.
Uh, there were certain people and I won't name names, but there were certain people who liked that story because they were able to say, well, the problem is immigration. We've we've let in so many immigrants and we have to clamp down on immigration. There were other people who, you know, saw it as an opportunity to win in the sense of we who I never thought I was
a part of. You know, we need to win. And Trump is anti trade and look lokid free trade did to the rust belt, you know, so we need to we need to have we need to pound that and and and talk about how Yeah, maybe maybe free trade is not so great anymore, you know, maybe we need to be careful. Maybe it's needs to be sensible. And there were a lot of people who I think were
anti China, you know, just broadly speaking. Uh, this there this geopolitical foe, and they're doing industrial policy and if we don't do industrial policy, we're not going to be able to keep up whatever the hell that means.
Yeah, let's mimic them. We don't like them, so let's let's let's mimic them, right.
Right, Yeah, But they would use the they would use the stagnation stuff, you know, as a way of justifying that. So there's different groups. Yeah, I think there's a lot of a lot of different things going on there.
I think, I mean, they all seem to share a common feature of they somehow want to increase the power of US central government. Yeah, and this is a excuse to do that.
Yeah. Yeah, you know, And and I'm sure some of it is the sort of just you know, basic power DC power hungry sort of mindset.
So so one of the arguments they make, of course, is and Trump makes and and uh I think has resonated is about industrial jobs and and uh, you know, we've lost and you you talk about this in the book. We've lost industrial jobs with de industrializing. We need to re industrialize. And again this is for years a talking point from the left, and they kept talking about this and and promising one day the jobs will come back.
And I think the political gimmick is that Trump figured out that he could get votes by stealing that and and claiming to be more serious about it. So well, what is the truth about the industrialization?
And and and and you know, I think it's I mean, you're right, the left did do that for a very long time. I think it's also uh important for people to remember that there was a faction. There has always been a faction on the right who was sort of doing the same thing like yeah, Ross Bureau. So there's so that that that was certainly always kind of there,
you know. And but but the truth then and the truth now you know, is that it wasn't because of free trade or globalization necessarily, right, it was it was really a productivity story. You can see it, you know, basically depending on exactly where which which data set you want to use, you can go back to like pre
nineteen hundreds, you can go back to nineteen twenty. You can basically look at the most consistent data set you can get at nineteen forty three, and you can see service sector jobs becoming a bigger share of employment while manufacturing is dropping. And to say, and it was even steeper with agriculture, you know, and that going on for even longer. Yeah, and then so you know that again in the forties, so that has absolutely nothing to do
with China or to or anything like that. And you could even take the data, say like the employment data and cut it off at nineteen eighty, so all those trends that took place between nineteen forty and nineteen eighty, and you can just do a simple linear projection and you basically nailed manufacturing employment. Yeah. So if the China stuff was so important and the NAFTA stuff was so important for jobs, just for jobs, you wouldn't be able
to do that, you know, but you can. You can do it for labor force participation as well.
So conquitise kind of make you what it means productivity gains.
What does that mean we can make a lot more stuff with a lot fewer people. I mean, it's really just that simple. You know, if you look at something like steel, you know, basically nineteen seventy one worker would take hours and hours and hours to produce a ton of steel, and now it's close to a half an
hour to produce a ton of steel. If we tried to have as many people working in the steel industry as we did, you know, say like in nineteen seventy, we would be producing enough to supply the world with steel, you know, even more or roughly on par rith or about the same roughly as what we were doing at the end of World War Two, when the industrial world
had been destroyed. So I mean it's so like so that you know, just everybody like that's that doesn't that wouldn't make sense, right, Like, that's not it's just not where we are anymore. Stanley Tools, you know, you can like there's there's stories in the Wall Street Journal. They have a new facility in North Carolina. They drop down from having over thirty to forty people on an assembly line to maybe like ten, and they're talking about it
in the next generation will have maybe two. Yep. Now, every single thing that we manufacture across the entire world, mind you, not just in the United States is like that. And that's a good thing. It's a very good thing. That's how that is the definition of becoming richer. But it does mean that you will have fewer jobs to produce certain things. I mean, that's just that is the
way that works. And unfortunately that's like a historically that's always been a thing, right you think of like Paul Bunyon, the lore of Paul Bunyon and Patrick Henry in the United States, you know, with the hammer trail, yep. I yeah, you're going to have fewer people that have to chip rocks, you know. I mean, if you don't want to chip rocks, then that's good.
Yeah, so there's something super attractive about chipping box for some reason.
I don't know. Yeah, yeah, it's done it before, even with the machine. I don't really want to do it that much.
Not fun at all.
I mean, there's this nostalgia to a world where we all worked in machines and worked with muscle, whereas progress has basically led us to work one with our minds, which is you would think, is progress.
Yes it is, you know that's I mean, if if we wanted to go and say well no, no, no, no, the thing that's important is that everybody has jobs, well we could we could do that right away, right We could outlaw machines, could outlaws shovels. I think I was a Midlton Friedman example. You know, why are you digging with the machines or shovels. You should just dig with spoons. We'll have a lot more jobs. You know, nobody wants to be in the fields all day. That was back breaking.
