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- [00:11]
A
Hello, and welcome to the Shaky Ground edition of Slate Money, your guide to the business and finance news of the decade. I think we're gonna. We're gonna take a big picture view of things right now. In case you hadn't noticed, which I'm sure you had, it is the 10th anniversary of Lehman Brothers going bust. And we. By we, I mean me, Felix Salmon of Axios and Anna Shymansky.
- [00:40]
B
Hello.
- [00:40]
A
And Emily Peck of the Washington Post are. Washington Post.
- [00:44]
C
I'm just kidding.
- [00:45]
A
And Emily Peck of the Huffington Post. Which rhymes. And Emily Peck of the Huffington Post.
- [00:51]
D
Hello.
- [00:52]
A
Are joined by the expert on all things financial crisis. You literally wrote the book on it. It was called shaky ground. 3. 3. No, shaky ground 2. All the devils are here. This is the one and only Bethany McLean. Welcome back.
- [01:08]
C
Thanks for having me.
- [01:10]
A
Bethany wrote four books, and the running joke is that all called Shaky Ground. The first one was about Enron, which famously collapsed. The second one was about the entire global financial system, which famously collapsed. The third one was about Fannie Mae and Freddie Mac, which famously collapsed. And the fourth one is about fracking. Fracking, which is all about basically taking a bunch of shale rock and making it collapse.
- [01:39]
C
We hope not quite collapse. We hope not quite collapse.
- [01:43]
A
We may or may not get into the subject of earthquakes when we talk about your new book, which is called.
- [01:49]
C
Saudi America the Truth About Fracking and How It's Changing the World.
- [01:54]
A
So we're going to talk about that because it turns out that the whole fracking industry, in a weird way, grew out of the financial crisis. And we are so obviously we are going to talk about the future of everything, because Bethany MacLaine is the only person who's smart enough to be able to walk us through that.
- [02:16]
C
That is clearly a joke.
- [02:17]
A
It's true. We love Bethany. She's amazing. But first we have to do some remembering. And you really did write the book. It's called all the Devils Are Here. It's really good about the financial crisis. We know. I think people forget with hindsight just how crazy things got towards the end of 2008. So when you look back and with the hindsight of having talked to everyone who's involved, do you think that we dodged a bullet or did we get it straight in the head and caused the complete destruction of the global geopolitical system? Wow.
- [03:03]
C
Well, that's a subtlety there. Yeah, that's a big question. I don't think there's any way. I'm not sure that I wouldn't want to go back and hit Rerun and not bail out the banks and see what happened. I think there's enough of a chance that the dire predictions of those in charge of the financial system at that point, like Hank Paul, and that it would have resulted in the total destruction of society. I'm not sure they're right, but I think there's enough of a chance that they're right that I wouldn't want to go back and hit replay and choose a different path and see what happened. But the problem is it's both possible that they chose to do the right thing and we needed to bail out the financial system and that it was horribly unfair and an absolutely awful thing. And the problem is both those things are true at the same time.
- [03:43]
A
This is like Neil Irwin just had a piece basically saying this, that the technocrats, so Paulson, Bernanke, Geithner, they did the sort of technocratically correct thing to do, but they had zero political nous and they utterly failed to sell it on a political level. And that failure was way more consequential than anyone could have ever imagined.
- [04:07]
C
I agree with that. With one big exception, which is I don't think there was a way to sell it and make it palatable. It just is completely unpalatable, no matter what kind of gloss you put on it. It's the proverbial lipstick on a pig. Right. We had to bail out the financial system. I don't. I don't think there's a good way to sell that to.
- [04:23]
D
But couldn't there have been a better. I don't know, couldn't there have been a better way to bail out the financial system? Like Barry Ritholtz you were just talking about. He has one of these. He has a post, I think, today or Yesterday, that's like 10 myths about the financial crisis. And one of the myths is that the bailouts had to happen and they had to happen the way they happened. And he said, no, you could have taken the banks. They could have done like a managed bankruptcy or something.
- [04:47]
A
They could have nationalized them. There was a lot of talk about that.
- [04:49]
D
I mean, couldn't there have been a better way to do the bailouts?
- [04:54]
C
I don't know. I give people credit for trying to do what they thought was right. Bound by the limits of their own view of the world. Right. Because we all are. And I give them credit for trying to do what was right. But I absolutely agree the consequences of the way things were done. And I'm not sure. I'm not actually sure there was a better way, but the consequences are terrible. And I think it's resulted in a real cynicism about corporate America and about the financial system that 10 years later has not gone away.
- [05:24]
B
I agree. And I, and I think that if you look at what happened in Europe where they tried to be much harsher on the banks, it ended up with a worse consequence. If you look at where the European banks are today compared to the American banking system.
- [05:34]
A
Well, we're not talking about the consequences for the banking system. The consequences for the banking system are fine. We're talking about the consequences for. Like Trump.
- [05:42]
C
Yes.
