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684. He Helped Clean Up the Last Crash. Does He See Another One Coming?
01:06:59
Former S.E.C. chair Gary Gensler has had a front-row seat to numerous financial booms and busts. How does he feel about America’s massive bet on A.I.? “Something has to give.”
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- [00:01]
Stephen Dubner
Freakonomics Radio is sponsored by Ozempic Innovation happens through rethinking what's possible, and when it comes to GLP, 1s ozempic pill does just that. Learn more about Ozempic Semaglutide Tablets 4 and 9 milligrams by calling 1833 OZEMPIC. Or visit ozempic.com to view the medication guide and ask your doctor what's possible with FDA approved Ozempic pillars. Freakonomics Radio is sponsored by Progressive Insurance isn't one size fits all. That's why drivers have trusted progressives Name your price tool for years. Just tell Progressive what you want to pay and they'll show you coverage options that fit your budget. Visit progressive.com to find a car insurance rate that works for you. Progressive Casualty Insurance Company and affiliates Price and coverage match limited by state law. Freakonomics Radio is sponsored by Hotels.com Hotels.com gives you access to hundreds of thousands of hotels worldwide and when you join for free, you can save up to 20% instantly with member prices. Plus, every stay earns rewards. So when you book one trip, you're already lowering the cost of the next one. Hotels.com is simple, rewarding and designed to help you get more out of every stay. Sign up for free and booktoday hotels.com all in the name. The US economy is made up of 20 different sectors, as the government calls them. There's the agriculture sector, manufacturing and construction, healthcare, transportation and energy. One of these 20 sectors is fundamentally different from the rest. Why? Because it intersects with every other sector with an intensity and at a scale that we have never seen in human history. I am talking about the finance sector. Listen to Gary Gensler.
- [02:09]
Gary Gensler
Finance is a critical piece of American exceptionalism. We're about 4% or so of the world's population. We're 25% of the world's economy, but we're 50% of the world's capital markets.
- [02:24]
Stephen Dubner
It's easy to argue, and some people have, that we are living through the greatest period of wealth creation in history. The financial markets that support this growth are exceedingly complex and few people understand them as well as Gary Gensler. He spent the first 18 years of his career at the elite investment bank Goldman Sachs. He first got into government work in 1999 when his Goldman elder, Bob Rubin, recruited Gensler to the treasury department. After the 2008 financial meltdown, Gensler was asked to help clean up the markets that drove the crash. Barack Obama installed Gensler as chair of the cftc, the Commodity Futures Trading Commission and later, during the Biden administration, Gensler chaired the sec, the securities and Exchange Commission. Now he is a professor at MIT with a specialty in financial booms and busts.
- [03:18]
Gary Gensler
The debate really is, when do you have these booms that lead to just recessions and when do you have these booms that lead to real washouts?
- [03:26]
Stephen Dubner
I wanted to speak with Gensler about the AI boom in particular.
- [03:30]
Gary Gensler
That's the big financial risk in the economy right now.
- [03:34]
Stephen Dubner
And why is AI such a big risk?
- [03:37]
Gary Gensler
We have a parlay bet right now. It's that the model companies like OpenAI and Anthropic and so forth, and the hyperscalers like Microsoft and Google that their capital expenditures will lead to enough revenues. The second part of the parlay bet is that it will also lead to sufficient productivity gains in the economy in the near term. I'm not talking about in 10 and 20 years. In the near term, enough productivity gains to make up for what is going to happen.
- [04:10]
Stephen Dubner
So what is going to happen today on Freakonomics Radio, we get Gary Gensler to help us sort that out. This is Freakonomics Radio, the podcast that
- [04:32]
Gary Gensler
explores the hidden side of everything with your host, Stephen Dubner.
- [04:45]
Stephen Dubner
All right, let's start with Gary Gensler's
- [04:47]
Gary Gensler
birthday, October of 1957, the same month that the Soviet Union put Sputnik in the air, and the same year, 1957, that you start with artificial intelligence.
- [05:00]
Stephen Dubner
Gensler is off by a year on what people consider the birth of modern AI. That was 1956, but that's not his point.
- [05:09]
Gary Gensler
Few people really think AI is as old as I am or that I'm that young.
- [05:14]
Stephen Dubner
And now Gensler is working at one of the epicenters of the AI revolution.
- [05:19]
Gary Gensler
I'm not a card carrying PhD, but MIT saw fit to take this old math guy and make me a professor of the practice. And I guess you don't view me as a competitor, but Simon Johnson and I started this podcast, Power and Consequences.
- [05:33]
Stephen Dubner
Oh, I know. I've been listening to it. I like it a great deal.
- [05:36]
Gary Gensler
Well, thank you. I mean, we just try to do explainers and we're broadening out and inspired by what we do with students. I think there's an overlap of what we're trying to do. We use data narratives, we use historical narratives a bunch. To me, history helps inform thinking about the present and mostly what it means about the future.
- [05:56]
Stephen Dubner
I was wondering if you could just compare how it is for you to navigate three different systems. Academia now, government service for a long time, and before that, private Sector Goldman Sachs for a long time.
- [06:08]
Gary Gensler
First, a similarity. I've been blessed by working with people of very high caliber professionalism. The Goldman Sachs merger department in its day was like the Green Beret of M and A. Bankers working on various campaigns and political efforts even when we lost, but working with really talented people. And now, my God, the finance group and my co podcaster Simon Johnson just won the Nobel Prize in economics two years ago. The similarity, very high level of professionalism and gray matter. There's real differences though. At Goldman Sachs, I learned about trying to discern value. What's the value proposition of a company? How do you sell it helped me in politics. Also what was the value in any transactional situation, but also broader strategy. The second thing I learned at Goldman Sachs that has helped me throughout is negotiating skills. They were amongst the best, skillful, courteous negotiators. I took that into the political world. I worked on a lot of legislative initiatives with Paul Sarbanes. That thing called Sarbanes Oxley. I find my colleagues at MIT are really collaborative. They're always curious if I reach out to them and say, hey, could I stop in. In academia though, it's not the same level of teamwork that I learned at Goldman Sachs. In politics you have to always find consensus and there's a hierarchy that messaging helps drive the political consensus and the policy analysis is part of it, but it's kind of third, whereas in academia it's in reverse. The analysis seems to come first. And I'm constantly saying, well, what about the political economy? What about can you get the consensus to move that forward? Importantly, what's your message that you can boil down to six seconds?
- [08:03]
Stephen Dubner
In politics, I'm usually surprised and frustrated by the lack of empirical attention paid to even significant things like the way that our government looks at the financial markets. To me, it feels as though the political temperature drives too much decision making versus empirical thinking driving decision making. Can you just talk about that for a moment?
