Why You Shouldn’t Be Scared of AI

23:49Financial derivatives have been around for a long time. The slave trade in the United States was not primarily, but heavily financed by slave bonds, mortgage bonds in the 1830s, 40s, and 50s. Derivatives have been around for a long time. Ratings agencies, I mean, the first rating agency was John Moody after the panic of 1907, so 1909. We've had literally 100 years of credit ratings and derivatives. Greedy investment bankers, like I worked on Wall Street in the 90s. We've been greedy for a long time. Michael Lewis, who wrote the book, worked at Salmon Brothers in the 1980s. He wrote his first bestseller, it was Liar Spoker.

24:24It's about greedy investment bankers. So Lewis knows better. He should know that there were greedy investment bankers long before 2007. Deregulation, I mean, we've known about lack of regulation and regulatory capture for ever since George Stiegler won the Nobel Prize for this in the 1990s, I think. So what happened in 2007 to make these four things go awry? And was it just greedy bankers that somehow for the first time in hundreds of years, even though they've been greedy for a long time and equipped with these weapons of mass destruction, finally they put the country into a recession in 2008?

25:00I think there's something very different that happened, and it really goes back to the role of government. So what did happen that was new in the 1990s? What I do in the book is I go through a more comprehensive global view of let's pick the countries that had the bubble and where it happened. Why did it happen in the U.S. in 2008? Why not in a different country in a different time? Like why not 1988? Why not 1968? Well, it turns out the bubble really happened in four countries. It was the U.S., the U.K., mostly Northern Ireland, Spain, and then Ireland. Didn't happen in Canada. Didn't happen in Germany.

25:33Didn't happen in France. Didn't happen in Japan. So what did those four countries have in common? they had a housing policy that encouraged affordable housing through incentives to lend. In the United States, this began in 1992. There was a bipartisan bill. I think it was called the Federal Enterprise Safety and Soundness Act. Some ridiculous name like that. Anyway, 1992. It's signed by George Bush, but passed by a Democratic Congress. And it, for the first time, told Fannie Mae and Freddie Mac, you have to put a certain amount of your money into low-income neighborhoods, into families or households that are at or below the median income in their community.

26:12Largely, a lot of the communities that have been redlined during the 1930s. Also by government policy, when the FHA began to do this. So what do Fannie and Freddie Mac do? These are huge government agencies. They are buying up a lot of - Just remind people what those agencies are and why they're special. Yeah, they are government-sponsored enterprises. So they are quasi-government agencies. They actually ran as independent companies and were essentially backed by the government. Their job was to go and to create liquidity in the mortgage market. So the way the mortgage market developed in the U.S.

26:42was first banks gave loans to individuals. So I give a loan to Coleman. What I'm taking on is, as a banker, I'm taking on a lot of idiosyncratic risk, right? Coleman can lose his job. You can be in a great neighborhood, a great house, but you can lose your job or just default. So I've got a lot of idiosyncratic risk as a bank. Well, what if I said, hey, I'm going to give money to Coleman, but I'm going to spread my risk to 10 other people in your neighborhood. And then 10 other bankers come and give money to people in your neighborhood as well. Now I've diversified my risk, and I've reduced the idiosyncratic risk of one mortgage going bad.

27:13So now I'm more willing to lend and play in the market. Then the secondary market develops. Like I've got these mortgages to Coleman and his friends. If I need money as a bank or I want to raise money as a bank or I want to diversify my risk even further, can I just sell them on a national market to other banks? They can come in. They can buy up some of that risk. And they're also diversifying their risk. So the market runs better. Government says, so 1938, they create Fannie Mae. In 1970, they create Freddie Mac. Those are big government-sponsored enterprises that are buying mortgages to create liquidity for banks who can then lend it on to other people.

