What The Actual Fed.

Like how many takes this is.

“For those who listen, this is like take 10.”

I feel so much better. [MUSIC] Hello, and welcome to Optimistic Economy. I'm Katherine Ann Edwards, economist. And I'm Robin Rouser, editor.

On this show, we believe the U.S. economy can be better. And we talked about how to get there. One problem in solution at a time. [MUSIC] Today on Optimistic Economy, we're going to talk about the Fed.

So this came up because, of course, the Federal Reserve Chairman Jerome Powell, instruments in mid-May. The President has just nominated Kevin Worst, or a place him. But I've just realized that I don't-- the more I read about the Fed, the less I understand it.

And so we're going to try to figure some things out. So that you understand the stakes and what's going on in the months ahead. I would argue that not a lot of people. I understand the Fed, so if you don't know what's going on with the Fed,

you're an amazing company.

Good, bigots. I have tried really hard in the last few days to figure it out.

“And like I said, the more I read the less I know.”

Yeah. Well, we'll get there together, or not. And you can just stop listening to the podcast. There's lots of ways that could get lots of options. This is what we get for trying to be like somewhat connected to the news.

All right, well, do we have any announcements? I don't think so. OK. Well, after announcements, we do-- Reckless straight to Reckon, straight to Reckon,

retroactive continuity, where we clarify, correct, and apologize. So a couple of Reckon's-- one, Carter liked the show. My co-author, who done all the brilliant math stuff dealing with income inequality calculations. He listened, and he said he really enjoyed it. Thank God.

I didn't tell him I was doing it. I thought I would surprise him, because I know he listened to the show, and then he said he liked it. And I was very happy.

Second-red concept, actually, a little harder to deal with, which

is that in the prior episode, I said that I went to London and brought home biscuits for Robin, but I actually forgot to give them to her. So I also ate them. And she was taking your taking responsibility for that. I think that we forgot to pick them up.

We left them on the dining room table. And we might be in fault. I just want to make it sure it's clear that it sounded like I was thoughtful enough to bring back cookies, but I was not thoughtful enough to make sure she got them.

And then I was happy enough to consume them myself. So I don't want you guys to get-- I think this is about being honest. This show is about honesty. And shortbread.

OK. Oh, Andy, say we got thousands of letters about this. Yeah. Yeah. They all wanted cookies.

Our next section is called Terms in Condition. This one, actually, we're going to put into Terms in Conditions as opposed to retcon. But I said that Bill Fredo Paredo was a polyglot and a listener emailed us to point out that he

is, in fact, a polymath. And a polyglot is someone that speaks a lot of languages. And a polymath is someone who is good at a lot of different things. And fairness, he could have been a polyglot, too. We don't know.

He probably was, but that's not what I was referring to. Me, economist, neither glot nor math. Robin, did you look anything up this? And also, I go, thank you for the email. I'm saying it's a little sarcasticly.

But I actually, like, we do love-- Oh, no, love me all of that. Yeah, I totally loved it. And he was like, I don't know if I should say anything. You should say something.

This show is as good as y'all help us be with your feedback in comments. That's true. I read a sentence that used buffalo as a verb. And apparently, this is a perfectly acceptable verb.

But I did not know that you can use buffalo like, to mean bamboozled or-- Oh, I'm realizing I don't know what bamboozled means. Thank you to Bill Wilder. The sentence example from Miriam Webster is,

I'm not some newcomer that you can buffalo with that nonsense. OK. I mean, this debate, I refuse to be buffaloed by a flurry of relevant issues. I had no idea.

You could use that one. Do you think it comes from the city or the animal? I don't know if you're going to do this. It just says it's a transitive verb.

“I think it's a well, but listeners prepare.”

Because in our biggest Pilkro, we will help you no longer be buffaloed by the Fed. Merch team of your listening. I feel like some kind of buffalo logo is an order. With, like, if you know you know, don't get buffaloed.

Optimistic economy. Wow, it's really a wonder ahead of economists. I've meant for a Madison Avenue. How much coffee did you have? A lot.

We're going to take a very quick break, and we'll be right back.

Yeah, all that enthusiasm through terms and conditions in RedCon. Meet the brick wall of Fed.

“I think I think that Jordan Cleparon, the Daily Show,”

put up a clip of Jerome Powell speaking. He's like, oh, so he's the human embodiment of whole music. Let's talk about the Fed. The Fed is in the news a lot for not good reasons. You mean right now?

Right now, the Fed is in the news a lot right now for two reasons. Neither of which are good. One, we don't know what's going on with the economy. People are generally worried that we're going to tip into a recession. And that's been a worry for a couple of years.

That puts the actions of the Fed front and center. And so what they say, what they do, what they're talking about, that comes up a lot.

The second reason why it's in the news a lot is because the Fed is an incredibly independent

institution and Trump doesn't like that. The current chairman of the Federal Reserve Board of Governors is Jerome Powell, who was appointed by Trump during his first term. 2017, yeah.