- [08:28]
Gary Gensler
The beauty of the political world is the American public gets to decide. If you can't describe something to the American public with a narrative arc, with a clean, why does it matter to me at my kitchen table, then it's hard to break through. An example is our unsustainable debt. Right now. The United States has gotten very comfortable and relaxed in this idea that every year we run federal budget deficits running around 6% of our gross domestic product. When you add up all of that debt and deficits, we're now at about 100% of our gross domestic product. To put it in dollars, 31 trillion. And that's going to keep growing. That's something we haven't had the political consensus, the political will to address. And I think we lost something our first 200 or so years. The capital markets and the political markets were aligned where we couldn't borrow too much. Then something shifted. About 40, 50 years ago the broad bond markets of the world said, well, no, we'll keep buying these dollar assets and keep basically supporting the US Government twin deficits. We have trade deficits and we have the federal government deficits. That would be an example where the analysis says this is unsustainable. Where does it tip over? That's the debate, but the political consensus just isn't there.
- [10:01]
Stephen Dubner
We asked some of our former guests on this show for questions for you. This is from Jessica Riedel, who's at Brookings now used to be at Manhattan Institute. So both sides of the divide. She says, do you think that financial markets can absorb $200 trillion in projected budget deficit borrowing over the next 30 years under the current policy baseline without interest rates significantly rising? I would just add, I don't know if interest rates significantly rising is the big threat or as you noted, people are still buying our debt. But that could stop too.
- [10:33]
Gary Gensler
The answer to Jessica would be no. I look at something in the capital markets that spread between two year borrowing, treasury and 10 year borrowing. It's called the yield curve. And something happened over the last 20 or so years that narrowed. Meaning the cost of borrowing for 10 years is only 40 to 50 basis points or a half a percent greater than for two year debt on average. For some time it was even less. And when I grew up at Goldman Sachs, it usually was in the 80 to 100 basis points. You'd say, well Gensler, what's 30 or 50 basis points between and amongst friends? But the central banks around the globe, plus China's excess savings pulled that down and it allowed the United States to lean in. I don't think we'll be allowed to lean in and borrow from the world that $200 trillion without the yield curve. Steepening interest rates, real interest rates adjusted for inflation moving up. At some point there'll be a reckoning.
- [11:44]
Stephen Dubner
The Democrats and Republicans have done a wonderful job of accusing each other over the past couple decades of being the ones to inflate the debt and deficit, but they both pretty much do it. There are a lot of members of Congress who really see this as a significant threat and would like to address it and absolutely are hamstrung by their parties. If they raise a public word about it politically, they're toast. Do you see any solution to that stalemate?
- [12:11]
Gary Gensler
It's really hard. And I think the challenge is really the American public itself. We're basically borrowing from the future and we're borrowing from foreigners to spend in the present. If you look at the federal budget in aggregate, it takes in about 17% of our economy, gross domestic product in revenues, that's the taxes and the tariffs, and we spend about 23% of the economy, 6 percentage points mismatch. Then you look at that 23% of the economy spending at the federal level, and you say, well, what can we adjust? The bulk of it, well over a majority of it is what in Washington is called entitlements. What we all know is Social Security and Medicare and Medicaid. Only about 4% of our overall economy is the discretionary spending, half of which is the Defense Department and half the non Defense Department. And so you say, well, can we take this on? Can we fill the deficits that are running at $1.7 trillion a year right now? Can we fill that with just adjusting the non defense discretionary? And the answer is no. The arithmetic of it all really runs into the political side.
- [13:33]
Stephen Dubner
I was hoping you'd have some magic solution, though.
- [13:36]
Gary Gensler
We just lost a remarkable public servant, Alan Greenspan. We can debate the pluses and minuses of his career, but one thing he did in the 1980s, he was asked by then President Ronald Reagan to chair a commission on Social Security reform. Somehow there was a political consensus at that moment to make some reforms on Social Security which effectively cut benefits for you and me. They said, all right, retirement age isn't going to be fully at 65. It's going to creep up, and I think now it's closer to 68 if you want full benefits. That political consensus doesn't exist today. Some people look to the 1990s and say, what led the federal budget surpluses at that point in time? And did it have some relation to productivity gains that were coming in the economy with computerization and the Internet and so forth? The optimist would say, could that happen here? I think it's far more challenging because we've had some very significant public policy changes since then on the tax side that we only bring in about 17% of our economy into federal budget revenues. And going into those 1990s, we were closer to 20% of our economy. The Bush tax cuts, the Trump tax cuts, both in his first term and his second term really have changed the whole fiscal picture.
- [15:10]
Stephen Dubner
You chaired both the SEC and cftc. I want to exploit your experience and wisdom in those two areas to talk about the economy. Now let's start with the CFTC. You chaired that from 2009 to 2014. The big headline that I'm aware of is Dodd Frank, the Swaps Oversight Provisions, Central Clearing, Real Time Trade Report. Bringing transparency to a market that hadn't been transparent. But if you could just walk us through what you saw as the hits and then either things you weren't able to accomplish or things that didn't work out the way you'd hoped.
- [15:47]
Gary Gensler
Let me say something about both chairing the Commodity Futures Trading Commission and the securities and Exchange Commission. And we in the United States are one of two large nations that have several market regulators. Japan followed us in the 1940s and did something similar, but one that oversees the securities markets. Securities are things that you buy and sell that issuers, companies raise money with. And then something that around the derivatives markets, financial contracts that derive their value from an underlying. And in the case of the Commodity Futures Trading Commission, initially they were financial contracts deriving their value from agricultural things, corn, wheat, later oil, later interest rates. In both jobs I am proud of and leaned into a field that seems a little geeky to many people. But it was the market structure, or more technically micro market structure. I think you can create great public good by the rules of the game. Is a market fair? Does a market have access? How transparent is it and how much do you promote integrity? Basically getting rid of fraud and manipulation, those are the key things of market structure. And if you have really good markets, it benefits somebody just filling up their car with a tank of gas because behind that somebody might be hedging the risk of the oil price going up or down due to war in the Strait of Hormuz or just due to production cycles. To answer your question, at the Commodity Futures Trading Commission it was a remarkable time to serve there it was the 08 financial crisis. 10 million people either losing their jobs, losing their homes, and many, many more people than that having financial uncertainty at the time. President Obama decided, put together a team and said we not only have to stabilize the economy, but but we also have to put in some reforms to make such failures less likely. Never going to get rid of them completely, but less likely. We did work with the rest of the Obama administration, with Tim Geithner, with Mary Shapiro, with congressional colleagues. Barney Frank, who we lost earlier this year, Chris Dodd, Blanche Lincoln, Colin Peterson. These were the relevant chairs of the committees and we put together provisions to lower the risks and create greater competition in these derivatives markets and what you call it, swaps markets. I'm proud to say that not only did we get a law passed, but then we were asked to implement various rules. We did 67 different rules. I think 85% of them bipartisan, meaning Republican and Democrats voting together. Almost two thirds were unanimous. And. And remarkably, 15 or so years later, they haven't been overturned. The big problem in the middle of that crisis, the credit default swap market, the interest swap markets are functioning at lower cost. The interest swap market, a lot lower spreads they're called. They're institutional markets. Many of your listeners would go, why, Stephen, have this guy on talking about interest rate markets. But it matters to your mortgage, it matters to your employer, it matters to your auto loan, your student loan, the interest rate markets. I'm very proud of that. I'm proud of one other thing. In the enforcement area, we found a bunch of cheats. I don't know what else to call it. We found a bunch of people at big banks that were fraudulently setting the interest rates. And they would say on a daily basis, this is what we will borrow and lend in the interest rate market called the London Interbank Offer Rate. Now, why did that matter? Many people's mortgages, many people's loans were set in relation to that market. That was called floating rates. Every day, 16, I think it was banks put in a rate and we found that a number of them were just lying and others were colluding. And I think we helped clean that market up.