That was a very difficult way of life. And we were poor. We were literally impoverished. And you know the flip side of that is that you have everybody has to do something to set themselves up to take advantage of the new opportunities. You know. But that's okay, because that's that and that has been happening. That doesn't mean that everybody is a millionaire, yep, But that's never going to happen that way. The numbers simply bear out that
everybody is on hold much better off. Our standard of living is so high across the board, even for the people among us who are on the lower sides, lower rung of the income distribution, have a lot more opportunity, have a lot more amenities, have a much easier life, you know, than we did in say, like nineteen hundred and nineteen forty, even so even nineteen seventy.
And it's not like we've had these massive unemployment rates. I mean, it's not like people last stage jobs and didn't find anything to do, and they found some stuff to do that pays more, that's right.
The numbers of people who who lose it, who are displaced by a trade shock or some other shock, right and have to get a new job. The share that are not able to get a job earning at least is at least is what as much as they earned before or more has also been declining steadily, so we've been trading more and that share has also been declining. So it went from being I think it was about in the nineteen seventies only about a third of the people who lost their job could get an equal or
higher pain, and now it's more than half. Yeah, I mean, that's why we're trading more, importing more.
Yeah, I mean because we have the ability to trade, because we have the money to trade, and they want they want the money to invest in the United States.
That's right.
Yeah, I mean people think of trade, people think of service jobs. The sovice economy as McDonald's and McDonald's is fine, but the reality is, like Apple is service jobs, right, I mean, Google's service jobs is.
So much more. Yeah, it's so much more. And it's service jobs broadly have been an incredibly important part of the US economy really from the beginning, you know, if you go back all the way to just after the Civil War, as we started to industrialize, uh, service jobs were taking off, and we're a big share, and it just kept growing and they've always been growing. It's it's
it's it's definitely not just one type. It's an incredible array of diverse activities that do not require you to stand on an assembly line.
So what happens with all these toasts? Do you have any sense of, you know, what happens to the US economy? Where do we go from here? Because it looks like Trump is not backing down. It looks like he's excuse me, he's serious about this, and it's.
Been uneven sort of the application, right, so some on some off and exemptions, and so I don't, I don't, but but in general, it doesn't look like he's backing down, and that's incredibly unfortunate because you know, this is however you want to cut this and sell this if you're the Trump administration, Okay, fine, But the truth is, this is just a tax, and the higher you make it, the more of an impact you're going to have. And it's not just a tax on Americans, it's a tax
on everybody. So it's a tax on economic activity. You know that this is designed for people to produce less, and that's what it will do. And the bigger we make the tariffs and the more people retaliate with their own tariffs, the less economic activity we're going to have, the less options we're going to have the less things we're going to have to buy, and the less income people are going to have, both in the United States and outside of the United States, so they're going to
have less income to buy our stuff. So it's it's an absolute lose lose situation. There's there's no win here. There just isn't. You can tariff the hell out of everything, and you're still not going to bring all those those garment factory jobs back and all these who would want to, you know, but even if you did. You know, that's another thing. If you look, we've we've had we have had abnormally high, above average tariffs on garment, on the
garment industry stuff for decades. It didn't save them. You're you know, you're not going to save it now, you know. It just it doesn't work, and it is it is. It is going to reduce economic activity at income for people all over the world, and that is not a good thing.
And do you see the same thing happening with immigration.
Yeah, yeah, that's one of my biggest pet peeves. You know, as an American whose last name is decidedly French, you know, I recognize that most of our are are my friends and brethren. You know, we were not Native Americans. We came our ancestors came from somewhere else. This country, you know, right or wrong, was is as big as it is because we've allowed people to come here from other places.
And it's not a nationalist thing. It's in the sense that it's we've literally been built upon the principles of our constitution and we let other people come in. And unfortunately there's always some of that I was here first attitude. This is that attitude on crack apparently. But again, you know, this this sort of thing keeping out people, kicking people out and keeping people out who are productive members of a society. Uh, that's that's how you shrink it. That's
how you isolate it. And that's not how you help people. And you you prevent help people from helping themselves. You know, that's that you're you're impoverishing people. Aside from what you're doing to their individual human rights, You're you're impoverishing people, both them directly and everyone else indirectly. And it's an incredibly bad idea.
So again I'll lose, We'll lose lose.
Yeah, yeah, And and and look, you know, if if we want to talk about securing the borders, that we have a better legal immigration system. Okay, fine, yeah, let's do that. That's not what we're doing.
No, it's not what we're doing. Yeah, same and and and we know that when the economic whatever economic crisis follows, it's going to be blamed on whatever freedoms we have. I mean, that's the other phenomena, right, is that the quasis always blamed on a little bit of freedom that we still have.
That's right, Yeah, I mean the two thousand and eight financial crisis was a great example. You know, somehow that got turned into well we had deregulated financial markets. Well, somebody forgot to tell all the people worked in financial markets that they had been regulating. But that's but that's what that's what took the brunt of that blame, you know, that idea, and we just expanded regulation and expanded the reach of government. You know, That's that's the way it usually ends up.