- [05:43]
B
Although one, I would say the consequences for the banking system do certainly have an effect on the real economy. And I think it is definitely true that there is a. The lack of faith in institutions is clearly tied partly to the financial crisis. 100%. Does that mean that the financial crisis is what led to Donald Trump? I think that's a bit of a jump, really.
- [06:06]
A
I mean, I feel like this seems to be received wisdom. I certainly believe it. Do you think what, Isn't it obvious that the complete disillusionment and lack of faith in institutions is, is what caused this kind of nihilistic, burn it all down, you know, elect a chaos monkey to happen? I mean it's. Or am I missing something?
- [06:28]
B
The reason I say that is not because I'm trying to say this financial crisis wasn't horrible. I'm not saying that at all. I'm just saying because if you look at what's just happened in Sweden, if you look at what's happened in Germany, if you look at Brexit, I think there are a lot of factors that are leading into this rise of nationalism and populism. And I think, don't think it is all just about finance.
- [06:48]
A
Although it was a global financial crisis and the financial crisis was, if anything, worse in Britain than it was in the United States.
- [06:55]
C
I'm going to argue a slightly different point, which is that the run up in mortgage credit, the explosion of mortgage credit in the run up to the financial crisis was used mostly to mask the underlying economic weakness, which is the real problem, because most of the risky mortgages that were made, which is why this has never been a homeownership issue, by the way. As a little aside, most of the risky mor that were made were refinancings and cash out refinancing so that people could essentially live off their homes and drain their homes of equity in order to be able to supplement their spending. And so that ability for people to live off credit helped mask underlying weakness and was a salve over underlying income inequality. And I think that's the real problem.
- [07:40]
A
Yeah, if you look at the my favorite chart of the past 10 years, which a little plug here, I am going to put in my new newsletter, which you can please subscribe to sign up.axios.com, it's called Axios Edge and I'm going to have a chart in it of US household debt as a percentage of GDP over the past 10 years or since just before the crisis. And as Bethany says, it was rising all the way into the crisis. It peaked at about 90% and since then it has been on a steady downward decline. And that's probably a good thing. We're having a deleveraging which we needed. But the consequence of not being able to borrow a bunch of money and spend it is that people feel poorer than they did pre crisis, even if their incomes have even gone up a bit.
- [08:29]
D
One thing I've been thinking about in anticipation of this episode is just that there's so much debate about the bank bailouts. Were they fair? Were they not fair? Could they have been different, et cetera, et cetera. I don't see a lot of conversation about what could we have done for the homeowners or the mortgage holders or the people that, you know, were foreclosed on. I mean, they got a lot of attention at one point, but these people are still struggling.
- [08:52]
A
I mean, do you remember HAMP and Harp?
- [08:54]
D
HAMP and Harp were not great. And there was a lot of help given to the financial institutions and very little help given to, you know, regular Americans. And income levels are pretty low. They barely recovered. So this is 2006. Wealth is still Americans wealth on average, average is still lower than it was in, in 2007. I mean, why wasn't more done for those people?
- [09:20]
A
So this is a great question for Bethany.
- [09:24]
D
Tell me.
- [09:24]
A
Bethany clearly hampered these, these sort of half hearted attempts to help homeowners as rather than their lenders were massively insufficient. And milquetoast, was there a way to direct bailout funds at individuals who owned homes rather than to banks? Was that ever possible?
- [09:50]
C
So I don't think so. I wish it were possible because part of what was so horribly unfair about this whole thing is that banks got bailed out and people did not. Right. That is awful. It's terribly unfair. But then you get into the details and you say, well, was there a way to bail out people? Remember, that's what gave rise to the Tea Party in many ways. Was other people being Angry that their neighbors might actually be bailed out. Literally. That's literally what gave rise to the T. So it's not like the country wanted this to happen and people to be bailed out and the bankers said, no, no, no, we get the money, did want it.
- [10:25]
A
With the exception of Rick Santelli.
- [10:28]
C
It'S way more controversial than that and really hard to figure out. How would you feel if you were struggling to make your mortgage and you could make your mortgage payments and your neighbor next door was overextended and couldn't make and they got a bailout and you didn't? Because at some point, you'd have to draw the line. Right. And figure out who it. Just when you try to really figure out how would you have. In a way that was fair, it. It, man, does it get complicated.
- [10:48]
A
And so this is. I think what the problem was, was that people like Neel Kashkari and Tim Geithner were trying to do it in a way that was fair. And if you try and do it in a way that's fair, as you say, like, you. You run into a whole bunch of edge cases and horrible decisions, and you wind up doing things which. Which aren't fair, and then you draw the line. You say, I can't do that because it's not fair. And my view is we would have been much better off, certainly on the political level and as a society if we'd done some unfair bailouts of individuals, because God knows we did a whole bunch of unfair bailouts of banks.
- [11:27]
D
Yeah. I mean, there was no problem with fairness in bailing out the banks. The one time there was a problem was Lehman. Right. They didn't bail out Lehman because they were like, there's too many bailouts for the banks. Let them just go under and see what happens. And then it was like, well, look what happened. But that was the attitude.