- [20:08]
Stephen Dubner
Well, you're talking about, some people may remember that being called the LIBOR scandal.
- [20:11]
Gary Gensler
Yes, that is the acronym. LIBOR stands for London Interbank Offer Rate.
- [20:17]
Stephen Dubner
When you were talking about how derivatives went from being on corn futures to derivatives on interest rates, the big picture of the last maybe 30 or 40 years, to me as a layperson, has been the amount of, let's call it, financial engineering in our economy. Can you just take a step back and describe that development pros and cons, generally, how much of the economy itself, but also the downstream effects are influenced by really a relatively small handful of people at a relatively small handful of firms who have found new ways to make money that are vastly different from old ways to make money.
- [20:56]
Gary Gensler
If I could tease apart two pieces of it, one is financial engineering, or you might say financial innovation or even technology, and the other is market concentration. Finance since antiquity has been coming up with new technologies. In fact, long ago we humans came up with this thing called Money, that's a technology we invented.
- [21:23]
Stephen Dubner
It's a good one. Yeah, it's a really good one. Very valuable.
- [21:25]
Gary Gensler
We went on to do a bunch of stuff on math. And I'm not talking about high end math, like AI math, I'm talking about like double entry bookkeeping. In the 1980s, a firm named Solomon Brothers invented the first interest rate swap. And others invented how you can take loans and sell them in the market called securitizations in the mortgage market and then in the asset backed securities markets. And now we have of course credit default swaps. And more recently, I'm guessing we'll talk about prediction markets as well. One former public servant who I had the honor to work with closely, Paul Volcker, said at one point in time after the financial crisis that the only technology he thought that really benefited the public was the Automatic telet machine ATMs. I thought Paul was a little too harsh.
- [22:17]
Stephen Dubner
We should also say that in the US especially corporate governance is a big deal in making markets function the way we want to.
- [22:25]
Gary Gensler
I think a gold standard in the United States. We are the big market for now. There's a lot of reasons, but part of it is because we set up institutions. The Federal Reserve in 1913, the SEC in the 1930s, the commodity futures Trading Commission, on and on we set up these institutions and they've on the main, functioned pretty well, focused on public goods, what's good for the market, access, transparency, fairness, competence and the like.
- [22:59]
Stephen Dubner
Let's talk about concentration. We're doing an episode right now on the price of beef in the US which is really high. And if you look at the concentration in the packers right now there's only like four major meat packers. But if you go back 130, 150 years, it was the same thing, a different four or five. And so that seems to me as a layperson to be a feature of our capitalism. And maybe it's a good feature, maybe it's a bad feature, I don't know. But I'd love you to talk about the kind of ongoing concentration of markets and in which markets. Maybe now you see that concentration as problematic.
- [23:35]
Gary Gensler
It's a feature of finance since antiquity. The Medicis had their day. They did, they did, they did. J.P. morgan, the man, not the company, had his day and his son in the late 19th century and early 20th century. I think it's a feature of finance. And then you might go, well, why? It has to do with the economics of networks. Just as Google is a network for search in the United States or Baidu as the search network in China, just as Amazon has that big network effect. There is a powerful set of economics around the centrality of a handful of either commercial banks, those that collect deposits and make loans, or the market makers themselves that they get in the center of the market. One of the key things they get an advantage of when you're in the middle of the market is you get more and better information. There's what economists call an information asymmetry. I have more information than you do. I'm glad to trade with you every day, Steven. If I have more information than you, you're called the less informed individual. Sometimes I would hear on Wall street that the broad public were like the slow deer and the Goldman Sachs or Morgan Stanley were the fast deer. Well, now it's changed. Maybe now it's Citadel or it's Jane street or Jump trading firms that are at the center of this capital market. One other thing happens in finance and it's a feature is the borrowing of money and then trying to make money on borrowing money. That's called leverage. Banks do it and when they get into trouble, people want their money back and that's called a run on the bank. Market concentration and leverage and technological waves are all features of finance. When I was born in the 1950s and you said, what was finance's total aggregate part of the U.S. economy? It was maybe 3%. When I went to Wall street in 1979, it was maybe 5% and now it's 8%. You'd say, do we have a better economy? For sure we have a bigger economy, but I'm saying, do we have a better economy? Yeah.
- [26:05]
Stephen Dubner
What's your answer there?
- [26:06]
Gary Gensler
We have a less equal economy. It's a far higher bit of inequality, wealth and income inequality. It leads to polarization. And there's a lot of political scientists who study the relationship of inequality and polarization. I think finance is a critical piece of the American exceptionalism. I think finance is also the thing that might be right now leading to this AI boom bubble that we're living through right now.
- [26:38]
Stephen Dubner
Coming up after the break, does every boom turn into a bubble? I'm Stephen Dubner speaking with Gary Gensler and this is Freakonomics Radio. Freakonomics Radio is sponsored by Mint Mobile. For kids, summer means freedom. And as adults, summer still means freedom. Thanks to Mint Mobile's summer sale. Right now, all of mint's plans are $15 per month, even unlimited. Free yourself from big wireless and switch to Mint for high speed data and coverage on the T Mobile 5G network. All plans come with high speed data and unlimited talk and text delivered on the nation's largest 5G network. You can even bring your current phone and your number. To get your new wireless plan for just 15 bucks a month, go to mintmobile.com freak that's mintmobile.com freak cut your wireless bill to 15 bucks a month at mintmobile.com/freak that's it. There's no catch. Upfront payment $45 for three months, $90 for six months or $180 for 12 months. Plan required $15 per month equivalent taxes and fees Extra initial plan term Only greater than 50 gigabytes may slow when network is busy. Includes up to 20 gigabytes hotspot capable device required Availability, speed and coverage varies see mint mobile.com Freakonomics radio is sponsored by Ozempic Innovation happens through rethinking what's possible and when it comes to GLP1s ozempic pill does just that. Learn more about ozempic semaglutide tablets 4 and 9 milligrams by calling 1-833-ozempic or visit ozempic.com to view the medication guide and ask your doctor what's possible with with FDA approved Ozempic pill. Freakonomics Radio is sponsored by Range Rover Sport. A vehicle that blends power, poise and performance with a distinctly British design, the Range Rover Sport is built to take on roads anywhere. Free from unnecessary details. Its raw power and agility shine. Combining a dynamic sporting personality with elegance and agility, it delivers an instinctive drive. Its assertive stance hints at an equally refined driving performance. Defining true modern luxury, the Range Rover Sport features the latest innovations in comfort and convenience. The cabin air purification system alongside the active noise cancellation creates a new level of quality, comfort and control. Terrain Response 2 offers seven terrain modes to choose from, fine tuning the vehicle for any challenging roads ahead of force inside and out. The Range Rover Sport is available with a choice of powerful engines, including a plug in hybrid with an estimated range of 53 miles. Build your Range Rover Sport at range rover.com ussport. I spoke with Gary Gensler on July 10. The markets have been a bit choppy since then, but the larger trends are still holding true by whatever index or measure you want to look at. US Stock market valuation is at an all time high relative to our GDP. I think roughly two and a half times GDP.