So so how how do we get so rich over the last fifty years given all that? I mean, that always makes me wonder. Though we did go through a phase of significant deregulation in the seventies, real deregulation, and.
In the seventies, what we did. Was the way I look at it is that we went through a change in the type of regulation. So in the seventies, we we we sort of moved away from rate regulation and and and profit regulation and price controls, and we did a lot more social regulation, you know, with e P I, e P A and VI, mental regulation and just other
just broadly speaking socioeconomic regulation. And then that started creeping up more slowly over time, you know, and now we're sort of starting to get back to some of that price control stuff and a little bit more invasive, which is definitely not good. You know. So we've had a different kind of regulation, but it hasn't really been a shrinking amount of regulation. It's just been a different kind
And you know, I don't know, I don't know. I think in a large part I think it says this is my opinion, but I think that it's in a large part it talks to how how much better our system pre enterprise included, limited government included, how much better it is in America than in a lot of other places, and how much opportunity we do provide through that kind
of system. It's really nothing short of phenomenal because because it sure has God to be a lot better and a lot freer and provide a lot more opportunity.
Yeah, no, absolutely absolutely, So let's talk maybe a little bit about I saw an article yesterday in the Wall Street Journal by the staff of the Wall Street Journal. I guess the editor is on Feddie and Fanny. Oh, you've written a lot about about Freddie and Fanny. Walk us through a little bit of the history of Fitting and Fanny and the financial crisis and what's happened to them since.
Sure, sure, sure, sure you want history like where they started, or just start with the financial crisis.
Give a little indication of where they where they started, right, I mean, and they coopose, and then we can go to what happened in the early two thousands and go from there.
Okay, sure, So the first thing for everybody to remember on that one, they were never really truly private company. Yes, in the nineteen thirties we started Fanny and that sort of started out as just a government agency. Story is more complicated, but that's basically that's what we had. And
they were buying government insured mortgages. Eisenhower tried to privatize them, or the Eisenhower administration tried to privatize them, and then it kind of like half asked it, and we ended up with these government this government's corporation, government sponsorship thing. In the sixties seventies and then late sixties we did
Freddie Mack. We created that on the government side as well, to basically be the same thing as Fanny but for the Federal Home Law Bank system, which also was a government sponsored enterprise.
Yep.
And so so so then they in the in the eighties they sorted to blow up a bit more and grow a bit more. And they were always they always had this mix of public and private, and they always had this quasi public mission of increasing affordable housing, and that got really kicked into high gear in the nineties under Clinton, and it and without blaming it, just on that in Clinton. Eventually it blew up, but it had blown up before. It was just that it was papered
over during the SNL cours. Yeah, Penny May was also insolvent, but everything else was insolvent, and they didn't want to make it look any worse, so we just kind of like let that one go. So it blew up again in eight and you know, at that point they could have been put into receivership where they would have been liquidated and shut down and say, Okay, this was a mistake. We shouldn't have gone this route. It keeps blowing up,
it keeps costing taxpayers money. But that's, of course not at all what happened.
There were put there was of privatizing them and breaking them up into smaller units.
I mean, there was a lot of tots of talk, lots of talk, you know, and nothing short of a miracle that that they could lose that much money and bleed that much cash for so long after that, because they did for years yep, and still come out of it as standing, you know, but they did. So there there were multiple There was one specific set of agreements there that were that were put in place to put them into conservatorship, and then that that agreement was amended
over the next several years. I believe four times. Account might be off, but roughly four times it was amended. And each time it was amended, the line of credit for the companies was expanded. So by the time it was over, the line of credit was up to over four hundred and forty billion dollars combined. Yeah, and they've just remained in government conservatorship. So they've been in purgatory
like that ever since two thousand and eight. And it's really questionable, and I think I don't know where I fall on it, but it's questionable as to whether that debt that they have and the book of business that they have should be on the federal budget instead of being off the federal budget. Oh yeah, so that's another seven trillion or so in potential guarantees that probably should be on.
Yeah, at least a portion of it.
It's at least at least a portion, yes, yeah, And it's not so. And and the the agreements are as they are written still include something called a liquidation preference, which is sort of like a standard receivership conservatorship bankruptcy provision that says, okay, once he's come and these are back on their feet, if they raise more capital, that's fine, but we the primary creditor in this case, the government. We get a bunch of money first. Yeah, so we
make the taxpayers hold. We compensate the taxpayers for all the risks that they've taken on. Well, that number is now really large, like a couple hundred billion dollars, right, So now to have to meet capital requirements, they would have to raise a couple hundred billion in the markets
and pay off the liquidation preference. So now you're talking about like roughly you know, four hundred billion dollars with a B. That's a tall order for anything any company, much less these like sort of like monoline insurance type companies. So you know, the smart money is what they're going to do is they're going to redo the agreements and they're going to tell the taxpayers, I don't worry about it. You know, we already got paid back.