27:49But both of those agencies, as big as they are, and they were deploying hundreds of billions of dollars at the top of the market,$600 to$700 billion in 2007, 2008. They're buyers, but they're not in the business of buying bad loans or making bad loans. They're looking for high-quality loans. Did the bank do their underwriting? Have they really diversified their risk? Is Coleman a good credit risk? Okay, if so, I will take that risk. Offer the bank's balance sheet, let the bank spend more money on it, on the market. Beginning in 1992, these government-sponsored agencies got a directive from this congressional law, the 1992 law.

28:22And the law was, you have to spend 30 % of your Fannie Mae and Freddie Mac buying has got to go into these middle and low-income neighborhoods. So they put a quota on the housing market. So imagine if, you know, let's take the NBA as an example. What if you said to NBA teams, you have to start one of your five players who is five foot eight or below? I'm picking five eight. Great for me.

28:48Coleman Hughes:I could finally live out my dream of being on the Brooklyn Nets. Well, that's one way to – they will definitely be – I support that law. I don't know. You seem like you're about to criticize this law. I totally love it. There's a good reason for the law. If you say five eight is the average side of an American man, and so let's get at least one starter. You will probably create opportunities for, you know, you'll find a Spud Webb or a Calumura. Or Nate Robertson, who's maybe, is he 5 '8"? About. About. There will be players like that that can start and maybe didn't get a chance to start before.

29:19And that's all good. And you also ensure that, hey, we're not going to, we don't want discrimination against short people. We want to at least give them an opportunity. So, okay. And you will, but then what happened was in the mid-90s, they soon ran out of these highly qualified loans going to people who were below or average income. So there are only so many Nate Robertsons that you can pull into the game, right? Right. So then they had to begin to stretch. Then the quotas went up. By 1996, they said 40 % of Fannie and Freddie purchased loans have to go into these low and middle income neighborhoods.

29:52Coleman Hughes:And these policies are justified in the name of helping the poor. Right. Yeah. Helping the poor, helping minorities, et cetera. Yes. I think yes to both. So Barney Frank would have said poor people, people with below average incomes should be able to live in a home. And live the American dream and so forth. That's right. And banks shouldn't be discriminating against those people. So we should ensure that everyone's got a chance to have a loan. And we shouldn't sacrifice underwriting quality. I don't think that was the intention of the law. But you can imagine, just if the NBA said, you've got to start somebody at 5 '8 or below, but make sure they're really, really good, because you've still got to play to win, Coleman.

30:33At a certain point, the team's going to be like, okay, I can probably find one of those people. I'm not sure I can find two, and I'm not sure they can start every game.

30:44Coleman Hughes:The assumption there also is that the teams aren't already looking for the occasional gem there. That's right. The Knicks did find Nate Robinson. and SpudWeb and so forth. But there is some assumption that maybe the markets don't work effectively and that banks left to their own devices will only give... Do you think that was true to any extent? I don't know that there's a lot of evidence of that. If you look at the 1960s and 70s, I think you can probably justify that argument that banks were very selective in terms of who they lent to. It was exceedingly difficult to get a loan unless they could check the boxes and certain very easy to understand metrics.

31:27There was probably a lot of racial discrimination as well. There almost certainly was. In the 60s, yeah. Yeah, I'm sure there was. I wouldn't say I'm an expert on that, but I could imagine certainly coming out of the 50s and 60s, there would have been racial discrimination just even based on what neighborhood you were in. Is the collateral high quality? But they would look at that loan to value ratio. They would look at your employment history. They would look at your credit rating. And then they would look at things like, what's your income? Like, what is your income to, you know, what is the ratio of the income you're bringing in to the debt payments that you're making?

31:58Essentially, your income to debt ratio. And so, you know, all those would be factors that would go into the analysis. In the 1980s, when banks were slow to lend, we had a lot of innovation in high-yield securities. And a lot of that was in the mortgage market. And so, there were innovators and bankers who would come in and would lend to people at higher interest rates, given the higher risk. But they would, it became a much more inclusive market in the 1980s. And if you read Liar's Poker, you know that. That's where all the fun happens at Salomon Brothers. It's the mortgage-backed securities market.