- [11:43]
A
Yeah.
- [11:44]
D
Literally, that was.
- [11:45]
A
I want to say, 60 minutes later, they. They. They said, well, we can't bail out Lehman. No more bailouts. And then 60 minutes later, they're like, oh, shit, we need to bail out aig.
- [11:54]
C
Although you also have to remember that after they didn't bail out Lehman, both the New York Times and the Wall Street Journal wrote favorable op EDS about how great it was that the government had not bailed out Lehman. So it's not like these. The little crew of Paulson and Geithner and Bernanke did this. And everybody said, how could you have done this? They did this. And everybody said, great, we're so glad you did this. So there's some complicity there that we all have to be. I don't know if complicity is the right word.
- [12:19]
A
As a member of the Wall Street Journal op ed page, I can tell you I feel entirely complicit.
- [12:25]
B
But I think this, if we're talking about the position of the normal American and where they are now, I think this goes back to something. Bethany, you were saying that the financial crisis amplified issues that were underlying in the economy for years. If you want to talk about the growth of consumer credit, it went from about 4% in the 40s to close to 20% in 2008. And this is just consumer credit. If you also look at corporate credit, we live in a debt fueled society. We live in a consumption fueled economy for an. A lot of that consumption has been fueled by home equity loans. Not even just in the 2000s. But I mean, you can frankly go back to talking about in the 70s that's happening. So we have underlying issues with how do we sustain a standard of living that Americans are used to when we don't produce as much as we used to, when we don't have this in terms of actual goods that we're exporting, if we don't, we aren't as competitive as we used to, as we used to be. Yet we still want the same standard of living. Of course we do. How do we achieve that? We've achieved it through debt fueled growth. We don't know how to achieve that standard of living without having debt fueled growth.
- [13:36]
A
And, and then in the past decade has been a story of deleveraging both at the household level and at the financial institution level, if not at the government level. And the, and the result has been this wave of populism of people saying, well, you know, my, my standard of living is not going up like it used to. And now I'm going to, you know, tore my toes out of the pram.
- [13:59]
C
There isn't a lever left to pull. I mean one lever that got pulled was women going into the workforce. And that helped. A two income family could do better than a one income family, even if that income, those incomes were relatively stagnant. And then we had the lever to pull. There are probably others I'm missing. But then we had the lever to pull of consumer credit such that the way we all think about money has become can I afford the interest payment? Not let's think about this giant lump sum of debt out here that I have to, I have to pay back and that lever's been pulled. And so I'm I'm not sure what levers we have for left pull at this point. And so it's not surprising that there's some widespread disillusionment.
- [14:34]
A
So that is the perfect segue to this amazing source of free money that the American economy has suddenly found itself sitting on top of. And one of the great, one of the most surprising passages in your new book is about the growth of manufacturing in the petrochemicals industry and in plastics and in cracking and then things like that. There's like $130 billion of new chemical plants making, I don't know what they make, like polyethylene and refined whatever it is. You know, it's like that line from the Graduate, right? Like the future is plastics. And this is, and this is all happening in America because the cost of petrochemicals in America is like half the price that it is in Europe and other places in the world. And the reason that it's so cheap here is racking. And so, yeah, so what's, and when did this start and how did this happen?
- [15:40]
C
So a guy I talked to a lot used to call this character in my book, Aubrey McClendon, who's one of the great characters in American business, one of those larger than life characters that comes along, Love him, hate him, people do plenty of both. But he used to call McClendon the most important man in America. And he meant that with some degree of hyperbole. But what he was getting at was that if McClendon was right about unleashing this tidal wave of natural gas that would make us a low cost energy environment, that it would change our economy going forward, it would make America a low cost place for all of this manufacturing. And that's indeed what happened. And that's in some ways the positive. Putting aside the environmental question, that's in some ways the positive side of the fracking boom, because it has created a lot of jobs and industry in America that wouldn't otherwise be here.
- [16:28]
D
But there's a problem.
- [16:31]
A
There's two problems.
- [16:32]
D
Again, setting aside the environmental issues, which.
- [16:35]
A
Are huge, and I don't, I really don't, I don't want to gloss over them too much because like the number of earthquakes in Oklahoma has gone up like 400 times. It's a big issue. And I feel like environmental issues alone are sufficient to be very, very skeptical of this entire fracking industry.
- [16:55]
C
They are. But at the risk of being cynical, I'm going to say in a world where we all need hydrocarbons right at this point in our History, the environmental issues aren't going to be what does in fracking. What might is this simple fact, which I found really interesting because despite the fact that fracking is changing the world, reshaping geopolitics, the industry does not make money. It's never produced free cash flow. Free cash flow, for those of you who aren't financial, is the stuff that you need to live on. That means you don't need to go out and raise more capital from Wall Street. And so I think if anybody.