It's just two hundred billion in a world of trillions. It's not a big deal.
Nobody do you know, And they and and it is true that the companies have paid back a lot of cash, but again you know that that was the deal. Yeah, you know, it's kind of like it's a principal interest agreement. And you know, with your home mortgage, for example, if you just said, well, I mean no, I didn't pay the principle back, but I paid you a lot of cash. I paid you cash to cover the value of the house. So I'm good. Right, the bank's gonna say, no, you're
not good. That wasn't the deal. And it's the same same sort of thing here, but the smart money is that that's they're going to do something like that.
Yeah, it's it's amazing to me. I mean, these companies are so corrupt. I remember that in the early two thousands, for years, you couldn't even get a financial audit, a financial statement. Yeah, out of out of I think it was Fanny or Feddy. They couldn't even audit the themselves. And well that's.
Another thing, you know, like when they when they were created with their charters, they were given these federal charters, they were exempt from SEC registration. They didn't they didn't have so they didn't have to file the statements at all. I mean eventually they did. They volunteered what they wanted to, but they didn't have to. They didn't have to pay state and local income taxes.
I didn't know that. Well.
Yeah, and then and they had a line of credit with the Treasury from the beginning.
So yeah, and and you know, God and Frank I think did pretty well off of these companies. And yeah, ultimately they bill saved them.
Yeah, I mean the whole thing, the Hair Act everything, and they I mean they could have they could have liquidated them but there was no way they were going to do that, and they didn't. And they're now you know, now they are they're more entrenched in the mortgage market US mortgage market, and they were before the crisis.
So this is Trump. According to the Wall Street Journal on his I am working on taking these amazing companies public. I want to be clear, the US government will keep its implicit guarantees, and I will stay strong in my position and overseeing them as president.
Yeah, that's so clear. I don't know what the hell that means. I don't know that's you know, if it's an implicit guarantee.
Why you saying it?
Yeah, you shouldn't be saying it, you know, And to take them public, well okay, but you know that's so. Are you saying that they're part of the government right now? And if they are, why isn't that on the government balance sheet?
And if there's an implicit guarantee, why isn't that on the government's balance sheet? Yes, it's it's no end. Yeah, it's one of those. The perpetual perpetually amazes me. And I mean, who is there's a there's a small interest group out there in Washington, DC fighting for these guys, and they and everybody else I think knows that it's completely corrupt and it makes no sense, and yet it can.
Every time I write anything about the g SES and how they should have been shut down and they should be shut down and that sort of stuff, I get tons of hate email and interesting. Interesting, Yeah, that's awesome, good, good.
So this is the lobbyists and employee employees, I assume, because I don't think there's anybody who does economics who believes they should still be about.
I don't know if it's bots or I don't know, you know, I don't I don't know what it is. It never fails.
Getting hate mail is a sign you're you're you're doing something in the world that's good. I'm a huge I'm a huge supportive of it.
Good.
Talk about another institution that is, and this one might be might be ending. Maybe this cfp B, which is a you know, it's a unique animal that was created also out of the financial crisis. A lot of you know, financial crisis resulted in a lot of regulations and a lot of inugatory agency. This one, so tell us a little bit about its origins, you know, what happened to it and now what the Trump administration's trying to do with it.
Sure, sure, this is another This is a Dodd Frank creation, flat out. This was Title ten of Dodd Frank and it was basically the brainchild of Elizabeth Warren and another lawyer. And the idea is that we needed this, or the idea that they as they pitched it, is that we needed a consumer protection agency just for the financial markets. And they kind of sort of ended up tying this to the financial crisis story, saying, well, you know that
was the problem. We didn't have a regulator like this, and all those people that bought those mortgages were tricked. You know, they didn't know what they were buying, They didn't understand what their payments were are going to be, and all that kind of stuff, which you know, that's that's a stretch. Yeah, but that aside, you know, that
story ignores that we had to create the CFPB. What we had to do was we couldn't ignore federal law because there were twenty something statutes that were absolutely one hundred percent consumer protection for financial market stuff, right, So we moved all of that stuff over to this new agency, and some of that authority came from and a little bit is still shared with the Federal Trade Commission, whose motto is protecting America's consumers, and the federal banking regulators.
So the FED basically what you had before basically was you had the FED, the comtroller, and the FDIC doing the consumer protection in the banking industry, and the Federal Trade Commission and the Department of Justice doing it everywhere else. So you know, maybe maybe you had a case for consolidating it at the FTC or something like that, maybe, but that's not what we did. And we also so
we created this new agency, the CFPB. We created it with some interesting structure that we didn't have in the other agencies. At first, you couldn't fire the director. They get their budget from this direct allocation from the Federal Reserve instead of appropriations and some other things. Some of this has changed a little bit, but not all of it. Anyway, what's going on now is the Trump administration has decided, yeah, we're just going to send everybody home and kind of
ignore that it's there. We don't we're just not going to do anything with it. So so it's kind of just sitting there in limbo, and you know, I don't know what the endgame is. I would not be sad to see the CFPB go not at all, because it was not necessary in the first place. So, I mean,
I believe that firmly. But you would need an Act of Congress to completely get rid of it, you know, so they could, I guess, theoretically, for the remainder of the term, just sit there, you know, and not do very much with it, just do the bare minimum to comply with the law.