“Yeah, his appointment is coming to an end, and Trump has been making political attacks”

and legal attacks on the Fed in order to exercise more control over what the Fed does. This is unprecedented in the degree in scope. He's targeted one Fed governor for mortgage fraud and said she needs to be fired. He's brought a federal investigation against Jerome Powell, the chairman himself. And now he's just announced his new replacements on the Fed Board of Governors and his ability

to have majority appointee control of the Fed will all rest on whether or not Jerome Powell stays on the Board of Governors after leaving the chairmanship. So what the hell does all that mean? That is what we were talking about.

This is the first thing that I find confusing about the Fed.

How is it that Jerome Powell has served two for your terms as chairman, but he could stay on the Fed Board beyond that? Can you explain to me? Yes. I think so.

So, so I'm fact checking, please. So I'm fact checking. So I'm fact checking.

“So I'm full of Wikipedia, an expert stocky.”

All right, the Federal Reserve has a Board of Governors. So, no, in the beginning, there was money, no home. Yeah. I mean, I was like, we have a few like that with the guy. Like, we have a Federal Reserve system, we will talk about, we'll get there in a minute.

But the Board of Governors is the head of this system that sits in DC. And then there are regional branches that are distributed geographically throughout the United States and have their own territory that they cover. The Board of Governors is truly a Board of seven people, six governors and a chairperson. The governors are appointed to 14-year terms.

The chairperson is appointed to a four-year term. They're appointed by the president, they're approved, by the Senate. And then once they get appointed and approved, there is very little power the president has over them. And as we're learning, it's not clear he has the ability to fire them.

They're an independent institution. So the reason why Powell can stay is that Jerome Powell was appointed to the Board in 2014 as a governor with a term that would run through 2028. While he was serving that term, he was appointed chairman of the Federal Reserve by Trump in 2017.

If you were on the board and you became chairperson, like Powell did, you can return to the board and fill out your term as governor. Nobody's done that for a long time. Most of the time they get done with the chairperson ship and they're like, I'm out. It's done.

But you can fill out your term. And then, like, it's also really weird, like if you leave your term early, the person that replaces you fills out your term, it doesn't start a new one. I mean, I've told people for a while, this is probably how we want the Supreme Court to work.

Like, they have age limits, they have term limits. Meaning they have fed the Fed. The Fed board of governors, like, you know, it's a very apolitical board, it's shielded from political influence through their independence and not being able to be fired, which is what Trump is attacking.

But the fact that it's every 14 years, it's going to be off with predictable presidential cycles and then they're staggered the 14-year terms. They're fairly staggered. Trump has had more appointees than usual because he is two terms are separated by another term.

That means more people will come up and then someone just quit. So that's the board of governors. They meet twice a month. They go over Fed's dump. It's not, yeah, it's not the other board that we think of that sets interest rate.

They oversee the operation of the regional banks. They monitor the economy.

They look at, like, the balance sheets and they basically review what's going on at the

Fed, which we haven't said, what's going on at the Fed yet. But I just want to be clear, they shouldn't be confused with the Open Market Committee. The Federal Open Market Committee is, or the FOMC, those are the meetings in which the

regional feds, meets to determine what to do about interest rates.

Right. And set monetary policy.

“This is, so it has, it's like, is it, okay, question from production?”

This is confusing. This is confusing. No, I'm purposeless. You know, yeah, so I think it would help to go back, to understand what the Fed does and why we need the Fed, it would help to go back, like, to the beginning.

Exactly. I knew it. So, creatures came out of the slime. Yeah, exactly. They wanted to consume things that they couldn't produce on their own.

So, they created capitalism, which is a fast forward to Fiat currency. Okay.

So, the Federal Reserve was created by the Federal Reserve Act of 1913.

And the reason why the Federal Reserve was created was because we had a ton of banking mechanics and banks at the time in the US, you know, in the 1800s, you had very few consolidated or large banks and you had thousands of very small banks that served a very small geographical area. Well, if a bunch of people make a run on the bank, in the sense that they just want to get

the money that they've deposited out of it, and the bank doesn't have that money,

“this creates a panic in the bank has to close and nobody gets through to deposits back.”

When we call this the, it's a wonderful life. It's a wonderful life. It's a wonderful life. Yes. Exactly.

You know, the bank has your like, quote-unquote money, but it doesn't have your actual money. And you can go away. If too many people come in and demand their actual dollar bills and the bank doesn't have enough.

It's a run in the bank folds. And if enough banks do that, it's a panic because you hear about a bank folding in another town and so you rush out to your bank to get your money and it's a kind of a domino cascading effect of bank panics. And there were a ton of panics throughout the 1870 or the 1800s into the early 1900s.

And the panic of 1907 was particularly bad. So the idea of the Federal Reserve was that they were going to create a new way for banks to have liquidity by having this special, not currency currency called the Federal Reserve Note. And when banks need money, but don't have it, like an panic, they can use the Federal Reserve notes they have to get access to cash.