- [17:26]
A
But doesn't that just mean it's. Isn't that the best kind of industry for the economy because it's not taking out dividends for itself, it's not making lots of money for itself. And all of, all of the goodness in terms of economic activity is going straight into the economy as a whole?
- [17:39]
C
No, that seems like it's more like. No, it's made immense amounts of. Of money for the executives and the private equity firms who have invested in it. So.
- [17:49]
A
Well, some of them lost a lot as well.
- [17:50]
C
There's really a big, I mean, TPG.
- [17:52]
A
And those lot like, have lost a huge amount of money in years.
- [17:57]
C
Some people have lost a lot of money, but a lot of people have made a lot of money. If you look at. I was trying to do this, I haven't finished it, but the number of sports teams owned by fracking billionaires, I mean, there's a lot of them at this point, but I really believe, I thought this conundrum or this dichotomy was part of the reason I wrote the book. I was so interested in this. How can you have this industry that is reshaping so much and yet it doesn't make money?
- [18:19]
B
And I think you bring up a really interesting point in the book, that a lot of this actually has to do with what happened after the financial crisis and specifically having extremely low rates, low interest rates.
- [18:30]
C
So I quote somebody in the book saying that the real enabler of the frack of the fracking revolution was the Federal Reserve. Because the Federal Reserve obviously cut interest rates during the financial crisis in the wake of it to try to spur economic growth. And that made debt available to fracking companies at a pretty low cost. And it's led to this huge availability of capital. And since capital to me is the key ingredient in fracking, it's not chemicals, it's capital. I don't think this whole. We would not be producing the amount of oil and gas we are if it weren't for us.
- [19:00]
A
So this is actually a complete vindication of the power of monetary policy. What we needed to do was cut rates to boost economic activity in this country. And we cut rates, and everyone was like, well, why do I care in terms of, like, the interest rate on my credit card, whether it's 29% or 28%. It turns out that that rate cutting caused hundreds of billions of dollars of economic activity in this very important part of the economy, where now we just discovered this week, I mean, it really is the business and finance news of the week, that the US now produces more oil than any other country in the world, more than Saudi Arabia, more than Russia.
- [19:44]
D
But there's one thing you talk about in the book, which is the goal has always been energy independence. And fracking is getting us close to there, to energy independence. But actually, energy independence might not be such a great thing for the United States.
- [19:59]
C
So I came away with this, the takeaway that this whole thing that we've been shooting for, this notion of energy independence, which every president since the 1970s has talked about as this grand goal of policy, is actually pretty much an illusion today. Forget about, Although it's an important argument, the fact that this industry is on shaky ground. Shaky ground. 4. It doesn't. It doesn't actually make money. But this whole idea is pretty suspect anyway because the price of a barrel of oil is set globally. It's set by events way beyond our control, way beyond anybody's control. It's not like the 1970s when America could control the price of a barrel of oil. So it's what people pay at the pump for their gas is going to be shaped by global events no matter whether how much gas and oil we're producing.
- [20:43]
A
Although I think people concentrate a little bit too much on the cost of a gallon of gasoline. It's like the most visible pricing of hydrocarbons that we see on the side of the road, and we have to refund ourselves.
- [20:55]
C
But it's a really big one to people. It's a really big one to people.
- [20:58]
A
But in terms of, again, going back to this whole. The way that the economy has been reshaped by fracking, that's the least of it, really. I mean, as you say, most of this is actually a gas story rather than an oil story. And to sort of contradict myself on the environmental front, gas involves many fewer carbon emissions than coal does. So if we're moving from coal to gas that's actually good for the environment.
- [21:22]
C
There's some controversy about methane leaks, but we'll put that aside since my book is explicitly not an Environmental book, partly because it's a mini book, but partly because I really, I guess I believe that if something is going to undo this, it probably is going to be the financial ramifications.
- [21:40]
B
So it's.
- [21:40]
A
Explain that to me, because that's the bit which I don't really understand. Understand that all of these fracking companies and fracking operations, they have geological stacks and they have capital stacks, and the geological stacks are very complicated and the capital stacks are even more complicated. And there are people who own the companies and then there are people who've lent secured debt against them, and then there's people who've lent unsecured debt against them. And all of these people are constantly jockeying to find their position in the pivot and all the rest of it. And it is entirely possible that the people who own the equity will get wiped out and then the people who own the debt will take over the company. And why does all of that kind of capital jockeying matter? Why would it matter if there were defaults and there were debt for equity swaps and the debt owners took over the company?
- [22:27]
C
Because if you don't have a constant infusion of new capital into this business, it's an open question how much oil and gas we would actually be producing because the companies can't fund their own way, they have to constantly borrow more money in order to keep producing oil and gas. Should that spigot get turned off and there'd be no more capital for financing this, then we wouldn't be producing more oil than Saudi Arabia and Russia. So, and the question is, how much would it decline if companies had to live within the cash flow they could produce? If they couldn't, if the spigot shut off, what would that do to production numbers?