So they basically fight everybody who looked at There were a lot of employees, if I remember it.
A lot of people. Yes, a lot of people have been furloughed, a lot of people have been told don't come to work. I think some of them are limbo still and they're just really not doing very much. They had nominated a director and then they pulled that nomination and sent him to Treasury. So it's just just kind of hanging out and Russ vote who is the OMB director is the acting CFPB director. So and look, I'm I'm all for.
Absolutely, you know, not having it. I mean, we have too many financial regulation regulators anyway.
Yeah, I mean, if you're if you're a large financial institution, you're regulated by over a dozen financial regulators.
A dozen I never got to a dozen, yeah wow, okay.
Or potentially depending on exactly what you're doing, you know. But that's that's another thing, you know, the cfp B. You know, it really didn't make any sense to give them examination authority. Well, if you're going to have an agency that's doing consumer protection, that's basically that's protection against fraudened deception, and that's you know, you don't examine somebody for that necessarily, right, It's if a case is brought,
you go with it. So they've they've they've been a controvert agency from the beginning.
And if they have done real home since they were established, I mean, is they real it was their cost? I'd say, so, okay, you know.
I mean it's it's it's an enormous regulatory cost, you know, and it's it's it's it becomes hard to do business. Yea. The very first sort of well one of the very first things that that they did under Richard Quadre was they they changed their interpretation of the Real Estate Settlement Procedures Act, which sounds benign, but but but they changed the way they interpreted had been interpreted at the federal level for decades, and then they went and they said, okay,
we're going to apply it retroactively. So they sued this company, Pah, and they find them one hundred million dollars. Now, how can you comply with a law retroactively based on an interpretation that somebody just made up? So you know, I mean that's a real cost, you know, I mean, and it's it's more than one hundred million dollars, you know, So so yeah, it's it's not been my favorite agency.
They basically destroyed the payday lending industry. You know, there there is still small dollar lending, but it's not the industry is not anything like it was. A lot of people dropped out of the of the consumer small dollar lending industry because they implemented a rule that was much harsher than it needed to be, that really wasn't based on evidence, really wasn't based on data. A lot of people on the left have been crusading against payday lending
and small dollar lending for a very long time. They wanted price controls, They couldn't get the price controls, so they de facto price controls, you know, and and and that's what happened, and now you're hearing a lot of that on the right too, you know, with in terms of price controls. But but anyway.
So what's your assessment of this new bill, the Genius Act, the stable Coin Act is this? Is this a positive step?
I think so there's there's some stuff in there that I think could be better, but there needs to be some clarity there. You know, there really does need to be some regulatory clarity, you know, in terms of of of how the SEC is going to regulate these things, how the banks are going to regulate these things. I mean, you just you can't move money in an unregulated fashion. Now I'm not saying that that shouldn't be the.
Case in the world in which we live exactly exactly.
So you're you're opening yourself up to a lot of liability without that regulatory clarity, and we need something, and there's a lot of good stuff in the bill. I think it should be opened up even more. I think part of it is anti competitive in terms of it makes it more difficult for non banks and non financial companies to issue their own stable coins.
I mean, the obvious people to issue stable coins, in my view is like Amazon. That's right, I mean, the ideal player in the stable coin market, and yet this bill makes it more difficult to them to do it.
That's right, that's right, that's right. Yeah, yeah, that's not the way to go. And that's anti competitive. And you know, if you are sitting there on the left or right and you're saying, you know you don't want concentrated economic power, well, I mean you would want to open that up.
Yep. Is there other stuff coming down on crypto that that you think is going to be positive?
There? So there's a market structure bill. Uh, Oddly enough, Clarity Act is one of them.
Okay, it's the name, and uh, that one.
Faces a lot of higher hurdles. I don't I don't know. I don't really see the obvious path for that one to get out of the Senate. But there's some stuff in there that's good, and there's some stuff in there that could also be a lot better. Maybe some you know that they I think it to to to really fix all of this stuff, you know, is going to take a much broader view than what we have at
the moment. And and unfortunately, even though the administration seems to be in many ways like pro crypto you know, it's not principled in in many unfortunate ways, you know.
And to start with the idea that it should be okay for us to exchange money, you know, without getting the government's permission before we do that, you know, that would be a big start, you know, But instead it's it's not really looked at that way, and that's that's that's the genesis of some of this, some of these problems.
Yeah, I mean, it seems like there's an inherent conflict there. On the one hand, you know, they like crypto for some reason. On the other hand, they don't want to give up the control and the power that they're controlling money gives them.
That's right, Yeah, And then you know, the House version of that and the Senate version of that, and how that plays in with the administration is a mess because a lot of people in both chambers see the administration rightly or wrongly, as in it for their own profit, and they see it as corrupt and you know, so it's just it's a mess in more ways than one.