- [30:05]
Gary Gensler
It's hovering right around 235% of our economy. It's called the Warren Buffett Index. He just simply takes the Value of the stock market divides by our economy. That's an all time high depending upon the day. You can look at price earnings ratios in the rearview mirror where we're about 30 times. You can look out in front of us the predicted price earnings ratios not quite the highest. We have been a little higher at times. Or there is a famous economist named Shiller that does a Shiller index which takes an average of 10 years. We're pretty much at the high there as well. Regardless of all that, what we're having right now in our stock market, everybody would agree, is this investment boom in artificial intelligence. Think data centers. Think chips. Not just computational chips like the graphic processing units of Nvidia, but think Memory Micron, Samsung, this SK Hynix out of Korea. All of that spending has gone up nearly five fold in three years, from about 140ish billion to 750 billion. To scale it in terms of our economy, just this year in 2026, that 750 billion is about 2.5% of our gross domestic product. It's estimated next year to go to a little over a trillion. All of a sudden it'd be 3% of our gross domestic product. That's more than we've done on nearly any of our general purpose technologies.
- [31:43]
Stephen Dubner
I'm curious to know the degree to which that concerns you and for whom. Especially for instance, Citadel has data showing that the bottom Half of U.S. households now own more than $600 billion in equities and mutual funds, which is an all time high. And that is to a lot of people, really good news. Because one complaint for a long time has been that the stock markets were mostly an opportunity for middle and upper income people. But when new investors get into a market, whether it's the stock markets or crypto or whatever it may be, that is often one of the preconditions for a bubble. Talk to me about your assessment of full absolute risk of the markets and for whom.
- [32:30]
Gary Gensler
It's a risk for the entire economy Right now. Our economy is driven by and large by two things, both related to AI. One is the actual capital expenditure. When you move from the Numbers I mentioned, 140 billion to 750 billion, that's 600 billion of more spending in just three years for capital expenditures on these data centers and the like. Secondly, the stock market itself creates a wealth effect generally for the upper income Americans. I like the figure that Citadel puts out there. But I note in aggregate the US stock market is hovering around $80 trillion. So if the bottom 50% of households hold 600 billion. It's less than 1%, with all respect.
- [33:20]
Stephen Dubner
So when someone like Citadel puts out a number like that, is it marketing?
- [33:24]
Gary Gensler
Essentially, as we say in politics, it's messaging. You gotta find the political consensus and then you figure out the analysis. Look, I would say this. The economy is at risk because if the capital spending just plateaus, that takes off growth. If this capital spending goes to a trillion next year and then declines just to a modest 500 billion, that's a shrinking construction, electricity, provisions, all the data chips, all of that shrinkage starts to go the other way. And so right now we have this ebullient valuation in the stock market. We have it pushing price pressure up from every bit of every laptop you want to buy, any iPhone you want to buy. Even your automobile has in it memory chips. There's only three big memory companies, one of whom just tapped the US Market. SK Hynix. And it's pushing pricing up. Pick your favorite general purpose technology. Stephen, there's a question Back to you. 200 years. You could start with canals in the 1830s or the Internet just 20 some years ago.
- [34:37]
Stephen Dubner
I have mine. I'm ready to go.
- [34:39]
Gary Gensler
All right. All right.
- [34:40]
Stephen Dubner
Electricity.
- [34:41]
Gary Gensler
Ah, good one.
- [34:43]
Stephen Dubner
I think it's wildly overlooked. Generally. Electrification. It's a good and wild story, and it's one of those things that we totally take for granted now.
- [34:52]
Gary Gensler
Yeah, it was 1880 when Thomas Edison created Edison Electric and built that first electric plant here in Manhattan, where I'm recording. And what happened to the stock market? And did we have a recession in the 1890s?
- [35:05]
Stephen Dubner
I would guess yes.
- [35:06]
Gary Gensler
Yeah. And what happened in the 1920s when we really had big utility and all the utility companies were starting to electrify rural America as well?
- [35:15]
Stephen Dubner
I'll say yes again. And I'll say yes to every single one. There's booms and busts.
- [35:20]
Gary Gensler
Right, Right. I'm glad you picked electricity, because in electricity's case, we weren't spending 3% of gross domestic product on the capital spend. Railroads a lot of people pick because it spent so much after the Civil War. We were just building those railroads. And government policy had made a difference too, giving away land for building the railroads. That big boom, we were peaking at 6 or 7% of our gross domestic product spending on railroads. And then the 1870s, we just washed out the economy. Sometimes we peak at 2, 2 and a half to 3% of gross domestic product like we did in the late 1990s on the Internet. I think a lot of it has to do with leverage. How much borrowing is in the system?
- [36:06]
Stephen Dubner
There's a book, I'm guessing, you know, Ken Rogoff and Carmen Reinhart, just after the global financial crisis, where you were heavily involved when the cleanup crew. The cleanup crew, right. And their book was called this Time Is Different. Eight Centuries of Financial Folly. They were talking about that financial crash, let's use that term now for AI because there are, as with any big new technology that's getting a lot of investment, there are people who claim this time is different. This technology is fundamentally different. The investment around it is different. The consequences, if or when parts of it don't go well, are also different. And I'm guessing you don't feel that way about AI But I'd love to know.
- [36:46]
Gary Gensler
Look, I'm an identical twin. I would say Rob and I are different, but we're also a lot similar. So let's just give me context. What's similar is that we have a set of technologies that come along every 20 to 40 years, the last being the Internet. Maybe before that you would say the computer and general electronics and, and so forth. Before that, automobiles and the highways and the great highway system, all the way back to canals in the 1830s. What you usually have, history tells us, is this investment phase, big capital expenditure phase. We're having that right now. It's in the data centers and the chips and the memory and the like, and revenues do not match it. Right now we have, give or take, 750 billion of spend, and we might have native revenues if we're being generous this year, 150, maybe 200 billion. So we know something. It's not in equilibrium right now. And we knew that when the Internet was building all those cables in the late 1990s as well.
