"Don't Fight The Fed" | The Snider Series | Episode 3 (WiM093)

Summary

Podcast Summary: "Don't Fight The Fed" | The Snider Series | Episode 3 (WiM093)
Host: Robert Breedlove
Guest: Jeff Snider
Release Date: December 15, 2021

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1. The Measurement Problem in Economics (00:08 - 00:58)

Jeff Snider opens the discussion by highlighting a fundamental issue in economics: the difficulty in accurately measuring critical variables such as the quantity of money and labor. He draws parallels between these measurement challenges and the persistent inflation problem, emphasizing that inaccurate metrics can lead economists to misunderstand economic conditions.

Jeff Snider [00:08]: "We're really talking about a measurement problem that's kind of the same as the money problem."

Robert Murphy concurs, noting that Austrian economists often distrust standard measurements, believing they can be misleading.

Robert Murphy [00:41]: "A lot of Austrian economists ... think that it can be misleading."

2. Critique of the Phillips Curve (00:58 - 02:38)

The conversation shifts to the Phillips Curve, a tool economists have relied on for decades to predict the relationship between unemployment and inflation. Snider criticizes its efficacy, labeling it a "debacle" that Austrian economists have long recognized as flawed.

Jeff Snider [00:58]: "One of the banes of Austrian economists is recognizing how stupid that was from the very beginning."

Murphy expands on this, referencing stagflation in the 1970s as evidence of the Phillips Curve's shortcomings.

Robert Murphy [01:37]: "When unemployment and inflation increased together, this was the infamous stagflation in the 70s."

3. Nixon's Policies and Early Federal Reserve Role (02:38 - 04:03)

Snider delves into President Nixon's decision in August 1971 to close the gold window, devaluing the dollar and implementing wage and price controls. He criticizes the Federal Reserve's minimal role at the time, arguing that the Fed was not the influential institution it is perceived to be today.

Jeff Snider [02:38]: "Nixon ... closing the gold window was supposed to be a way for him to devalue the dollar."

4. Paul Volcker and the Expectations Policy (04:10 - 05:27)

The discussion moves to Paul Volcker's tenure at the Fed, where he introduced the expectations policy to combat inflation. Snider contends that Volcker's measures are often oversimplified, suggesting that the Fed's actions were more about asserting control than effectively managing inflation.

Jeff Snider [04:10]: "The expectations policy is born. The idea that Paul Volcker and a committed central bank can essentially do whatever it wants."

5. Evolution of the Eurodollar System and Financialization (05:29 - 07:47)

Snider explains the transformation of the Eurodollar system during the late 20th century, leading to increased financialization. He argues that financial instruments like interest rate swaps and derivatives became more prevalent, further complicating the monetary landscape.

Jeff Snider [05:29]: "The Eurodollar system ... went into more hyper financialization ... derivatives, currency swaps and interest rate swaps."

6. The Savings and Loan Crisis (07:52 - 13:09)

A significant portion of the conversation focuses on the Savings and Loan (S&L) crisis of the 1980s. Snider explains how traditional S&Ls attempted to emulate the Eurodollar model without the necessary expertise, leading to risky ventures and eventual failures. He highlights the issue of bad repo collateral, where S&Ls used unreliable assets to secure loans, culminating in massive losses.

Jeff Snider [07:52]: "Savings and loans ... ended up ... creating the savings and loan crisis ... bad repo collateral."

Murphy adds that these institutions, originally meant to be safe depositories, became entangled in high-risk financial activities, further destabilizing the banking sector.

Robert Murphy [09:20]: "These financial institutions, S&Ls ... tried to emulate these Eurodollar institutions ... and that's what got them into trouble."

7. Repo Collateral and Systemic Risks (09:45 - 15:42)

Snider delves deeper into the mechanics of repo transactions, explaining how the misuse of collateral can lead to significant financial instability. He draws parallels between the S&L crisis and the 2008 financial meltdown, emphasizing the ongoing risks within the repo market.

Jeff Snider [09:45]: "If you post some kind of collateral ... you're supposed to seize your assets if you default ... manipulation ... bad collateral leads to depository loss."

8. Efforts to Educate and Influence Policy (17:00 - 19:23)

After skipping a mid-episode advertisement, Snider discusses his attempts to raise awareness about the complexities of the Eurodollar system through podcasts and other platforms. He lamentably notes the lack of engagement from policymakers and the media, who often dismiss his insights as fringe theories.

Jeff Snider [17:00]: "I think it's simply because ... they don't have the right background to understand what banks are actually doing."

9. The Asian Financial Crisis and LTCM (25:47 - 39:34)

Snider contextualizes the 1997-98 Asian Financial Crisis as a precursor to the global financial crisis of 2007-2008. He explains how Long-Term Capital Management (LTCM), a hedge fund with massive leverage and complex financial models, played a pivotal role. Both the Asian crisis and LTCM's collapse were manifestations of the fragility inherent in the Eurodollar system's complex financial instruments.

Jeff Snider [25:47]: "The Asian financial crisis was ... a dollar shortage ... similar to what happened in 2007 and 2008."

Murphy underscores the systemic risks posed by such highly leveraged entities and the Fed's inconsistent responses to them.

Robert Murphy [30:14]: "So there's a key point here that the false reliance on models justified too much reliance on leverage."

10. The Dot-Com Bubble Through the Lens of Eurodollars (49:50 - 53:49)

Contrary to the mainstream narrative attributing the dot-com bubble to speculative exuberance, Snider argues that the underlying driver was the Eurodollar system's unchecked credit expansion. He posits that the prosperity fueled by this system masked the creation of asset bubbles, leading to detached and unsustainable stock valuations.

Jeff Snider [50:15]: "The Eurodollar system was creating this prosperity ... so all these rationalizations combine to lead to this completely detached pricing mechanism in the stock market."

11. Convertibility and the Role of Public Information (56:40 - 61:49)

In the concluding segment, Snider and Murphy debate the effectiveness of central banking versus a public-driven information filter in managing economic stability. Snider advocates for empowering the public to act as a widespread information filter to regulate the financial system, arguing that central banks lack the comprehensive oversight needed to prevent systemic crises.

Jeff Snider [56:51]: "The public's ability as an information filter to put the brakes on would have put the brakes on long before any of this."

Murphy echoes this sentiment, emphasizing the intelligence inherent in collective market actions over centralized authority.

Robert Murphy [58:08]: "You're talking about the entire intelligence of the marketplace, which is by definition more intelligent than any individual."

They both critique the Keynesian viewpoint that distrusts the public's ability to manage economic stability, advocating instead for a more decentralized approach to financial oversight.

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Notable Quotes with Attribution and Timestamps

• Jeff Snider [00:08]: "We're really talking about a measurement problem that's kind of the same as the money problem."

• Robert Murphy [00:41]: "A lot of Austrian economists ... think that it can be misleading."

• Jeff Snider [00:58]: "One of the banes of Austrian economists is recognizing how stupid that was from the very beginning."

• Robert Murphy [02:38]: "When unemployment and inflation increased together, this was the infamous stagflation in the 70s."

• Jeff Snider [04:10]: "The expectations policy is born. The idea that Paul Volcker and a committed central bank can essentially do whatever it wants."

• Jeff Snider [07:52]: "Savings and loans ... ended up ... creating the savings and loan crisis ... bad repo collateral."