But that's a big problem, you know, to get it across politically where you but you really do again, you know, with with just broader crypto you need some clarity on what is a token versus what a security? What is a security? And without that, you know, you could easily see a replay of what happened under Gary Gensler's SEC if Paul Atkins isn't there or somebody on the other side comes back who's Againstler like person.
Tell us a little bit what happened on the Guessla and I guess Elizabeth with Elizabeth Wallen's uh, yeah, you know, nudging yes, so no.
They so they went they took a very broad.
View of what would be a security, and what that effectively means is, if you're the SEC, you can look at pretty much any crypto token and say, no, it's a security.
What you're doing and what you've done is illegal, and you can't do anything else unless we say it's okay, and we don't really know what we want yet, but we'll figure it out. So that just squelches everything.
Yep.
And that's that's the short layman version of what's happened. You know, it's it's it's just squashed innovation and it's held it's held the industry back quite a bit.
And then they went after the banks, right, they went after the banks that hold custody on on on the on crypto, anybody who dealt anything with crypto.
They yeah, yeah, that that was a you know what was a reputational risk you know that was that was one of the excuses for there because supposedly under crypto the only people who use crypto or criminals, Yeah, terrorists.
I mean, they fosd that bank in California to shut down Silva something, Silva silver Gates, the.
Silver Gate, Silicon Valley Bank, so Silvergate, and one other one that.
It was the New York Bank. There was a New York bank that probably if it didn't have crypto, would not have been closed, but because they had crypto, was probably shut down because of that.
That's right. And that was the Barney Frank Bank.
Yes, yes, ironically, Yeah, he was on the board.
So you know, and here you have the former Democrat, former Democrat chairman of the House Financial Services Committee saying, no, this is bogus. But didn't it didn't matter.
Yeah, that was surprising. It didn't matter because you'd think he had he'd have some political capital over there, but I guess he is. He's at the end of his career. Not the not not not the peak or the beginning.
I guess not enough, not enough sway anymore. I guess right.
Let's see, we got a few questions here from from the audience. Okay, Michael asks, I mean feel fee to say, you know, if you don't want to answer them, that's fine. And mikel ask is the stock market doing well because of deregulation under Trump?
Mm hmm, I mean I I.
Is they deregulation going on? Or put it this way, is they deregulation going on into Trump?
I think that there are there are pockets of things that are better for regulation, for the regulatory environment for there's no doubt. I think a lot of that is agency driven, though, you know, so hopefully I mean not hopefully, I mean it'll it will last as long as an agency lets it last. I but I don't see the massive type of deregulatory state that you know, we need. Yeah, And I don't know that they can do that without bills.
They need Congress. They need Congress, but they need to do the hard work that's involved in that. Yeah, yeah, I mean maybe an energy It seems like it seems like they they're taking most systematic approach to deregulation.
Yeah, I think that's I think that's been one of the bright spots. From my understanding of it is that it is one of the bright spans. So, you know, but but financial markets, you know, I I would say that we're much better off than Gensler than we were with Gencler for crypto and on the banking side, you know, I'm sure that the larger banks are happy that they're going to get a better capital regime than they would have had otherwise.
Well, they're going to love consolidation. I think in the smaller bank space, the Biden administration was really restricted the the consolidation and banking need to consolidate. We have still way too many banks.
Yeah, oh, I would agree with that. You know, I think we're probably in the minority opinion there, but yeah, everybody loves the community banks for some reason.
Yeah, crazy, I mean, I love I don't know, if you know. Color Moses work on on on on the difference between the Canadian banking system and the American banking system, and it's striking.
Yeah, yeah, yeah, Charlie's done got a great work on that, so is George George Ala. It's been it's an enormous difference we have. The US has the worst track record of pretty much any industrialized country, and you can't really say that they've been be regulated ever pretty much. Ever.
No, it's a lay up on layer. They keep laying them on.
Yeah, And that's so that's that's another area where you know there are some marginal changes for sure, but you know there's not there's not a structural change in the way we do the regulatory stuff, right. It just it's there's some good things, like the reputational risk stuff coming out of Congress, but there there's there's we need a lot more, I would say, yeap oh yeah, So I hate to predict or prognosticate on why the stock market is doing good or bad.
Yeah, nobody should. Nobody should. It's it's a very dangerous game. Yes, So here's another one prediction progostinating. What do you so, what is going to happen with AI? I mean if if if everybody's still panicking about something, you know, tech reducing manufacturing jobs twenty years ago, AI is going to revolutionize productivity.
In a way.
That's that you know, jobs are going to change dramatically. How does the world deal with AI? I mean, economically, I don't think it's a problem. But politically and in terms of the kind of stuff, the policy stuff, how does what happens?
I mean, that's a that's a that's a great question, and it's probably a little bit broader, you know, than than my area of expertise. Economically, I agree, I think
it will work out. Politically, you know, there are all these data problems that that we have politically and in the sense that everybody's freaks everybody freaks out about who has what data and and what you can do with it or where the companies can do with it, and then we get into this weird space of should the government do this or that, or should the government have that or should the company have that? And there's a lot of a lot of potential major policy snaff Who's
I think that you can get out of that? See a lot of stuff happening at the state level. So I don't know. I think, you know, it's probably the beginning of this is going to be a little messy. But I don't I don't I don't know politically, I don't know where that goes in. I'd be hard pressed to make an easy prediction on that one.