- [23:02]
B
And if you're looking at a period where we may be seeing increasing rates, that becomes a much bigger question, not only because of the interest that, that these companies are going to have to pay on their debt. Right now, the spread between high yield and investment grade is pretty small, but it also, you point this out in the book and this, I think this is really, really smart. Is that because we've had really low rates, a lot of pension funds have had to shift into alternative investments because they can't get the same return on fixed income instruments. And so as a result, you've had just a wall of money coming into PE and hedge funds that are then investing in these fracking companies.
- [23:39]
C
That's exactly right. You just said it better than I could say it. So I'll leave It, I'll leave it. But that's true. And the reason the whole daisy chain sounds a little bit too cynical, but the reason the whole thing has worked is that publicly traded fracking companies have been valued not on a multiple of the profits they produce, but rather on a multiple of the acreage they own. It's a little bit like the old dot com days when companies that weren't making money were valued as a multiple of eyeballs. Because in the absence of profits, a traditional measure of value, you have to turn to untraditional measures. And so you've been able to take a fracking company that doesn't produce profits and sell it to a publicly traded company. And the people who funded the private equity team that funded the company that got sold makes a lot of money and the executives make a lot of money, but that still doesn't mean the whole industry is profitable.
- [24:25]
D
So what's going to happen when the whole thing falls apart? Because, I mean, it just seems like it's a matter of time.
- [24:29]
A
I mean, the one thing you definitely learn from your book is that this entire industry is so stochastic and unpredictable every single time anyone makes a prediction like, it goes the opposite direction. And so, as Emily says, like, we're 100% certain to get some crazy blow up at some point. What happens when that happens? We had one not so long ago, right?
- [24:54]
C
We did. So thus far, the Frackers have defied every attempt to kill them. Which people saw Saudi Arabia's policy in 2014 and 15 as a definite attempt to kill the US frackers. They've been far more resilient than even their proponents dreamed. And a big part of that is that the capital supply hasn't dried up. So as somebody said to me, Wall street was there. I got a little bit humbled by this book because I came away saying, you know what? When I look at the history of this thing and then more broadly at the history of people who've tried to even predict oil prices, everyone is always dead wrong. So I don't actually know what's going to happen. To me, it was just important to say if we are beating our chests about American energy independence and how great we are and how we're now producing more, let's at least look at what could really undo this and try to. And then maybe our perspective shouldn't be so myopic and so short term about, look how much we're producing. Maybe we should have a longer term perspective that takes some of the industry's real weaknesses into account.
- [25:50]
D
Is there a fracking bailout ahead of us?
- [25:55]
C
In a weird way, there kind of was a fracking bailout because when oil prices collapsed in 2015 and 2016, 150 companies did go bankrupt, but the bankruptcies were far less than were predicted, in part because the capital supply didn't shut off. So you could almost view the Federal Reserve's continued low interest rate policy as a bailout of fracking companies.
- [26:17]
D
I mean, there isn't. You could argue there's a national interest in keeping these companies alive.
- [26:21]
C
Well, that is a question that has come up.
- [26:23]
A
As long as you don't want to live on an earthquake zone, That's a.
- [26:26]
C
Question that has come up. Would you want to subsidize their production? I actually don't think you would. And the reason why is that it ties into kind of a conservation argument too. But thus far, there still is no substitute for hydrocarbons in certain key areas of life. And why are we so eager to drill it all out of our ground and export it and sell it to other countries? Why is that, that, why is that so great when we might need it ourselves one day?
- [26:50]
B
Especially at low prices?
- [26:52]
C
I mean, especially at low prices. Why is there this need for immediate gratification? Get it out of the ground, sell it. Why, why not think long term?
- [27:00]
D
I mean, this is America.
- [27:02]
B
We don't do long term.
- [27:03]
C
No, that's, that's the problem.
- [27:05]
A
Right, but let's do that. Let's talk about long term. I love these segues. They're perfect. Because this is, this is, I think the key, the change that I have seen in the recent years that has become more obvious in recent years to me is that when we had the technocrats in charge, when we had Geithner and Bernanke and Summers and Paulson and they were trying to make decisions that were in the long term best interest, not only of the country, but as the global economy and the rise of populism and nationalism and all of these other things has shortened time horizons enormously. And that people are not making decisions on the basis of multi decade time horizons anymore. They're making decisions on the basis of what is the effect of my tweet going to be in the next 30 minutes. And for me, that's the scariest legacy of the financial crisis and going forwards in terms of how the world is going to, to operate. If we have a bunch of, if the world is basically a bit like a bunch of five year olds playing soccer and they're all like chasing the soccer ball and they're not trying to be strategic or long term about it. That's going to cause massive deadweight, systemic losses for decades to come. Am I wrong about this?
- [28:30]
B
I just wonder if you're overestimating how well things functioned previously.
- [28:35]
C
I was going to say exactly the same.