• Jeff Snider [09:45]: "If you post some kind of collateral ... you're supposed to seize your assets if you default ... manipulation ... bad collateral leads to depository loss."

• Jeff Snider [17:00]: "I think it's simply because ... they don't have the right background to understand what banks are actually doing."

• Jeff Snider [25:47]: "The Asian financial crisis was ... a dollar shortage ... similar to what happened in 2007 and 2008."

• Jeff Snider [50:15]: "The Eurodollar system was creating this prosperity ... so all these rationalizations combine to lead to this completely detached pricing mechanism in the stock market."

• Jeff Snider [56:51]: "The public's ability as an information filter to put the brakes on would have put the brakes on long before any of this."

• Robert Murphy [58:08]: "You're talking about the entire intelligence of the marketplace, which is by definition more intelligent than any individual."

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Concluding Insights

Jeff Snider and Robert Murphy provide a critical analysis of the Eurodollar system and its profound impact on global financial stability. They argue that complex financial instruments and an overreliance on mathematical models have obscured the true state of the economy, leading to repeated financial crises. Their discussion underscores the need for greater transparency, better measurement tools, and a decentralized approach to financial oversight to prevent systemic risks.

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For listeners seeking a deeper understanding of the intricate workings of the Eurodollar system, central banking policies, and their historical implications, this episode offers a nuanced perspective that challenges conventional economic narratives.

Transcript

[Jeff Snider]

Robert, we're really talking about a measurement problem that's kind of the same as the money problem. Right. Which was a measurement problem. Right. If you're talking about inflation, you want to know the quantity of money, and the quantity of money is important in determining inflation, especially its relative position to economic conditions. But you don't know how to quantify or measure the quantity of money. It's the same thing. If you're inaccurately measuring the quantity of labor that's available to be used, you're going to be fooling yourself. So what is it that economists actually do here? Wow, 50 years of just essentially fooling themselves into believing they understand things that they don't.

[Robert Murphy]

Yeah. This may speak to the proclivity of a lot of Austrian economists that they're very adverse to measurement and metrics in general. So they think that it can be misleading, which I can't. I guess this would be a great instance of that, this Phillips Curve debacle.

[Jeff Snider]

Oh, and that's one of the banes of Austrian economists, is that recognizing how stupid that was from the very beginning.

[Robert Murphy]

Yeah. And we're still relying on it today, is that right?

[Jeff Snider]

It's gone through several different intellectual iterations where it's been. Neo Keynesian economists have claimed they've updated it, made it more accurate and more usable. Like I said, they use more inflation expectations instead of just raw unemployment rate versus cpi, things like that. But by and large, you know, again, as we said, if, if you don't know how to measure the thing, you're attempting to control or exploit and manipulate.

[Robert Murphy]

Right.

[Jeff Snider]

It's, you know, garbage in, garbage out. The old programming.

[Robert Murphy]

I love Wittenstein's ruler on this. As if you're trying to measure a table with a ruler, but you can't trust the ruler. You don't know if you're measuring the table or the ruler. You know, you're just in this domain of relativism, you can't figure anything out. So that's excellent point. And then when unemployment and inflation increased together, this was the infamous stagflation in the 70s.

[Jeff Snider]

Right. Friedman's argument was essentially that people would become sort of normalized to higher rates of inflation, so it wouldn't matter. The Phillips curve wouldn't apply because it would only apply in the short run. The long term expectations actually determined rates of inflation as well as rates of unemployment, essentially because high levels of inflation tend to be not very good for economic conditions either. If you become normalized to the one, you essentially become normalized to the other.

[Robert Murphy]

Incredible. And Then.

[Jeff Snider]

So yeah, and the thing was nobody knew how to get out of it. It was sort of like in 1970, August 15, 1971. Of course, Nixon closed the gold window, but that wasn't even his point. It was everything else in the Nixon. I mean he sort of threw that in at the end. And by the way, nobody told the Fed about this. Supposedly the Fed's printing press, fiat currency, they were supposed to be set free on August 15th, 19th or August 16th, 1971. Nobody at the treasury told the Fed they were going to do this because nobody. The Fed wasn't even an important part of any of these things because at that time the modern Fed that we all have an image of was essentially a recent fiction, a recent creation. Back then the Fed was subservient to treasury anyway. But by and large, Nixon in August of 71, closing the gold window was supposed to be a way for him to devalue the dollar and maybe get back on a gold exchange at some point in time. But really his idea was about essentially socialism, wage and price controls because they did not know how to break the inflationary paradigm. They didn't know how to get out of it because they didn't really understand what was going on in it. And that's why it was one thing after another after another after another, stretching out an entire 15 to 17 year period of just everybody sort of looking at each other wondering how the hell do we fix this? Because didn't really understand the problem to begin with.

[Robert Murphy]

Wow. So, and this gets, I mean, clearly gets out of control. And then it's Volcker that comes in.

[Jeff Snider]

And does something about this legend. And that's where the expectations policy is born. The idea that Paul Volcker and a committed central bank can essentially do whatever it wants. If it says I'm going to be an inflation fighter, then don't fight the Fed. The part that people always get wrong about that is that nobody really knows what Volcker did. We just assume that Volcker ended the great inflation because he let the level of money rates go through the roof. And that provoked a double dip recession in the early 1980s. But what did he really do? Again, it's essentially the Fed trying to take credit for everything and subsuming it under this expectations policy where if we want to do something, we're going to be able to do it. If we want to break inflation, we're going to do it. And you don't fight the Fed because that's what's going on. But if you go back to the late 70s and early 1980s, while this is going on, nobody was attributing the Fed much of anything. They were not saying, hey, Paul Volcker, our hero, let's give him a parade. It was like, we don't really know what's happening. And by the middle 1980s, we didn't have another explanation for what's going on. So maybe it was Volcker. I mean, it could have been anything, right?

[Robert Murphy]

What happened?

[Jeff Snider]

Maybe it was the Eurodollar system essentially broke. It got to a point where that early initial phase had gone too far. And in those recessions of 1980 and 1981, 82, it sort of reconstituted itself, it snapped back. And when we came out of it in the middle 1980s, it focused in other directions because all of the things that had happened during the 1970s, great inflation, like the Latin debt crisis, for example, which was a big part of it, this global expansion of money, that was a bad place to be. So all the stuff that the Eurodollar system did during the 1970s, the Eurodollar participants like, we can't do that stuff again, let's try something else. And they went into essentially hyper financialization, where much of this balance sheet resources started to get dedicated into these even more esoteric financial forms like Eurodollar futures, interest rate swaps that became standardized in 1985, which ISDA got formed, which allowed the system to go into a less real economy inflation, more asset type activities.

[Robert Murphy]

So it was the, these economic crises then that caused a drawdown in the euro dollar expansion. Is that what corrected.

[Jeff Snider]

Absolutely, yeah. That's what corrected Latin debt crisis was for the time. I mean, the numbers today sound quaint. It's like $30 billion in bad debt. That's a drop in the bucket today. But back in 1979, that was an enormous problem. In fact, they didn't solve really the Latin debt crisis until the early 90s, the issue of Brady bonds and Tequila bonds and everything else, it was really a lingering problem where the Eurodollar system was. We got all this capacity, we got all this ability, what do we do with it? And so you had this period between 1980 and 1982, 83, where they kind of sat back and just let everything play out until it started to look like, okay, the economy is starting to recover, certainly in the United States, 83 and 84. So back at it, back at it in a very different way than it had been done beforehand. Which is why you have more hyper asset financialization post great inflation than what you did in pre great inflation.