- [37:59]
Stephen Dubner
It's never been the case with a big new technology that it is in equilibrium only because a new technology needs an older, awful lot of startup investment. Or am I wrong there?
- [38:08]
Gary Gensler
You're correct. But it's also the nature of financial markets and it's a nature of human incentives. Think about the chief executive officers in any one of these eras. They said, oh my God, they're building a canal. I got to build a canal. They're building a railroad, I got to build a railroad. And now Mark Zuckerberg can't help himself, right? I mean, he spent 80 plus billion dollars on the metaverse, those goggles. And so Google rightly is saying, if I don't do this spend, I could lose my ad revenues to OpenAI. So there's a fear of missing out FOMO. But there's also defensiveness. I've got to protect my high profit margins, I have currently. And so you get an over investment that comes from the actual incentive systems right in the moment, financial incentives and FOMO incentives. And you get this enthusiasm and the capital markets support it over and over again. Decade after decade we support these booms and then at some point in time it plateaus and all of a sudden it's a little bit like that cartoon. You're watching the character run and all of a sudden they ran off the cliff and their feet are still moving and there's not the revenues to support where they are. And the difference that a lot of people point to is two. One that I think is right and the second one I worry about. One is they say, listen, there's not as much debt borrowing because a lot of this build is from these big tech companies, the so called hyperscalers, the Microsofts, the Googles. And they're using their own cash flow, they're not using capital, they're already public,
- [39:55]
Stephen Dubner
they've been public a long time and they generate a lot of cash. Yeah.
- [39:58]
Gary Gensler
And they don't have a lot of debt yet though. They're now tapping the debt markets. Right. All of them are doing things that are off balance sheet financing. They're also having a lot of other companies called neo cloud companies like CoreWeave and others lease or buy the chips and then they lease from them. There's a lot of interconnected finance that if we have a crisis, people will look back and say, where's that Freakonomics podcast with Gensler? He mentioned that.
- [40:26]
Stephen Dubner
But wait a minute. Sorry to interrupt, but let me ask you this. How do you like that style of ramping up? I'm just trying to gauge your level of concern.
- [40:35]
Gary Gensler
I think that we have a stock market that is highly valued by any measure. We have a boom in the capital expenditures that will plateau and maybe even decline in next few years. So when that comes, that's a reversal that you see will happen for, for all of these chip manufacturers, construction and so forth. Something has to give. If AI is successful, it's also going to lead to a lot of disruption. It's going to be significant disruption. The s and P500, a couple hundred of those companies, their valuations kind of need to go down because they've been disrupted by somebody. I'm not predicting which one, but it could be software as a service or other service companies and so forth. So somewhere AI's got to really work out. And I'm an optimist that it will over time work out, but not in the next several years. It will be much slower, I think, in terms of really changing productivity growth.
- [41:38]
Stephen Dubner
Let's talk about who loses out in the AI transition, especially when it comes to employment. We saw this with the so called China shock when US manufacturing jobs were sent overseas. Some predictions say that the net job loss from AI will be much larger, but it strikes me that nobody really knows yet.
- [41:57]
Gary Gensler
AI needs to be thought of. And I say this to these great students at mit. I say you've got to look at the task level, not the job level. What are the tasks of the producers of Freakonomics that they can offload to AI? There's still going to be a human asking the questions, I think for a while. Stephen, I think you're not an AI agent, are you?
- [42:19]
Stephen Dubner
I am not an AI agent just yet. I do find AI helpful in my research, but I'm just using it essentially as a better version of a search engine or maybe a talented and smart assistant who also makes a lot of mistakes.
- [42:34]
Gary Gensler
Correct? Correct. You have to be dubious. You have to really challenge it. You can't offload too much because they'll tell you something that's just not correct. But what tasks will be automated and then later, subsequently, what whole processes will be transformed like Henry Ford transformed the factory floor and did that whole assembly line.
- [42:56]
Stephen Dubner
And then extending that metaphor, when you create the car, you add mobility and that leads to billions of opportunities that didn't exist. So that's the creative destruction argument that the people that I hang out with, the economists like. But when I raise that argument to AI skeptics younger and older, they see it more in the this time is different way. There's no way that that's going to happen. So what do you say to that skepticism?
- [43:21]
Gary Gensler
I feel it. I understand it. There's been skepticism about a lot of different technologies for centuries. There was that old story of the Luddites in the United Kingdom about weaving and millwork. This is more challenging in some ways because to the extent that you concentrate on a winner take all or winner take most model, if the scaling goes that way, then a lot of the profits and revenues go to that one or two main central models. Then if companies, law firms, consulting firms, software firms are offloading and automating tasks, then the worry is, well, does everybody else get paid lower for what they're doing? There's gonna be a lot of disruption in the2030s. I think there'll be a lot of political angst and changes of coalitions around this throughout the 30s and maybe the 40s.
- [44:24]
Stephen Dubner
I was hoping you were going somewhere positive with this. But you're saying that what we've got now in terms of uncertainty, let's say political partisanship, let's say angst, as you put, you're predicting at least 10, maybe 20 more years.
- [44:38]
Gary Gensler
I think that we're in a transitional period of time and we've seen this at other times. In the industrialization of the late 19th century, it was a little bit about electrification, it was a lot about the railroad, a lot about industrialization, moving from the farms to the cities. But that was a period of time we had the Progressive Era. It was one of the most dynamic periods of time that we actually broadened the franchise to vote to women by 1920. We did some heinous things on race, though. We went backwards and we even stalled the Jim Crow era. But the Progressive Era was one that we did. Antitrust laws. We set up the Federal Reserve and the Federal Trade Commission. I think the 2000-30s and 2000-40s will be a challenging political time. I think that the American public is going to rise to the challenge and say we need to change some of the imbalances that are in society because, and I hope you ask me about China.