- [28:39]
B
Yeah. Like if you look at the history of even say just monetary policy and how it was always just kind of reacting to what had just happened and expectations of what maybe was going to happen right around the corner and then they were always wrong, so then they overcorrected and then under corrected. What we're seeing right now in politics definitely seems super sped up. I just don't know if in the larger financial system, if it's really that different.
- [29:01]
A
I'm looking at trade especially, but.
- [29:03]
C
Well, I'm going to focus on a slightly different area which I think is a problem for all of us and for the financial system and that's pensions. Right. Which have been chasing returns in higher risk areas like fracking precisely because the low interest rates make it even more difficult for them to meet their obligations. But part of that has been this very short term attitude on the part of politicians which is, let me promise people, all sorts of goodies that I don't have to pay for today that have to be paid for down the road. And that attitude which has been in place, I don't know, 80s, 70s is landing us in a really big pickle today. So that to me would sort of undercut this notion that we were once really good at planning for the long term and now we're really bad. I think politicians have made horrible decisions in their own short term best interests that are coming back to bite us. And I think they've done that for decades.
- [29:51]
B
Yeah, I mean you can even go back to essentially post war, even in 60s economic policy. It's because it's based on politicians wanting to get reelected. It always has been, it always will be. And I think you're totally right that right now, you know, nobody wants to do hard things. And it's understandable and especially at a time when you don't have significant wage increases, it's very hard to say, well, we're now going to cut pensions or we're going to have to increase contributions. Nobody wants to do that. Nobody wants to. Also if you're, you know, working with unions and it's understandable that they want higher wages. But then unfortunately what tends to get to happen is they say, well, we won't give you higher wages now, but we'll increase you Know, pensions, all these things down the line and then they can't pay for it.
- [30:29]
D
Yeah, it seems like there's a lack of imagination when it comes to solving our economic problems. But I was reading a lot. I mean there are, there are maybe hundreds of financial crisis. Look back and look forward pieces on the Internet right now.
- [30:41]
A
Possibly thousands.
- [30:42]
C
Possibly.
- [30:44]
D
I compiled a small list of things that people say might cause the next crisis. And I'm gonna just say I don't think it's right. Any of these are right. But I'm curious what you all think. Corporate debt, one thing. Cyber attacks, emerging markets, the shadow financial system.
- [31:02]
A
And that's why the word shadow in.
- [31:04]
D
It'S gotta be shadow, shadow, shadow lending. That was different somehow. And Trump. So those are the things that I.
- [31:14]
C
Think you should keep going and keep going and going and going and naming everything you possibly can. Because the one rule of crises is that it's always what nobody saw coming. So if we've talked about everything that could possibly be possible, then maybe we'll prevent.
- [31:26]
A
I think in terms of. There's two different types of. I want to draw the distinction here, which I think is a useful one, between bear markets, like market crash. I mean, obviously the stock market is super frothy right now. The stock market could easily decline by 50% or whatever and that would be bad for people who hold stocks, but it wouldn't be a financial crisis. We had that in 2000 and it wasn't a financial crisis. You could have a bunch of debt defaults. And similarly people who own bonds would lose money and that would be bad and it would probably be worse than the stock market crash because you know, debt defaults are where, you know, they hurt people in a place where you have a little bit less risk appetite. But even then it's more or less rich people losing money. The thing which causes a financial crisis is when normal people, you know, lose money.
- [32:21]
D
That was the thought I had. I was like, none of this involves people losing their homes, which is like the worst thing that should happen to.
- [32:27]
A
But I think the cyber attack thing is real. Like if there were a major crippling of the Internet in the United States that could cause unbelievably enormous damage and repercussions.
- [32:45]
B
And also going back to one thing you mentioned, corporate debt, that actually is somewhat interesting because totally Global debt to GDP has been relatively stable since 2014. But if you look since 2018 to now, non financial corporate debt has like more than doubled. And it's not only that there's more of it, it, it's that a lot of it is to issuers who have lower credit ratings. Now some of this has to do with China, if you're looking at global. But this, this is a.
- [33:09]
C
It's fracking.
- [33:10]
B
Yeah, it's fracking. No, I mean in the US it's almost entirely.
- [33:13]
A
There's some of it. But again, if I can, if I can plug my Axios Edge newsletter one more time because it's launching, it's nice. I have a, I have a chart in there of leveraged loans, which is basically junk rated loans. The amount of leverage loans out there has hit a massive all time high. It's twice as big as it was pre crisis. We are now over a trillion dollars in leverage loans. That happened. I discovered this On April 28, 2018, we hit $1 trillion. That's, you know, that's more than the amount of subprime mortgages that there were pre prices.
- [33:47]
D
But it's like half of. I saw a chart on Bloomberg and they called it shadow lending.
- [33:52]
B
Right.
- [33:52]
A
Because it's not CLOs, it's not banks. Yeah. And that's one of the reasons I don't think it's system is because it's not being held by banks. So long as the banks are safe, we're probably.