[Robert Murphy]

So then does that get us into the savings and loan crisis in the 80s?

[Jeff Snider]

Absolutely. In fact, really, the funny thing is about the savings and loan crisis that people don't really realize is that it was exactly this. It was savings and loans, which are supposed to be these traditional mom and pop type depository institutions. But some of these mom and pop institutions got to be big through some strategic mergers. And then they got jealous. They looked at all of these global commercial banks, these larger banks, especially in the operating Eurodollar system, and said, I want to be that too. They're making all this money, making money. How do I do that? And the savings and loans, the ones that adopted that wholesale Eurodollar balance sheet approach, they're the ones that ended up by 1985 and 86, creating the savings and loan crisis because they got themselves in over their heads. And a lot of it had to do with bad repo collateral. Believe it or not, especially a couple of the SNLs in the early crisis period essentially were defrauded by bad collateral. But the idea is they wanted to adopt this new model, this evolutionary model that commercial banks around the world had done. But that was not a really good idea because they had no expertise and no real depth in trying to do those things and try to adopt this Eurodollar system in a domestic S and L type safe depository industry. It was just unsuitable for it. That's really what the SNL crisis came from was again this transition between the old way and the new way.

[Robert Murphy]

So that's interesting. These financial institutions, SNLs that actually had reserves, these are domestic institutions, I assume they tried to emulate these Eurodollar institutions that were making money by making money, and that's what got them into trouble. Could you maybe expand upon. You mentioned bad repo collateral. What happened there?

[Jeff Snider]

What happened there was you're in the repo market, you don't really know who's on the other side of it. And that's really the point. In an unsecured market like federal funds or just Eurodollar deposit, something like that, you're essentially, you're doing business with banks that you know. Right. We talked about that in the pedigree. The Cayman Islands bank with a Goldman Sachs letter of credit, you know that guy. So you can do it. You can do a unsecured interbank transaction with them because you've been doing business. They have the reputation established and everything else. It's really a small type of club where there's not a lot of, you know, other people. There's Not a lot of new names coming into it because by and large reputation matters. And if you don't have a reputation, you can't do it.

[Robert Murphy]

Right.

[Jeff Snider]

But how do you expand this interbank type of system, wholesale money system to a mass audience? Well, one way you could do it, circumvent pedigree and reputation is by financial collateral. Right? I don't know you, but if you post some kind of collateral to me, then if you default, then I can just seize your assets and sell it and I'm good. So we have a low risk type of transaction between people who don't necessarily know each other. And the problem with that is it opens the door to manipulation, especially if you're sort of, you're sort of a noob to the repo system. And maybe you don't understand that I'm going to give you some crap collateral and try to manipulate you into valuing it more than it should be when it's really a piece of junk. Next thing you know, I'm going to default on the loan because why wouldn't I? I gave you a piece of junk. I now have your cash. I don't really care. Now you're a depository institution with state regulators and federal regulators and everybody on your back and you've just lost money on the safest transaction that's supposed to be out there. And of course, what does that do? It leads to depository loss, right? Because depositors say this idiot just got taken on a repo transaction. I don't know what a repo transaction is, but he lost money on a safe loan. How good is this bank? I might want to take my deposits out and put them at a better bank. That's really how it started to snowball because a lot of these SNL's got themselves in way over their head with a way of doing banking that they didn't really understand. So these, there's all sorts of, you know, the FDIC reports From the early 1990s, looking back on the, looking back on the slo SNL crisis, there's a wealth of information there about all of this kind of stuff. What they said was that, look, Most of the SNLs that ended up failing and being taken over, they were growing themselves. And it was completely, completely almost binary. The SNLs that survived or didn't participate in SNL crisis were just people were banks that just stayed snls the whole time. There's a trouble banks for all of these SNLs that tried to adopt this wholesale model. And I can't remember the statistics off my head, but like I said, the FDIC reports from the early 1990s, there's a lot of detail there about exactly what happened there, which was they wanted to adopt this monetary model because why wouldn't they?

[Robert Murphy]

Yeah, yeah. Everybody likes free money, right?

[Jeff Snider]

Right. I mean, look at these other, you know, these. What used to. I think that's part of the problem too, is that we don't realize that, you know, not that all that long ago there used to be two different types of banks that had been separated because of the Great Depression.

[Robert Murphy]

You know, Glass Steagall, Glass Steagall, yeah.

[Jeff Snider]

It used to be banks, depository banks, which were called banks. And then there were these other Eurodollar institutions that were called commercial banks because they were doing other things. They largely started out in the securities business, which is what allowed them to start this balance sheet manipulation, things like that. And the depository institutions, by the late 70s and early 80s, we want to be like them because they're making all the money, they have all the political power, they have everything that we want. Why not? They're a bank, we're a bank, everybody's a bank. Why not just do that?

[Robert Murphy]

That's interesting. So on the bad repo collateral, is this just a fraudulent actor misrepresenting their treasury holdings as collateral?

[Jeff Snider]

It's not, no. In a lot of cases it wasn't Treasuries. It was just a piece of junk. It was an illiquid piece of junk where I give you a corporate letter, just a corporate letter, and say, hey, this is what everybody in repo does. Well, you don't know any better. You accept it, as it turns out, it's a worthless piece of paper. Or even if it's a worthful, it's not worth what it's supposed to be worth to over collateralize the loan I just gave you. So you default on the loan and I have a security that's less than I thought it was worth, which means I'm going to lose money on what's supposed to be a safe transaction. So it doesn't have to be outright fraud. It can just be simple manipulation about what's priced what. That's really. That's sort of the downside of this. And it's still to this day a problem in repo because how do you evaluate and how do you value the collateral that's used in widespread fashion, and some of it's because of market inputs. But in some cases, in a lot of cases, really, you get into subprime mortgages and things like that we'll talk about later. I assume it gets really difficult. It's a lot more difficult than you think.

[Robert Murphy]

Yeah. I was just going to say it has kind of an echo of what happened in 2008. It sounds like bad collateral, the SNL.

[Jeff Snider]

Crisis in a lot of ways because it was this wholesale. This wholesale model was kind of a test run for what came up in 2007 and 2008 because it was these esoteric monetary forms that regulators were like, we don't know what the hell this stuff is. I mean, repo, what's a repurchase agreement? And even by then I should mention that the repo market was not standardized to that point. In the 70s and 80s in particular, it hadn't really been standardized. So banks and counterparties were treating repurchase agreements as literal repurchase agreements, as if title had been transferred to an enormous amount of confusion and messiness too, which you would expect.

[Robert Murphy]

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[Jeff Snider]

I'm the first that I've noticed and there are a few people here and there who have mention Eurodollar, but they never get the whole thing. There's like, you know, they pick off like petrodollar, they pick off a little piece of it and kind of poke at it a little bit, but they never really got into the whole thing. I think it's simply because first of all, there's too much. But they don't have the right background to understand what banks are actually doing. You have to be in the mindset of understanding what banks do and why they do things. And a basis swap, for example, that's beyond the capability of most people who investigate what a monetary or money and economy are. They can't comprehend that thing. They don't have the accounting basis to understand how banks put together balance sheets. And I think that's really been the impediment for people putting all of this stuff together, like Ben Bernanke's Global Savings Club. They can see it, they can think, they can feel the edges of it, but they can't get their heads around the whole thing.