32:27So a lot of those inefficiencies were going away because of the market. Well, the bank puts quotas to go even further with Fannie and Freddie. And the quotas begin at 30%. They go to 40%. They were 50 % by 1999. They were 56 % by 2007 under George Bush. So it's a bipartisan problem with two presidents, Clinton and Bush, and their respective congresses, pushing the quotas higher and higher and higher. because they're getting more affordable housing. I guess that's politically popular. At the time, interest rates were super low. So people were making their payments. Housing prices were going up.

32:59So everyone was happy. But by 2007, housing prices have now escalated to a bubble proportion, especially in certain neighborhoods where you have tier three housing that's much, much more expensive than it should be. There's a building boom happening. Then people got into subprime loans. So what happens when you're around a high-quality people that you can lend to? The SpudWeb, Nate Robertson's example. Well, now you've got to stretch. You've got to find someone that is 5 '8 or below, who's like a low LMI, a low or middle-income family or household. And what if, based on these other metrics, they don't want to take your money or you can't get them to qualify?

33:41Well, you begin to reach. So what do they begin to do now? Now the bankers began doing things like, well, let's cut your interest rate from 6 % to 1.9 % now for two years, and then it'll kick up to 10 % later, teaser rates. If normally I'd want 10 % down, can you give me 5 % down? Can you give me 2 % down? How about you give me 0 % down? How about we do a negative amortizing loan? What's the negative amortizing loan, you say? Oh, well, you need$100 ,000 for a house? Let me lend you$102 ,000. So I'm actually negative. I'm going to negatively amortize the loan. and then you're just going to owe me interest for a bit and then we'll get to the principal payments later.

34:17And Fannie and Freddie May were buying these loans in 2004 or 2005. Not only were they buying them, they were telling people, I want more loans like this. So Fannie and Freddie May were doing this in the West.

34:26Coleman Hughes:What was their incentive? Was their incentive simply to comply with the law or did it go beyond that? The actual decision makers there at Fannie and Freddie. I think they're, well, their incentive, they were pushed by this congressional mandate. So they had to put 56 % of their money into these LMIs. And so the government quota, the government mandate was, I think that was their main incentive. They did tell the government on more than one occasion, we're not compromising underwriting standards. So yes, we've relaxed the loan to value ratio. Yes, we've relaxed standards on things like your debt to income ratio.

35:02Yes, we've relaxed some of the other unusual payments like negative amortization and teaser rates. We would not have done that in the 1980s. We're doing it now. Up until 2007, they were representing that they were not sacrificing loan quality. And they were kind of right. But what was happening was from 2003 to 2007, you also had a period of strong economic growth and super low interest rates. The rates had fallen to all-time lows by 2003. In the 1980s and 90s, in the 80s, you might remember, mortgage rates were 8%, 9%, 10%. The economy was growing, and people would pay 10 % for a housing loan.

35:38In the early to mid-90s, rates came down to 6%, 5%, 6%. Pretty affordable, but still relatively high relative to what happened after 2001. 9-11 happens, rates come way down. 2003, 2004, rates stay way down. You get 1 % and 2 % interest rate mortgages. So in that environment, people were making their payments, and you didn't have a problem. And Fannie and Freddie, I think, were feeling like, okay, we've changed some of our rules, but we haven't relaxed our standards and no one's defaulting, so it's got to be good, right? Well, 2007, it begins to go wrong. The economy begins to slow down. All of a sudden, the default rates begin to pick up and pick up and pick up.

36:20Historically, the subprime bonds, which is kind of a new asset class, had only seen default rates of 2%, 3%, 4%. They got a size 40 % in 2008. And I would argue that some of that is bankers dropping the ball and making bad loans and bad decisions. Some of that may be malevolent. Some of that may be deliberately predatory or obviously obfuscating loan dock requirements. But I think the reality was the market disciplines people who do that. You don't have to send them to jail. They will lose money all by themselves. They don't have to go to jail to learn the consequences. But when you have the government buying up a big chunk of those ill-performing loans, and you've also got super low interest rates that are disguising a lot of bad behavior, those are also, I'd call that contributory negligence, to use a legal term.