- [34:01]
C
But here's the thing. I think it's a lesson of the crisis that hasn't really been learned is that if you look at the crisis and how it happened, you remember Paulson and Bernanke saying, it's contained, it's contained. Subprime mortgage losses are small enough that they're contained. You know, that actually numerically turned out to be true. The subprime mortgage losses were nowhere near as big as they were forecasted to be. The losses actually were manageable. And if you go back and you try to say step by step, why did this crisis happen? There's no proof that the MA and me can embrace and say this led to this and this was causal and this led to this. There are lots of correlations. But what happened in the end was panic. It was panic. And so when you look at all the numbers and try to say, well here's why this isn't big enough to do this, you know what? It doesn't always have to be that, that big because in the end, right, it's confidence and the root of credit is confidence. So that's, that's the issue.
- [34:51]
B
Also in an age of mark to market accounting, it doesn't have to be that big because if your assets, if the if the market says they're worth nothing, if that's not, if that's completely untrue, it doesn't matter when you have to mark the market. Let's talk about what happen Lehman's. I mean, that's right.
- [35:02]
C
Or if your trading partners start to believe that your assets aren't worth what they're marked at. It doesn't even have to be true.
- [35:07]
B
Exactly. And this was what was really happening, the financial crisis. It wasn't just the size of subprime mortgages. It was the fact that what was happening is you were doing this borrowing and then you were using some of those assets as collateral with another institution and then that it was this kind of daisy chain effect that was what really caused it. So it's not just the overall sizes.
- [35:23]
A
But for me, you know, going back to the whole cause of the financial crisis thing, I think think fundamentally the single biggest problem, and we saw this, especially after Lehman went bust, was that no one really believed, no one had any certainty that any bank was solvent. You had no visibility into banks balance sheets. There was good reason to believe, especially if you mark to market, that virtually every bank in the world was insolvent. And if the banks were insolvent, as Bethany says, all of the financial connections in the world basically fall apart. And then, then you panic and then things get as bad as we saw they got and possibly even worse if there hadn't been a bailout. And I might be a little bit Pollyanna this year, but I just feel that in the wake of Basel III and various other banking reforms and banking just generally becoming a lot more boring since the crisis, that we're not going to be there anymore. That even if all of the frackers go bust, there's not a huge amount of fracking debt on banks balance sheets that would cause people to worry about the solvency of the banking system.
- [36:25]
C
I think that's probably right. But I think there's another risk out there that you guys complexity risk. Right. Remember, we've all kind of forgotten about JP Morgan and the whale and this thing that nobody understood that they didn't even, even Jamie Dimon, the best CEO banking CEO in America, arguably didn't see happening. And suddenly it was what, a $5 billion loss, a $7 billion loss. And even after the fact, when people tried to explain to me how this credit derivative index thing tied to various corporate credits malfunctioned and why that could lead to a $5 billion, it's crazy stuff.
- [36:56]
A
And we just saw another one of those this Week In Norway, this EU emissions trader in Norway ran up like a $3 billion loss trading carbon credits in Europe.
- [37:06]
C
And like, what complexity, risk.
- [37:10]
B
Last thing I'll say though, just going off a little bit what you're saying. I do tend to think that there really have been big changes that were made post the financial crisis. And if you look historically, when you really have the type of real crises that really hurt the economy in it's following a period where people think there is no risk, like this is what, this is what always happens. And we have, because we had such a massive crisis, we do not have people acting as though there is no risk. And so I think that because people are so cautious, I think it's hopefully going to be a long time.
- [37:41]
A
This is why people call it the most hated bull market in history, because everyone is just. No one's happy, no one's like, yay, we're making lots of money. They're always just like, this is, this is all going to end in tears. And so long as people think that way, maybe, maybe it won't, maybe it won't.
- [37:54]
C
I mean we did go from the Great Depression through to the financial crisis. What was that, 70 years without, you know, a massive bank bailout. And so, you know, maybe it's, I don't know.
- [38:04]
A
Yeah, there was a massive recession in 1958 which no one even remembers. Like we can cope with that.
- [38:08]
C
We can cope with that.
- [38:09]
D
I was thinking just American, just regular Americans just don't have that much to lose anymore.
- [38:17]
A
On which cheery note.
- [38:19]
C
Silence around the table. Sorry.
- [38:22]
A
On which cheery note. I think we're gonna have a numbers round. Why not? And Bethany, did you bring a number?
- [38:28]
C
I did bring a number.
- [38:29]
A
Oh, wonderful. What's your number?
- [38:31]
C
It's so not surprising. 11 million, which is the barrels of oil per day that the US is producing in July and August, according to our Energy Information Administration, making us the world's biggest oil producer.
- [38:44]
A
Boom.
- [38:45]
D
Emily, My number is 92%, which is 92% of the time on analyst calls. It is men who are speaking, according to this delightful analysis that was published in Bloomberg yesterday. And before you say to me, but Emily, most of the people who speak on analyst calls like it's CEOs and analysts are majority male.