[Robert Murphy]

Have you written a book about this?

[Jeff Snider]

No, I probably never will because I can't see spending six months or a year on something nobody's ever going to buy. The cost benefit analysis is not really favorable.

[Robert Murphy]

But you're already publishing. I mean, you publish, like you said, multiple times a week. So that's the gist. Yeah.

[Jeff Snider]

And I'm trying to work make a more concrete organization called Eurodollar University, where the output is to try to put this together in a coherent, organized fashion. The problem is, first of all, coming up with the, you know, how do we do that? And the second is what is the right medium to do it? Right, That's. It's really difficult. So I think what we're deciding on is, you know, we're doing our podcast, but that's really sort of, you know, just ad hoc and everything else.

[Robert Murphy]

Yeah.

[Jeff Snider]

Try to do some more podcasts that are explanatory and try to do them in an organized fashion so that people can follow along from sort of beginning to end. And what the problem is, as we're finding out, is there's no place to start. It's not like you can say, okay, here's. Let's start here and just move. Linear progression. Because as we're saying, as we're finding out, we talk about one thing and it leads us off into a whole. A whole bunch of stuff.

[Robert Murphy]

Yeah.

[Jeff Snider]

And it's just. It's really hard to put it together. One step after another after another.

[Robert Murphy]

Yeah, I've struggled with that. Have you had feedback from policymakers?

[Jeff Snider]

I talk to them occasionally. For example, 2018. Actually, it was May 29, 2018. I had a meeting with the Vice President's chief economist, which was a complete and utter waste of everyone's time. I've been to the Treasury Department before, and it's not worth it. Where I've had More success is talking to people in the media. But most of the media, what they'll tell you is the shit that they write, they have to write it. They're told I have to write a story. This is the story. I can't write your stuff because it's not approved. It's not editorial. We take all of our editorial standards from what central bankers tell us, so they can't write about it even though they want to learn about it. There's a few of them at hand. Andy Kessler at the Wall Street Journal. I've been talking a lot with John Dyser from the Financial Times, who just wrote a collateral story just today. I think it's kind of getting out there, but it's certainly slow. It's even tough to get people engaged with it because by and large, it's just so contrary to their expectations, their initial responses. This cannot possibly be true. It doesn't matter how much evidence you show them, how much history you know, I can quote, I can quote central bankers from, you know, from the beginning. It doesn't matter because it's just so far different from what we're supposed to believe that it sounds like a conspiracy theory.

[Robert Murphy]

Yeah, it's. There's this very strong status quo bias. It seems I'm seeing a lot too. This, all this vaccine mandate stuff. People are just like, oh, no, it could not possibly be bad. I'm like, I side with George Gammon on this one. Like, you don't mandate things like that. No, let the individual decide. I mean, everyone decide for themselves. You like the vaccine, great. You don't, great. But the idea of mandating it, well, it doesn't make any sense. That scares the shit out.

[Jeff Snider]

If you're vaccinated, what do you care if somebody's not exactly. You're protected. So it's okay, you know, it's, it's, you know, I'm not vaccinated. I've had Covid, but I'm supposed to get vaccinated even though I have natural immunity, which is a million times better than some vaccine. It's all about government control.

[Robert Murphy]

It's.

[Jeff Snider]

I can't prove that I have, I have antibodies. There is no good antibody test. So the government to check off their box. They need me to get a vaccine.

[Robert Murphy]

Yeah.

[Jeff Snider]

That's not science, that's politics.

[Robert Murphy]

Yeah. I'm not, I'm in the same boat. I've had Covid and I'm not vaccinated and I'll never be vaccinated.

[Jeff Snider]

My daughters just got Covid two Of my daughters just got Covid. And you know what? They didn't even have a runny nose. They lost their sense of smell for two days and that was it.

[Robert Murphy]

Wow.

[Jeff Snider]

But I'm supposed to, I suppose we joke around all the time. My second daughter just got tested, tested positive a week ago. Every time I see her, I'm like, oh, you look dead. This is so awful. She's like, absolutely no symptoms whatsoever. That's supposed to be like the black death in the plague.

[Robert Murphy]

Yeah, it kicked my ass. My daughter had it. She wasn't very affected, but it kicked my ass.

[Jeff Snider]

Me too. It was not fun.

[Robert Murphy]

Yeah.

[Jeff Snider]

You know, it was not a. It was not a good disease.

[Robert Murphy]

Yeah.

[Jeff Snider]

But it wasn't like I was going to die.

[Robert Murphy]

Yeah. No. Yeah, just like a week of bed rest. Pretty much, yeah. Okay, let's shift back into this. All right, so we get through savings and loan crisis, I guess things get back to kind of business as usual. Eurodollar system, I presume, starts to expand again.

[Jeff Snider]

Yeah, qualitatively as well as quantitatively. And in fact, I think the mature phase, which is the post 1970, 1985 and forward, is where you really start to see the widespread adoption of all these more esoteric things like repo collateral and securities lending, as well as derivatives, currency swaps and interest rate swaps and those kinds of balance sheet tools that really unlock the true potential behind this reserveless virtual currency based on bank balance sheet construction factors.

[Robert Murphy]

So all of these policy tools, they become increasingly esoteric or exotic. This is further interconnecting bank balance sheets and these interbank liabilities so it's flowing even faster in more complicated patterns. Is that right?

[Jeff Snider]

Absolutely. And central bankers trying to keep up are just simply saying we can't keep up. So we're going to try to keep it simple. For the public especially, we'll just say we're going to move a federal funds rate around in the us there's other rates in central banks around the world. But by and large, the modern central bank model is not a central bank. It's something else entirely. And that's really kind of the other key takeaway here is that the private monetary system, private Eurodollar system that does money kind of leaves central banks out in the cold. They're kind of pretending like they're the center of everyone's universe and then they have the vested interest in making people believe that. But in reality, it's all about banks and banks balance sheet. And there's sort of a symbiosis with, hey, we'll keep up the pretense for central bankers because that gives us political coverage. We've sort of evolved into this weird, you know, you guys don't have any monetary authority, but you do have some political cover that you can provide the banking system. And so we won't spoil the. We won't tell anybody that you're a bunch of frauds because you are kind of our political operation to what is essentially the exogenous monetary system and situation.

[Robert Murphy]

Interesting. Okay, so the next crisis chronologically is the dot com bubble, late 90s or into the early 2000s. Is that right?

[Jeff Snider]

Before we even got to that though, there was the 1997, 98 Asian financial crisis.

[Robert Murphy]

Oh yeah.