37:05Coleman Hughes:If you're like me, you've probably seen a recent headline and wondered, can the president really do that? That's why I recommend checking out the chart-topping podcast, You Might Be Right, hosted by former Tennessee governors from the left and right, Phil Bredesen and Bill Haslam. It's produced by the Baker School of Public Policy and Public Affairs at the University of Tennessee. And fun fact, the show is named after Howard Baker's principle, always remember the other fellow might be right. Now that's a quote that conversations with Coleman can get behind. On You Might Be Right, the governors tackle timely policy conversations with political luminaries like Al Gore and Judy Woodruff.

37:46Coleman Hughes:If you need a place to start, check out their recent episode on whether there's too much money in politics. Political spending enables expression and participation, but at what cost? As we approach the midterms, this is a timely and thoughtful discussion featuring Harvard Law School professor Larry Lessig and former chair of the Federal Election Commission Brad Smith. Hear balanced perspectives without the shouting matches found on mainstream news. Follow You Might Be Right on Apple Podcasts, Spotify, or wherever you get your podcasts, and tell them I sent you. On this show, we spent a lot of time having honest, unfiltered discussions around Israel, Zionism, and anti-Semitism.

38:25Coleman Hughes:And if our conversations have made you more curious about any of these topics, I have a recommendation for you. Wondering Jews with Mijal and Noam is a podcast hosted by two of the leading Jewish voices of today, Noam Weissman and Mijal Bitan. On their show, Mijal and Noam are finding fresh perspectives on tough subjects. They've explored the war on Iran from the viewpoint of Persian Jews. They've poked fun at anti-Semitism with comedians. And they've asked prominent rabbis about the future of religion. If you value nuance over hot takes and want to get past all of the noise, this show is for you.

39:02Coleman Hughes:Search Wondering Jews with Mijal and Noam on Spotify, Apple Podcasts, or YouTube and subscribe. Or find the link in the show notes. When you finally find your thing, you want the whole world to know about that thing. So you use a thing called Canva to make it an even bigger and better thing. Whether you want to create flyers for that thing, make presentations for that thing, or design merch for that thing, you can do anything. So people can see your thing, feel your thing, love your thing. The next thing you know, it's a thing. Canva, the thing that makes anything a thing.

39:42Coleman Hughes:So is one of the causes of, you mentioned that subprime loans were a new asset class. And that strikes me as potentially important to understanding bubbles in general. Maybe not everyone, But don't they often involve new asset classes that are poorly understood as a result? Like, we don't totally understand crypto's value in the long run because it's new. We don't totally understand subprime mortgages, or at least we didn't at the time. Tulips were new even in the Dutch case, right? Like, there's something that happens when something new is introduced where its value is inherently more uncertain.

40:21Coleman Hughes:Is that an important component of the story with bubbles? Or is that just a few cases I'm cherry picking? I think it can be. Not always. I think subprime, it was something that was small and niche and was kind of around in the 80s and 90s. But it was like$10 to$50 billion a year. And it was all like, you couldn't securitize that stuff. A bank makes a risky loan, 99 % loan-to-value ratio, or hey, we'll do a teaser rate. That would not have qualified for most securities pools. It wouldn't have qualified for Fannie and Freddie. So they're taking the risk on their own. And maybe Coleman's a good guy, and I'm going to make him a one-off loan.

40:57But it went from being a little niche industry to$600 billion a year in the 2000s because of the – it became a really big asset class because of the government policy, is what I argue. Tulips was definitely new, but, you know, flowers had been around for a long time. Maybe tulips were – there was a special scarcity to them, and it became a very coveted flower in the 1620s and 1630s in Europe. Came from Turkey. A lot of the bubbles, though, are just like around land. The Australian land boom is a perfect example. Like there was nothing new about land. It just became really scarce. Japan was also about land.