I mean, I see these factories in China. They call them lights out factories because they never have to turn on the lights because they're no human beings there. It's just these robots just doing it all automated. Yeah, and it's one hundred automated. And and that's the future, one way or the other.
Yes, I mean it, yeah for sure. How long it takes to get there and how pervasively that ends up being, you know, we'll see.
So Jacob asks, what's a competitive edge for bick and mortar banks. I can't see their purpose other than consumer sentiment for an inputs and banker.
Yeah. I think that a lot of people do like going in to see somebody. The banks, many banks, not the banks. Many banks still base their business on relationship building. Yeah, I think you would. I would have to say without data, But I think my gut feeling is that their competitive advantage has gone down.
I think that the best data on that is the fact that the number of branches are shrinking.
Yeah, so they recognize.
It, Yeah, they know it, and so I yeah, I'd say the people who like to go into the bank are dying off, you know. So I think my generation is probably the last generation. I mean because the kids, you know. I mean I I don't go into the bank. I haven't been to the bank in a long time.
Either, neither. My wife doesn't my son. I don't think it's ever been there.
Yeah, exactly. So it's it's it's it's all going to be on the phone. And this is why you don't need so many community banks. Community banks are dying. I will die ultimately. Hopefully they'll consolidate a way instead of just going bankrupt, but they will die.
Yeah. That's that's another interesting piece of this administration because a lot of those small banks are called c DFIs community development financial institutions. Okay, so a lot of those smaller banks are subsidized quite a bit. They get a lot of grants, they implement text credits, you know. But you don't you don't need them, No, you don't. You could lend to a rural community from anywhere. Ye you know,
maybe you do need a branch here or there. I mean, I like that's for them to decide, you know, But you don't need thousands of little banks that are tied to individual communities, you know, which is where the whole the Community Reinvestment Act a big regulatory piece that whole that whole thing is misplaced. The technology has outstripped that act. It's a nineteen seventy seven billis that says you have
to reinvest in the community that you're in. Yeah, that was before we had branch banking legalized, and now with technology it's it's basically completely obsolete. Ye.
But it's this purpose of redistributing wealth to the Uh. Yeah, those social groups who all the groups that got the investment money in the communities. I remember they used to bribe. They used to they used to bribe the banks and say we'll object to your morgia unless you pay us X. And he got the money.
No, that's right, that's right, not the money. Uh.
Kim asks if you have any thoughts on Malay. Oh, it's been great to see the one bright spot in the world.
It's great for me. I think it's great. Uh Caate went down and did a big conference with him. Okay, you know, I think it's it's a great, great example in the modern world of markets really do work and regulation and in heavy heavy government involvement. I don't if if the metric is you know, people doing well, Yeah, people improving their living their their living standards.
It's it's uh, it's pretty amazing what he's managed to do in a year, I mean in a in a in a bit, so it's uh, it's quite stunny. Uh let's see. Oh yeah. Kim Os asked what's the best data to show people to dispute to claim the middle class shrinking because everyone is getting poor.
Well, I mean, I've got a bunch of stuff in the book. I'm not trying to hawk the book.
It just talked the book. The book.
Buy his book, tell me and I'll send you the book for free. But but you can there's that's the thing, you know, there's really not one best bit of data. Like you can look at household income data, you can look at personal income data, you can look at consumption data, you can look at uh, total compensation data, and you there's there's a whole bunch of references in there. I've got a whole bunch of blog posts you know that
that show different different cuts of this. The thing to remember is you want to look at along as long of a series as possible. You want to avoid the trick of starting the series somewhat excuse me, starting to look at somewhere in the middle of the series, it's better to adjust it with the PCE for inflation rather
than the CPI. What's there too, The the CPI is going to bias you downward, so it's it's not going to look like there's as much growth because there's an inward there's a there's already about a bias toward higher inflation in there. Okay, but even if you just do use the c p I UH and you can, you can use the official UH Census Bureau numbers, you know,
when they put out the household income distribution. If you want to avoid you know, having to listen to somebody like me, and just go to the government website, go to the Census Bureau when they where they put out the annual income household income distribution. You can see that. You can go right there. You can see it. You can see the if you look at the long series, you don't see this. You know, you see this. It's real,
It's really there. But I but I do have more more in the book, I have more blog post I'm happy to I'm happy to send things.
And you post stuff on Twitter that that corroborates all this. Kimos asked, is the middle class shrinking a problem even if they're getting richer? Should we redefine middle class?