[Jeff Snider]

Which I think is an important part of the development because in many ways I know we said the SNL crisis was sort of a precursor event. The Asian financial crisis was very much a precursor event to the global financial crisis in every way imaginable. I know, again, it's another one of those things that Americans in particular don't really follow too closely. They don't really understand what happened simply because it sounded like there's a bunch of stuff going on in Asia that has nothing to do with us, when in fact it was a dollar shortage. It wasn't a global dollar shortage. It was the Eurodollar system experiencing a regional spasm that took all the same types of forms that we would see fail in 2007 and 2008 leading up to which was the Lehman Brothers of the time, ltcm, which is involved with balance sheet stuff. It's funny, you read some of the transcripts, which, again, I'm the world's most boring human. I've done this. The FOMC transcripts from 98 in particular, and they're all just throwing up their hands. One of them, I can't remember the exact wording, I wish I probably should pull it up, but they're talking about LTCM and Alan Greenspan or one of the FOMC members says, can you pass me a balance sheet for ltcm? And the other guy says, don't bother. Everything they do is off balance sheet. And it was sort of one of those poignant moments where it was like the light bulb should have gone off here.

[Robert Murphy]

Yes.

[Jeff Snider]

But they looked at LTCM like it was an outlier, like it was an isolated case. And oh well, LCCM is doing all this ALF balance sheet stuff and balance sheet manipulation, all this other crap. And you know, it was Robert Merton, who was a Nobel Prize winner, tremendous mathematician. So, you know, they downplayed the significance of ltcm when in fact LTCM was nothing more than Bear Stearns or Lehman Brothers before we got to those. And they knew at the time what was really going on was this weird balance sheet stuff.

[Robert Murphy]

Yes, yeah, LTCM for the audience. I don't know if we said it out loud. Long Term Capital Management, they had effectively represented that. They had perfected this risk model. They had the ultimate spreadsheet, if you will, that they could somehow, I mean you could speak to this more intelligently than I, but they could create near risk free return through their risk management model. And that blew up just a couple of years in.

[Jeff Snider]

Right, it was five years.

[Robert Murphy]

Five years, yeah.

[Jeff Snider]

And the funny thing, yeah, that was the idea, but it was really what we talked about before, which was how do you create and manage a bank balance sheet? And the way you do it is quantitatively through these mathematical models. And what Robert Burton and some of his cronies, John Merriweather of Salomon Brothers fame, what they said was we have these very sophisticated mathematical models that allow us to safely navigate all of these esoteric functions, including their favorite tool of choice was interest rate swaps, their off balance sheet, all the stuff that they had created off balance sheet. As we said before, these interest rate swaps actually function like money. There was this hidden form of money off the LTCM's balance sheet that LTCM believed were completely risk free. And because they had these proprietary models, they were using gain on sale and present value accounting, creating value out of future cash flows and expected future cash flows. They were essentially everything that banks were becoming, all distilled into a hedge fund. But because they were a hedge fund, Alan Greenspan and his cronies, policymakers at the time thought, well, that was just one hedge fund. The funny thing about it is, at the very same time LTCM was doing this, JP Morgan had created something called risk metrics, which they began selling in 1995 to everybody on Wall Street. And guess what risk metrics was? It was essentially the database that was very similar, if not the exact same that Robert Merton was using for ltcm. So LTCM wasn't a one off loan outlier, it was simply ahead of the curve. It started doing these things in much bigger way as banks were going to be doing further down the road. So 97, 98 really was a rehearsal for what would happen in a more global systemic faction less than a decade later.

[Robert Murphy]

Right, right, right. So there's a key point here that the false reliance on models justified too much reliance on leverage. I think LTCM was 30 to one or more levered.

[Jeff Snider]

That was another thing in that discussion I talked about. Policymakers were trying to figure out what the leverage was. And I think it was Peter Fisher, who was the open market desk manager, said it might be 200 to 1. We can't calculate the leverage. Again, the light bulb should be going off here. Wait a minute here. This is a monetary institution, by all accounts. It really was. It was a global eurodollar monetary institution. It was a non bank. But that didn't mean anything because eventually the rest of the banking system looked like ltcm, which meant that these banks were no longer banks, they were just large regulated hedge funds.

[Robert Murphy]

Right, right, right.

[Jeff Snider]

And that really should have been the policymakers saying what is really going on here? Especially Alan Greenspan, who had spent that time, as we talked about before, saying we can't track money. We don't know what's going on in the monetary system. Maybe we should really take a really hard look at what's going on with ltcm because it might not be just a lone wolf out there. We can't calculate its leverage. Let's just scare the crap out of everybody.

[Robert Murphy]

Right? Yeah.

[Jeff Snider]

They just rationalized it.

[Robert Murphy]

There's this great quote from Taleb. He says all models are wrong. Some are useful, most are dangerous. And it sounds like this was just that lesson learned the hard way. Could you speak a little bit to the mechanics of this off balance sheet mode of operating? Is this just them using these accounting equations to value assets that are just showing up as a dollar figure on their balance sheet without displaying the calculation behind it? How does this work exactly?

[Jeff Snider]

Yeah, and it depends on the instrument being used. But for example, derivative transaction. We'll do a currency. You and I will do a currency swap. I'll swap, let's say a billion dollars in US dollars for the equivalent in yen. Well, what goes on my balance sheet isn't that billion dollars that I've basically given you as a liability. What goes on my balance market value of that swap, because there's future cash flows involved in how we model. How does the dollar exchange value change versus the yen. So all that goes on the balance sheet is the market value of that particular transaction, not the billion dollars in gross notional. That goes off balance sheet. Even though in many cases that allows you to do something. And we can think of that as sort of a synthetic cross currency repo transaction, especially if I demand some kind of collateral. And then we mark to market, where we mark to market collateral.

[Robert Murphy]

So the liability is not on the balance sheet.

[Jeff Snider]

The whole thing isn't just the market value goes on the balance sheet. And so you get, you know, you think about this in long, you can create a synthetic repo transaction where almost none of it shows up on somebody's balance sheet because of the way the accounting rules are. And that's part of the problem here too is that you don't have to, you have to be a finance, you have to understand finance, number one. But you also have to understand the accounting because when we're talking about bank balance sheets as the actual monetary form, you got to know how bank balance sheets are accounted for.

[Robert Murphy]

Right.

[Jeff Snider]

And what banks figured out in this eurodollys, it's a qualitative expansion is there was any number of ways to manipulate the accounting so that they can stuff as much leverage as possible into a balance sheet, which includes sticking a whole hell of a lot of it off balance sheet. And again, that's where I said before the Enron adopted their model, because that's kind of what Enron did. How do I put so much of it off balance sheet, but still within the letter of the accounting law.

[Robert Murphy]

Right. That's the key point there is following the letter, not necessarily the spirit of the law. And they gain this obfuscation through accounting rule exploitation.

[Jeff Snider]

Yeah. I think to me, part of the monetary reform that needs to be done is to update accounting standards as stupid and simple as that sound. We're using accounting standards that were developed 70 years ago for a world that hasn't existed in generations of lifetimes here.

[Robert Murphy]

Right, Interesting. So the Asian financial crisis, you said it was a dollar shortage that was related to LTCMS implosion?

