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

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.

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."

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.

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.