I don't know if that makes any more sense. It actually took me, I would say a solid half decade to figure out what liquidity was. Like no matter how many times somebody said it, I was like, "I still don't get it." That should have been our term in condition. Yeah.

It's really just like cash. It's cash. Yeah. I mean, liquidity is your ability to convert your holdings into cash. So you're walking down the street with your best friend.

I come up and I give you both $10,000. Congratulations. Here's free money. Your friend is in the middle of buying a house, so she puts that towards the down payment towards the house and gets us lightly better mortgage rate.

You don't have a house and don't want to buy one, so you take your $10,000 and you put it into the stock market. Well, a month later, I run into you both again and say, "Actually, it's not free money. I need my $10,000 back." Your friend can't access the money.

She's put the cash into a relatively ill-equipped asset in which it's not easy to necessarily get the $10,000 out. You can't. You sell your stocks. You get the, as much as you value you have of it, and you can sell your stock in quickly

get liquidity. So a lot of times what happens when things go south for banks, they don't have enough liquidity. They truly just don't have cash on hand. So we start the Federal Reserve Bank with the Federal Reserve Act of 1913 in

order to stabilize this very decentralized banking system that we have in prevent panics and bank runs, and is incredibly successful. Does it prevent them? What does it just respond to them, I guess? No, it's like if there is a run on the bank and there's a worry about cash, they can borrow

from the Fed discount window.

You really just have to stop the first bank run in order to prevent a panic from occurring.

And the way that you stop a bank run is like having a source of liquidity for banks that allows them to land as much as they were before, but still have the ability to meet an excess demand for cash. Can you explain the window? The window.

It's just like a bank window, like it's like a metaphoric. It's a metaphoric window. Thank you. Sure. Yeah, it's really just the window is what they called it when it was the Fed to the bank

as opposed to a customer.

“I think it did start as an actual window.”

Yeah, you would actually go up to the, you would go from Pasadena up to the Federal Reserve Bank in San Francisco and say, "Hey, I have some Fed notes and I need some liquidity." Help a bank out? Help a bank out. Fed window?

Okay. Can I have some Fed notes?

Can we get notes? Fair notes. So I got some liquidity. Yep. Okay.

Does it sound made up yet? Well, how is this different from the FDA?

“What the FDA see does in terms of ensuring deposits?”

And I don't understand why you needed a whole new currency to do it. The FDA see didn't exist yet. Okay. It doesn't come around till the Banking Act of 1933, which also affected the Fed. But it's not, it's not a currency because a currency means like you can take a Fed note

and like go down to your local 1913 Starbucks and buy a latte. It's not legal tender. It doesn't work in the market. You need this kind of quasi-currency like currency reserve notes because if everything was held in cash, it would affect the value of the dollar and cash was tied to gold.

Because we're all still on the gold standard because we are all still on the gold standard. So the purpose of the Federal Reserve Act was to come up with a way to get resources to banks that would not disrupt the otherwise flow of credit and would not disrupt the value of the US dollar.

“And so they do this by creating a new, not currency called the Federal Reserve note”

that they trade so the discount window. So at this point it's all broker through the 12 regional banks. It's not really like the Fed, we think of the Fed of the Board of Governors in DC. But the Fed in this era is really about the regional banks. They're supporting their local economies and the regional banks are holding a fair amount

of gold, but they are lending through this Federal Reserve note so that if you didn't have liquidity instead of having to get the cash version of that, you can get the Federal Reserve note of it and still meet your deposits.

I mean, the Federal Reserve, even though it's a system, it is ultimately always reactive

to whatever bad thing just happened. So that's the creation of the Fed. Don't have bank panics. We've got this. Now, big old problem.

They don't have a mandate when it started in 1913 that has any type of macroeconomic consequence or just stop local banks, it's just serve local banks to prevent bank runs and make sure that we have a way of providing them with liquidity so that they don't have runs on banks and we stabilize the credit system in the US. That is all they're meant to do, but they do understand on some level, especially as

they kind of really get going in the 20s that the rate that they charge at their discount window and the interest that they charge on their own currency as they lend it does affect broader economic activity. So the Federal Reserve system is arriving at the notion that their actions can stabilize the macroeconomy.

Sorry, I'm laughing because then the great depression happens and they get like everything wrong. I mean, if it's swinging a miss, it's like miss, miss, and there are historians, especially economic historians who will tell you we only had a great depression because the Federal Reserve did such a bad job as the stock market crashed.

So one thing that they did is that as the economy started to slow down, they started raising interest rates, which we know to be like the opposite of what they raised interest rates like three times.

“What was the thinking that they were trying to control the plan?”