[Jeff Snider]

Yes. In fact, that was what caused it. The lack of liquidity in these markets, which then because of risk aversion that grew into these dealer networks that were doing business in Asia, meant that dollars became hard to source. And when you're in this type of business, this type of, whether you think it's quantitative or you've got risk coverage or not, when you run into liquidity problems and then you run into markets that become more and more illiquid, which means all of the stuff that you've been doing gets priced on an illiquid input. Suddenly your models, which had never accounted for an illiquid marketplace, can't account for these sudden risks that show up out of nowhere, which then leads to collateral calls, which is really what brings down all of these institutions is they're not collateralized for any type of movement outside of their quantitatively determined Margins, which happens far more frequently than the models would have you believe. So LTCM is pricing all of its interest rate swaps based on what it thinks is normal operating conditions. And along comes this regional dollar shortage which causes these markets to go haywire. And suddenly your pricing inputs mean well, I thought I had 10 billion in good assets off balance sheet that were priced a certain way. Suddenly they're only worth eight. And now all my counterparties are banging on my door at once saying the prices have moved against you. I need you to collateralize this right away or I'm going to start seizing your assets. And of course it got to the point where LTCM didn't have the collateral to post and they had to go begging to the rest of Wall street, then the Federal Reserve to try to resolve their shortfall. But really it started with the fact that this was a dollar shortage and some of these dollar markets started to go haywire because it had priced these Asian tigers like Thailand and Taiwan in one way as if they were risk free when it turned out to be anything but. And that's really kind of the repeating pattern and the repeating theme over and over again is the idea that there is no risk here and then all of a sudden there is risk here. Except we can't handle the introduction of risk because the system is actually much more fragile than we believe it to be.

[Robert Murphy]

Interesting. So again, we have this over reliance on models, which leads to a lot of leverage. Let's just say 30 to 1, could be more. We don't really know.

[Jeff Snider]

Completely unknown levels. Exactly.

[Robert Murphy]

Gives you a very low margin for error. Right. Because you're very small capital base relative to your notional position. And then you get these, which can, if you get outside that margin of error, you get into collateral calls. And these can be cascading because all of these institutions are similarly under collateralized. Right? Yeah.

[Jeff Snider]

Because you have exposure. LTCM has exposures to the interest rate swap market. It starts to go against them. They have to post collateral, they'll usually have to borrow collateral. They're the other side of the transaction, might be another bank. All of a sudden the bank is exposed. If LTCM doesn't have the collateral now, they have lost potential at their balance sheet. And it's not just LTCM, it's not just this other bank. There's usually 8, 9, 10 other banks that are exposed to LTCM to the.

[Robert Murphy]

Rush down the exit or pyramid. Right. To from higher to greater liquidity, basically.

[Jeff Snider]

Right. And away from, in this instance, there's nothing at the bottom because there is no currency that you can convert into. I mean, you can convert an off balance sheet interest rate swap into physical currency. It doesn't work because what would you do? And that's really kind of what the FOMC was struggling with. Not again, you don't have much sympathy for these idiots. But that's what they were struggling with, that they're trying to figure out. We can't even figure out what the hell these people are doing. But we know that they're creating exposures to banks. And the other thing about it was that nobody had heard of LTCM before all of this crisis started. Even though their balance sheet had ballooned to something like 10 billion and off balance sheet had ballooned to something. I mean, 10 billion in the 90s.

[Robert Murphy]

Was a lot for a hedge fund.

[Jeff Snider]

And their off balance sheet exposures, they couldn't even calculate. So it was almost out of nowhere this monster showed up that had some kind of linkage into this global dollar reservoir that was seemingly going wrong. And that wasn't. Ltseum wasn't the only mode of failure. The biggest problem in the Asian financial crisis was actually Japanese banks. And you had a wave of bank failures in Japan based on this dollar shortage proposition, that in one instance the bank of Japan and the Treasury Department, the Finance Ministry of Japan went banging on the door of the Federal Reserve saying we need a dollar swap from you guys because our banks are going out of business because they can't obtain dollars. It was all of this nasty offshore dollar stuff going backwards that nobody could. We didn't understand it, we couldn't pin it down, we don't know what's on anybody's balance sheet. And this is exactly describing what would.

[Robert Murphy]

Happen in 2007-2008 using LTCM as a case study. This was a similar situation with the Japanese banks more generally. They were in similar positions. And so this cascading collateral calls and collapse was just basically taking out Japanese banks too.

[Jeff Snider]

Which of course, as we know from history, when you have that kind of a bank run, even though it wasn't a depository run like it had been in the past, this was an interbank run. Yes, which is exactly what 2007, 2008 was. So it was a bank run, but it was an interbank run, which when you start having failures, what does that do? It just leads to the cascading effect, which creates not just nervousness in the interbank system, but it also leads to liquid market inputs.

[Robert Murphy]

Back to your point about expectation based system, those expectations invert Right. And all of a sudden it's cuts against you as fast as it expanded.

[Jeff Snider]

Yeah. It's nonlinear. Right. The risk shows up. It's not like it's okay a little bit here, there, there. It's almost in some of These cases, like LTCM's final days, it's. It's not just. Not even exponential. It's all or nothing.

[Robert Murphy]

Yeah.

[Jeff Snider]

You're kind of in business one day and the next business next day.

[Robert Murphy]

You didn't.

[Jeff Snider]

You didn't see coming the fact that you have, you know, an $8 billion collateral call that you cannot possibly meet.

[Robert Murphy]

Right. Yeah. That's fascinating. So this is a core property of leverage too. Right. Amplifies gains and can lead to total ruinous losses. So this is just leverage being realized in the system ultimately. Right.

[Jeff Snider]

The degree of leverage, Hidden money, hidden leverage. Because we don't know nobody buy again. As we said before, the regulators and authorities were only too happy to be relieved of this global money problem. And they just simply thought that they could hold the wolf by the ears with this expectations policy, which, I mean, as long as it didn't impact the United States. Alan Greenspan was like, not my problem. It's a bunch of Asian stuff. He should have said no dollar system. Global financial system interconnected. The fact that it stayed outside of the United States in 97 and 98 was in some ways a matter of just sheer randomness.

[Robert Murphy]

Yeah. And then so things get a little bit extra ugly, I think, with LTCM. Because, I mean, who are the LPs of LTCM? Because now they had enough political clout to go knock on the door of the Fed and get a bailout. Right.

[Jeff Snider]

Essentially. Well, I mean, part of it was that they were doing business with Wall street, really Lombard street, but the prototypical Wall street banks. So, you know, it was Goldman Sachs, it was Morgan Stanley, was all the bold bracket names. So they're the ones, as we said before, like, why did they keep the central bank ridiculous game around? Because the central banks gave them political cover to do all this crap. That's really what, that's really the idea of too big to fail came from was the idea that, look, we have this game. We like the way it makes it privileges us. We make our own money. We're making money at making money. We just need a central bank to give us enough political cover so that we can continue to do this over and over again. That's really what LTCM was, was the idea. But they had, you know, everybody on Wall street had exposure to ltcm. Therefore they, you know, they went to the Fed and said, look, if you don't, if you don't let us help us buy or bail out ltcm, it's going to create, it's going to create a whole bunch, you know, the, the stuff going on in Japan right now. It's going to go on here.

[Robert Murphy]

Right.

[Jeff Snider]

That was enough to convince Greenspan and everybody else, especially politicians, you know, as little as central bankers understood what was going on, politicians didn't understand a fraction of what central bankers did, of course. So it was very easy to just work this out in this way.