41:29In some cases, it's just, you know, some of these other factors play into a very well-known asset.

41:33Coleman Hughes:Right. So if it's true that the 2008 financial crash was like the key variable that made it all possible was government policy intended charitably to expand housing to the poor. Yeah. Why is that not the lesson that most Americans are walking around with in their heads from the 2008 financial crash? Is it just that the story has been told through a left-wing media bias that doesn't want to come to that conclusion and is more comfortable sort of blaming greedy Wall Street? Or is there more to the story? That's a great question. i so the question i guess you would have to it's it's entertainingly told with michael lewis and adam mckay it's an easy narrative like oh the bankers were badly behaving um whether that's left-wing or just entertaining i don't know obama definitely campaigned on that in you know in 2008 2009 and the financial crisis inquiry commission um drew that conclusion with the majority of Democrats writing that conclusion.

42:37So that became, there was some political hate to be made. If you ask the question, why this happened in the US and not in Canada? So Canada also, or Germany, the Netherlands, all these countries want to do affordable housing too. What did they do in Germany? They didn't encourage lending to people who couldn't afford the loans to buy low-income housing. What did Germany do? They built housing. The Netherlands, Belgium, they built housing. Canada built housing and then they subsidized people. So Coleman, you qualify for a housing subsidy, a voucher. I'll give you the money directly, you do what you want.

43:10I'm not going to go subsidize JP Morgan to give you a loan or force them through a quota. So this kind of level of understanding of comparative economics, I think, looking at the US, asking yourself, why did it happen in the US and UK and Ireland and Spain, all of which had similar housing policies, by the way. How come it didn't happen in Germany, China, Japan? I think that's just hard thinking. People really have to work to think about it and have to understand economics a little bit. It's easier, I guess, to tell a story about greedy bankers. It sells more. It's easier to campaign against it.

43:39A lot of economists have looked at it since. I think I've come to that other conclusion, which is there's more to it than that. But I think a lot of this is just economic literacy among the broader population. And would you take the right lesson away from history, which is what I hope to resolve with my book. I hope everyone reads the book and asks those questions.

43:58Coleman Hughes:Yeah, what's the status quo now with respect to quotas on, are there still any quotas on mortgages of that kind, or was that lesson properly learned? That's a great question. Fannie and Freddie went bankrupt in 2008. In fact, a little-known trivia point, who were the first major institutions to go bankrupt when 2008 happened? Lehman Brothers, Bear Stearns, AIG, very famous victims. Fannie, Freddie Mac. Of that group, who was the first one to declare bankruptcy? Do you know? Bear Stearns or Lehman? I don't know. In my memory, that's what it is. Because you've read the big short. That's probably where your head goes.

44:38That's what a lot of Americans think. Actually, it was Fannie and Freddie. Bear Stearns had a couple of high-flying hedge funds that were in March of 2008 that were restructured. Didn't go bankrupt. Fannie and Freddie went bankrupt first in September. And then Lehman followed about a week later. And then the shit really hit the fan. And then the government had to step in to take out and to prevent the other catastrophes from happening. But Fannie and Freddie were essentially taken off the market. They went bankrupt. They were privatized. They're still running under government restructuring plans now.

45:07There's discussion now to take them public again. But they're far smaller than they were back then. Today, they're between$500 billion and a trillion in purchases, I want to say, against a – what's the U.S. GDP? $35 trillion. Back then, U.S. was$10 trillion in GDP, and these guys were spending over a trillion dollars at the top of the market. So they were far bigger relative to the economy at the time. They've relaxed their quotas, and they've completely changed how they go about evaluating loans and are, I think, much stricter in terms of what they scrutinize. But you can imagine—

45:37Coleman Hughes:Which is a tacit admission that those laws were part of the story. I think when they declared bankruptcy, that was an admission that they weren't quite playing the way. they didn't quite have it right. At the time, there was congressional testimony where if you asked senators, hey, what percent of all the bad loans in America are being held by Fannie and Freddie? There was congressional testimony in the middle of 2008 that was like, oh, none of it. It's all the private sector, isn't it? And it only came out later that when Fannie and Freddie were properly audited, like, oh, they're holding like half, two-thirds of all the bad loans in America in 2009 were on Fannie and Freddie and other agency books.