They were trying to control like the exuberance and the hysteria. I mean, it's like there's in the peo, let's raise interest rates, people will just put money in banks, there was a real like if the people put money in banks and the interest rates high enough that'll stabilize everything and then we won't be like worry about stock market returns and that was the opposite of what happened and so much of the great depression

was accelerated by the Fed making just incredible mistakes and actually they made it worse,

they made it longer. I mean, because they, they were raising interest rates, I want to say as late as like 1931. And at this point, there's still 12 of them, right? If the Federal Reserve System, they're not acting in coordinated court, like they talk to each other, there is a decent office, but it's not like the same budget and for

meetings, right? Yeah, it's not the same type of centralized decision making we have now. So the Fed, as we know it, comes from the Banking Act of 1933, aka Glass Stegle. And Glass Stegle does, well, I mean, it does a tons of things, but one of the things it does is it says that there's going to be an open market committee, which had been loosely

in existence before and it was going to be formalized and centralized and given the task of setting interest rates with a view to keep the economy stable. So it was actually given this like mandate of keep the economy stable, make good decisions, make good choices, Fed.

What's kind of amazing is that Glass Stegle, Glass was the Senator and he was a former

we need to have a strong central bank. Stegle was a house member from Alabama who said that big banks are what caused this problem. We shouldn't do anything to help out Wall Street, and we need to have a deposit insurance system in order to protect just like your mainstream American.

And it took incredible convincing to get the Senate in glass on board, but it was really

a steel that came out with it. And at the time, most of the big central banks, any of the larger banks, the most people in Wall Street, as well as the Senate Banking Committee, they all thought that it was a moral hazard scheme that if you put deposit insurance into smaller banks, the larger banks would have been a payment of pay for it and the smaller banks would act irresponsibly.

And Glass Stegle sets up the Federal Deposit Insurance Corporation, FDIC, which is funded by bank fees that are then used to ensure deposits so that there would be no run on the banks. And then the Federal Reserve got a broader mandate to basically keep the macro economy stable. So it was Team A, get your act together and act more in concert with one another.

So we've also created a secondary way to prevent bank panics. Yes. Okay. So at this point, the Fed's job is just basically keep the economy stable by setting interest rates at your discount window.

And then monitor overall banking activity and lending activities. So that, in order like if they're going to lend to a bank, they're going to look at its books. Okay. So there's a certain amount of oversight that they're doing on banks too.

Yeah. So after the great depression, like the next seminal event in the Fed's history is Stagflation, the inflation spike in the 1970s. And that was another one where the Fed, so you're going to skip 1951. Oh, the accord?

Yeah. Yeah. I mean, how much history to our listeners like World War II, the US government has to borrow

an incredible amount of money to finance the war.

That will disrupt all kinds of markets. It'll deal with long-term like treasury notes in the 30 year, the two year, the five, I mean, all of these things are going to be affected by the federal government becoming an insatiable consumer of debt in order to finance World War II production and eventually armament and shipping people overseas.

“They basically tell the Fed you have to keep interest rates at 2.5 percent.”

Because if you go up, it could cost the federal government so much more money to borrow. Well, if you keep interest rates artificially low, and a bunch of people get jobs, you're going to see inflation. So not only did the federal government say interest rates are going to be really low and they have to be capped at 2.5, but we're going to have wage controls and we're going

to have price controls. And this is how we are going to keep inflation. I'm going to keep a tamp down. Yeah, a reasonable amount of control through World War II. So by 46, the wage controls and the price controls are gone, but they have basically said

the Fed needs to keep interest rates at 2.5 percent, not because of the way it would stimulate

the economy, because how much the federal government was borrowing. And because of the market relationship between interest rates and treasury bonds. And by 1951, this comes to a pretty severe head and they sign, quote unquote, "the accord that the Fed is free to fight inflation."

“And that's what really creates the, I mean, as you were just saying, before that, the government”

was telling the Fed, we're just saying interest rates. Yes. And that's the moment where the Fed gets its independence from, right? It is this pivotal moment in that the Fed can't just, it's not going to be a tool of the federal government, of the president of Congress.

It has to put basically the macro economy first. Yeah. And it kind of breaks up this idea that the federal government is the best or is necessary in that management. Okay.

So big heads, we've got 1913, we're created, 1933, we get re-orged a bit after a poor performance, 1951, we have listened to the federal government in order to make it through World War 2. But now we are on our own working on industry policy. And with that newfound independence, like most teenagers, we go right into some terrible

decision-making. The Fed of the 1960s and 70s makes some pretty incredible miscalculations about inflation. And if it is their job to manage it, they don't do a good job. There are volumes written about this period.

“I think I've tried to, I was trying to so hard, I was walking the dog today and I was just”

like speaking out loud of trying to workshop, like how do you explain what went wrong

And I think what happened over this period, probably the shortest version is like, yes,

“they make a lot of decisions related to interest rates in inflation and unemployment.”

But the biggest miss is that they lose the credibility that they actually care about inflation. And then it comes off this trade-off of like, we're willing to tolerate some inflation to help with unemployment and then it could not, they could not have done this at an absolute worst time if there was a period in which it would have been okay to show a little bit of

tolerance for inflation, the 1970s was not it. You start off the decade, the U.S. formally delinks and gets off the gold standard. By the end of the decade, we have a massive supply shock from oil and go into these like oil price wars, it quickly turns a situation from bad to worse. It gets to be like catastrophically high inflation and the Fed comes down through Volker.