[Robert Murphy]

Yeah. And so, I mean, this is where all the moral hazard gets realized. And is that not. That's the common refrain? It seems like when these guys do go to the central bank to get bailed out, it's like you have to do this. Right. The whole world's going to collapse. You see what's happening in Japan, it's going to happen here.

[Jeff Snider]

But that's the thing. It was correct. That was the right. I mean, they weren't doing it because some nefarious reason. They actually believed it because it was true. Right. It wasn't something made up because again, that's exactly what happened not even 10 years later. Right. They were saying, look, if you, if we don't nip this in the bud, it will spread everywhere.

[Robert Murphy]

Yeah.

[Jeff Snider]

So they kind of got lucky that they nipped it in the bud. And that's where, that's, that's. And of course, what did that do to the legend of, you know, the Greenspan myth? It only, it only enhanced it that much more because it made it seem like the Fed really could do whatever it wanted to do, which leads to even more risk.

[Robert Murphy]

Yeah. Less capitalization, more leverage, more risk taking.

[Jeff Snider]

Sows the seeds for the Fed is behind us. They'll bail everything out. If push comes to shove, the Fed will come riding to the rescue. That was a big part of that last stage of the Eurodollar system that really got pushed into a mania was the fact that the Fed was really effective at ltcm. And that's really where you see, for example, the housing bubble in the United States that wasn't specifically 2003 to 2007. The housing bubble really started in 95, 96 and 97 and then really took off from 97 forward, partially because of this, because the idea that we can pile leverage into balance sheets, we can manipulate them, we can quantify them in all these mathematical models, and it all just is riskless. There's no risk anywhere.

[Robert Murphy]

Yeah. And this is the core issue I think with central banking is that this is purely anti capitalist. We're talking about always just papering over losses, deferring, bailing out, kicking the can down the road and it just makes the ultimate consequence worse and worse. I mean every crisis is worse than the previous it seems like.

[Jeff Snider]

Right. And that was the point of convertibility in a hard money sound money system was that we're trying to weed out the bad actors. Right. And if we can't weed out the bad actors, the bad actors are not going to be the only bad actors. Everybody else is going to want to be like the bad actors. Right. As we just said with the SNL system.

[Robert Murphy]

Yes.

[Jeff Snider]

And I said I want to be like the bad people because they're the ones making all the money and they seem to be the ones that are protected as soon as you reach a certain level of confidence and a certain level of reputation and you're insulated from your own bad decisions. Which is the exact opposite of what we want to have.

[Robert Murphy]

Yeah. LTCM blows up. They because of I guess their counterparties, they get a bailout. Was this the first time a hedge fund like this was bailed out?

[Jeff Snider]

Yeah. In fact it's the introduction to the world to the idea of a hedge fund which is essentially taking this wholesale balance sheet Eurodollar model to its most logical extreme. Whether it's logical extreme, maybe not sensical extreme or sane extreme, but most logical extreme is to strip down the financial institution to its basic core which is in this version of banking in this non bank form is essentially entirely balance sheet creations. No cash, no deposits, no depositors, no regulators, nobody on your back. Just pure balance sheet finance done to its most elegant. And then some of the stuff is really beautiful and interesting and some of it's like a lot of things, it's a good idea, just bastardizing taking to extreme. But that's all really the hedge funds were were simply this version of banking taken to its completely beyond all of existing limits to test out this money for money idea.

[Robert Murphy]

Yeah, I guess kind of like the apex financial abstraction in a way of organizations at least. And it's so ironic, I mean the irony just abounds here. Even the name Long Term Capital Management, they thought they had completely tamed risk and then they blew up five years in.

[Jeff Snider]

Yeah, it's like the Bear Stearns hedge funds that blew up in 2007. They were all called high grade. You can name them whatever you want. Doesn't mean it's Indian, but that's it's funny but it illustrates part of the problem here which is they call themselves Long Term Capital Management. When there's nothing long term, there's no capital and the management is brand new financial quantitative modeling. But how would anybody know otherwise? And that's kind of the point is that they're out there doing all these things. They're not alone, they're out there doing all these things but nobody's keeping an eye on them, not even the people themselves working in this. That's part of the issue too is I talk to a lot of bankers all the time who are doing this stuff themselves and they're like we had no idea what we're doing. Now that I see the big picture, the Eurodoll system, it kind of makes sense. But as I was working on the bank's repo desk, I really didn't understand what was going on. There was really this lack of knowledge as everything's happening which leads to the fact that these things just continue to proliferate because there's really no mechanism to rein it all in, including understanding what everybody's doing.

[Robert Murphy]

That's interesting. So it's opaque even from within.

[Jeff Snider]

Oh, it's forest from the trees kind of a thing.

[Robert Murphy]

Yeah, interesting. So then we go into the dot com bubble from there which is sort.

[Jeff Snider]

Of parallel to it, which you know that's going on obviously at the same time of ltcm. And of course the dot com bubble reached its absolute insane apex in those years after the Asian financial crisis was successfully mitigated by the Federal Reserve and Alan Greenspan and all that. When Alan Greenspan. Well throughout that time you remember was like I'm really uncomfortable with all this because we don't even know what's going on. We have no idea that we really didn't do much with LTCM yet we bailed it out but we have no idea what's going on here. And stock prices are going through the moon. That was just a recipe for only bad things.

[Robert Murphy]

So that narrative of the, I mean even the name, the dot com crisis, I think most people just believe people got irrationally exuberant about tech stocks and then the market corrected back to reality. But what was the actual. Looking through the lens of the Eurodollar system and everything we've laid out, how would you describe that narrative differently from what is traditionally believe to be true?

[Jeff Snider]

I think that's true on the way up that the fact that people did get irrationally exuberant because it was again, we don't really know what's going on the global system is prospering in a way we hadn't seen since maybe the 1920s. So we've seen this global wave of prosperity that seems like there's lots of money flowing everywhere. And we also have any number of future technologies that we can think is valuable, invaluable, doesn't matter if there's current earnings or not. So all these rationalizations combine to lead to this completely detached pricing mechanism in the stock market. And a lot of it had to do with the fact that the Eurodollar system was creating this prosperity, not the Federal Reserve. And the Federal Reserve was given all the credit for it. So everybody thought again, like banks, the idea that there's no risk involved in anything. Now where I think it goes maybe a little bit contrary, my opinion goes contrary to what most people think is on the dot com crash was that expectations were forced to be normalized by any number of reasons, but it was not a monetary crash. That's why, for example the dot com crash, like the crash of 87 didn't lead to a massive economic setback or even a depression like everybody associates with stock market crashes, because the monetary system was largely unscathed by the dot com bubble, because it was sort of in the same area, but they too were not necessarily, they were certainly not directly related. So there was no monetary consequence to stock prices falling. In fact, that's why the US experienced one of the mildest recessions on record despite what had been one of the largest stock market crashes on record. Because the monetary system kept going fine and the housing bubble kept going fine, which is the much bigger bubble. The monetary bubble kept going even though stock expectations were knee jerked lower because they had gotten so far, so far out of whack.

[Robert Murphy]

Right. A lot of the roaring 90s that was driven by a boom in real estate prices as well. So you had money flowing into US real estate, US equities presumably, US Treasuries as well, I guess through this other eurodollar mechanism you outlined earlier. Is this just money flowing into store value assets?