46:16The Veterans Agency, they're all subsidizing their lending. And no one knew in Congress that it was the VA and Fannie and Freddie. This all came out in subsequent testimony. In fact, this came out in 2011 and 12 after the FCIC commission issued the report, which is a point now that gets made by economists who are thinking about this a bit more clearly. So I think Fannie and Freddie have substantially changed how they operate. It doesn't mean that they're immune from political pressure. I could easily imagine this happening again because people don't always take the correct lesson away. Mm-hmm.

46:47Coleman Hughes:What lessons should we draw from the Great Depression and how it was ended? A, what actually ended the Great Depression? I know that's a source of controversy among economic historians. And so in your opinion, what ended it? What lessons should we draw? I think the mainstream view, I don't know there's much disagreement anymore. In 1929, just to refresh everyone's memory, the economy is coming off of a nine or 10-year run of like 4 % real per capita GDP growth. That is the best decade on record. Like after the 1880s, it's probably the best decade that the US has had on record. A lot of technological change, whether it's the automobile, the assembly line, chemical factory processes, the movies began to talk.

47:32Talkies begin in 1927, 1928. And a lot of this economic growth happens during the roaring 20s. In 1929, the stock market crashes. And we've had crashes before. Stock markets had gone down 10%, 20 % multiple times, never created this kind of a massive contraction in economic activity. But between 1929 and 1933, the economy contracts by one third. Unemployment rate peaks at 24%, 25 % about 1932, 1933. And even 25 years later, a lot of economists didn't really understand, could not have told you, there was no consensus as to what was the cause of the Great Depression. Why did this stock market crash cause everything to collapse?

48:12and we had this big, prolonged decade of economic despair. One of the bestsellers was written by John Kenneth Galbraith called The Great Crash. He wrote it in the mid-1950s. And he opens it by saying, to this day, we don't really know what caused the Great Depression. So up until the 1950s, and Kenneth Galbraith is like a bestselling author, Harvard professor. If anyone knows the answer, it's going to be him. He's like, I don't know. Not only do I don't know, nobody knows. In the 1960s, there's groundbreaking work from Milton Friedman and his wife Anna. And he eventually wins a Nobel Prize primarily for this research.

48:43He writes a book called The Monetary History of the United States, and he points to the money supply. And he goes back and says, here's what happened. Beginning in 1929, the Federal Reserve, it was kind of new at the time, only about a decade and a half old at the time. They let the money supply contract by about a third. And as they did, it basically took all the economic activity down. Money really matters. Managing the money supply really, really matters. And economists ever since then, I think have generally said, yeah, he's probably right. How do I know that? Well, one, he won the Nobel Prize.

49:14Doesn't necessarily mean that he's right, but it means that they were coming around to that point of view. Ben Bernanke, who won his own Nobel Prize in 2019 for writing about the depression and the money supply, was Federal Reserve chairman. At Milton Friedman's birthday a few years ago, he said, you know what, Milt, you got it right. I agree. We were the problem. We, the Federal Reserve, were the problem. We'll never do it again, thanks to you. So by then, I think he had a consensus view that the shrinking at the money supply was a huge factor. Can you explain why that was a factor? What's the model there?