Well, a lot of people associate with Reagan. He was a Carter appointee. He was a Carter guy. Yeah. And Volker's like, yeah, I don't know what to tell you, but if we don't hand on inflation now,

we lose the credibility that we will fight inflation in the future and this very painful recession happens in the United States essentially to correct for the Fed's mistakes, get inflation under control. And interest rates like 20%, inflation is so high and it interest rates have to get high in the effort.

It's almost like this, like, proof through pain that the U.S. economy will be well-managed. And we get a lot from it. Prices stabilize and stay relatively low, almost the entire history we've had since then with the exception of this last inflation spike, I mean, it's 40 years of really reasonable prices. And in some ways, it's not the action of the Fed that helps control

inflation. It's knowing that the Fed will act to control inflation that also keeps it in check. It's like a strict pair. Yeah. Yeah.

Yeah.

So all this is happening where the Fed is like in this first person, a plot, they're managing

the economy. They're making choices. They're making decisions. They're learning a lot. They're growing his people.

“They're usually tells him, like, hey, remember, 1968, sorry, the Humphrey Hawkins Act”

is in 1978. And the Fed is told via congressional legislation, we need to have stable prices, full employment, and predictable interest rates. Over time, the interest rate one kind of goes away, and it's only in the 1990s that you start to think of this as the dual mandate, because it's really about inflation and unemployment.

But as all of this is going on, lots of countries have lots of central banks, not just ours. And we start to get this like very robust body of evidence that an independent central bank

that does not answer to elected leadership or not elected leadership is crucial to economic

stability and growth in keeping inflation in check. And so it's not just our experience that shows this. It's the global experience during this time, like if you gave elected officials and let them put their dirty little hands on interest rates, they would make them too low to juice the economy to make people happy to win elections, and you'd have higher prices for longer

as a result. Speaking of grubby little hands that is exactly what Trump is trying to do, and he says this is what he's trying to do. Oh, yeah, there's no secret about it. Yeah.

But before we get to grubby little hands from the Trump administration, we still have to get this through yet another calamity in our economic history, the Great Recession. So last one, Great Recession, last one, last formative to Fed history event, Great Recession. So there's this thing that happens somewhere in here, and this is one of the things that I find hard to get my hands around about the Fed, which is there are these number of things

that it does to stabilize the macro economy and that they move beyond just setting interest rates at the discount window to take all these additional steps.

“And I think that this is referred to often as the balance sheet of the Fed.”

So when does that start? I mean, it obviously is at a pretty high point during the Great Recession, and again in the pandemic recession, where the Fed isn't just saying, like, okay, interest rates are going to be low. They're doing other things that they think will call markets, stabilize banks, stimulate economic

activity, keep people in jobs. So the guy in charge of the Fed or reserve during the financial crisis has been Bernanke. And he has been a governor previously, but he's also an economist who specializes in the Great Depression. And he understands it very well.

And he in fact had said, while he was a governor, the Great Depression was the Fed's

So this is like a moment for the ages to have spent your career studying the Great Depression,

“the Great Depression, and then to basically have one like land on your doorstep.”

So Bernanke is in charge of the Fed, it's 2006, the next year home prices peak and start to slide. In December 2007, it's the official start of the Great Recession, and the Great Recession is the deepest and longest since the Great Depression, which is why we call it the Great Recession.

So he knows, at least like some softballs here, he needs to immediately lower interest rates, which he does. And interest rates fall to zero, but there is still not enough movement in the economy. Banks have behaved bombinably over this period. They have not done due diligence, they have almost no cash on hand.

And so the Fed rolls there basically starts to buy stuff.

It buys treasury bonds and it buys mortgage-backed securities in order to get movement going through the banking system, because everything is just essentially frozen. Everything is frozen.

“So in other words, the banks weren't coming to the window to be like, "Hey, I need more”

money." The banks were like, "We're just going to sit here, and count our non-money." Yeah, they weren't lending, they pulled back on economic activity, like let me just give you an example of what I mean. In the summer of 2007, I've graduated college, and I am about to move abroad, and I

need a credit card. So I go down to the Chase Bank at the corner, and I apply for a credit card. And no job, no credit history. I've been on a credit card of my parents that I'm no longer on. And these heroes give me a credit card with a $15,000 limit.

Okay, so then I come back, it's two summers later in 2009. I get a job, and my best friend is in grad school in Atlanta, and she is just kind of apply for a credit card, and they gave her a $250 limit. That is what we mean by throughout the financial system. It is just freezing up.

They are not lending, they're not giving out money.

And what the Fed does during this time through large-scale purchases, is they're basically

trying to buy stuff off of bank's books so that they'll stimulate the economy. So that they'll actually go out and move money. So they bought mortgage back securities and treasury back securities, and this was called quantitative easing. And then when they thought the market was strong enough, they sold them again.