- [39:08]
B
True.
- [39:08]
D
But in the analysis they also looked at for how long men speak versus the women who are on the call. And the men speak a lot longer.
- [39:16]
C
I was going to say that's because it takes the men a lot longer to say what they want to say. They just like hearing themselves.
- [39:22]
D
I think it's because I was thinking about it and like, people will say, oh, it's like a gender thing. Like, women are like this and men are like that. But I think it's more about who has the power. And people have the power tend to just go on and on a bit longer. No one interrupts them.
- [39:35]
B
I was just going to say, do they have a breakdown of the people who ask questions? The breakdown of men versus women?
- [39:40]
D
I would have to look. I don't remember.
- [39:41]
B
I'd be curious. Yeah, well, I'm pretty sure it's probably mostly men. Although I would say, interestingly. Interestingly, if you on calls for a lot of like, Russian, Ukrainian companies, you get a lot of female analysts who ask questions.
- [39:53]
C
Just.
- [39:54]
B
Really?
- [39:54]
C
Yes.
- [39:55]
B
Yeah.
- [39:55]
A
CFO is one of those jobs which is just way too male. And the people who speak the most on analyst calls are always the CFO. So let's just like get a lot more female CFOs. Just as long as their name isn't Erin Callan. And we'll be. We'll be fine.
- [40:10]
C
Speaking of Lehman.
- [40:12]
A
Speaking of Lehman Lehman. My number is 200 billion. This is my. This is my attempt to troll Anna again. The 2,200 billion dollars is the size of Turkey's sovereign wealth fund. Did we know that Turkey had a sovereign wealth fund? Turns out that Turkey has a sovereign wealth fund. Its assets are mostly Turkish companies or stakes therein. It's been kind of of wandering around in circles and going sideways for a bunch of years now. But never. Do not worry about that, because guess who has just been placed in charge of Turkey's $200 billion sovereign wealth fund? Mr. Tayyip Erdogan himself. The President has placed himself in charge of the sovereign wealth fund. So what could possibly go wrong?
- [41:02]
B
Yes, exactly, exactly. Although at least their central bank finally raised rates. It's not going to be enough.
- [41:06]
D
Oh, you should plug next. Next week or when is. When are they. When are they coming on?
- [41:11]
A
So we have. Yes, we talking of sovereign wealth funds.
- [41:15]
B
Erdogan's going to be on our show.
- [41:18]
A
We're going to have. Yeah, we're going to have like in the annals of corrupt sovereign wealth funds, there are many, but there is one above all others, which was just the most ridiculously corrupt sovereign wealth fund, where basically every single penny that it, number one, borrowed like. No, the whole point about sovereign wealth funds is that you use your sovereign wealth, you don't borrow the money anyway. It borrowed billions and billions of dollars and then spent it all on Hoofus and Blow, basically, and Paris Hilton. We are going to have this in two weeks. Bethany, you know what we're talking about.
- [41:50]
C
Here, is it IMDb.
- [41:52]
A
1Mdb.
- [41:53]
C
1Mdb. Yes, that's what it is, 1mdb.
- [41:56]
A
And we're going to have Tom Wright, who has just written the book on 1mdb. It's a great book and it's coming out this week I believe. So go out and buy Billion Dollar Whale and then we're going to get him on to talk about that next week. Anna, what's your number?
- [42:14]
B
My number is 35%. So up until this week, companies that had unfunded pension liabilities could make contributions and they were able to deduct 35% of that from their taxes. But now that's changing to 21%. Why? Because tax rates have changed. Changed. Now the reason this is interesting, at least to me, is that in the lead up to this, you've had a ton of companies buying long term treasury strips because it's good to offset their liabilities. So you've had a ton of money going into these long term Treasuries. And there's been some thought that perhaps this has actually been keeping some like pressuring the long end of the yield curve, keeping it down.
- [42:49]
A
So wait, we're not inverted.
- [42:51]
B
So there's. I don't know if this is true or not, but I thought it was a really interesting theory to see what'll happen when that kind of artificial demand goes away.
- [42:58]
C
So I had no idea. I love that number.
- [43:01]
A
That's awesome. Yeah. So. And when does it go away? When does the change go?
- [43:05]
B
I think it was like this week.
- [43:06]
A
This week. Okay, so if you suddenly see a spike in 30 year treasury yields, you'll know why it is. Because Anna told you. I think that's it then. Thank you, Bethany. Oh my God. It's always so amazing to have Bethany. Bethany Maclean on. It's not often that we get to just call up someone in Chicago and say, come on our show in Brooklyn and she'll come all this way. But it's so awesome whenever you do.
- [43:33]
B
So.
- [43:33]
A
Thank you for coming in. Thank you to Max Jacobs for producing. Thank you all for listening. Keep the emails coming. Slatemoneylate.com thank you for subscribing to my email newsletter, which I will stop plugging soon. But this is the first week and we will talk to you next week on Slate Money.