49:44Yeah, it's kind of complicated, but I'll try to keep it simple. The way that money supply gets created in a banking system is a bank gives you a loan, you Coleman, a loan. You go out and spend that money in the economy, and then you're spending that money on items and goods and services, and that money gets circulated in the economy over and over and over again, and so that creates money. liquidity in the economy. Well, let's say the bank stops lending and calls back the loan. So you, Coleman, have to give the money back to the bank. You can no longer spend it on goods and services or your kids or your car or whatever else.

50:18And so there's a contraction in the amount of money circulating in the economy. During the Great Depression, what had happened was once the economy contracted, banks began pulling in their loans. The Federal Reserve actually encouraged them to. They were like, hey, don't have any bad money going out into the economy because that's That's not good for the banking system. So banks began to pull their loans back, and that caused people to stop spending, and the economy dropped. Then asset prices fell, stock market, but also the housing market. Banks are like, oh, my God, our collateral. Homes, real estate, the value of stocks.

50:53Collateral value is going down. We've got to pull back our loans even more, and this creates a cycle of stricken money supply. And then there was a huge bank run. There were a couple of them in the 1930s. And now, all of a sudden, people want their money back from banks, so banks have to pull their loans in even more. So the loan portfolio shrank by a dramatic amount, and that just pulls money out of the economy. So Friedman would have said, well, the Federal Reserve should have stepped in at that point and ensured that banks were liquid. That means that they don't pull their loans back. They could have cut interest rates.

51:21Didn't do that. And they just created this deflationary spiral by allowing collateral values to drop and banks to pull in money. And that's just a cycle that's very, very hard to get out of. I think most people would now agree. John Maynard Keynes recommended, and I think people would agree, what broke the cycle in 1936. was there was a reflation of the money supply. The US comes off the gold standard, which forces you to keep your money very, very tight. Again, technical reasons we don't have to go into, but when you're on a gold standard, you can't just print money willy-nilly. You have to keep, you have to, you know, if Coleman comes in my bank and says, I want, hey, I want a, I want, I've got a, here's a bunch of cash, I want gold, or I want gold and I want a bunch of cash.

51:58I have to be able to honor that commitment. So if I print a bunch of money and, you know, all of a sudden Coleman comes at me with all that money and says, I want gold. Well, I better have gold enough to back my currency. So the US comes off the gold standard in 1932, 1933. And at that point, they can print more money and they can lower interest rates and they reflate the currency. And then John Maynard Keynes says, you should spend a lot of money on the deficit in order to push the economy forward, kind of counter cyclical when the economy is shrinking. Government should step in and spend. They do that around World War II.

52:28They resisted initially in 1836, 37, but 39, the war comes along, then it's all bets are off. And then they start spending money, reflating the currency and the combination of those two things gets the economy moving again. So I think that's sort of what caused it. And that's what got us out. One last point, which I think is kind of my predisposition, although I think Friedman is largely right. There was a big tax increase in 1932. Calvin Coolidge had cut taxes from the end of World War I from up to 60 % at one point down to 25%. Those tax cuts really helped to stimulate the economy and move it forward.

53:02Kind of a supply side argument before supply side economics was a thing. Under Hoover, tax rates went back up from 25 to 63 % in 1932. And then by 1933, they were at 79%. And when you increase taxes, I think anyone today would say, if you increase taxes from 25 to 79 % in a recession, well, you're bound to have a, that's bound to be bad for the economy. I think all economists, left-wing, right-wing, and centrist would now agree that had to be a contributing factor as well.

53:32Coleman Hughes:So they just didn't understand that massive tax increase at a time of decreased economic activity, which is kind of obvious today. You say that now because you've got the benefit of 100 years. That's how it became obvious. That's how it became obvious. And the money supply thing would also be obvious until at that time, though. It was not obvious to people at the time. Right. Okay. So is AI a bubble? I would say no. Let's go back and remind ourselves what is the definition of a bubble. It's a big run-up in asset values that then all goes away. So what you're asking is, is all that value created in open AI, Anthropic, Google, is that all going to go away in the next year or two years?