- [45:37]
Stephen Dubner
Coming up after the break, what about China? I'm Stephen Dubner in conversation with Gary Gensler, and this is Freakonomics Radio. We will be right back. Freakonomics Radio is sponsored by netsuite. They say that every day your business is late to AI, you fall two days behind. But. But how do you keep up? Fortunately, there is NetSuite Next. NetSuite is the AI powered business management suite that brings your financials, inventory, commerce, HR and CRM into a single source of truth. NetSuite NEXT is the next huge leap in how business gets done because AI is built into everything you do. AI agents work alongside you to solve problems and handle routine work. Whether your company earns millions or even hundreds of millions, it's time for NetSuite. NetSuite Next, where your business meets AI for the first time ever. You can try NetSuite Next for free. If your revenues are at least in the seven figures, go to NetSuite. AI freak. Built for every industry, ready for every boardroom. NetSuite. AI freak. Freakonomics Radio is sponsored by figure. Did you know that 40% of homeowners own their home outright? If that's you, don't let your equity sit idle. Tap it with a home equity line of credit. Figure the number one non bank HELOC lender in the US Helps tap equity you've built in your home so you can do things like tackle a renovation or pay down debt. HELOC is a line of credit secured by your home. You can draw what you need, repay and draw again. Figure offers a 100% online application, get approved in five minutes, and funding in as few as five days. It's faster than a bank loan and cheaper than a personal loan. Check your rate today without impacting your credit@figure.com freakonomics this post is sponsored by figure.nmls.id 1717824 figure is an equal housing lender. For more information about their licensing, visit nmlsconsumeraccess.org Figures HELOC is subject to to credit approval and terms apply. Freakonomics Radio is sponsored by Range Rover Sport A vehicle that blends power, poise and performance with a distinctly British design, the Range Rover Sport is built to take on roads anywhere. Free from unnecessary details, its raw power and agility shine. Combining a dynamic sporting personality with elegance and agility, it delivers an instinctive drive. Its assertive stance hints at an equally refined driving performance. Defining true modern luxury, the Range Rover Sport features the latest innovations in comfort and convenience. The cabin air purification system alongside the Active Noise cancellation creates a new level of quality, comfort and control. Terrain Response 2 offers seven terrain modes to choose from, fine tuning the vehicle for any challenging roads ahead. A force inside and out the Range Rover Sport is available with a choice of powerful engines, including a plug in hybrid with an estimated range of 53 miles. Build your Range Rover Sport at range rover.com ussport. Gary Gensler is former chair of both the securities and Exchange Commission and the Commodity Futures Trading Commission. Before that he was a partner at Goldman Sachs and now he is a professor at mit. We're talking about how the AI boom may play out, and that depends on who wins the AI race.
- [49:15]
Gary Gensler
China and the US Are in the lead right now. China and the US have different approaches. We're spending really significant we're spending probably seven times as much as China this year on building those data centers, and yet their models are only maybe four to nine months behind us. There's a lot of price pressure in the US. Our companies in the US are saying, well, if you want to use OpenAI or Anthropic, we have to charge you and at some point in time we have to pay our bondholders and our stockholders. China might be four or nine months behind, but it's good Enough. When you do your searches for Freakonomics, I don't know if you're looking at the budget for how much it's costing you, but if you thought, I can do almost as good a search for half the price, you might say, I'll use a deep Seq model from China or a Moonshot model or Alibaba Quinn model. We're in an interesting time where we may have put a lot of cards on this thing as a nation, but we'll have the Maseratis and the Ferraris of AI and they're going to be building the Volkswagens. And the Volkswagens will sell a lot. Well, just think about it. In China, they have a pretty darn good electronic vehicle.
- [50:36]
Stephen Dubner
They do. It's taken over most of the world except for the U.S. yes, yes.
- [50:41]
Gary Gensler
BYD. And so is that where we're going to be on this AI front in, in two or four or five years, where we get some commoditization of good enough AI for most tasks? China's also ahead on industrial robotics, so I think that's going to play out significantly as well.
- [51:05]
Stephen Dubner
Have you ever heard of an exercise called a pre mortem, Gary? This was invented by a guy named Gary Klein, who's a psychologist, who's got
- [51:13]
Gary Gensler
a great first name.
- [51:17]
Stephen Dubner
I agree. So the pre mortem asks, let's say you work at a firm and you're launching a new product. You're the CEO and you say, I think we're doing great. I want to make sure it succeeds, but I also want to take out an insurance policy. Let's get together everybody who knows really what's going on here, and imagine that our product came out and failed. And let's try to identify the causes right now. And if you can successfully do that, then maybe you can amend them and the, the launch can be successful. So if I were to ask you, Gary Gensler, to conduct a pre mortem, imagining that there's a massive market Correction in the US let's just call it 20%. What would be the causes? We've got private credit looking wobbly. It could be an AI collapse. I'll let you fill in the rest. But if you had to face that dark scenario, what would be the causes? And then let's say what would be
- [52:13]
Gary Gensler
the consequences too, my friend, 20% is not the dark consequence. There's a lot of room between us right now at a stock market that's 236% of gross domestic product. And the average of the last 25 years is maybe 110 or 120%.
- [52:33]
Stephen Dubner
Okay, you want to take it to 50% then?
- [52:36]
Gary Gensler
I'm just saying that what did you want to do a pre mortem on? Look, the consequential underpinning of the economy and the capital markets right now is this AI investment. I don't think many people will disagree with that. Where there's debate is how that's going to play out on your pre mortem. If the market had a correction, so to speak, and it was off, whether it's your 20% or more, it's likely to be that. Folks look at this and say the revenues and the profits aren't there. The companies are still there, but the revenues and the profits. When you think some of these tech companies have profit margins, that's the gross profits divided by their revenues. But profit margins in the 50 to 80% range. I mean the memory companies and Nvidia are in that 70 to 80% range. And a number of them have moved their pricing for their chips, particularly the memory companies, up four and five fold over the last year. This is not like 4 or 5% inflation, it's like 300%. There's remarkable innovation going on, there's remarkable technological advances going on. Your pre mortem it would be, well, gross margins collapse at these companies. Their pricing pressures right now are going on because there's this huge demand factor. And then you see the chip companies, the data centers, all rushing to build new factories, new plants, new laboratories. Your pre mortem would say, well, there's not enough revenues to support all that and there's an adjustment. And how does it spill through to the private credit field? How does it spill through to these NEO cloud companies? There would be some breakage. And I go back to Warren Buffett, he says, you really find out who's been swimming with their trunks off. When the tide goes out, we'd find out who was swimming with their trunks off. But it would be where is the leverage which companies not just have to retrench but actually go into some bankruptcy. There will be some somewhere, I think for the economy writ large, the spending, the consumption would come off a bit, the high net worth, individual consumption would come off. One last thing I think is if AI continues to be successful and if the anthropics and the OpenAI's can charge more, the Googles and Metas can charge more. More and more US companies are going to turn to the Chinese models and say I'm going to go to the good enough model, I'm going to go to the Volkswagen of AI not the Maserati of AI. Most of our economy does not buy the Frontier desk chair for their office,
- [55:43]
Stephen Dubner
the automobile, whatever, you name it. You live in a place like New York City, you think everybody drives a
- [55:48]
Gary Gensler
BMW, but that's not what all the Uber drivers are driving.
- [55:51]
Stephen Dubner
Right.
- [55:52]
Gary Gensler
You need the production model of AI mentality. Hundreds of companies in 2026 are already turning to their technology buy, and they're going, look, we've got to lean into AI, but we've also got to manage the costs. Right now, let's do what the technologies call orchestration. I don't want vendor lock in. I don't want to be dominated by somebody that can charge a lot more.