[Jeff Snider]

It's flowing everywhere into anything. And look, the 1990s was not simply just a bubbly period. It was of asset bubbles started out in that period, but there was a lot of legitimate economic growth, not just in the United States, but around the rest of the world. That happened because of this. The monetary system, the Eurodollar system was doing its job. It was doing its job only too well, which is why we had these excesses. But by and large it was greasing the wheels of global Prosperity, which of course then usually feeds into risk taking and asset bubble rationalizations because you think the global economy is legitimately prosperous. So maybe there isn't. And this is going to go on forever. We've reached a permanent plateau of prosperity, so there is no risk. But that's really, again, it was the combination of lack of understanding what's really going on and the fact that there weren't really any circumstances that would lead anyone to believe that the situation was any different. Because the Eurodollar system could continue on, the global credit bubble could continue to expand regardless of the stock market. It kept going on further and further and further until it reached its most insane proportions in that little narrow window between the dot com recession and 2007.

[Robert Murphy]

Right, right, right. So that's interesting. Yeah, this whole, I mean again, back to the principle of all of this is we needed these deferred settlement systems to accelerate transactions, to make transactions cheaper. Really. You're lowering transaction costs so that you can grease the wheels of commerce and facilitate economic growth. But the flip side to that is that all of this counterparty risk and systemic risk that accumulate as a result of an inability to settle with finality. I guess in a lot of ways that's interesting. So we've always kind of been stuck with this problem as human beings between the need to make transactions really cheap and easy and seamless, but then the trust that's inherent to that, taking them too far.

[Jeff Snider]

Right. And going too far in the other direction, which is what we talked about, I think in the crux of our earlier discussion about what is money and elasticity. Right. This is the downside of an elastic currency system is that it can be taken too far. Whereas the downside of an inelastic system is that none of stuff happens to begin with. And sort of it's what is the better trade off? Is it better to have an inelastic system where some of these excesses don't happen, but we take a lot off of economic growth? Or do we like the elastic system or this perfectly elastic system where we get a lot of this economic growth, but we also get the asset bubbles and imbalances and excesses that go along with it. And I think it doesn't have to be an either or. But that's essentially the two parts of the debate. They go back in, you know, sound money. Sound money debate that goes back for a very, very long time is, you know, which one is it? And I don't think it has to be an either or situation. But we don't Want one or the other. I mean, you know, people think that I'm advocating for the Eurodollar system and extolling its virtues. It did have some virtues, obviously, but I'm not, I'm just trying to describe to people what actually happened so they can understand how we got here and where we're going, simply because it did go too far. Because as we said before, all of the incentives were skewed in that direction and they favored the wrong kind of people to take advantage of the incentives without any of these self correction mechanisms that are usually inherent in a private free market capitalist system. That's really kind of the monkey, the wrench in the works, if you will, because there was nothing to really stop it. It was supposed to be Alan Greenspan, right. Everybody thought, well, if things get out of control, he'll raise the federal funds rate when the banks would just laugh, as we found in the middle 2000s when Alan Greenspan raised the federal funds rate and the monetary system only went into overdrive. Really.

[Robert Murphy]

Yeah, that's a good point. There needs to be really this option for convertibility. Seems like you, it's really, you know.

[Jeff Snider]

What we're talking about, convertibility is the public's ability to put the brakes on. Yeah, but we're not really just talking about the public. Right. We're talking about. Let's think about it in terms of information systems. A public is a widespread, very broad based information filter.

[Robert Murphy]

Yes.

[Jeff Snider]

And so if the public is given the ability to put the brakes on the financial system, it's because we want this widespread, broad based information filter to be able to do that, which makes sense to me. We're talking about sort of like big data, for example, but not in that centralized fashion. But, you know, the public and all the public can encompass more information and sort it out far better than, you know, Alan Greenspan could sitting around in his cozy little conference table trying to pick apart LTCM's balance sheet. Yeah, I think that the public, the public's ability as an information filter to put the brakes on would have put the brakes on long before any of this.

[Robert Murphy]

That's really the benefit because it's intrinsically more intelligent than just Alan Greenspan. You're talking about the entire intelligence of the marketplace, which is by definition more intelligent than any individual market actor or any group, even of market actors, over the long run. That's why the market is the referee, so to speak.

[Jeff Snider]

But then the flip side of that is what economists argue, which is that you can't depend on the public because it's driven by emotion rather than rational behavior. And that's the argument that they made as we talked about before the 19th century, all those depressions and deflationary currency circumstances that arose there. The public got blamed for that essentially because they kept saying that the public would just fly into a tizzy over any little rumor, whether true or not, and that would, they would cause a banking panic that didn't need to be caused. That was sort of the counter argument to what we just said is that, look, we need to have a detached public institution that can filter information better than a rational emotional public.

[Robert Murphy]

Yeah.

[Jeff Snider]

Which one do you believe?

[Robert Murphy]

Yeah, that one doesn't hold water for me, honestly.

[Jeff Snider]

Me neither. But that's been the argument since before the Great Depression was that the public cannot be counted on to act in a public, in a, in a widespread manner of the public. The greater good, for example, social responsibility.

[Robert Murphy]

It doesn't hold water for me because I agree public can become emotional, we know that, but I think there's a check on that too, which is the profit motive of each market actor. You can exploit those opportunities. When a market becomes overbought or oversold based on emotion, that's when the smart market actor will go in and arbitrage. It will turn a profit basically on that emotion. So, yeah, that one's.

[Jeff Snider]

I guess that's where it's hard to swallow, isn't it?

[Robert Murphy]

That's the crux of the argument where the Keynesian viewpoint loses me, that you need a social institution to filter the market. I don't agree with that.

[Jeff Snider]

No, but I see there is value in that opinion too. Because on the other side, you know, it may be that the broad based public information filter isn't perfect either. And I think we need to recognize that it is not perfect or that it is inherently messy. And so that, you know, there is wiggle room here for, okay, maybe that's the best sort of system, but can it be improved maybe by a mechanical central bank feeding some kind of elasticity to it? So it doesn't, you know, when the public does get irrational or maybe doesn't make the right decisions, the profit motives get skewed or whatever actually does happen. Markets are not perfect and efficient, that there's some sort of check, it's not an overriding check, but there's some way, some mechanism in place that we can try to bring it back into a more stable position. And it's a really tough argument to make in either direction because it's easy to point to excesses on both the Great Depression versus what we're just talking about, the Eurodollar credit bubbles. Those are really kind of the two extremes and maybe there's a better way to do it but if I have to pick between the two, I'm with you, Robert. I'll take the public broad based information filter every day of the week.

[Robert Murphy]

Yeah, yeah, yeah.

[Jeff Snider]

No, as long as you believe you recognize it's not perfect. It's messy, but it's a hell of a lot better.

[Robert Murphy]

Yeah. And arguably more volatile in the short run even like we'd have less of these giant blow ups but we probably have more small blow ups along the.

[Jeff Snider]

Way which you know, the giant blow up we had 14 years ago has meant, you know, being robbed of 14 years of economic growth which is an incredible disaster of immense proportion. It's not just. It's 14 years and remember, compounding is the most powerful force in the universe.

[Robert Murphy]

Yeah.

[Jeff Snider]

14 years of lost growth is, you know, socialism and everywhere de.

[Robert Murphy]

Civilizing. Yeah, absolutely.