Well, in one sense, it's you know, it's it's the group that's in the middle all and you know if if if people are getting richer and and and they're still in the middle, well, I don't really care, you know, that's how I look at that. The but the part of the problem is how do you define middle And if you do define it in a static way, you know what happens when people get richer and and I don't I I don't think that that's a problem. I
think that that's a good thing. So even the people who come into the middle or used to be the middle have been getting richer. And I think that is as long as per capita income is going up, as long as people at the lower end and the mid and and every other you know, cut that we take of that distribution, As long as as people have opportunities, and as long as as people are doing well, then then we're good.
Well we're good. We're not as good as we could be.
No, that's right, that's right, that's right. I know I I should have been more careful.
No, that's right now.
I mean I do. I I because I and that's a fine line that I walk with the book, because I do think that things could be a lot better. I do which and given how good that they have they have been, I mean, I think that that's amazing. And unfortunately, I think we're going in the wrong direction. And I do think you're going to see things flatten out a bit.
I think stagnation is it looks like it's it's where we're heading.
It's they have what some would call a de growth agenda, whether they want to say that or not.
And they left and right are united on this. That's what's scary.
Yes, it's very hard to see getting out of it.
If if so, Mike, as if the fond companies eat the tariffs, could that justify saying China will pay me so much money just justifying them?
No? No, I mean that's no.
They can't eat the tarffs.
No, they can't. And and and even if you even if you want to have that thought experiment, okay, fine, then basically what you're doing is you're saying that attacks on our imports is a tax on their exports. So now you're going to take money away from them. On their side, they're going to have less money to buy other stuff. So that's still a decline in your overall consumer base. And that's enriching government officials, not the private sector, and not the people who are trying to make a living.
So no, that's not it's still not a win.
And and given that, given that it appears tariff revenue is way up, somebody, you know, we're obviously paying for it. Yeah, the American government doesn't get anything directly from China. They get it from customs officials who collect customs at American borders. So we are paying for it one way or the other.
That's right. No, No, And and you know, I mean there's not like historically the average rate of profit is not fifty Yeah, I mean that's that's not the way any businesses tend to.
Work, particularly not in China, particularly now Walmart. Right, none of these companies there's they run a very thin margins, so they could go out to business if they eat it, which is another hits on our stand of living, quality of life. So there's no way out of it. No, Jacob says Hong Kong didn't collect financial data for years due do they fear that politicians would distort it. Should all governments do the same, you know, take us out
of business vi yeah, some people out of business vie. Yeah.
Yeah, I mean you can make a good case for that, you know. I think unfortunately, you know, if we talk about the realm of what's possible in the US polics right now, I don't think we're closed.
But yeah, I mean, I mean, laym I do it in Argentina. You could you could imagine him doing something like that. You see what happens there. Yeah, all right, I think this is the last question. A take as a Turk dicotomy says the middle class is shrinking, with more moving up, some falling down. How do we address those who fall behind and grow resentful and.
Destructive and go and go resentful?
Yeah, because they're falling down, they grow resentful and destructive.
Oh okay, okay, okay, Well, I mean so some I'm sure some have fallen down, you know. But but again that's to be clear, that's a small because.
The actual low income is actually shrunk the number of people in the low income Yes.
And the groups at the lower end on average have done much better as well. Now, so all that said, Okay, this is is another one of those things where let's let's just sort of theorize that the thing to do is to have some government safety net. I'm not saying you should, but let's just say you should have some government safety net there that maybe it even includes, say
like career development and a special assistance and stuff like that. Okay, well, we've actually got that, and we've had that for many years. We've had specific things that deal with trade assistance, so if your job was taken away by trade, then you go for that, you know. And we've had over three thousand one stop labor development shops. You know. We've got aid for two year degrees, four year degrees, vocational training. All of that is. We have financial aid available to everybody,
especially lower income folks. It's easier for them to get it now. So I'm willing to entertain that it's possible that we need to do those sorts of things. But I just want to start from the position of Okay, we do do do do it. We have been and we have been for decades. That's not new. You know, this stuff started a lot of it in the thirties or forties, increasing so in the sixties and seventies and
it has not gone away. So there are things that we can do as just members of our community and our society just to be aware of what's going on and pay attention to our fellow citizens as well. You know, I think that's important.
And a lot of its education.
Right.
As long as we have these people are the right and the left capitalizing on these people's frustrations, it's very hard to get through. But if you had actual leadership explaining to them what's actually going on, Yes, I think that would maybe they're like all these things would be different, but you all right, great, this is this will be fun. Thanks you no, but I really appreciate it. So where could people find your stuff? Twitter handle stuff like that.
Yeah, if you go, if you go to Cato dot org, you can search my name, or if you just do a Google search Cato nor Bird, Michelle m I C H E. L. You know I'm right there. You'll find me right there.
And don't forget guys to get the book. So question capitalism, a populist policies are threatening the American dream. It's Amazon, Buns and Noble, It's it's available everywhere to.
Get the book, and it's a quick read.
Yep, it's a quick read and it's fun. If you like data, absolutely get it. And uh if you want those tools. I think Kim asked for convincing people the data is all there. Yeah.
I hope it's there. I tried to invest to keep it pretty comprehensive and not put people to sleep. So thanks Novode, thank you very much. Appreciate it.
Keep up the good wok all wait wait here man,