- [56:19]
Stephen Dubner
Before AI was all the rage, especially in the markets, crypto was not all the rage, but there was a lot of ra, positive and negative rage, let's call it. And you, when you were running the sec, were very involved in crypto regulation. You declared the industry the Wild west, and you launched enforcement actions against a bunch of firms, Coinbase, Binance and others. I'd love you to talk about the work that you did toward crypto regulation during the Biden administration. And then what, to me, as a layperson, would appear to be a pretty total washout by the Trump administration. Overruling and undoing. I've also got a question here from someone who's been on the show before, Brendan Ballou. Brendan wrote a book about private equity a couple years ago, former doj. He said many of Gensler's regulations were enjoined by courts, and that'll only become more common as more of the federal judiciary is appointed by President Trump. Even if a Democrat gets elected president, in a world where Congress remains dysfunctional and averse to regulating finance and where courts are eager to stop new regulations, what are the institutions that will rein in either private equity or crypto, et cetera? So I want to know what it's like for you to see how crypto has been obviously embraced by the Trump administration and Trump personally benefiting from his own crypto adventures. That's kind of one part of it, whether you want to talk about that as a grift or not. But I'm also curious to hear you talk about what happens when well constructed regulation gets undone in a heartbeat when there's a new administration.
- [57:57]
Gary Gensler
I think there's a mix of questions in there, my friend.
- [58:00]
Stephen Dubner
I'm sorry, I have a wandering mind.
- [58:02]
Gary Gensler
One is we live in a functioning democracy, and I think it's a really positive thing that when the American people speak and they elect a new lead, a president, a new Congress, that policy can shift. That's the American public's right, and that's a good thing. You also asked about the courts and how does it feel? I think the courts have shifted, and that's a market in itself. I used to say to my colleagues, we have to think about not where the puck is, but where the puck is going. That famous Wayne Gretzky quote in the courts, the puck was moving very much so during the Biden administration, really for the last 20 years. But it's shifted a fair amount in terms of constraining what the administrative state and the executive branch can do in terms of using the laws to promote public good. I think, Brendan, is a little bit unfair, if I might say this. I think that of the 40 or 45 or so regulations that we did, while I was proud to be chair of the sec, while a handful of them were challenged in court and we did lose a number down in the fifth Circuit, it's a handful, and I would not have wished to have lost them, particularly as it relates to transparency and private equity, which I think you mentioned, the private capital markets. We were trying to get more transparency to those pension funds and endowments that were investing in private alternative investments like private Equity. And the 5th Circuit down in Texas and Mississippi said no, they didn't think that we had had that authority under the Dodd Frank act to just provide transparency to the limited partners. There were two or three other cases that, unrelated to those crypto fields. The last part that you asked about, I say this. All the capital markets since antiquity, now and into the future trade on a mix of fundamentals and sentiment. But now you get to some markets that feel nearly entirely sentiment and not much fundamentals. Those are usually those markets that are not sustained in valuation. You might think I was going to go to tulip bulbs. I didn't need to go to tulip bulbs. I could go to meme stocks of some sort of. So what is it that supports the valuation of thousands upon thousands of crypto assets? If you're an investor, you really have to think long and hard. Well, what supports the valuation? Maybe there's one or two of these things that persists for some time because there's nearly 8 billion people in the world. And Satoshi Nakamoto, who wrote that seminal paper, the Bitcoin white paper, whomever Satoshi Nakamoto was, came up with an interesting ledger system. That's what it is, a database system called blockchain technology. But I would note, I don't know of any financial firm, I don't know of any crypto firm that uses the blockchain technology to keep their books and records. It is used to move this asset in a permissionless way around the globe. And in some, some cases that creates an economic benefit of avoiding sanctions. It creates an economic benefit to some who want to avoid anti money laundering laws and gun running.
- [61:37]
Stephen Dubner
Its advocates say it also prevents friction and profiteering from the banking system. I assume you're not sympathetic to that argument.
- [61:46]
Gary Gensler
I think that it hasn't proved out to be that beneficial. Are there frictions in the banking system? Yes. All you have to do is look at the stock market and say, what's the valuation of Visa and MasterCard and why are they trading at somewhere between 400 and 700 billion dollars of market cap each? So there's economic rents, there is market concentration in the US Payment system and the Chinese payment system, the Indian payment system are cheaper to do commercial payments than in the United States. But we have a very efficient payment system when it comes to paying our mortgages. Being paid. I'm guessing, Stephen, you're not paid in bags of gold, are you?
- [62:30]
Stephen Dubner
Only in December. The rest of the year I'm getting regular crypto payments.
- [62:35]
Gary Gensler
Oh, no, no, no, no, no.
- [62:37]
Stephen Dubner
Yes. I'm not paid. I've never been paid in a bag of gold. I'm open to the possibility, I assume
- [62:43]
Gary Gensler
that you get paid in digital dollars, bank account dollars. I do.
- [62:48]
Stephen Dubner
I love them.
- [62:49]
Gary Gensler
They spend really well.
- [62:51]
Stephen Dubner
They're clean and easy and they go everywhere.
- [62:53]
Gary Gensler
Yeah, they go everywhere. It's a very efficient system.
- [62:57]
Stephen Dubner
They're the type O of currencies.
- [62:59]
Gary Gensler
We have seen this debate and Jamie Dimon has gotten some publicity recently on it and I think he's right to raise these points. If you have something that is purportedly backed by US Dollars, stablecoins, if they're well regulated, maybe will be backed by US Dollars. In the case of tether, I'm not sure. I think close to 20% of its backing is not dollars, but it's bitcoin and investments and alternative investments and things. But this debate, well, what happens if you have a US dollar backed digital dollar that doesn't have the same rules and doesn't comply with any money laundering laws and the like. Will that destabilize the US Banking system and will it disintermediate the banking system that's playing out right now? And it's a fascinating political debate, but I think as an economic point of view, I would say if that three or so hundred billion dollars of stablecoins grew as Secretary of the Treasury Scott Bessant said, to 2 trillion. It's going to take something away from the U.S. banking system.
- [64:09]
Stephen Dubner
And the person who would be signing that legislation has his own financial stake in crypto. When you've got that kind of behavior coming out of the White House itself, what does that do to public trust?
- [64:21]
Gary Gensler
Well, you have challenges in terms of public confidence in their elected leaders, Congress, the executive branch, the President themself and the President and elected leaders, families and colleagues. We have serious enough differences on policy, we have serious enough differences on how to take our great nation forward. And what we were talking about earlier about how do we do that in a world that has so much inequality and polarization. And then you layer onto it an additional sense that some individuals, and in this case the President himself and his family, are taking economic gains out of it. But whether it's insider trading or not, you just think about the disclosures that you referenced earlier about the very large gains. The numbers are publicly reported. $1.4 billion of profit to the President has disclosed on his financial disclosure forms in crypto, crypto alone.
- [65:24]
Stephen Dubner
And we should say there's someone on the other side of those bets.
- [65:27]
Gary Gensler
Look, I mean most of the field doesn't have fundamentals.
- [65:32]
Stephen Dubner
Let me ask you two questions though about insider trading. First of all, I don't understand why elected officials in D.C. and elsewhere who may have access to private information based on their job and who may have the ability to influence market moves, why they are allowed to buy and sell stocks the way they are. Does that make sense to you? And did you ever try to do anything, anything about that?