I don't know. I mean, people debate how much it was like Bernanke's brilliance or just his grounded in history that he met the moment. I had a friend who lived in Capitol Hill on the time, and he said that he was walking his dog one day, and he kind of came up behind a guy who was like both walking a little

like plotting, but also speaking allowed full volume, and he realizes it's Ben Bernanke.

“And I was like, "But did you say, listen to what he was saying to himself?”

It could be so hard to take on."

Did you think we were going off a cliff, what did he think? I should say, I have not read Bernanke's book, it was like a thousand pages longer than I was prepared for her, so I haven't read his book, I'm saving it, I will read it. He wrote a book about the 2008 recession. But Bernanke's scene is being pretty successful in preventing that, I mean it was a bad

recession, but not turning into a depression, yes, even though it was the deepest and longest and 50 years. Probably because it was like 80 years. It was definitely the worst since World War II, but the one we had before that was the great depression.

It's really, it's the worst recession since the Great Depression. It was probably the closest we've ever been to sliding back into one, and the other thing that happened, which Bernanke was also instrumental in doing, was that he tried to change the relationship of the Fed with the public in the outside, like he, they started to do things like, tell people what they talked about, have press, like he started press

because that was the public statement, so they, they now released what's called, quote, unquote, forward guidance to let you know what the Fed is thinking about long term. They give summaries of the Open Market Committee, release notes, and then they'll also give you their economic projections. For being someone inscrutable and confusing, this moves towards accountability or

helpful. I mean, the Fed staff economists are truly elite, they're very good at what they do. They just want to be, like, in the action, providing the best information, and I would have, have loved to have been that. I am a little biased, and that I would have liked to have worked for them.

Still don't love the Fed's institution, or the fact that our economy needs one, but at the same time, our economy does need one. And what we've learned over the Fed's history is the financial sector needs to have, like, the threat of the strong parent in order to believe that there is stability and credibility in the U.S. financial system, and that for all the talk of the Fed not being necessary,

And that, to me, is testimony to the fact that we need them in place doing a good job.

You know, I don't think central banks are appealing institutions, given how anti-democratic

“they are, in a sense, but what do you mean by that?”

Well, I mean, that's not like we vote for them. We don't elect them, and then our elected leaders have, I mean, they're our appointed and confirmed, right? Yeah, they're appointed and confirmed, but like, if someone told me, like, I don't know why you could like the Fed and not and then hate the Supreme Court, I'd be like, oh, no,

I can't hate it at both. One of them has been successfully politically penetrated and the other one has remained quite apolitical. So far. So far.

So far. Also, I said that we had to get through the Great Recession. Well, we also need to get through the pandemic, which is another academic calamity, man. It's just keep on coming, but the pandemic, the pandemic tees up, what is going on with the Fed today really well.

So it's, we're not in history anymore.

“Now we're in to present day, starting six years ago, oh my God.”

But when the pandemic started, the US economy came to a sudden inscreding halt, not in a way that could have necessarily become a depression because of deep underlying weakness revealed by the slowdown of economic activity, but essentially that economic activity was stopped for safety purposes, and then we had to turn it back on. This wasn't some ways the deepest recession since the Great Depression because of just how

many people lost their jobs, but we also rebounded from it very quickly. It was a two month recession, and we started to immediately grow out of it by April of 2020. We were on the front foot growing quickly, adding a lot of jobs and so on. By 2021, we are recovering jobs, but we haven't fully recovered them in inflation starts to tick up.

And it starts to tick up really quickly, and the Federal Reserve says that they don't want to risk the very kind of fragile jobs environment. Fragile jobs environment, in which we still have high unemployment, we still have people we need to bring back into the labor force by cutting it off too quickly. So we're going to tolerate a little bit of inflation until we can't anymore and hope that

it's just a blip that's because of all the crazy stuff that's happening to become other pandemic. It's not, and they have to raise interest rates, which they start doing at the start of 2022. We are now almost four years into this conversation of can the Fed raise interest rates to

“successfully lower inflation without causing a recession?”

That is a question we have had for four years. And towards the end of the Biden administration, we were really close to answering it, things looked really good. We had added jobs, the unemployment rate had fallen, and had creeped up a little bit, but inflation had fallen as well, it was under three, we were ready to go.

Coming in for that soft land and coming in for that soft landing and then like Trump take the wheel, maybe we won't do that. And he starts a contractionary economic policy that has inflationary components through tariffs, deportation, and the firing of federal workers. So pursuing three contractionary policies at the same time leads to a separate question

same one.

Second verse, same as the first.

Is he going to cause a recession? Not like, is there any interest rates going to cause a recession? But is Trump going to cause a recession? In order to maintain like a relatively neutral position as all this goes on, into staying a place to respond, should a recession occur?

The Fed has lowered interest rates a little bit from their peak, but then stopped. And said that they were going to stop. So they lowered rates three times last year, and then they were like, that's it until we know what the **** is going on, although they didn't say it like that. Well, so they said it more or less like that.