54:17So a couple of facts. Most of the AI spend right now is coming from four really big hyperscalers. It's Meta, it's Microsoft, it's Alphabet, it's Amazon. These are very profitable companies. They're all kicking off cash flow. So at the end of last year, these companies collectively had$260 billion in cash and cash reserves on their balance sheets. A lot of this is financed with equity. The stock market today, as we sit here, is trading at about 20 or 21 times next year's earnings, EPS. This is the S &P 500. The hyperscalers are low 20s. Google's at 15. NVIDIA's like 15, 16 times price earnings ratio, okay?

54:57Let's compare this to 1999. The price-earnings ratio of the NASDAQ 100 peaked at 73. The company in the middle of everything then was Cisco. It's NVIDIA now. NVIDIA is a profitable, cash flow positive company. They're going to buy back probably$100 billion of stock in the next couple of years. They just authorized an$80 billion buyback, I think, a week ago. The company in the middle of everything then was Cisco. Cisco, they were building the routers for the internet and the networks, which is 200 times. price earnings ratio in 99 and 2000. They lost money in 2001. They were not selling to well-capitalized hyperscalers.

55:38They were selling to mostly telecoms, Global Crossing, Quest Communications, WorldCom, Enron. We thought the telecoms were profitable at the time. It turns out they weren't. And they ended up going through accounting frauds and scandals and restated earnings. And when all the dust cleared, there were also money losing. So you had this massively valued company, Cisco, selling to primarily money-losing companies, and that was the telecom bubble of 2000, 2001. Very, very different from where we are today. Just the valuation environment's different. Right. And so that would suggest to me this is not the thing that bubbles are made of.

56:14One other really important point, and this is distinct, I think, from the 99 bubble and also the 1845 railway boom. In 1845, we had a railway bubble because people thought railways would change the world. They did. Correct. They thought the profits would come in like the next three to seven years. They didn't. But they built a lot of railway in advance of demand. So it was a build-out of a new technology in advance of the demand really materializing. They thought people would take the railways that would go from transporting cargo to passengers, and the railway revenues will increase dramatically in the next three to seven years.

56:48Well, it turned out between 1845 and 1850, railway revenue doubled. And it doubled again from 1850 to 1859. So you're like, how can that be a bubble? Well, they spent so much money that even that doubling and doubling of revenue didn't justify the investment, and that caused a market crash. In 99, they were laying so much dark fiber, basically fiber optic network cable that connected people through broadband, but it wasn't lit up by demand. Internet demand was rapidly increasing, but they built so far ahead of it that 99 % of all the fiber laid by like 99, 2000 was dark, hadn't been lit up.

57:19Coleman Hughes:What's the probability that data centers are like the railways of today? Like, it's a good investment, but they're going too fast. I think every single, so this feels more like it's demand-driven. And the constraint is supply now. Meaning if every single GPU that NVIDIA rolls off the assembly line, metaphorically, lights up the next day. It's not like they're laying dark fiber or building railways that no one is using. And then thinking, if we build it, they will come. They're already here. They're building what people want. So this feels like there's real demand. And the demand is coming from OpenAI and Anthropik, as you said, but also from Google and from Facebook and from lots of other folks who are just now figuring out the use cases for it.

58:02So I think those are three reasons why it doesn't feel like a bubble. The valuations are different. I think it's demand-driven, not supply-driven. And then I think just the overall business, the technology, the value of it is incredible. There are a lot of things that AI is going to enable us to do that we haven't yet figured out, but that will leave a lasting and generally positive impact in what we do. So it doesn't feel like we're in a bubble at that level. I will say there's a very good possibility the market will go down by 20 % next year. And OpenAI or Anthropic or one or the other or both may not be worth a trillion dollars.

58:36So there'll be lots of companies that don't make it and lots of individual idiosyncratic losers. But that's not quite the same thing as being in a systematic bubble. All right. I'm on Virgi. Thank you so much for coming on my show. Okay. Thank you for having me. Had a good time.