- [65:57]
Gary Gensler
I think it would be a good thing if Congress moved ahead to build greater confidence in our governance system and democracy and said individual members and their staffs not be able to buy and sell individual stocks.
- [66:14]
Stephen Dubner
I mean, to me that sounds like a no brainer.
- [66:16]
Gary Gensler
I would note, Stephen, that it is against the law for a member of Congress or their staff to trade on material non public information. That's against the law. It is a challenge. Where does the blurry line go? If you have a member of Congress or their staff who's working on an investigation and they have material nonpublic information, they know, okay, I can't trade on that. But what if they're just meeting with executives of a company? If they're working on legislation that might influence the profits of that sector or that company, it would just be positive for the American public to say, aha. I Have better confidence there. I think it would be a good thing to have a law that say all three branches, Judiciary, Executive and Legislative, plus their staffs, not be trading in prediction markets. I saw recently that Goldman Sachs said that their staff can't trade in prediction markets, except for sports, apparently.
- [67:20]
Stephen Dubner
One argument in favor of prediction markets, historically this comes from the academic side. Robin Hansen in particular at George Mason University has been making this argument for a long time, which is that stock markets typically prohibit insider trading. But prediction markets, if you can set it up in a way that allows and even exploits insider trading, it makes the market it more efficient, that it gets better information into the markets for everybody. What do you make of that argument in defense of prediction markets?
- [67:51]
Gary Gensler
I have heard it. It's been debated in one form or another for decades. I think that it fails to recognize that there's a big cost to that. Robin's argument. And those that make that argument, they are saying the markets will incentivize people to get information out there faster. An insider is at Apple or Google will get that information out there because they will profit from it. But what I think is the cost, and a very real serious cost, is trust in the markets. There's a concept in economics around public goods. How do you create a broad public good? In this case, I'm talking about trust in the market. That if I participate in the market, it's a somewhat level playing field. I know that others might spend more money on their research. Even you, Steven, you're running a media company, so you might have more information than I, but you don't have an inside look inside those companies, those that say, let's financialize information and let's say there's no prohibition on insider trading, they fail to take in that. That will have a cost to our overall capital markets and our overall capital markets will have less trust in them. And then everybody trying to raise money in those capital markets will probably get a slightly lower price earnings ratio. Literally the cost of capital will go up. Now for individuals, it's also like a raw deal. You mean somebody else is going to have an inside scoop as to whether the President's going to bomb Venezuela tomorrow? That just to me undermines capital markets.
- [69:38]
Stephen Dubner
I recently spoke with an economist who runs an institute that's focused on what he calls bringing the economy to the people. He argues essentially that an economy that generates wealth mostly for the upper end of the income distribution just isn't a good economy. Do you feel that the economy is either unbalanced or too strongly weighted against what people used to think of as accomplishing the American dream, rising up. Do you think that's in danger? Danger?
- [70:07]
Gary Gensler
The United States is still one of the most innovative, dynamic economies of the world, but it's shifting. The inequality issue that you just raised is a real challenge. It influences the power dynamics in our political decision making. And if you keep tipping towards the elite or the people that have more wealth and they can change the rules of the game, then that tips more towards their favor and you get more polarization in society. We've seen this as a nation. We went through the Gilded Age in the late 19th century, and then we had a progressive era. And even Teddy Roosevelt, a Republican, said, ah, aha. I've gotta be a bit of a populist. The current president, President Trump, I think in part, got elected both terms by tapping into some of those concerns of the broad public. Now, I think his policies have not aligned with his rhetoric, but I think that he understands that the public feels the system isn't working for them.
- [71:18]
Stephen Dubner
If in the future, there's need for a big cleanup, and let's say there's maybe a Democrat in the White House, are you up for another round of cleanup duty, or have you had your turn?
- [71:28]
Gary Gensler
Oh, God, is a big, great country of 350 million people.
- [71:32]
Stephen Dubner
They can find somebody else.
- [71:33]
Gary Gensler
I would say this for anybody listening, if you have a chance in your country, your city, your state to serve, it's a remarkable thing to feel that you can do something for your community. It could be at your church or your synagogue or your mosque as well your local school. I think there's just something remarkable about it.
- [71:58]
Stephen Dubner
That, again, was Gary Gensler. His podcast with Nobel laureate Simon Johnson is called Power and Consequences. And Gensler just added one more title to his resume. Friend of the Court. In his first ever amicus brief, Gensler urged a court to reject the legal position of the cftc, the agency he once ran.
- [72:19]
Gary Gensler
This will end up debated and discussed amongst nine individuals in a small conference room in Washington, D.C. and that's called the Supreme Court. None of us will be in the room.
- [72:29]
Stephen Dubner
What is this controversial case? It involves the prediction market Cauchy, which argues that the CFTC has the authority to allow what is essentially sports betting. Gensler says it doesn't. We are working on an episode about prediction markets, so you will hear from Gary Gensler again sometime in the next month or two. We'll also hear from the CEO of Kalshi, Tarek Mansour.
- [72:54]
Gary Gensler
Every time there's a new financial instrument,
- [72:56]
Stephen Dubner
it's like, oh, gambling in the stock market. People used to call grain futures gambling. That is coming up soon on Freakonomics Radio. Until then, take care of yourself and if you can, someone else too. Also, I hope you'll check out the new TV talk show we're making. It's called Better In Person and you can find it on the Freakonomics YouTube channel. Also on Apple Podcasts. Freakonomics Radio is produced by Renbud Radio. You can find our entire archive on any podcast app. It's also@freakonomics.com where we publish transcripts and show notes. This episode was produced by Teo Jacobs. It was edited by Pete Madden and mixed by Jake Loomis with help from Jeremy Johnson. The Freakonomics Radio Network staff also includes Augusta Chapman, Dalvin Abuji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth and Elaria Montenacourt. Our theme song is Mr. Fortune by the Hitchhikers and our composer is Luis Guerra. As always, thank you for listening. I appreciate it. Maybe we'll sit down there one day.
- [73:57]
Gary Gensler
Just let me know. You just have to go through my book or that's me. The Freakonomics Radio Network the Hidden side of Everything this episode is brought to
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- [74:37]
Gary Gensler
Learn more at sofi.comsxm A History of the United States in 100 Objects is a brand new podcast from 99% Invisible and BBC Studios. Each week we're looking at a different object from across American history with a unique story to tell about who we've been, what we've built, and what what we've allowed ourselves to forget. Some of these objects are well known, many are not, but all of them carry the story of how we got to this moment. Find a history of the United States and 100 objects on the 99% invisible feed. Wherever you get your podcasts, this episode is brought to you by Charles Schwab. Is there a right time to sell a stock? Are you taking the right risks with your portfolio? Financial decisions can be tricky and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab can help join host Mark Reape as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Listen@schwab.com financialdecoder.