More or less. More or less. When interest rates can go up or down depending on what happens, we're just, yeah, because if interest rates are too low and then the economy falls, you don't have one or tools.

Yeah. So they said we're going to stop here, and they have been very reluctant to cut rates because they are still worried about inflation, which almost as soon as he got to office Trump has been saying the Fed needs to lower interest rates, they're killing the economy, the economy needs to be boosted.

And so he has been targeting kind of one at a time, the ability to take over the Fed. So who is this guy, Kevin, worse, worse, comes in with a worse kind of a, not a maybe total surprise pick, but there seems to be a general like, well, could have been worse. Good have been worse. I mean, the thought was like, there's more than one check on Trump here.

One is that the Senate has to approve whoever he picks.

And then the second is that if he picked someone that was truly crazy, the financial

market would have revolted. They want someone who's going to be stable and independent. And so if he had picked someone who wasn't going to do that, you would have seen kind of like upset and financial markets. Now the question mark is, what will the wash be like?

And we have a lot of public records of how he votes on things and what he thinks about things. The question is, less so what has he done, but will he continue to be independent in the future?

“I don't know. I think that the U.S. is an extraordinary position because so much of our”

economy rest on the Fed being independent yet so much of the next appointees, success that being appointed will rest on Trump a believing that he will do whatever Trump says, which means our economy is kind of hinging right now on the ability of a handful of men to successfully lie to the presidents that they will do what he wants and then go out and do what they want because they're fed chair.

And it's like that just seems like a gamble and it's a failing of the system that somehow this is where we are. The day after he announced him as Fed chair and was like, oh yeah, he'll be independent. He made it like Trump made a joke that was like, and if he doesn't lower interest rates, I'll sue him.

I've already told him that I'm just kidding. It's like, no you're not man. You don't, you don't have a filter and you're not clever like you absolutely told him you would sue him for lying if he doesn't lower rates. So everything's going to come down to this Supreme Court case, which again, doesn't inspire

confidence about what happens to Lisa Cook.

The Federal Reserve Board Governor appointed by Biden, first black woman on the Board

of Governors, who he has tried to fire in a ledge that she had mortgage fraud in our friend Bill Polti at the FHA said that she had lied on her mortgage application and she said, no, I didn't and you can't fire me anyway. And her case is before the Supreme Court, and when it went up for discussion, Powell was right there next to her.

I mean, the court watchers seem to think that she came up through that hearing pretty well, right? Yeah, they, I mean, the Supreme Court has not expressed what's the word I'm looking for backbone. That's a word.

That's a word. Independence. I mean, they have given Trump a lot of leeway to implement his policies, but they have seemed pretty concerned about the independence of the Federal Reserve.

When even as they're letting him fire the heads of other agencies, but they're always saying

in the background, but this doesn't really apply to the Federal Reserve. The Federal Reserve is different. So if the Fed stays different, the Fed stays different. This institution has been around a long time. It's not perfect.

It has made mistakes, but it has also outlasted its detractors. And in the end, what makes it so successful as an independent agency is its necessity in our economy. You can think of, if you think of the Fed as this like technocratic overlord over our economy, it's one thing, but really it's a technocratic overlord over the financial system.

It interferes much less in our lives, and much more so in keeping credit flowing in the financial system.

And because it's the central bank of the U.S., it is the most important central bank

in the world. And most countries have the dollar as a reserve currency.

“So what happens to the U.S. matters to everybody else?”

They've picked us because we are so stable in other things. So I guess I just, I don't like all the interference at the Fed. I don't like having to talk about the Fed. I don't like how much we have to talk about the Fed. I don't.

Yeah, I think that's like you just kind of want the Fed to do it's thing and do it well. And like, I just don't think the background, I don't want to think about you. Yes. It should go back to just Wall Street and financial companies are obsessed with the Fed and no one else cares.

And like, that's how it ought to be. Or maybe not. I don't know. I, I, I, I'm so tired of pretending like what is going on with the Fed is normal. Yeah.

So let's, let's make sure we have a very clear understanding of the present day. The head of the FHA Bill Pulti publicly accused Fed Governor Lisa Cook of mortgage fraud. He has not proven it. That's part one. Part two is that the Federal Reserve building is undergoing renovation.

Renovations of a historic building on the National Mall are expensive, especially when a lot of the work takes place after the pandemic and the inflation spike, Powell, who gave a testimony in front of Congress in which he detailed the progress of the renovations to the historic building and even toward the renovations with Trump himself at one point to talk about what was happening.

Now, the Justice Department is investigating Powell for lying to Congress and essentially doing some type of book cooking related to the cost of the renovation.

“The nominee, Fred Warsh, I think you just want to explain to people that eventually”

what will happen, we don't know when, is Kevin Warsh will have to go before the Senate

Yeah.

Warsh has to be confirmed by the Senate Banking Committee.

But a key Republican member of the Senate Banking Committee has said he will not vote on Warsh's confirmation until Powell's Justice Investigation has wrapped up. Right. So Powell would stay on as Chairman, beyond his May 15th, term limit date. Okay.

So we've given you a lot of context to absorb the news over the next couple of months. Which was really my goal was like, the Fed is in the news a lot anyway, but it's going

“to be in the news a lot between now and May and I think it's be nice to give listeners”

a little backstory on what the Fed is, what they do, why we, why we should care on how much we should care. I think I was. My concern. Yeah.

Oh, question from production, do we like Powell?

I don't know whether to root for him.

Speaking as a general consumer of Fed news, do we like him? I don't think he need to. It's like liking your dentist. You just need him to be really good at his job. Exactly.

The best Fed chair and Fed system is one that doesn't have that much scrutiny. It doesn't have much public fascination. We shouldn't have to care about them. They should just do their job and we shouldn't really know that much about, like, shouldn't have to know that much about them.

It was like that 2000, as an L-skit from the first Trump administration where they go to

“a fortune teller and she's like, what do I get from, what do I want from my birthday?”

Like, what do I get? And she's like, you get exactly what you want, stamps. And she's like, I want stamps and then the fortune teller says, yeah, and you get them and say, take that post-master general, Lewis DeJoy and she's like, why do I know the name of the post-master general?

If they do a good job in their independent position, you shouldn't have to know about them. And we should have trust in institutions. So, Powell for what it was worth was a Trump appointee and, and to be, like, probably one of the biggest thorns and Trump sides in his entire professional career.

So you can't always predict what's going to happen.

Yeah. All right. That's it for the Fed. We're going to take a quick break and we'll be right back. We got two executive orders.

I think of this as the word ban edition of executive orders. These came in both by email to [email protected]. First, Alex and West Virginia wants to ban the phrase common sense from politicians, use, and David from Wisconsin wants an instant 10% wealth tax again for federal officials who use the term, the American people.

And I get, especially when you hear politicians talk about policies and things you disagree with, they call them, these are just common sense policies. And this is what the American people want and that it does great on one's nerves. So I think that this to me falls under what my family calls the restaurant rule, which is if a restaurant has an adjective in the title, it's not that.

So, like, if it's called quality restaurant, it does not have quality. Or if it's called, like, luxury, like anything, if you put an adjective in any, it could apply to non restaurants. So when someone says, like, this is common sense, 100% it's not, absolutely, it's not that's the restaurant rule that trying to be with or not. These are great executive orders.

Okay. Do you have a spiritual sponsor over this week? For new listeners, we don't have any actual sponsors, not that much money, but we do need to think our spiritual sponsors who get us through our week in our life. Yeah.

My spiritual sponsor this week is the fact that it's 81 in sunny here. I don't want to gloat. My poor sister is buried under two inches of ice. I mean, I shouldn't see words under ice as about a crack off and go to the Atlantic. For all the time, they've said, "Oh, California is going to crack off."

No, it's not as, no, it's been beautiful and we've had to take a lot of long walks because, you know, it has been a category five news storm for a month. So, I'm really grateful sometimes that I live here. Awesome. My spiritual sponsor is Team USA Fits.

I love the Olympics so much. I love winter. I love summer. I love every story.

“You need to give me 10 seconds of backstory on an athlete and I'm sobbing and I'm like”

rooting for them like they're my own child. Like, I just, I cannot tell you how much I love the Olympics. And my spiritual sponsor is just all the Team USA. So, opening ceremony, loved our outfits. I like lint up how much I went cost for me to buy an Olympic outfit.

Yeah, you can buy the whole thing. You can buy the opening ceremony and closing ceremony outfit. And I'm priced it out. I think. Maybe not this year.

Got like two kids in daycare, like the same thing before. But like one year, I'm just, where would I, what would I wear it to?

We're going to have a full Team USA.

LA 2028, baby.

“I'm excited because Coach Jackie is now doing her.”

Is she gay or is she just an Olympic athlete? Oh, thank God. I'm just started. Thank God.

I love the Olympics so, so much.

This is great. We also love the Olympics and that will probably be our spiritual sponsor for the next three weeks. Yeah.

“Yeah, I expect a theme on the spiritual sponsor executive order front that it is going”

to be a lot of events in the Olympics and we record with a lag so this we're like two to three weeks behind. We record two weeks ahead. Two weeks ahead. I didn't know.

Let's wrap, let's just wrap this. The optimized economy podcast is edited by Sophie LaLon, our video production for social

“media is by Andy Robinson video consulting.”

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have the means to contribute, please do so and you can do so at optimistic economy. Com, we will also happily sell you a shirt, a hat, but actually the top bag is one of my family loves the best. I don't know about you. For my family loves the top bag, it's a wide bottom bag so it's really good.

It's excellent. It's weird to find bringing it places. I feel like, oh, I've heard it all the time. You can't help. I can't do it.

I can't do it. I'm just waiting, you know, someday I will cross pass with an optimist economist and then happens, I'll be like, what? Me? No.

Anyway, it's never me who's done that.

Thanks, Andy. Thanks so very much.